Exam 25: Short-Term Business Decisions

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: Which of the following amounts represent a sunk cost?

Kim Company's western territory's forecasted income statement for the upcoming year is as follows: Kim Company's management is considering dropping the western territory and has determined that $310,000 of the fixed expenses is avoidable. What is the change in Kim Company's forecasted operating for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

Healthier Cook Company manufactures two products: toaster ovens and bread machines. The following data are available: Healthier Cook can manufacture six toaster ovens per machine hour and four bread machines per machine hour. Healthier Cook's production capacity is 1,800 machine hours per month, and Healthier Cook can sell as many units of either type as it can produce. What product and how many units should the company produce in a month to maximize profits?

Doro Fill Company fabricates inexpensive automobiles for sale to 3^rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows: A factory in Indonesia has offered to supply Dora Fill with ready-made units for a price of $10 each. Assume that Doro Fill's fixed costs are unavoidable, and that the company will not be able to use the excess capacity in any profitable manner. In order to maximize operating income, Doro Fill should not outsource.

The contribution margin approach helps managers in short-term decision making because:

Valuable Electronics uses a standard part in the manufacture of different types of radios manufactured by it. The total cost of producing 25,000 parts is $95,000, which includes fixed costs of $40,000 and variable costs of $55,000. The company can buy the part from an outside supplier for $3 per unit, and avoid 20% of the fixed costs. If Valuable Electronics decides to outsource the production of the part, how will it impact its operating income?

Tyler Corporation has provided you with the following budgeted income statement for one of their products: Tyler Corporation believes that 80% of the fixed costs would be avoidable if the product line was dropped. Based on the impact of company's operating income, Tyler should not drop the product line.

Fine Arts Inc. produces a special kind of light weight, recreational vehicle that has a unique design. It allows the company to follow a cost-plus pricing strategy. It has $9,000,000 of assets and shareholders expect a 10% return on assets. Additional data are as follows: Using the cost-plus pricing approach, what should be the price per unit?

Freemen Company's western territory's forecasted income statement for the upcoming year is as follows: Freemen Company's management is considering dropping the western territory. This move would be financially advantageous only if the company could eliminate $96,000 of fixed costs or more.

If a business is considering buying a new vehicle, the cost of insurance on the new vehicle is information that is relevant to the business decision.

Healthier Cook Company manufactures two products: toaster ovens and bread machines. The following data are available: Healthier Cook can manufacture six toaster ovens per machine hour and four bread machines per machine hour. Healthier Cook's production capacity is 1,800 machine hours per month. What is the contribution margin per machine hour for toaster ovens?

Which of the following is a historical cost that is always irrelevant?

Dong Fang Company fabricates inexpensive automobiles for sale to 3^rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows: A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14 each. Assume that Dong Fang's fixed costs could be reduced by $5,000 if they outsource, and that Dong Fang will not be able to use the excess capacity in any profitable manner. What will be the impact on Dong Fang's monthly operating income, if Dong Fang decides to outsource?

Which of the following phrases most accurately describe opportunity cost?

Yummy Foods sells jars of special spices used in Spanish cooking. The variable cost is $1 per unit. Fixed costs are $9,000,000 per year. It has $40,000,000 of assets, and investors expect a return of 5% on their assets. Yummy Foods sells 5,000,000 units per year. They use cost-plus pricing because they are the only company which produces this kind of product. Using cost-plus pricing methodology, determine the price per unit. (Round your answer to the nearest cent)

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows: If Sweet Dreams can eliminate total fixed costs of $30,000 by dropping the pillows line, operating income will go up by $16,000.

Sprint Company makes special equipment used in cell towers. Each unit sells for $400. Sprint produces and sells 12,500 units per year. They have provided the following income statement data: A foreign company has offered to buy 80 units for a reduced price of $300 per unit. The marketing manager says the sale will not negatively affect the company's regular sales. The sales manager says that this sale will require incremental selling & administrative costs, as it is a one-time deal. The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs. If Sprint accepts the deal, how will this impact operating income?

Which of the following statements is true?

A company produces 1,000 packs of chicken feed per month. Sales price is $4 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. At what price for the new product will the two alternatives (sell as is or process further)produce the same operating income? Round to nearest cent.

Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures media center in-house, but is considering the possibility of outsourcing that function, in order to close down some of their facilities and reduce the administrative costs. At present, the variable cost per unit is $275 and the fixed costs are $39,000 per month. Assume that if they outsource, fixed costs could be reduced by 40%. The production manager advised the company to contract with a foreign supplier which offered a contract rate of $420 per unit. If they outsource, how would that affect operational income?