Exam 25: Short-Term Business Decisions

Fantabulous Products sells 2,000 kayaks per year at a price of $450 per unit. Fantabulous sells in a highly competitive market and uses target pricing. The company has calculated its target full product cost at $720,000 per year. Total variable costs are $330,000 per year and cannot be reduced. How much are the target fixed costs?

A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month. Assume the company could cut fixed costs in half by outsourcing, and that there is no alternative use for the facilities presently being used to make circuits. How will it affect monthly operating income, if the company outsources?

Which of the following is a major consideration when analyzing a special order?

Hilltop Golf Course is planning for the coming season. Investors would like to earn a 15% return on the company's $60,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $30,000,000 for the golfing season. About 600,000 rounds of golf are expected to be played each year. Variable costs are about $15 per round of golf. Hilltop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus pricing approach, what price should Hilltop charge for a round of golf to achieve the desired profit?

CM Manufacturing has provided the following unit costs pertaining to a component they manufacture and use in the production of one of their main products: A supplier has offered to provide the component to CM manufacturing for $630 per unit. If CM Manufacturing acquire the component from the supplier, they could use the released facilities to manufacture a product which would generate contribution margin of $20,000 annually. Assuming that CM Manufacturing needs 3,000 components annually and the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if the company outsources?

Nordic Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. Nordic sells 30 radios per month. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of $800 per month. The current price of the radio is $260. The CEO wishes to improve operating income by $1,000 per month by selling the enhanced version of the radio. In order to hit his target, the price to be charged for the enhanced product is:

Centric Sail Makers manufacture sails for sailboats. The company has the capacity to produce 35,000 sails per year, and is currently producing and selling 25,000 sails per year. The following information relates to current production: If a special sales order is accepted for 5,500 sails at a price of $150 per unit, and if the order requires both variable manufacturing and variable marketing and administrative costs, and incremental fixed costs of $400,000, what will be the impact on operating income?

Fixed costs that do not differ between two alternatives are:

Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victory sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe that they can boost the price up to $325. If so, the variable cost will go up to $230 and the fixed costs will remain the same. If Victory decides to upgrade, how will it affect operating income?

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. At present, the variable cost per unit is $275, and the fixed costs are $39,000 per month. If they outsource, fixed costs could be reduced by half, and the vacant facilities could be rented out to earn $1,000 per month of rental income. At what contract rate would outsourcing pay off for Seven Seas?

When a business is considering whether to replace old equipment with newer equipment, the cost of operating the old equipment, compared to the cost of operating the new equipment, is relevant information to the business decision.

Macaulay Company has three product lines-D, E, and F. The following information is available: Macaulay Company is thinking of dropping product line F because it is reporting an operating loss. Assume that $15,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating income?

A company sells two products with information as follows: Products are made by machine. 4 units of Product A can be made with one machine hour and 2 units of Product B can be made with one machine hour. The company has a maximum of 3,000 machine hours available per month. The company can sell up to 7,000 units of Product A per month, and up to 3,000 units of Product B for the month. What is the maximum amount of contribution margin that the company could earn in a month given the stated constraints?

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 bread machines?

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 it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer. If Sprint accepts the deal, how will this impact operating income?

Nordic Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of $800 per month. The marketing manager believes that they would be able to boost their price of the radio from $260 to $300. Nordic sells 30 radios per month. If they decide to process further, what would the impact be on monthly operating income?

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, but there will be no change in fixed costs. The company will price the new product at $4.25 to compete with other producers. How will this affect operating income?

In making product mix decisions under constraining factors, a company should maximize sales of the product with the highest contribution margin per unit.

Centric Sail Makers manufacture sails for sailboats. The company has the capacity to produce 30,000 sails per year, and is currently producing and selling 25,000 sails per year. The following information relates to current production: Fixed manufacturing costs increase by $100,000 for every 500 units produced beyond the maximum capacity of the plant. If a special sales order is accepted for 5,500 sails at a price of $150 per unit, and if the order requires no variable and fixed marketing and administrative costs, what will be the effect on operating income?

Gotham Products is a price-taker and uses target pricing. Gotham has just done an analysis of their revenues, costs and desired profits, and has calculated its target full product cost. Please refer to the following information: Actual costs are currently higher than target full product cost. Assuming that fixed costs cannot be reduced, how much is the target variable cost?