Exam 25: Short-Term Business Decisions

Gotham Products is a price-taker and uses target pricing. Please refer to the following information: How much is the target full product cost per year? Assume all units produced are sold.

Meson Production is a price-taker. It produces large spools of electrical wire in a highly competitive market, so it practices target pricing. The current market price of the electric wire is $800 per unit. The company has $3,000,000 in assets and its shareholders expect a return of 6% on assets. The company provides the following information: If fixed costs cannot be reduced, how much reduction in variable costs will be needed to achieve the profit target?

Fixed costs are relevant to a special sales order decision if those fixed costs are subject to change as a result of the special order.

Revenue at the market price less the desired operating income equals the product's target full product cost.

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 are unavoidable, but that Dong could use the vacated production facilities to earn an additional $7,500 of profit per month. What will be the impact on Dong Fang's monthly operating income, if Dong Fang decides to outsource?

DM Corporation has provided you with the following budgeted income statement for one of their products: DM has just encountered environmental problems with the product and will be forced to drop the product line altogether. They will be able to eliminate 75% of the fixed expenses. What will be the impact on operating income of the company?

Rica Company is a price-taker and uses a target-pricing approach. Refer to the following information: How much is the desired profit for the year?

Peacock Inc. sells 2,500 kayaks per year at a price of $500 per unit. It sells in a highly competitive market and uses target pricing. The company has calculated its target full product cost at $820,000 per year. Fixed costs are $350,000 per year and cannot be reduced. How much is the target variable cost per unit?

Lightening Semiconductors produces 400,000 hi-tech computer chips per month. Each chip uses a component which Lightening makes in-house. The variable costs to make the component are $1.20 per unit, and the fixed costs run $1,200,000 per month. The company has been approached by a foreign producer who can supply the component, ready-made and with acceptable quality standards for $1.10 each. The fixed costs are unavoidable, and Lightening would have no other use for the facilities currently employed in making the component. What is the effect on operating income, if the company decides to outsource?

Clay Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp. The following per unit data are available: Total fixed costs are $30,000. Marketing data indicate that the company can sell up to 8,000 units of the Bedford lamp and up to 4,000 units of the Lowell lamp. Machine hour capacity is 25,000 hours per year. What product mix will deliver the optimum operating income?

Paragon Products sells a special kind of navigation equipment for $1,200. Variable costs are $900 per unit. When a special order arrived from a foreign contractor to buy 40 units at a reduced price of $1,000 per unit, there was a discussion among management. The controller said that as long as the special price was greater than the variable costs, the sale would contribute to the company's profits, and so it should be accepted as offered. The vice-president, however, decided to decline the order. Which of the following statements, if true, will support the decision of the vice-president?

Nelson Products is a price-setter, and they use cost-plus pricing methodology for pricing their products which are specialty vacuum tubes used in sound equipment. The CEO is certain that he can produce and sell 300,000 units per year, due to the high demand for the product. Variable costs are $2.40 per unit. Total fixed costs are $980,000 per year. The CEO will receive stock options if he reports $200,000 of operating income for the year. Using the cost-plus pricing method, what price would allow the CEO to achieve his target? (Please round to nearest cent.)

When replacing an old asset with a new one, the original purchase price of the old asset represents:

When a company is considering the possibility of processing their product further to achieve higher sales revenues, they must carefully study the production costs needed to make the basic product before processing further in order to come to an informed decision.

Rica Company is a price-taker and uses target pricing. Refer to the following information: How much is the target full product cost per unit? (Round your answer to nearest cent.)Assume all units produced are sold.

Marlow Company makes bulk quantities of cleaning fluids. They currently sell 1,200 containers a month at a price of $23.75 per unit. If they add a new scent, they could charge $25 per unit for the improved product. It would cost them a total of $800 per month to make that alteration. If they decide to process further, it will improve their operating income.

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: Which of the information provided in the table is irrelevant to the replacement decision?

Which of following statements is true of short-term decision making?

Which of the following statements describes a scenario when management should consider dropping a business division?

Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price up to $340. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. If Victory decides to upgrade, how will it affect operating income?