Exam 25: Short-Term Business Decisions

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 variable costs are dependent on commodity prices and cannot be reduced, how much is the target fixed cost?

Gabriel Metalworks produces a special kind of metal ingots which are unique, and it allows Gabriel to follow a cost-plus pricing strategy. Gabriel has $10,000,000 of assets and shareholders expect approximately 9% return on assets. Additional data are as follows: Using the cost-plus pricing approach, what should be the price per unit?

The income statement for Eagle Inc. is divided by its two product lines-blankets and pillows-is as follows: If total fixed costs remain unchanged and Eagle Inc. drops the pillows line, operating income will fall by $70,000.

Which of the following is the key to choose the product type to be maximized, in making product mix decisions under constraining factors?

Shasta Company is trying to decide whether to continue to manufacture a particular component or to buy the component from an outside supplier. Which of the following is irrelevant with respect to this 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. Assuming fixed costs are unavoidable, if Macaulay Company drops product line F, and rents the space formerly used to produce product F for $17,000 per year, total income will be:

A depreciable asset's original cost is relevant when considering whether to replace the depreciable asset.

Managers' decisions are based primarily on quantitative data because the qualitative factors are not usually relevant to the decision making process.

Rica Company is a price-taker and uses target pricing. Refer to the following information: With the current cost structure, Rica cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that fixed costs cannot be reduced, how much will be the target variable costs per unit per year? (Round your answer to the nearest cent.)

A company has two different products that sell to separate markets. Financial data are as follows: Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other. Because the contribution margin of Product B is negative, it should be dropped.

Custom Furniture manufactures a small table and a large table. The small table sells for $900, has variable costs of $560 per table, and takes ten direct labor hours to manufacture. The large table sells for $1,500, has variable costs of $980, and takes eight direct labor hours to manufacture. The company has a maximum of 5,000 direct labor hours per month when operating at full capacity. If there are no constraints on sales of either of the products, and the company could choose any proportions of product mix that they wanted, the maximum contribution margin that the company could earn will be:

Brio Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows: Fine Company has offered to sell 6,000 units of the same part to Brio Company for $17.50 per unit. Assuming the company has no other use for its facilities and that the fixed manufacturing costs are unavoidable. What should Brio Company do?

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 fixed costs remain unchanged, what is the change in operating income? (Assume the special sales order will require variable manufacturing costs and variable marketing and administrative costs.)

A company sells two products with information as follows: Products are made by machine. 4 units of product A can be made with 2 machine hour and 2 units of product B can be made with 0.50 machine hour. If there are no constraints on production or sales of either product, then the company should emphasize sales of Product B.

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. Assuming fixed costs are unavoidable, if Macaulay Company drops product line F and does not replace it, what effect will this have on operating income?

When a company is considering the option of processing their product further to achieve higher sales revenues, they must ignore:

Rica Company is a price-taker and uses target pricing. Please refer to the following information: With the current cost structure, Rica cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that fixed costs cannot be reduced, how much will be the target variable costs per year?

Lit Furniture manufactures a small table and a large table. The small table sells for $900, has variable costs of $750 per table, and takes 7.5 labor hours to manufacture. The large table sells for $1,500, has variable costs of $900, and takes 15 direct labor hours to manufacture. The small table has a lower contribution margin per unit, but a higher contribution margin per direct labor hour.

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. Assume there are no constraints on sales of either product, and the company could choose any product mix they wish. What is the maximum amount of contribution margin that the company could earn in a month?

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. Machine hour capacity is 25,000 hours per year. Assuming that the company can sell as many products as it can make, which product mix would deliver the highest operating income?