Exam 25: Short-Term Business Decisions

Companies are price-takers when:

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 $1,000,000 of assets and the shareholders wish to make a profit of 18% on assets. How much is the target full product cost?

Carlo Company makes bulk quantities of cleaning fluids. They currently sell 1,000 containers a month at a price of $22 per unit. If they added a newer scent, they could charge $22.75 per unit for the improved product. It would cost them a total of $700 per month to make that alteration. What would be the effect on operating income?

________ refer to the value forgone in order to make one particular investment instead of another.

Rica Company is a price-taker and uses a target-pricing approach. Refer to the following information: How much is the target full product cost in total for the year? Assume all units produced are sold.

Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows: An offer has come in for a one-time sale of 100 units at a special price of $120 per unit. The marketing manager says that the sale will not negatively affect the company's regular sales activities, and that it will not require any variable marketing costs. The production manager says that there is plenty of excess capacity and the deal will not impact fixed costs in any way. What is the effect of this deal on operating income?

Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: Assuming fixed costs remain unchanged, and that there would be no adverse effect on other sales. What will be the effect of dropping Football Helmets line on the operating income of the company?

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, and Clay can sell a maximum of 10,000 units of each style of lamp annually. Machine hour capacity is 25,000 hours per year. What is the contribution margin per machine hour for the Bedford lamp?

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, fixed costs remain unchanged, and there are no variable marketing and administrative costs for this order, what is the change in operating income?

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. Marketing limitations indicate that Healthier Cook can sell a maximum of 5,000 toasters a month, and 4,000 bread machines per month. What product and how many units should the company produce in a month to maximize profits?

The Badminton Company has 4,000 machine hours available annually to manufacture racquets. The following information is available for the two different racquets produced by Badminton: How many units of each racquet should be manufactured for the company to maximize its operating income?

Grand Products is a price-setter, and they use cost-plus pricing methodology for pricing their products which are unique, artistically designed architectural decorations. They produce and sell 6,000 units per year, at their maximum capacity. Variable costs are $330 per unit. Total fixed costs are $900,000 per year. The CEO has a target of $50,000 operating income which he wants to hit by year-end. Using the cost-plus pricing method, what price should Grand use? (Round to nearest whole dollar.)

A company has two different products that are sold in different 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. If Product B is dropped, what would be the impact on total operating income of the company?

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 marketing manager is sure that they can charge a higher price for the improved version. At what price level would the new, improved radio begin to improve operational earnings? Round to nearest whole dollar.

In deciding whether to accept a special sales order, management should only consider the quantitative data and disregard qualitative factors.

Enthusiastic Products is deciding whether to outsource production of a certain component that is included in all of its products. It currently costs Enthusiastic Products $1.20 to make each component in-house. If Enthusiastic Products outsources, it can buy the component ready-made for $0.90 each, and can shut down the production facilities it is currently using to manufacture the component, and save $20,000 a year in fixed costs. Annual requirement for the component is 12,000 units. What is the effect of outsourcing?

Which of the following is the most important key to short-term business decision making?

Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: Assuming the Football Helmets line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $100,000 per year, how will operating income be affected?

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, and Clay can sell a maximum of 10,000 units of each style of lamp annually. Machine hour capacity is 25,000 hours per year. What is the contribution margin per machine hour for the Lowell lamp?

Sand Corporation manufactures two styles of lamps: a Bedford Lamp and a Lowell Lamp. The following per unit data are available: Total fixed costs are $40,000. Machine hour capacity is 30,000 hours per year. The Lowell lamp has the highest contribution margin per unit, and also has the highest contribution margin per machine hour, so the company should focus sales on the Lowell lamp.