Exam 25: Short-Term Business Decisions

A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the 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. The controller says that they could outsource production of the circuit, if it reduces fixed cost greater than $200 per month. Is this statement true or false?

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. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. The CEO wishes to increase his operational income by 25%. What price level would give the desired results?

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 80% of the fixed expenses are avoidable. What is the change in Kim Company's forecasted operating loss for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

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. Assuming that if they outsource, and the fixed costs could be eliminated entirely, at what contract rate would outsourcing pay off for Seven Seas? Round to nearest whole dollar.

Fox Inc. manufactures and sells pens for $5 each. Wolf Corp. has offered Fox Inc. $3 per pen for a one-time order of 3,500 pens. The total manufacturing cost per pen, using traditional costing, is $1 per unit, and consists of variable costs of $0.85 per pen and fixed overhead costs of $0.15 per watch. Assume that Fox Inc. has excess capacity and that the special order would not adversely affect regular sales. What is the change in operating income that would result from accepting the special sales order?

Todd Corporation produces two products, P and Q. P sells for $5 per unit; Q sells for $6.50 per unit. Variable costs for P and Q are respectively, $3 and $4.50. There are 4,300 direct labor hours per month available for producing the two products. Product P requires 4 direct labor hours per unit and Product Q requires 5 direct labor hours per unit. The company can sell up to 900 units of each kind per month. What is the maximum monthly contribution margin that Todd can generate under the circumstances? Round to nearest whole dollar.

The income statement for Eagle Inc. is divided into two product lines, blankets and pillows, as follows: Eagle Inc. should eliminate the pillows product line only, if by doing so, they can eliminate more than $70,000 of fixed costs.

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. Variable cost is $200 per unit and cannot be reduced. How much is the target fixed costs?

When a company is considering the possibility of processing their product further to achieve higher sales revenues, the rule is as follows: if incremental revenues exceed incremental costs, then further processing will enhance operational profits.

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows: Sweet Dreams is considering eliminating the pillows product line. If they do so, they will be able to eliminate $76,000 of total fixed costs. How would that business decision impact operating income?

Sprint Company makes special equipment used in cell towers. Each unit sells for $400. Sprint uses just-in-time inventory procedures; it produces and sells 12,500 units per year. It has provided the following income statement data: A foreign company has offered to buy 100 units for a reduced price of $250 per unit. The marketing manager says the sale will not negatively impact the company's regular sales. The sales manager says that this sale will not require any 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?

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. If the company chooses to outsource, it could reduce the fixed costs by 40%. The company does not have any other use for the facilities currently employed in making the component. What is the effect on operating income, if the company decides to outsource?

Price-setters emphasize a cost-plus pricing approach.

Verdant Avionics makes aircraft instrumentation. Their basic navigation radio requires $120 in variable costs and requires $3,000 per month in fixed costs. If they process the radio further to enhance its functionality, it will require an additional $40 per unit of variable costs, and $300 per month in fixed costs. The marketing manager believes they would be able to boost their price of the radio from $260 to $280. In making this decision, the amount of additional fixed costs per month is a relevant piece of information.

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

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. Fixed costs are $500,000 per year and cannot be reduced. How much is the target variable costs?

Special sales orders increase operating income if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order.

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%. The company will price the new product at $5 per pack. How will this affect operating income?

A company has two different products that are sold in different markets. Financial data are as follows: Assume that fixed costs of $1,000 could be eliminated if product B was dropped. Assume furthermore 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?

A chemical company spent $530,000 to produce 150,000 gallons of a chemical, which can be sold for $5.20 per gallon. The chemical can be further processed into a weed killer which can be sold for $7.20 per gallon; it will cost $270,000 to process the chemical into a weed killer. Which of the following is true?