Exam 25: Short-Term Business Decisions

Doro Fill 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 Dora Fill with ready-made units for a price of $10 each. Assume that Doro Fill's fixed costs are unavoidable, but the company could use the vacated production facilities to earn an additional $5,000 of profit per month. In order to maximize operating income, Doro Fill should outsource.

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 $25,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating income?

The benefit foregone by not choosing an alternative course of action is referred to as a(n):

Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: If $50,000 of fixed costs will be eliminated by dropping the Football Helmets line, how will dropping Football Helmets affect the operating income of the company?

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 as many of either product as it can produce. What is the maximum monthly contribution margin that Todd can generate under the circumstances? Round to nearest whole dollar.

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 $325. If so, the variable cost will go up to $230 and the fixed costs will rise by 40%. If Victory decides to upgrade, how will it affect operating income?

If a company is a price-taker, it has considerable flexibility in setting its products' prices.

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. Calculate the contribution margin per direct labor hour for the large table.

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 variable costs cannot be reduced, how much will be the target fixed costs per year?

Fin 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 Fin Company with ready-made units for a price of $15 each. Assume that Fin's fixed costs are unavoidable, and that Fin will not be able to use the excess capacity in any profitable manner. What will be the impact on Fin's monthly operating income, if Fin decides to outsource?

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 eliminate all fixed costs 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?

When a company is considering the possibility of processing their product further to achieve higher sales revenues, the rule is as follows: as long as the additional processing generates higher sales revenues, it is the preferred alternative.

Meson Production is a price-taker. They produce large spools of electrical wire in a highly competitive market, and so they practice target pricing. The current market price is $800 per unit. The company has $3,000,000 in assets and shareholders expect a return of 6% on assets. The company provides the following information: Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If fixed costs cannot be reduced, how much reduction in variable cost per unit will be needed to hit the profit target?

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. If the company has no sales limitations on either product, they should make and sell as many of the large tables as possible to maximize 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 optimum product mix to maximize company's operating income?

If a company wishes to be a price-setter, which of the following strategies should they take?

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 $780 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 variable costs cannot be reduced, how much reduction in fixed costs will be needed to achieve the profit target?

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 not reduce any fixed costs 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?

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. Calculate the contribution margin per direct labor hour for the small table.

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, but no change to the fixed costs. The marketing manager believes that they would be able to boost their price of the radio from $260 to $280. If they do so, how would the change affect operating income?