Exam 25: Short-Term Business Decisions

If a product line has a negative contribution margin, the product line should probably be dropped, assuming there are no other significant considerations.

Hilltop Golf Course is planning for the coming season. Investors would like to earn a 15% return on the company's $60,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $30,000,000 for the golfing season. About 600,000 rounds of golf are expected to be played each year. Variable costs are about $15 per round of golf. Hilltop golf course is a price-taker and will not be able to charge more than its competitors, who charge $75 per round of golf. What profit will it earn in terms of dollars?

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 product, and the company could choose any proportions of product mix that they wanted, what is the optimum product mix to maximize operating income of the company?

Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: Assuming the Football Helmet line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the Football Helmet line is used to double the production of Baseball Helmets, operating income will be:

A company is planning to replace an old machine with a new one. Which of the following is a sunk cost in this decision?

Valuable Electronics uses a standard part in the manufacture of different types of radios manufactured by it The total cost of producing 25,000 parts is $95,000, which includes fixed costs of $40,000 and variable costs of $55,000. The company can buy the part from an outside supplier for $3 per unit, and avoid 20% of the fixed costs. Assume that free factory space can be used to manufacture another product that can earn profit of $15,000. If Valuable outsources, what will be the effect on operating income?

Which of the following pieces of information would be irrelevant in deciding to upgrade a company's heating and air conditioning system?

When considering whether to have a new roof installed on a building, the money spent previously on roof repairs to the old roof is information that is relevant to the business decision.

Wing Company makes a special kind of racing tire. Variable costs are $320, and fixed costs are $35,000 per month. Wing sells 600 units per month at a price of $400. If Wing upgrades the quality of the tire, they believe they can boost the price to $450. If so, the variable cost will go up to $350 and the fixed costs will rise by 30%. The CEO wishes to increase his operational income by 20%. If the company decides to upgrade the product according to the data above, the CEO will reach his goal.

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 fixed costs are unavoidable, but that company could employ the vacated premises to earn rental income of $700 per month. How will it affect monthly operating income, if the company outsources?

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. Refer to the following information: Actual costs are currently higher than target full product cost. Assuming that fixed costs cannot be reduced, how much is the target variable cost per unit?

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 CEO wants to price the new product at a level which will bring operating income up to $1,000 per month. What price is to be charged?

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

Polynesia Company manufactures sonars for fishing boats. Model 70 sells for $250. Polynesia produces and sells 5,500 of them per year. Cost data are as follows: A potential deal has come up for a one-time sale of 30 units at a special price of $115 per unit. The marketing manager says that the sale will not negatively impact the company's regular sales activities, but it will require the normal amount of 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. The controller points out, however, that because the incremental revenues are just equal to the incremental costs to fill the order, the deal will not have any impact on the bottom line. The controller is correct in his statement.

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. At present, the variable cost per unit is $275, and the fixed costs are $39,000 per month. The CEO wishes to boost operational income by $5,000. He has an offer from a foreign producer to provide the media centers at a contract rate of $300 per unit. The required saving in fixed cost in order to achieve his objective would be:

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 disinfectant, they could charge $25 per unit for the improved product. It would cost them a total of $3,800 per month to make that alteration. What would be the effect on operating income?

A sunk cost is a cost that was incurred in the past and cannot be changed regardless of which future action is taken.

Felix Time Company manufactures and sells watches for $40 each. Times Products Company has offered Felix Time $25 per watch for a one-time order of 6,000 watches. The total manufacturing cost per watch is $30 per unit, and consists of variable costs of $22 per watch and fixed overhead costs of $8 per watch. Assume that Felix Time 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?

In deciding whether to drop its electronics product line, a company's manager should ignore:

Gnome Company is trying to decide whether to continue to manufacture a particular component or to buy the component from a supplier. Which of the following is relevant to this decision?