Exam 8: Relevant Costs for Short-Term Decisions

A joint production process at Specialty Jams Farm results in two products, cherry jelly and cherry jam. The following cost and activity data relate to these two products: Cherry jelly can be sold as-is (at the split-off point)for $2.70 per unit, or it can be processed further into a specialty cherry smoothie and then sold for $5.00 per unit. If cherry jelly is processed further into the specialty cherry smoothie, what would be the overall effect on operating income?

The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows: If Germain Appliances can eliminate fixed costs of $34,000 and increase the sale of Toasters by 6300 units at a selling price of $30 per unit and a contribution margin of $12 per unit, then discontinuing the Microwaves should result in which of the following?

Stoneycreek golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Stoneycreek course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Based on these numbers, what is Stoneycreek's target revenue?

Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 50,000 parts is $170,000, which includes fixed costs of $80,000 and variable costs of $90,000. By outsourcing the part, the company can avoid 30% of the fixed costs. If Harvey Automobiles buys the part, what is the most Harvey Automobiles can spend per unit so that operating income equals the operating income from making the part?

Stoneycreek golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Stoneycreek course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Based on these numbers, what are Stoneycreek's total costs?

Zach has the following information to evaluate-his current salary of $76,000 versus total revenues of $120,000 and expenses of $72,000 from starting a new business. How much is the opportunity cost associated with staying at his current job?

An "opportunity cost" is best described by which of the following?

Widget Inc. manufactures widgets. The company has the capacity to produce 100,000 widgets per year, but it currently produces and sells 75,000 widgets per year. The following information relates to current production: If a special sales order is accepted for 8100 widgets at a price of $39 per unit, and fixed costs increase by $13,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Buzz Appliances manufactures two products: Food Processors and Espresso Machines. The following data are available: The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,200 machine hours per month. What is the contribution margin per machine hour for food processors?

The internal financial statements of Vera Incorporated show that their beaded purses incurred an operating loss in the most recent year. There were 25,000 purses sold in that year. Selected financial information about the purse line follows. If the line of purses were to be discontinued, the company would avoid $18,000 in fixed costs per year. If Vera Incorporated were to discontinue the line of purses, the change in annual operating income would be a(n)

Target total cost is defined as

Managers' decisions are based solely on quantitative factors.

Cruise 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 6100 units, are as follows: Suri Company has offered to sell 6100 units of the same part to Cruise Company for $14.40 per unit. Assuming the company has no other use for its facilities, what should Cruise Company do?

A sunk cost is a past cost that can be changed regardless of which future action is taken.

For a product, revenue at market price plus desired operating profit equals target total cost.

The effect of a plant closing on employee morale is an example of which of the following?

Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $36,000,000 of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 520,000 members are expected to swim each year. Variable costs are about $12 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $40 for a membership. What profit will it earn in terms of dollars?

Lie Around Furniture manufactures two products: Couches and Beds. The following data are available: The company can manufacture two couches per machine hour and one bed per machine hour. The company's production capacity is 8300 machine hours per month. What is the contribution margin ratio for Couches?

Cost-plus pricing is essentially the opposite of target-costing.

Jeff's Widget Corporation produces and sells a part used in the production of bicycles. The unit costs associated with this part are as follows: Saturn Company has approached Jeff's Widget Corporation with an offer to purchase 20,000 units of this part at a price of $.80. Accepting this special sales order will put idle manufacturing capacity to use and will not affect regular sales. Total fixed costs will not change. Determine whether or not the special order should be accepted. Justify your conclusion.