Exam 8: Relevant Costs for Short-Term Decisions

Make or buy decisions are often referred to as outsourcing decisions.

Stockholders' expectations of company profits are affected by which of the following?

A decision must be made at the point in a process where a product can either be sold as is or processed further.

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 7000 widgets at a price of $41 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Managers should consider which of the following when deciding whether to outsource a product or service?

To maximize profits, produce the product with the lowest contribution margin per unit of the constraint.

A sunk cost is described as which of the following?

Not factoring in qualitative factors, if the incremental revenue from fulfilling a special order is ____________ the incremental costs of the order, the company should accept the special order.

One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs.

Totally Technology manufactures Cameras and Video Recorders. The company's product line income statement follows: Management is considering discontinuing the Video Recorder product line. Accountants for the company estimate that discontinuing the Video Recorder line will decrease fixed cost of goods sold by $10,000 and fixed marketing and administrative expenses by $4,000. Prepare an analysis supporting your opinion about whether or not the Video Recorder product line should be discontinued.