Exam 8: Relevant Costs for Short-Term Decisions

Lasso Corporation manufactures Part B89 in its internal processing division. Lasso produces 11,000 units of Part B89 annually. The annual costs to produce Part B89 at the level of 11,000 units include: All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Assuming Lasso can purchase 11,000 units of the part from the Nadal Parts Company for $20.50 each, and the facilities currently used to make the part could be rented out to another manufacturer for $18,000 a year, what should Lasso do?

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to the current production of the product: If a special sales order is accepted for 7400 seats at a price of $350 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Target total cost is described by which of the following?

High Flying Copters manufactures two types of toy remote control helicopters, small and large. The following per unit data are available: Total fixed costs are $450,000 and the company has a machine hour capacity of 30,000 hours per year. What is the contribution margin per machine hour for the small helicopters?

Mission Company has three product lines: D, E, and F. The following information is available: Mission Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Assuming Mission Company discontinues line F and is able to double the production and sales of product line E without increasing fixed costs. What affect will this have on operating income?

The following information relates to current production of outdoor chaise lounges Backyard Posh: The regular selling price per chaise lounge is $340. The company is analyzing the opportunity to accept a special sales order for 300 chaise lounges at a price of $220 per unit. Fixed costs would increase by $22,000. The company has the capacity to produce 35,000 chaise lounges per year, but is currently producing and selling 13,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

Stooge Enterprises manufactures ceiling fans that normally sell for $93 each. There are 320 defective fans in inventory, which cost $58 each to manufacture. These defective units can be sold as is for $21 each, or they can be processed further for a cost of $40 each and then sold for the normal selling price. Stooge Enterprises would be better off by a

Martin Incorporated provided the following information regarding its only product: Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 1200 units at a sale price of $49 per product? The 1200 units would not require any variable selling and administrative expenses. (NOTE: Assume regular sales are not affected by the special order. Round any intermediary calculations to the nearest cent.))

Mission Company has three product lines: D, E, and F. The following information is available: Mission Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Assume Mission Company is able to increase the sales revenue of product F to $32,000 with no change in volume of units sold and no change in variable costs or fixed costs. What affect will this have on operating income?

"Total cost of product or service" is best described as which of the following?

Elite Office Furniture received a special order for 1,200 units of its executive chairs at a selling price of $90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5. What will be Elite Office Furniture's change in operating income if they accept the special order? Should Elite Office Furniture accept the order? Explain why or why not.

Mission Company has three product lines: D, E, and F. The following information is available: Mission Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed expenses are unavoidable. Assuming Mission Company discontinues product line F and does not replace it, what affect will this have on operating income?

Expected future data that differs among alternative courses of action are referred to as

Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 2700 seats at a price of $350 per unit, fixed costs increase by $6600, and variable marketing and administrative costs for that order are $1 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

When making product mix decisions, companies are most profitable when they maximize production of the product with the highest contribution margin per unit of constraint.

Companies that are considered price-setters usually employ the _________________ approach to pricing products.

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $24,000,000 for the golfing season. About 440,000 golfers are expected each year. Variable costs are about $20 per golfer. Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $102 per round of golf. What profit will it earn as a percent of assets?

What is the difference between relevant and irrelevant information for making decisions. Provide examples of each.

Variable costs are irrelevant to a special decision when those variable costs differ between alternatives.

Irrelevant costs are costs that do not affect short-term decisions.