Exam 8: Relevant Costs for Short-Term Decisions

Ida Enterprises is considering replacing a machine that is presently used in its production process. The following information is available: Which of the information provided in the table is irrelevant to the replacement decision?

Cost-plus price minus desired profit equals total cost.

Costs that differ between alternatives are irrelevant.

Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow: Assuming fixed costs remain unchanged, how would discontinuing the Fashion line affect operating income?

Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow: Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $28,000 per year, how will operating income be affected?

A price-setter company emphasizes a cost-plus approach to pricing.

The following information relates to current production of outdoor chaise lounges at Backyard Posh: The regular selling price per chaise lounge is $280. The company is analyzing the opportunity to accept a special sales order for 900 chaise lounge at a price of $210 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 65,000 chaise lounges per year, but is currently producing and selling 9000 chaise lounges per year. The 900 units would not require any variable marketing and administrative expenses. 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?

Tunnel Incorporated provided the following information regarding its single product: The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 2500 units at a sale price of $54 per product assuming additional fixed manufacturing overhead costs of $15,000 are incurred? (Round any intermediary calculations to the nearest cent.)

Tunnel Incorporated provided the following information regarding its single product: The regular selling price for the product is $80. The annual quantity of units produced and sold is 42,000 units (the costs above relate to the 42,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 5000 units at a sale price of $56 per product? (Round any intermediary calculations to the nearest cent.)

Served Inc. manufactures two products, salad plates and platters, from a joint process. Salad plates are allocated $7900 of the total joint costs of $26,000. There are 3500 salad plates produced and 3500 platters produced each year. Salad plates can be sold at the split-off point for $10 per unit, or they can be hand painted for additional processing costs of $8600 and sold for $19 for each deluxe salad plate. If the salad plates are processed further and made into deluxe plates, the effect on operating income would be

Each month, Burrel Incorporated produces 500 units of a product that has unit variable costs of $22. Total fixed costs for the month are $4800. A special sales order is received for 200 units of the product at a price of $28 per unit. In deciding to accept or reject the special sales order, it is appropriate to consider the

A "relevant cost" is best described by which of the following?

Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no change in the number of units produced. By what percent would Heinz Manufacturing's operating income improve if the change is made?

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Mountaintop charge for a round of golf?

Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue Technologies $21 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30 per DVD player. The total manufacturing cost per DVD player is $18 and consists of variable costs of $11 per DVD player and fixed overhead costs of $3 per DVD player. (NOTE: Assume excess capacity and no effect on regular sales.) How much are the expected increase (decrease)in revenues and expenses from the special sales order?

Faux Trees Company produces artificial Christmas trees. A local shopping mall recently made a special order offer; the shopping mall would like to purchase 240 extra-large white trees. Faux Trees Company is currently producing and selling 20,000 trees; the company has the excess capacity to handle this special order. The shopping mall has offered to pay $140 for each tree. An accountant at Faux Trees Company provides an estimate of the unit product cost as follows: This special order would require an investment of $9000 for the molds required for the extra-large trees. These molds would have no other purpose and would have no salvage value. The special order trees would also have an additional variable cost of $5.59 per unit associated with having a white tree. This special order would not have any effect on the company's other sales. If the special order is accepted, the company's operating income would increase (decrease)by

Lie Around Furniture manufactures two products: Futons and Recliners. The following data are available: The company can manufacture 3 futons per machine hour and 2 recliner per machine hour. The company's production capacity is 3500 machine hours per month. To maximize profits, what product and how many units should the company produce in a month?

Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: If $22,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $35,000,000 of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $13,000,000 for the year. About 510,000 members are expected to swim each year. Variable costs are about $11 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $41 for a membership. What profit will it earn as a percent of assets?

Blue Ridge Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 43,000 parts is $140,000, which includes fixed costs of $68,000 and variable costs of $72,000. The company can buy the part from an outside supplier for $3.80 per unit, and avoid 30% of the fixed costs. If Blue Ridge Bicycles makes the part, how much will its operating income be?