Exam 8: Relevant Costs for Short-Term Decisions

Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40: Jackson Corporation can purchase the part from an outside supplier for $4.67 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $2500 profit. If Jackson Corporation makes the part, what will its operating income be?

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: Assuming no other use for its facilities, what is the highest price per unit that Cruise Company should pay for the part?

On the line in front of each statement, enter the letter corresponding to the term that best fits that statement. An item may be used more than once or not at all. ________ Costs that were incurred in the past and cannot be changed ________ Benefits foregone by choosing a particular alternative course of action ________ Expected future costs that differs among alternatives ________ Costs of developing, producing and delivering a product or service ________ A factor that restricts production or sales of a product

When companies consider outsourcing a product, fixed costs are always irrelevant.

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 $37,000 by discontinuing the Microwave line, then discontinuing it should result in which of the following?

An opportunity cost is a past cost.

Qualitative factors play an important part in make or buy decisions.

The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows: If Lovely Locks can eliminate fixed costs of $33,000 and increase the sale of Curling Irons by 6500 units at a selling price of $33 per unit and a contribution margin of $11 per unit, then discontinuing the Straighteners should result in which of the following?

Lie Around Furniture manufactures two products: Couches and Beds. The following data are available: The company can manufacture 4 couches per machine hour and 2 beds per machine hour. The company's production capacity is 13,600 machine hours per month. What is the contribution margin per machine hour for beds?

The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows: If fixed costs remain unchanged and Lovely Locks discontinues the Straightener line, how will operating income change?

Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $37,000,000 of assets. The company primarily incurs fixed costs to maintain the swimming pool. Fixed costs are projected to be $12,600,000 for the year. About 540,000 members are expected to swim each year. Variable costs are about $13 per swimmer. The Philadelphia Swim Club has a favorable reputation in the area and therefore, has some control over the membership price. Using a cost-plus approach, what price should Philadelphia Swim Club charge for a membership?

When using a target costing approach, the company starts with revenue at market price, and then subtracts its desired profit, to yield the target total cost.

All of the following would be considered in evaluating product or sales mix allocations, except

ABC Toys manufactures and sells wooden toys for $17 each. The company has the capacity to produce 28,000 toys in a year, but is currently produces and sells 24,000 toys per year. The company currently incurs the following costs at its current production level of 24,000 toys: A retailer is interested in purchasing the excess capacity of 4000 toys if it can receive a special price. This special order would not affect ABC Toys' regular sales or its cost structure. ABC Toys' profits would increase from this special order if the special order price per toy is greater than

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. Stoneycreek golf course is a price-taker and won't be able to charge more than $60 per round because of local competition. What will Stoneycreek's revenue be at a market price of $60/round?

Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 60,000 parts is $160,000, which includes fixed costs of $50,000 and variable costs of $110,000. The company can buy the part from an outside supplier for $3.00 per unit, and avoid 30% of the fixed costs. If Harvey Automobiles makes the part, how much will its operating income be?

Fixed costs that are allocated among all departments are known as

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. What would be the operating income for Item Q?

Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow: If $30,000 of fixed costs will be eliminated by discontinuing the Fashion line, how will operating income be affected?

Benace Parts and Supply makes a variety of car parts. The company produces 6100 A90 parts each year. Each A90 sells for $7 and has a contribution margin of $4. Currently, $16,400 of fixed manufacturing overhead is allocated to the A90 product line. If Benace Parts and Supply discontinues the A90 product line, $7300 of fixed manufacturing overhead costs would be avoided. What would be the impact on total operating income if the A90 product line were to be discontinued?