Exam 8: Relevant Costs for Short-Term Decisions

Fixed costs affect product mix considerations.

When making outsourcing (make-or-buy)decisions, the focus is on how best to use available resources.

When making a pricing decision, it is not necessary to separate costs into fixed and variable.

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

All About Animals has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow: Assuming the Dog food line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Dog food line is used to double the production of Cat food, how will operating income be affected?

When deciding whether to discontinue a product, managers should only consider the costs that will be saved.

When deciding whether to accept a special order, managers need to consider whether they have available excess capacity.

One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits.

Fixed costs that will continue to exist if a product is discontinued are relevant.

Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $30,000 per year, how will operating income be affected?

Extreme Sports received a special order for 1,000 units of its extreme motorbike at a selling price of $250 per motorbike. Extreme Sports has enough extra 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, $100; direct labor, $50; variable manufacturing overhead, $14; fixed manufacturing overhead, $10, and variable selling costs, $2. A)List the relevant costs. B)What will be the change in operating income if Extreme Sports accepts the special order? C)Should Extreme Sports accept the special order?

If a product line has a negative contribution margin, the product is not covering its fixed costs and should be discontinued.

Blue Ridge Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 45,000 parts is $142,000, which includes fixed costs of $70,000 and variable costs of $72,000. By outsourcing the part, the company can avoid 30% of the fixed costs. If Blue Ridge Bicycles buys the part, what is the most Blue Ridge Bicycles can spend per unit so that operating income equals the operating income from making the part?

If the cost savings from discontinuing a product exceed the lost revenues from discontinuing the product, it should be retained.

In most circumstances, all fixed costs can be eliminated by outsourcing a product.

"Contribution margin per unit" is best described by which of the following?

The managerial accountant at Sellers Manufacturing produces a product, Part Z that the company uses to make multiple products at its facility in Virginia. The managerial accountant reported to the operations manager that 12% of its fixed overhead costs assigned to Part Z will not continue if Sellers Manufacturing outsources the production of Product Z at $44 per unit to Manufacturing World. The managerial accountant reported that to produce 1,200 units of Product Z, Sellers Manufacturing incurs the following costs: Should Sellers Manufacturing produce Part Z or outsource it to Manufacturing World?

Yummy Granola is considering selling premium granola. It already sells regular for $6.75/pound and would sell premium granola for $9.50/pound. The cost for organic grains for the premium granola would be $1.15/pound. A cost that would not be considered in this decision would be

Longview Baskets has in its inventory 2500 damaged baskets that cost $20,000 The baskets can be sold in their present condition for $17,000, or repaired at a cost of $18,000 and sold for $36,000. What is the opportunity cost of selling the baskets in their present condition?

Which of the following is irrelevant when making a decision?