Exam 25: Short-Term Business Decisions

Australia Company manufactures sonars for fishing boats.Model 70 sells for $250.Australia produces and sells 5,600 of them per year.Cost data are as follows: Variable manufacturing \ 115 per unit Variable selling and administrative \ 17 per unit Fixed manufacturing \ 290,000 per year Fixed selling and administrative \ 170,000 per year A potential deal has come up for a one-time sale of 32 units at a special price of $120 per unit.The marketing manager states that the sale will not negatively impact the company's regular sales activities and will require the normal variable manufacturing costs and selling and administrative costs.The production manager states that there is plenty of excess capacity and the deal will not impact fixed costs.The controller points out,however,that because the expected increase in revenues are equal to the expected increase in costs to fill the order,the deal will not have any impact on the bottom line.The controller is correct in his statement.

A company sells two products with information as follows: A B Sales price per unit \ 14 \ 23 Variable cost per unit \ 7 \ 13 Products are made by machine.Six units of product A can be made with five machine hours and three units of product B can be made with 0.8 machine hour.If there are no constraints on production or sales of either product,then the company should emphasize sales of product B.

Fixed costs are relevant to a special pricing decision if they are subject to change as a result of the special order.

Home Bakery Company manufactures two products-toaster ovens and bread machines.The following data are available: Toaster Ovens Bread Machines Sales price \ 100 \ 160 Variable costs \ 20 \ 70 Home Bakery Living can manufacture six toaster ovens per machine hour and four bread machines per machine hour.Home Bakery's production capacity is 1,600 machine hours per month.What is the contribution margin per machine hour for toaster ovens? (Round machine hour per unit to two decimal places and your final answer to the nearest whole dollar.)

Leslie's Sunglass Company's western territory's forecasted income statement for the upcoming year is as follows: Sales revenue \ 840,000 Variable costs (520,000) Contribution margin \ 320,000 Fixed costs Operating loss \ (160,000) The company's management is considering dropping the western territory and has determined that $300,000 of the fixed expenses is avoidable.What is the change in Leslie's Sunglass Company's forecasted operating for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

Define joint cost.Should joint costs be considered in the decision to sell or further process the product? Explain your answer.

Route Two Tire Company makes a special kind of racing tire.Variable costs are $200 per unit,and fixed costs are $30,000 per month.Route Two sells 500 units per month at a sales price of $300.The company believes that it can increase the price if the tire quality is upgraded.If so,the variable cost will increase to $240 per unit,and the fixed costs will rise by 25%.The CEO wishes to increase the company's operating income by 30%.Which sales price level would give the desired results? (Round your answer to the nearest cent.)

A company produces 500 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures the circuits in-house but is considering outsourcing the circuits at a contract cost of $28 each.Currently,the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month.Assume the fixed costs are unavoidable but that company could employ the vacated premises to earn rental income of $2,200 per month.If the company outsources,monthly operating income will ________.

Paragon Products sells a special type of navigation equipment for $1,300.Variable costs are $800 per unit.When a special order arrived from a foreign contractor to buy 42 units at a reduced sales price of $900 per unit,there was a discussion among the managers.The controller said that as long as the special price was greater than the variable costs,the sale would contribute to the company's profits and should be accepted as offered.The vice president,however,decided to decline the order.Which of the following statements supports the decision of the vice president?

Cambridge Roller Skates has three product lines-D,E,and F.The following information is available: $\begin{array}{|l|c|c|c|}\hline&\mathrm{D} & \mathrm{E} & \mathrm{F}\\\hline \text { Sales revenue } & \$ 70,000 & \$ 60,000 & \$ 30,000 \\\hline \text { Variable costs } & (40,000) & (15,000) & (10,000) \\\hline \text { Contribution margin } & \$ 30,000 & \$ 45,000 & \$ 20,000 \\\hline \text { Fixed costs } & (15,000) & (5,000) & (23,000) \\\hline \text { Operating income(loss) } & \$ 15,000 & \$40,000 & \$(3,000) \\\hline\end{array}$ The company is deciding whether to drop product line F because it has an operating loss.Assume that $21,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating income?

When considering whether to replace the building roof,the total amount paid for previous roof repairs is relevant to the business decision.

Peacock,Inc.sells 2,100 kayaks per year at a sales price of $500 per unit.It sells in a highly competitive market and uses target pricing.The company has calculated its target full product cost at $820,000 per year.Fixed costs are $340,000 per year and cannot be reduced.What is the target variable cost per unit assuming units sold are equal to units produced?

Regarding relevant nonfinancial information,which of the following statements is incorrect?

A company produces 1,000 packages of chicken feed per month.The sales price is $4 per pack.Variable cost is $1.50 per unit,and fixed costs are $1,800 per month.Management is considering adding a vitamin supplement to improve the value of the product.The variable cost will increase from $1.50 to $1.90 per unit,and fixed costs will increase by 20%.The CEO wants to price the new product at a level that will bring operating income up to $4,000 per month.What sales price should be charged? (Round your answer to the nearest cent.)

A company produces 1,000 packages of chicken feed per month.The sales price is $4.00 per pack.Variable cost is $1.60 per unit,and fixed costs are $1,700 per month.Management is considering adding a vitamin supplement to improve the value of the product.The variable cost will increase from $1.60 to $1.70 per unit,and fixed costs will increase by 20%.The company will price the new product at $6 per pack.How will this affect operating income?

The cost-plus pricing approach is emphasized by price-setters.

In deciding whether to accept a special pricing order,management should only consider the quantitative data and disregard qualitative factors.

Kim Sunshades Company's western territory's forecasted income statement for the upcoming year is as follows: Sales revenue \ 850,000 Variable costs (530,000) Contribution margin \ 320,000 Fixed costs Operating loss \ (180,000) The company's management is considering dropping the western territory and has determined that 90% of the fixed costs are avoidable.What is the change in the forecasted operating loss for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

Fox,Inc.manufactures and sells pens for $7 each.Walton Corp.has offered Fox,Inc.$3 per pen for a one-time order of 3,500 pens.The total manufacturing cost per pen,using absorption costing,is $1 per unit and consists of variable costs of $0.75 per pen and fixed overhead costs of $0.25 per pen.Assume that Fox,Inc.has excess capacity and that the special pricing order would not adversely affect regular sales.What is the change in operating income that would result from accepting the special pricing order?

Spirit Company makes special equipment used in cell towers.Each unit sells for $420.Spirit produces and sells 12,500 units per year.They have provided the following income statement data: Traditional Format Revenue \ 5,250,000 Cost of goods sold 2,800,000 Gross profit 2,450,000 Selling \& admin, expenses Operating income \ 1,825,000 Contribution Margin Format Revenue \ 5,250,000 Variable costs: Manufacturing 800,000 Selling \& admin, Contribution margin 4,050,000 Fixed costs: Manufacturing 2,000,000 Selling \& admin. 225,000 Operating income \ 1,825,000 A foreign company has offered to buy 85 units for a reduced sales price of $320 per unit.The marketing manager says the sale will not affect the company's regular sales.The sales manager says that this sale will require additional selling and administrative costs,as it is a one-time deal.The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs.If Spirit accepts the deal,how will this impact operating income? (Round any intermediate calculations to the nearest cent,and your final answer to the nearest dollar.)