Exam 25: Short-Term Business Decisions

Nordic Avionics makes aircraft instrumentation.Its basic navigation radio requires $80 in variable costs and $4,000 per month in fixed costs.Further processing the radio,to enhance its functionality,will require an additional $27 per unit of variable costs but no change to the fixed costs.The marketing manager believes that the company would be able to increase the sales price from $280 to $300.If Nordic decides to further process the product,operating income would ________.

Which of the following statements describes a scenario when management should consider dropping a business division?

Lightning Semiconductors produces 300,000 hi-tech computer chips per month.Each chip uses a component that Lightning makes in-house.The variable costs to make the component are $1.30 per unit,and the fixed costs are $1,200,000 per month.The company has been approached by a foreign producer who can supply the component,within acceptable quality standards,for $1.10 each.The fixed costs are unavoidable,and Lightning would have no other use for the facilities currently employed in making the component.What would be the effect on operating income if the company decides to outsource?

Grand Products is a price-setter that uses the cost-plus pricing approach for pricing its products.These products are unique,artistically designed architectural decorations.Grand produces and sells 6,200 units per year,which represent maximum capacity.Variable costs are $330 per unit.Total fixed costs are $900,000 per year.The CEO has a target of $50,000 in operating income,which he wants to achieve by year-end.Using the cost-plus pricing method,what sales price should Grand use? (Round your answer to the nearest cent.)

Rica Company is a price-taker and uses a target-pricing approach.Refer to the following information: Production volume 600,000 units per year Market price \ 32 per unit Desired operating income 16\% of total assets Total assets \ 13,700,000 What is the desired profit for the year?

Trina Productions is a price-taker.The company produces large spools of electrical wire in a highly competitive market; thus,it uses target pricing.The current market price of the electric wire is $800 per unit.The company has $3,000,000 in average assets,and the desired profit is a return of 9% on assets.Assume all products produced are sold.The company provides the following information: Sales volume 110,000 units per year Variable costs \ 690 per unit Fixed costs \ 14,000,000 per year If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the desired target?

Macaulay Roller Skates has three product lines-D,E,and F.The following information is available: D E F Sales revenue \ 80,000 \ 40,000 \ 31,000 Variable costs (40,000) (10,000) (12,000) Contribution margin \ 40,000 \ 30,000 \ 19,000 Fixed costs (20,000) (10,000) (25,000) Operating income (loss) \ 20,000 \ 20,000 \ (6,000) The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Macaulay drops product line F and does not replace it,what effect will this have on operating income?

Centric Sail Makers manufactures sails for sailboats.The company has the capacity to produce 36,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: Sales price per unit \ 185 Variable costs per unit: Manufacturing \ 60 Selling and administrative \ 20 Total fixed costs: Manufacturing \ 675,000 Selling and administrative \ 300,000 If a special pricing order is accepted for 5,600 sails at a sales price of $150 per unit,and fixed costs remain unchanged,what is the change in operating income? (Assume the special pricing order will require variable manufacturing costs and variable selling and administrative costs.)

Back Bay Company is a price-taker and uses target pricing.Refer to the following information: Production volume 602,000 units per year Market price \ 32 per unit Desired operating income 17\% of total assets Total assets \ 13,700,000 What is the target full product cost per unit? (Round your answer to nearest cent.)Assume all units produced are sold.

Gabriel Metalworks produces a special kind of metal ingots that are unique,which allows Gabriel to follow a cost-plus pricing strategy.Gabriel has $11,000,000 of assets and shareholders expect approximately a 8% return on assets.Assume all products produced are sold.Additional data are as follows: Sales volume 450,000 units per year Variable costs \ 15 per unit Fixed costs \ 1,700,000 per year Using the cost-plus pricing approach,what should be the sales price per unit? (Round your answer to the nearest cent.)

Victory Tire Company makes a special kind of racing tire.Variable costs are $220 per unit,and fixed costs are $10,000 per month.Victory sells 600 units per month at a sales price of $300.If the quality of the tire is upgraded,the company believes it can increase the sales price to $350.If so,the variable cost will increase to $240 per unit,and the fixed costs will remain the same.If Victory decides to upgrade,how will it affect operating income?

Jones Company is considering purchasing a new truck.The decision has been narrowed to two models.The cost of each of these two trucks is relevant to this business decision.

Wing Company makes a special kind of racing tire.Variable costs are $340,and fixed costs are $35,500 per month.Wing sells 620 units per month at a sales price of $400.If Wing upgrades the quality of the tire,management believes that the sales price can be increased to $450.If so,the variable cost will increase to $370,and the fixed costs will rise by 30%.The CEO wishes to increase his operating income by 20%.If the company decides to upgrade the product,the CEO will reach his goal.

Superior Containers produces restaurant storage containers .The company makes two sizes of containers: regular (55 gallon)and large (100 gallon).Demand for the products is so high that Superior can sell as many of each size as it can produce.The company uses the same machinery to produce both sizes.The machinery can be run for only 2,500 hours per period.Superior can produce 20 regular containers every hour,whereas it can produce 8 large containers in the same amount of time.Fixed costs amount to $250,000 per period.Sales prices and variable costs are as follows: Per Unit Regular Large Sales price \ 105 \ 225 Variable costs 28 42 To maximize profits,how many of each size container should Superior produce? Given this product mix,what will the company's operating income be?

Battista Stationery Company is a price-taker and uses target pricing.The company has completed an analysis of its revenues,costs,and desired profits and has calculated its target full product cost.Refer to the following information: Target full product cost \ 500,000 per year Actual fixed cost \ 280,000 per year Actual variable cost \ 2 per unit Production volume 150,000 units per year Actual costs are currently higher than target full product cost.Assume all products produced are sold.Assuming that variable costs are dependent on commodity prices and cannot be reduced,what is the target fixed cost?

Faros Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: Total Batting Helmets Football Helmets Sales revenue \ 1,050,000 \ 700,000 \ 350,000 Variable costs \ 250,000) (280,000) Contribution margin \ 520,000 \ 450,000 \ 70,000 Fixed costs (200,000) (90,000) (110,000) Operating income (loss) \ 320,000 \ 360,000 \ (40,000) What is the effect of dropping football helmets line on the operating income of the company? (Assume that fixed costs remain unchanged and that there would be no adverse effect on other sales.)

If a business is considering buying a new vehicle,the cost of the insurance premium is relevant to the business decision.

Lehigh Roller Skates has three product lines-D,E,and F.The following information is available: $\begin{array}{|l|c|c|c|}\hline&\mathrm{D} & \mathrm{E} & \mathrm{F}\\\hline \text { Sales revenue } & \$ 70,000 & \$ 50,000 & \$ 30,000 \\\hline \text { Variable costs } & (20,000) & (10,000) & (12,000) \\\hline \text { Contribution margin } & \$ 50,000 & \$ 40,000 & \$ 18,000 \\\hline \text { xed costs } & (10,000) & (5,000) & (23,000) \\\hline \text { erating in } & \$ 40,000 & \$ 35,000 & \$(5,000) \\\hline\end{array}$ The company is deciding whether to drop product line F because it has an operating loss.Assume that $15,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating income?

The income statement for Bedtime Company is divided by its two product lines,blankets and pillows,as follows: Blankets Pillows Total Sales revenue \ 640,000 \ 298,000 \ 938,000 Variable costs (465,000) (242,000) (707,000) Contribution margin \ 175,000 \ 56,000 \ 231,000 Fixed costs (74,000) (148,000) Operating income (loss) \ 101,000 \ (18,000) \ 83,000 Bedtime is considering eliminating the pillows product line.If this line is eliminated,Bedtime will be able to eliminate $72,000 of total fixed costs.How would this business decision impact operating income?

CM Company manufactures a component used in the production of one of its main products.The following cost information is available: Direct materials \ 410 Direct labor (variable) 100 Variable manufacturing overhead 90 Fixed manufacturing overhead 35 A supplier has offered to sell the component to CM for $630 per unit.If CM buys the component from the supplier,the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually.Assuming that CM needs 4,000 components annually and that the fixed manufacturing overhead is unavoidable,what would be the impact on operating income if CM outsources?