Exam 25: Short-Term Business Decisions

The income statement for Nighty Night,Inc.is divided into two product lines,blankets and pillows,as follows: Blankets Pillows Total Sales revenue \ 700,000 \ 510,000 \ 1,210,000 Variable costs Contribution margin 350,000 70,000 420,000 Fixed costs Operating income (loss) \ 265,000 \ (26,000) \ 239,000 Nighty Night,Inc.should eliminate the pillows product line only,if by doing so,they can eliminate more than $70,000 of fixed costs.

Ridley Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available: Bedford Lamp Lowell Lamp Sales price \ 30 \ 35 Variable costs \ 18 \ 23 Machine hours required for one lamp 2 4 Total fixed costs are $40,000.Marketing data indicate that the company can sell up to 8,000 units of the Bedford Lamp and up to 4,000 units of the Lowell Lamp.Machine hour capacity is 26,000 hours per year.Which product mix will deliver the optimum operating income?

Management of Bluebird Manufacturing is considering whether to drop a product line.So far,management has determined that the product has a negative contribution margin and that lost revenues are less than the total cost savings.In making the final decision,what are other questions that the management of Bluebird should consider?

Brookline Furniture manufactures a small table and a large table.The small table sells for $900,has variable costs of $770 per table,and takes 8.00 labor hours to manufacture.The large table sells for $1,700,has variable costs of $900,and takes 15 direct labor hours to manufacture.The small table has a lower contribution margin per unit,but a higher contribution margin per direct labor hour.

A company has two different products that are sold in different markets.Financial data are as follows: Product A Product B Total Revenue \ 17,000 \ 9,400 \ 26,400 Variable cost (8,000) (9,700) (17,700) Fixed cost (allocated) Operating income (loss) \ 8,000 \ (2,300) \ 5,700 Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other.If Product B is dropped,what would be the impact on total operating income of the company?

Which of the following provides a key in analyzing short-term business decisions?

Polynesia Company manufactures sonars for fishing boats.Its Model 70 sells for $300.Polynesia produces and sells 5,700 of them per year.Cost data follow: Variable manufacturing \ 100 per unit Variable selling and administrative \ 16 per unit Fixed manufacturing \ 290,000 per year Fixed selling and administrative \ 170,000 per year Arthur Bailey,the sales manager,wants to offer a special sale to a new customer that outfits boats.He proposes a sale of 41 units at a special price of $150 per unit.Arthur believes that it will not affect the company's regular sales in the long run because it is a one-time transaction.The sale will require the normal variable costs,both selling and administrative costs and manufacturing costs,but will not impact the fixed costs.The president of the company has some reservations but finally agrees to make the deal if and only if it adds a minimum of $1,700 to operating income.Based on the president's criteria,Polynesia will not make the offer.

In deciding whether to drop its electronics product line,a company's manager should ignore ________.

Todd Corporation produces two products,P and Q.P sells for $4.00 per unit; Q sells for $5.50 per unit.Variable costs for P and Q are $2.00 and $4.50,respectively.There are 7,300 direct labor hours per month available for producing the two products.Product P requires 2.50 direct labor hours per unit,and product Q requires 2.00 direct labor hours per unit.The company can sell as many of either product as it can produce.What is the maximum monthly contribution margin that Todd can generate under the circumstances? (Round your answer to nearest whole dollar.)

A company produces 1,000 packages of chicken feed per month.The sales price is $6 per pack.Variable cost is $1.50 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 $1.50 to $2.00 per unit,but there will be no change in fixed costs.The company will price the new product at $4.30 to compete with other products.How will this affect operating income?

The income statement for Eagle,Inc.is divided by its two product lines,blankets and pillows,as follows: Blankets Pillows Total Sales revenue \ 700,000 \ 500,000 \ 1,200,000 Variable costs Contribution margin 350,000 170,000 520,000 Fixed costs Operating income (loss) \ 285,000 \ 95,000 \ 380,000 If total fixed costs remain unchanged and Eagle,Inc.drops the pillows line,operating income will decrease by $170,000.

Differential analysis is a common approach to making long-term business decisions.

Blair Stationery Company is a price-taker and uses target pricing.The company has just done an analysis of its revenues,costs,and desired profits and has calculated its target full product cost.Assume all products produced are sold.Refer to the following information: Target full product cost \ 510,000 per year Actual fixed cost \ 260,000 per year Actual variable cost \ 3 per unit Production volume 151,000 units per year Actual costs are currently higher than target full product cost.Assuming that fixed costs cannot be reduced,what are the target total variable costs?

Explain the difference between price-takers and price-setters.

Differential analysis is a method that looks at how operating income would differ under each budget scenario.

Nelson Products is a price-setter that uses the cost-plus pricing approach.The products are specialty vacuum tubes used in sound equipment.The CEO is certain that the company can produce and sell 300,000 units per year,due to the high demand for the product.Variable costs are $2.30 per unit.Total fixed costs are $980,000 per year.The CEO will receive stock options if $300,000 of operating income for the year is reported.What sales price would allow the CEO to achieve the target if the cost-plus pricing method is used? (Round your answer to the nearest cent.)

Rocca 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 \ 950,000 \ 600,000 \ 350,000 Variable costs (430,000) (150,000) (280,000) Contribution margin \ 520,000 \ 450,000 \ 70,000 Fixed costs (182,000) (90,000) (92,000) Operating income (loss) \ 338,000 \ 360,000 \ (22,000) Assuming the football helmet line is dropped,total fixed costs remain unchanged,and the space formerly used to produce the football helmet line is used to double the production of batting helmets,operating income will be ________.

Off Road Concepts,Inc.produces a special kind of light-weight,recreational vehicle that has a unique design.It allows the company to follow a cost-plus pricing strategy.It has $10,000,000 of average assets,and the desired profit is a 9% return on assets.Assume all products produced are sold.Additional data are as follows: Sales volume 2,000 units per year Variable costs \ 2,000 per unit Fixed costs \ 4,000,000 per year Using the cost-plus pricing approach,what should be the sales price per unit?

The contribution margin approach helps managers in short-term decision making because it ________.

A company is planning to replace an old machine with a new one.Which of the following is a sunk cost?