DM Corporation has provided you with the following budgeted income statement for one of its products: \[\begin{array} { | l | r | } \hline \text { Sales revenue } & \$ 700,000 \\ \hline \text { Variable costs } & ( 430,000 ) \\ \hline \text { Contribution margin } & \$ 270,000 \\ \hline \text { Fixed costs } & \underline { ( 310,000) } \\ \hline \text { Operating loss } & \$ ( 40,000 )\\ \hline \end{array}\] DM has just encountered environmental problems with the product and will be forced to drop the product line altogether.DM will be able to eliminate 60% of the fixed costs.What will be the impact on operating income of the company?

A) Operating income will decrease by $186,000. B) Operating income will decrease by $84,000. C) Operating income will increase by $186,000. D) Operating income will increase by $84,000. A) Operating income will decrease by $186,000. B) Operating income will decrease by $84,000. C) Operating income will increase by $186,000. D) Operating income will increase by $84,000.

Lighthouse Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: \[\begin{array} { | l | r | } \hline \text { Sales price per unit } & \$ 175 \\ \hline \text { Variable costs per unit: } & \\ \hline \text { Manufacturing } & \$ 62 \\ \hline \text { Selling and administrative } & \$ 20 \\ \hline \text { Total fixed costs: } & \\ \hline \text { Manufacturing } & \$ 700,000 \\ \hline \text { Selling and administrative } & \$ 300,000 \\ \hline \end{array}\] The fixed manufacturing costs increase by $102,000 for every 500 units produced beyond the maximum capacity of the plant.If a special pricing order is accepted for 5,500 sails at a sales price of $150 per unit,and if the order requires no variable or fixed selling and administrative costs,what is the effect on operating income?

A) Operating income increases by $382,000. B) Operating income decreases by $382,000. C) Operating income increases by $484,000. D) Operating income decreases by $484,000. A) Operating income increases by $382,000. B) Operating income decreases by $382,000. C) Operating income increases by $484,000. D) Operating income decreases by $484,000.

Melville Company makes special equipment used in cell towers.Each unit sells for $420.Melville produces and sells 12,700 units per year.They have provided the following income statement data: $\begin{array}{c}\begin{array}{|l|r|} \hline \text { Traditional Format }\\ \hline \text { Revenue } & \$ 5,334,000 \\ \hline \text { Cost of goods sold } &2,800,000 \\ \hline \text { Gross profit } & 2,534,000 \\ \hline \text { Selling \& admin, expenses } & \underline{750,000} \\ \hline & \\ \hline & \\ \hline &\\ \hline &\\ \hline \text { Operating income } & \$ 1,784,000 \\ \hline \end{array} \begin{array}{l|r|} \hline \text { Contribution Margin Format}\\ \hline \text { Revenue } & \$ 5,334,000 \\ \hline \text { Variable costs: } &\\ \hline \text { Manufacturing } & 800,000 \\ \hline \text { Selling \& admin, } & \underline{500,000} \\ \hline \text { Contribution margin } &4,034,000 \\ \hline \text { Fixed costs: } \\ \hline \text { Manufacturing }&2,000,000 \\ \hline \text { Selling \& admin. } & 250,000\\ \hline\text { Operating income }& \$ 1,784,000\\ \hline \end{array}\end{array}$ A foreign company has offered to buy 75 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 incremental selling and administrative costs,as it is a one-time deal.The production manager reports that it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer.If Melville 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.)

A) Operating income will increase by $13,677. B) Operating income will decrease by $13,677. C) Operating income will increase by $24,000. D) Operating income will decrease by $16,323. A) Operating income will increase by $13,677. B) Operating income will decrease by $13,677. C) Operating income will increase by $24,000. D) Operating income will decrease by $16,323.

Michael's Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: \[\begin{array} { | l | r | r | r | } \hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \\ \hline \text { Sales revenue } & \$ 1,100,000 & \$ 700,000 & \$ 400,000 \\ \hline \text { Variable costs } & ( 480,000 & \underline { ( 200,000 ) } & ( 280,000 ) \\ \hline \text { Contribution margin } & \$ 620,000 & \$ 500,000 & \$ 120,000 \\ \hline \text { Fixed costs } & ( 220,000 )& ( 70,000 ) & ( 150,000 ) \\ \hline \text { Operating income (loss) } & \$ 400,000 & \$ 430,000 & \$ ( 30,000 ) \\ \hline \end{array}\] If $90,000 of fixed costs will be eliminated by dropping the football helmets line,how will dropping football helmets affect operating income of the company?

A) Operating income will increase by $90,000. B) Operating income will increase by $120,000. C) Operating income will decrease by $150,000. D) Operating income will decrease by $30,000. A) Operating income will increase by $90,000. B) Operating income will increase by $120,000. C) Operating income will decrease by $150,000. D) Operating income will decrease by $30,000.

Clay Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available: \[\begin{array} { | l | r | r | } \hline & \text { Bedford Lamp } & \text { Lowell Lamp } \\ \hline \text { Sales price } & \$ 25 & \$ 36 \\ \hline \text { Variable costs } & \$ 17 & \$ 23 \\ \hline \text { Machine hours required for one lamp } & 1 & 4 \\ \hline \end{array}\] Total fixed costs are $30,000,and Clay can sell a maximum of 10,000 units of each style of lamp annually.Machine hour capacity is 30,000 hours per year.What is the contribution margin per machine hour for the Bedford Lamp? (Round your answer to the nearest cent.)

A) $8.00 per machine hour B) $3.25 per machine hour C) $25.00 per machine hour D) $36.00 per machine hour A) $8.00 per machine hour B) $3.25 per machine hour C) $25.00 per machine hour D) $36.00 per machine hour

Rice Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available: \[\begin{array} { | l | r | r | } \hline & \text { Bedford Lamp } & \text { Lowell Lamp } \\ \hline \text { Sales price } & \$ 25 & \$ 35 \\ \hline \text { Variable costs } & \$ 17 & \$ 23 \\ \hline \text { Machine hours required for one lamp } & 2 & 4 \\ \hline \end{array}\] Total fixed costs are $50,000.Machine hour capacity is 25,000 hours per year.Assuming that the company can sell as many products as it can make,which product mix would deliver the highest operating income?

A) 6,250 Bedford Lamps and 12,500 Lowell Lamps B) 0 Bedford Lamps and 6,250 Lowell Lamps C) 12,500 Bedford Lamps and 0 Lowell Lamps D) 12,500 Bedford Lamps and 12,500 Lowell Lamps A) 6,250 Bedford Lamps and 12,500 Lowell Lamps B) 0 Bedford Lamps and 6,250 Lowell Lamps C) 12,500 Bedford Lamps and 0 Lowell Lamps D) 12,500 Bedford Lamps and 12,500 Lowell Lamps

Smash Company has 5,000 machine hours available annually to manufacture badminton racquets.The following information is available for the two different racquets produced by Smash: \[\begin{array} { | l | r | } \hline \text { Pro } & \\ \hline \text { Unit sales price } & \$ 500 \\ \hline \text { Unit variable costs } & \$ 150 \\ \hline \text { Annual demand } & 1,900 \text { units } \\ \hline \text { Machine time } & \text { 1 hours per unit } \\ \hline \text { Mid } & \\ \hline \text { Unit sales price } & \$150\\ \hline \text { Unit variable costs } &\$60\\ \hline \text { Annual demand } & 4,000 \text { units }\\ \hline & \text { 2 hours per unit } \\ \hline \end{array}\] How many units of each racquet should be manufactured for the company to maximize its operating income? (Round your answer to the nearest whole unit.)

A) 1,900 units of Pro and 350 units of Mid B) 1,900 units of Pro and 1,550 units of Mid C) 1,900 units of Pro and 4,000 units of Mid D) 4,000 units of Mid and 1,550 units of Pro A) 1,900 units of Pro and 350 units of Mid B) 1,900 units of Pro and 1,550 units of Mid C) 1,900 units of Pro and 4,000 units of Mid D) 4,000 units of Mid and 1,550 units of Pro

Healthier Living Company manufactures two products-toaster ovens and bread machines.The following data are available: \[\begin{array} { | l | r | r | } \hline & \text { Toaster Ovens } & \text { Bread Machines } \\ \hline \text { Sales price } & \$ 120 & \$ 160 \\ \hline \text { Variable costs } & \$ 60 & \$ 70 \\ \hline \end{array}\] Healthier Living can manufacture six toaster ovens per machine hour and four bread machines per machine hour.Healthier Living's production capacity is 2,000 machine hours per month.What is the contribution margin per machine hour for bread machines?

A) $60 B) $90 C) $360 D) $540 A) $60 B) $90 C) $360 D) $540

Exam 25: Short-Term Business Decisions

DM Corporation has provided you with the following budgeted income statement for one of its products: Sales revenue \ 700,000 Variable costs (430,000) Contribution margin \ 270,000 Fixed costs Operating loss \ (40,000) DM has just encountered environmental problems with the product and will be forced to drop the product line altogether.DM will be able to eliminate 60% of the fixed costs.What will be the impact on operating income of the company?

(Multiple Choice)

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Question 101

Lighthouse Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 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 \ 175 Variable costs per unit: Manufacturing \ 62 Selling and administrative \ 20 Total fixed costs: Manufacturing \ 700,000 Selling and administrative \ 300,000 The fixed manufacturing costs increase by $102,000 for every 500 units produced beyond the maximum capacity of the plant.If a special pricing order is accepted for 5,500 sails at a sales price of $150 per unit,and if the order requires no variable or fixed selling and administrative costs,what is the effect on operating income?

(Multiple Choice)

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Question 102

Melville Company makes special equipment used in cell towers.Each unit sells for $420.Melville produces and sells 12,700 units per year.They have provided the following income statement data: Traditional Format Revenue \ 5,334,000 Cost of goods sold 2,800,000 Gross profit 2,534,000 Selling \& admin, expenses Operating income \ 1,784,000 Contribution Margin Format Revenue \ 5,334,000 Variable costs: Manufacturing 800,000 Selling \& admin, Contribution margin 4,034,000 Fixed costs: Manufacturing 2,000,000 Selling \& admin. 250,000 Operating income \ 1,784,000 A foreign company has offered to buy 75 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 incremental selling and administrative costs,as it is a one-time deal.The production manager reports that it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer.If Melville 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.)

(Multiple Choice)

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Question 103

Michael's 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 \ 1,100,000 \ 700,000 \ 400,000 Variable costs (480,000 (280,000) Contribution margin \ 620,000 \ 500,000 \ 120,000 Fixed costs (220,000) (70,000) (150,000) Operating income (loss) \ 400,000 \ 430,000 \ (30,000) If $90,000 of fixed costs will be eliminated by dropping the football helmets line,how will dropping football helmets affect operating income of the company?

(Multiple Choice)

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Question 104

Clay 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 \ 25 \ 36 Variable costs \ 17 \ 23 Machine hours required for one lamp 1 4 Total fixed costs are $30,000,and Clay can sell a maximum of 10,000 units of each style of lamp annually.Machine hour capacity is 30,000 hours per year.What is the contribution margin per machine hour for the Bedford Lamp? (Round your answer to the nearest cent.)

(Multiple Choice)

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Question 105

A depreciable asset's original cost is relevant when considering whether to replace the asset.

(True/False)

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Question 106

Marlow Company makes bulk quantities of cleaning fluids.They currently sell 1,400 containers a month at a sales price of $25 per unit.If they add a new scent,they could charge $30 per unit for the improved product.It would cost them a total of $1,000 per month to make that alteration.If they decide to process further,it will improve their operating income.

(True/False)

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Question 107

Target full product cost equals the revenue at the market price minus the desired profit.

(True/False)

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Question 108

Rice 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 \ 25 \ 35 Variable costs \ 17 \ 23 Machine hours required for one lamp 2 4 Total fixed costs are $50,000.Machine hour capacity is 25,000 hours per year.Assuming that the company can sell as many products as it can make,which product mix would deliver the highest operating income?

(Multiple Choice)

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Question 109

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 $1.90 per unit,and fixed costs will increase by 10%.At what sales price for the new product will the two alternatives (sell as is or process further)produce the same operating income? (Round your answer to the nearest cent.)

(Multiple Choice)

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Question 110

Willow Golf Course is planning for the coming golfing season.Investors would like to earn a 15% return on the company's $58,000,000 of assets.The company primarily incurs fixed costs to groom the greens and fairways.Fixed costs are projected to be $30,000,000 for the season.About 600,000 rounds of golf are expected to be played each year.Variable costs are about $17 per round of golf.Willow golf course is a price-taker and will not be able to charge more than its competitors,who charge $75 per round of golf.Compute the operating profit that will be earned.

(Multiple Choice)

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Question 111

Doro Fill Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: Volume 800 units per month Variable cost per unit \ 7 per unit Fixed costs \ 15,000 per month A factory in Indonesia has offered to supply Doro Fill with ready-made units for a cost of $10 each.Assume that Doro Fill's fixed costs are unavoidable and that the company will not be able to use the excess capacity in any profitable manner.In order to maximize operating income,Doro Fill should not outsource.

(True/False)

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Question 112

Which of the following is irrelevant when deciding to upgrade a company's heating and air conditioning system?

(Multiple Choice)

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Question 113

If a business is considering whether to replace old equipment with newer equipment,the cost of operating the old equipment,compared to the cost of operating the new equipment,is relevant to the business decision.

(True/False)

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Question 114

Emery Products is deciding whether to outsource the production of a certain component that is included in all of its products.It currently costs Emery Products $1.20 to make each component in-house.If Emery Products outsources,it can buy the component ready-made for $0.90 each and can shut down the production facilities it is currently using to manufacture the component and save $20,000 a year in fixed costs.Annual requirement for the component is 12,000 units.What is the effect of outsourcing?

(Essay)

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Question 115

A company is a price-taker when ________.

(Multiple Choice)

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Question 116

Merrimack Tire Company makes a special kind of racing tire.Variable costs are $220 per unit,and fixed costs are $30,000 per month.Merrimack sells 500 units per month at a sales price of $300.If the quality of the tire is upgraded,the company believes it can increase the price to $325.If so,the variable cost will increase to $230 per unit,and the fixed costs will rise by 40%.If Merrimack decides to upgrade,how will operating income be affected?

(Multiple Choice)

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Question 117

Smash Company has 5,000 machine hours available annually to manufacture badminton racquets.The following information is available for the two different racquets produced by Smash: Pro Unit sales price \ 500 Unit variable costs \ 150 Annual demand 1,900 units Machine time 1 hours per unit Mid Unit sales price \1 50 Unit variable costs \6 0 Annual demand 4,000 units 2 hours per unit How many units of each racquet should be manufactured for the company to maximize its operating income? (Round your answer to the nearest whole unit.)

(Multiple Choice)

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Question 118

Healthier Living Company manufactures two products-toaster ovens and bread machines.The following data are available: Toaster Ovens Bread Machines Sales price \ 120 \ 160 Variable costs \ 60 \ 70 Healthier Living can manufacture six toaster ovens per machine hour and four bread machines per machine hour.Healthier Living's production capacity is 2,000 machine hours per month.What is the contribution margin per machine hour for bread machines?

(Multiple Choice)

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Question 119

Which of following statements is true of short-term decision making?

(Multiple Choice)

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Question 120

A depreciable asset's original cost is relevant when considering whether to replace the asset.

Target full product cost equals the revenue at the market price minus the desired profit.

Which of the following is irrelevant when deciding to upgrade a company's heating and air conditioning system?

If a business is considering whether to replace old equipment with newer equipment,the cost of operating the old equipment,compared to the cost of operating the new equipment,is relevant to the business decision.

A company is a price-taker when ________.

Which of following statements is true of short-term decision making?

Introduction to Managerial Accounting

Job Order Costing

Process Costing

Cost-Volume-Profit Analysis

Master Budgets

Flexible Budgets and Standard Cost Systems

Cost Allocation and Responsibility Accounting

Capital Investment Decisions

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