Exam 25: Short-Term Business Decisions

Boylan Company manufactures two products-toaster ovens and bread machines.The following data are available: Toaster Ovens Bread Machines Sales price \ 70 \ 150 Variable costs \ 40 \ 70 Boylan can manufacture six toaster ovens per machine hour and four bread machines per machine hour.Boylan's production capacity is 1,800 machine hours per month.Marketing limitations indicate that Boylan can sell a maximum of 5,000 toasters and 4,000 bread machines per month.Which product and how many units should the company produce in a month to maximize profits? (Round machine hour per unit to two decimal places and your final answer to the nearest whole dollar.)

A company has two different products that sell to separate markets.Financial data are as follows: Product A Product B Total Revenue \ 15,000 \ 9,400 \ 24,400 Variable costs (8,000) (9,500) (17,500) Fixed costs (allocated) (2,000) Operating income (loss) \ 5,000 \ (2,100) \ 2,900 Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other.Because the contribution margin of Product B is negative,it should be dropped.

Lit Furniture manufactures a small table and a large table.The small table sells for $800,has variable costs of $780 per table,and takes 8.00 labor hours to manufacture.The large table sells for $1,500,has variable costs of $900,and takes 15 direct labor hours to manufacture.If the company has no sales limitations on either product,it should make and sell as many of the large tables as possible to maximize operating income.

Define the terms Relevant Cost and Sunk Cost.

Home Industries is considering replacing a machine that is presently used in its production process.Which of the following amounts represents a sunk cost? Old Machine Replacement Machine Original cost \ 55,000 \ 46,000 Remaining useful life in years 5 5 Current age in years 5 0 Book value \ 30,000 Current disposal value in cash \ 9,000 Future disposal value in cash (in 5 years) \0 \0 Annual cash operating costs \ 7,000 \ 4,500

Verdant Avionics makes aircraft instrumentation.Their basic navigation radio requires $130 in variable costs and requires $3,000 per month in fixed costs.If it processes the radio further to enhance its functionality,it will require an additional $30 per unit of variable costs and $300 per month in fixed costs.The marketing manager believes the sales price of the radio can be increased from $270 to $300.In making this decision,the amount of additional fixed costs per month is a relevant cost.

Mulcahey Automobiles Company fabricates automobiles.Each vehicle includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: Volume 900 units per month Variable cost per unit \ 6 per unit Fixed costs \ 12,000 per month An Indonesian factory has offered to supply Mulcahey with ready-made units for a cost of $16 per wiring harness.Assume that Mulcahey's fixed costs could be reduced by $5,000 if it outsources and that Mulcahey will not be able to use the excess capacity in any profitable manner.If Mulcahey decides to outsource,monthly operating income will ________.

Valuable Electronics uses a standard part in the manufacture of different types of radios.The total cost of producing 29,000 parts is $105,000,which includes fixed costs of $50,000 and variable costs of $55,000.The company can buy the part from an outside supplier for $2 per unit and avoid 30% of the fixed costs.Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $16,000.If Valuable outsources,what will be the effect on operating income?

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 $7,000 per month.Assume the company could eliminate all fixed costs by outsourcing and that there is no alternative use for the facilities presently being used to make circuits.If the company outsources,operating income will ________.

Cassa Company is a price-taker and uses target pricing.Refer to the following information: Production volume 601,000 units per year Market price \ 32 per unit Desired operating income 15\% of total assets Total assets \ 13,900,000 Variable cost per unit \ 20 per unit Fixed cost per year \ 5,600,000 per year With the current cost structure,Cassa cannot achieve its profit goals.It will have to reduce either the fixed costs or the variable costs.Assuming that fixed costs cannot be reduced,what are the target variable costs per year? Assume all units produced are sold.

Freemen Company's western territory's forecasted income statement for the upcoming year is as follows: Sales revenue \ 600,000 Variable costs Contribution margin \ 0 Fixed costs Operating income (loss) \ (496,000) Freemen Company's management is considering dropping the western territory.This move would be financially advantageous only if the company could eliminate $496,000 of fixed cost.

Murphy Productions is a price-taker.The company produces generators in a highly competitive market; thus,it uses target pricing.The current market price is $600 per unit.The company has $18,500,000 in average assets,and the desired profit is a return of 8% on assets.Assume all products produced are sold.The company provides the following information: Sales volume 65,000 units per year Variable costs \ 500 per unit Fixed costs \ 7,500,000 per year Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs.If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the desired target? Show all computations.

Tonix Corporation produces two products,P and Q.P sells for $5.00 per unit; Q sells for $6.50 per unit.Variable costs for P and Q are $3.00 and $4.50,respectively.There are 4,300 direct labor hours per month available for producing the two products.Product P requires 4.00 direct labor hours per unit,and product Q requires 5.00 direct labor hours per unit.The company can sell up to 900 units of each kind per month.What is the maximum monthly contribution margin that Todd can generate under the circumstances? (Round to nearest whole dollar.)

Worthington Sailboats Company manufactures 80 luxury yachts per month.Included in each yacht is a compact media center.Worthington Sailboats manufactures the media center in-house.The company is considering the possibility of outsourcing the production of the media centers in order to close down some of its facilities and reduce the administrative costs.At present,the variable cost per unit is $280,and fixed costs are $54,000 per month.Assume that if it outsources,fixed costs could be reduced by 60%.The production manager advised the company to contract with a foreign supplier who offered a contract cost of $400 per unit.If it outsources the media center,how would that affect operating income?

Companies are price-takers when ________.

A company should decide to process its product further if the additional processing generates higher sales revenues.

Princeton Avionics makes aircraft instrumentation.Its basic navigation radio requires $60 in variable costs and $4,000 per month in fixed costs.Princeton sells 20 radios per month.If the company further processes the radio,to enhance its functionality,it will require an additional $40 per unit of variable costs,plus an increase in fixed costs of $500 per month.The current sales price of the radio is $280.The CEO wishes to improve operating income by $1,200 per month by selling the enhanced version of the radio.In order to meet this target,the sales price to be charged for the enhanced product is ________.

A company produces 500 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures the circuit 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 $24 per circuit and fixed costs of $6,000 per month.Assume the company could not reduce any fixed costs by outsourcing and that there is no alternative use for the facilities presently being used to make circuits.If the company outsources,operating income will ________.

Backyard Living sells its barbecue sets for $170 each.Suppose the company incurs the following average cost per barbecue set: Direct materials \ 52 Direct labor 28 Variable manufacturing overhead 11 Variable selling expenses 5 Fixed manufarturing overhead* Total cost * $ 1,800,000 / 75,000 units Backyard Living has enough idle capacity to accept a one-time-only special order from Superstore,Inc.for 2,000 barbecue sets at a sales price of $130 per set.Backyard Living will not incur $2 of variable selling expenses for this order. How would accepting the order affect Backyard Living's operating income?

A company sells two products with information as follows: Sales price per unit \ 12.00 \ 20.00 Variable cost per unit \ 10.00 \ 10.00 The products are machine made.Four units of product A can be made with one machine hour,and two units of product B can be made with one machine hour.The company has a maximum of 5,000 machine hours available per month.The company can sell up to 17,000 units of product A per month and up to 3,000 units of product B for the month.What is the maximum amount of contribution margin that the company could earn in a month given the stated constraints?