Exam 25: Short-Term Business Decisions

Foundations,Inc.produces and sells cosmetic products.Currently,the company is operating at 70% of its capacity.The sales price of its product is $30 per unit,and it incurs a full cost of $25 to produce each unit.Its yearly fixed manufacturing overhead amounts to $20,000.The company has received a one-time order for supplying 5,000 units at $26 per unit.This order can be executed within the excess production capacity and will not involve any additional fixed costs.To make this decision,the management of Foundations should use ________.

Adorn Furniture manufactures a small table and a large table.The small table sells for $900,has variable costs of $540 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1500,has variable costs of $980,and takes eight direct labor hours to manufacture.Calculate the contribution margin per direct labor hour for the small table.

Viper Avionics makes aircraft instrumentation.Its basic navigation radio requires $80 in variable costs and $2000 per month in fixed costs.Further processing the radio,to enhance its functionality,will require an additional $25 per unit of variable costs,plus an increase in fixed costs of $800 per month.The marketing manager believes that they would be able to increase the sales price of the radio from $260 to $300.Viper sells 30 radios per month.If Viper decides to further process the radio,monthly operating income would ________.

Canvas Company manufactures sonars for fishing boats.Its Model 70 sells for $310.Canvas produces and sells 5,600 of them per year.Cost data follow: Variable manufacturing \ 100 per unit Variable selling and administrative \ 17 per unit Fixed manufacturing \ 290,000 per year Fixed selling and administrative \ 150,000 per year Alejandro Bauista,the sales manager,wants to offer a special sale to a new customer that outfits boats.He proposes a sale of 40 units at a special price of $148 per unit.Alejandro 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 $1,500 to operating income.Based on the president's criteria,Canvas will not make the offer.

Supersonic Tire Company makes a special kind of racing tire.Variable costs are $220 per unit,and fixed costs are $30,000 per month.Supersonic 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 Supersonic decides to upgrade,how will operating income be affected?

Sutton 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 310,000 units per year,due to the high demand for the product.Variable costs are $2.40 per unit.Total fixed costs are $970,000 per year.The CEO will receive stock options if $100,000 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.)

Tryniski 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.

Ignite Products 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 $700 per unit.The company has $3,000,000 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 120,000 units per year Variable costs \ 660 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?

Ultimate Travel Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: Volume 1,000 units per month Variable cost per unit \ 7 per unit Fixed costs \ 13,000 per month A factory in India has offered to supply Ultimate Travel with ready-made units for a cost of $8 each.Assume that Ultimate Travel's fixed costs are unavoidable,but the company could use the vacated production facilities to earn an additional $5,000 of profit per month.In order to maximize operating income,Ultimate Travel should outsource.

Accelerate Rollerblades has three product lines-D,E,and F.The following information is available: D E F Sales revenue \ 90,000 \ 60,000 \ 31,000 Variable costs (20,000) (15,000) (11,000) Contribution margin \ 70,000 \ 45,000 \ 20,000 Fixed costs (20,000) (5000) (24,000) Operating income (loss) \ 50,000 \ 40,000 \ (4000) 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?

A company sells two products with information as follows: Sales price per unit \ 12.00 \ 26.00 Variable cost per unit \ 10.00 \ 12.00 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 6000 machine hours available per month.The company can sell up to 18,000 units of product A per month,and up to 3000 units of product B for the month.What is the optimum product mix to maximize the company's operating income?

A sunk cost is a cost that was incurred in the past and cannot be changed regardless of what future action is taken.

Head Bucket,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 \ 820,000 \ 500,000 \ 320,000 Variable costs (430,000 (150,000) (280,000) Contribution margin \ 390,000 \ 350,000 \ 40,000 Fixed costs (160,000 (70,000) (90,000) Operating income (loss) \ 230,000 \ 280,000 \ (50,000) 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 ________.

Santora Company manufactures two products-toaster ovens and bread machines.The following data are available: Toaster Ovens Bread Machines Sales price \ 80 \ 170 Variable costs \ 40 \ 50 Santora can manufacture six toaster ovens per machine hour and four bread machines per machine hour.Santora's production capacity is 1600 machine hours per month,and it can sell as many units of either type as it can produce.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.)

Pegasus Avionics makes aircraft instrumentation.Its basic navigation radio requires $60 in variable costs and $3000 per month in fixed costs.Pegasus sells 10 radios per month.If the company further processes the radio,to enhance its functionality,it will require an additional $27 per unit of variable costs,plus an increase in fixed costs of $270 per month.The current sales price of the radio is $290.The marketing manager is sure that Pegasus can charge a higher sales price for the improved version.At what sales price level would the new,improved radio begin to improve operating earnings? (Round to the nearest whole dollar.)

Which of the following is a major consideration when analyzing a special pricing decision?

Blue Streak Company makes a special kind of racing tire.Variable costs are $340,and fixed costs are $35,500 per month.Blue Streak sells 610 units per month at a sales price of $410.If Blue Streak 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 $350,and the fixed costs will rise by 30%.The CEO wishes to increase his operating income by at least 20%.If the company decides to upgrade the product,the CEO will reach his goal.

Boylan Company manufactures two products-toaster ovens and bread machines.The following data are available: Toaster Ovens Bread Machines Sales price \ 60 \ 170 Variable costs \ 50 \ 60 Boylan can manufacture six toaster ovens per machine hour and four bread machines per machine hour.Boylan's production capacity is 1600 machine hours per month.Marketing limitations indicate that Boylan can sell a maximum of 6000 toasters and 4100 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.)

Homewood Furniture manufactures a small table and a large table.The small table sells for $1100,has variable costs of $560 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1700,has variable costs of $960,and takes eight direct labor hours to manufacture.Calculate the contribution margin per direct labor hour for the large table.(Round your answer to the nearest cent.)

Armor Sports,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 \ 1,040,000 \ 700,000 \ 340,000 Variable costs (430,000 (150,000) (280,000) Contribution margin \ 610,000 \ 550,000 \ 60,000 Fixed costs (180,000 \ 90,000) (90,000) Operating income (loss) \ 430,000 \ 460,000 \ (30,000) 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.)