Exam 25: Short-Term Business Decisions

Dugout Water Products sells 2000 kayaks per year at a price of $470 per unit.Dugout sells in a highly competitive market and uses target pricing.The company has $990,000 of assets,and the shareholders wish to make a profit of 18% on assets.Assume all products produced are sold.What is the target full product cost?

Price-setters emphasize a target-pricing approach while price-takers emphasize a cost-plus pricing approach.

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

A company produces 100 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 $26 per circuit and fixed costs of $5,000 per month.The controller says that they should outsource production of the circuit,if it reduces fixed cost more than $200 per month.Is this statement true or false?

Fuller 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 \ 45,000 Remaining useful life in years 5 5 Current age in years 5 0 Book value \ 30,000 Current disposal value in cash \ 9000 \ 0 Auture disposal value in cash (in 5 years) \ 8000 \ 4500

Deeper Clean Company makes bulk quantities of cleaning fluids.They currently sell 1,300 containers a month at a sales price of $24 per unit.If they add a new scent,they could charge $28 per unit for the improved product.It would cost them a total of $900 per month to make that alteration.If they decide to process further,it will improve their operating income.

Costs that do NOT differ between alternatives are ________.

Qualitative information that a manager might evaluate in making a decision would include all of the following EXCEPT ________.

A company produces 1000 packages of cat food per month.The sales price is $3.90 per pack.Variable cost is $1.60 per unit,and fixed costs are $1700 per month.Management is considering adding a vitamin supplement to improve the value of the product.The variable cost will increase from $1.60 to $1.70 per unit,and fixed costs will increase by 20%.The company will price the new product at $7 per pack.How will this affect operating income?

Carver 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) 110 Variable manufacturing overhead 80 Fixed manufacturing overhead 35 A supplier has offered to sell the component to Carver for $640 per unit.If Carver buys the component from the supplier,the released facilities can be used to manufacture a product that would generate a contribution margin of $20,000 annually.Assuming that Carver needs 3000 components annually and that the fixed manufacturing overhead is unavoidable,what would be the impact on operating income if Carver outsources?

Luna Company makes special equipment used in cell towers.Each unit sells for $400.Luna produces and sells 12,600 units per year.They have provided the following income statement data: Traditional Format Contribution Format Revenue \ 5,040,000 Revenue \ 5,040,000 Cost of goods sold 3,000,000 Variable costs: Gross profit 2,040,000 Manufacturing 1,000,000 Selling \& admin, expenses 550,000 Selling \& admin. 300,000 Contribution margin 3,740,000 Fixed costs: Manufacturing 2,000,000 Selling \& admin. 250,000 Operating income \ 1,490,000 Operating income \ 1,490,000 A foreign company has offered to buy 75 units for a reduced sales price of $350 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 variable selling and administrative costs.The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs.If Luna 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.)

Last year,Perkins Company spent $25,000 on employee training to improve customer service.The cost and time spent on training is considered a(n)________.

Terra Potteryworks is a price-setter that uses the cost-plus pricing approach for pricing its products.These products are unique,artistically designed architectural decorations.Terra produces and sells 6100 units per year,which represent maximum capacity.Variable costs are $330 per unit.Total fixed costs are $910,000 per year.The CEO has a target of $60,000 in operating income,which he wants to achieve by year-end.Using the cost-plus pricing method,what sales price per unit should Terra use? (Round your answer to the nearest cent.)

Pastryworks Company manufactures two products-toaster ovens and bread machines.The following data are available: Toaster Ovens Bread Machines Sales price \ 80 \ 150 Variable costs \ 20 \ 50 Pastryworks can manufacture six toaster ovens per machine hour and four bread machines per machine hour.Pastryworks' production capacity is 2000 machine hours per month.What is the contribution margin per machine hour for toaster ovens? (Round machine hour per unit to two decimal places and your final answer to the nearest whole dollar.)

When considering whether to replace the building roof,the total amount paid for previous roof repairs is relevant to the business decision.

Which of the following is always irrelevant to short-term operating decisions?

Modern Living Furniture manufactures a small table and a large table.The small table sells for $1000,has variable costs of $550 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1600,has variable costs of $960,and takes eight direct labor hours to manufacture.The company has a maximum of 5000 direct labor hours per month when operating at full capacity.If there are no constraints on sales of either of the products and the company could choose any proportions of product mix that they wanted,the maximum contribution margin that the company could earn will be ________.

A company produces 1000 packages of dog treats per month.The sales price is $6 per pack.Variable cost is $1.50 per unit,and fixed costs are $1700 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 $1.80 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.)

A company sells two products with information as follows: Sales price per unit \ 11.00 \ 26.00 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 4000 machine hours available per month.The company can sell up to 17,000 units of product A per month and up to 3000 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?

Geo Company's western territory's forecasted income statement for the upcoming year is as follows: Sales revenue \ 830,000 Variable costs (540,000) Contribution margin \ 290,000 Fixed costs Operating loss \ (210,000 The company's management is considering dropping the western territory and has determined that 90% of the fixed costs are avoidable.What is the change in the forecasted operating loss for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.