Exam 25: Short-Term Business Decisions

Briny 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 \ 185 Variable costs per unit: Manufacturing \ 62 Selling and administrative \ 20 Total fixed costs: Manufacturing \ 675,000 Selling and administrative \ 250,000 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 5500 sails at a sales price of $165 per unit,and if the order requires no variable or fixed selling and administrative costs,what is the effect on operating income?

Grill Time 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 manufacturing overhead* 24 Total cost \ 120 * $ 1,800,000 / 75,000 units Grill Time has enough idle capacity to accept a one-time-only special order from Backyard Living,Inc.for 2,000 barbecue sets at a sales price of $130 per set.Grill Time will not incur $2 of variable selling expenses for this order. How would accepting the order affect Grill Time's operating income?

Sundial Company manufactures and sells watches for $42 each.Tick-Tock Company has offered Sundial $30 per watch for a one-time order of 5900 watches.The total manufacturing cost per watch is $28 per unit and consists of variable costs of $20 per watch and fixed overhead costs of $8 per watch.Assume that Sundial has excess capacity and that the special pricing order would not adversely affect regular sales.What is the change in operating income that would result from accepting the special sales order?

A customer of Cooke Manufacturing has requested a one-time order at a reduced sales price.Before making the special pricing decision,what are three questions that management of Cooke Manufacturing must consider?

All of the following are disadvantages of outsourcing a product EXCEPT ________.

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

Voyage Boat Company manufactures 100 luxury yachts per month.A compact media center is included in each yacht.Voyage Boat manufactures the media center in-house but is considering the possibility of outsourcing this function.At present,the variable cost per unit is $280,and the fixed costs are $42,000 per month.Aaron Dalton,the CEO,wishes to increase operating income by $3000.He has an offer from a foreign producer to provide the media centers at a contract cost of $350 per unit.The required savings in fixed costs in order to achieve his objective would be ________.

Delish Foods sells jars of special spices used in Italian cooking.The variable cost is $2 per unit.Fixed costs are $10,000,000 per year.It has $42,000,000 of average assets,and the desired profit is a 5% return on assets.Delish Foods sells 5,000,000 units per year.The company uses cost-plus pricing because it is the only company that produces this kind of product.Using cost-plus pricing methodology,determine the sales price per unit.(Round your answer to the nearest cent.)

Motion Rollerblades has three product lines-D,E,and F.The following information is available: D E F Sales revenue \ 90,000 \ 50,000 \ 31,000 Variable costs (40,000) (15,000) (12,000) Contribution margin \ 50,000 \ 35,000 \ 19,000 Fixed costs (15,000 Operating income (loss) \ 35,000 \ 25,000 \ (4000) The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Motion drops product line F and does not replace it,what effect will this have on operating income?

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?

Belfry Company makes special equipment used in cell towers.Each unit sells for $410.Belfry produces and sells 12,700 units per year.They have provided the following income statement data: Traditional Format Contribution Format Revenue \ 5,207,000 Revenue \ 5,207,000 Cost of goods sold 2,800,00d Variable costs: Gross profit 2,407,00 Manufacturing 900,000 Selling \& admin, expenses 550,00 Selling \& admin. 300,000 Contribution margin 4,007,000 Fixed costs: Manufacturing 1,900,000 Selling \& admin. 250,000 Operating income \ 1,857,000 Operating income \ 1,857,000 A foreign company has offered to buy 85 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 it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer.If Belfry 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 company has two different products that are sold in different markets.Financial data are as follows: Product A Product B Total Revenue \ 18,000 \ 9300 \ 27,300 Variable cost (8000) (9900) (17,900) Fixed cost (allocated) \ 1000) (2100) \ 3100) Operating income (loss) \ 9000 \ (2700) \ 6300 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?

A company produces 400 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 $5000 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 ________.

Determinant Company is a price-taker and uses a target-pricing approach.Refer to the following information: Production volume \ 01,000 units per year Market price \ 34 per unit Desired operating income 15\% of total assets Total assets \ 13,900,000 What is the target full product cost in total for the year? Assume all units produced are sold.

Managers should consider both the potential quantitative and qualitative effects of their decisions.

Fowler Company is a price-taker and uses target pricing.Refer to the following information: Production volume \ 00,000 units per year Market price \ 30 per unit Desired operating income 17\% of total assets Total assets \ 13,700,000 Variable cost per unit \ 17 per unit Fixed cost per year \ 5,600,000 per year With the current cost structure,Fowler cannot achieve its profit goals.It will have to reduce either the fixed costs or the variable costs.Assuming that variable costs cannot be reduced,what are the target fixed costs per year? Assume all units produced are sold.

Managers must consider both financial (quantitative)and nonfinancial (qualitative)factors when making decisions.Identify some possible relevant nonfinancial factors that managers might consider.

List three questions managers should consider when deciding whether to drop a product or a business segment.

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 $30 each.Currently,the cost of producing circuits in-house includes variable costs of $22 per circuit and fixed costs of $11,000 per month.Assume the company could cut fixed costs in half 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 ________.

Mickey Tire Company makes a special kind of racing tire.Variable costs are $220 per unit,and fixed costs are $30,000 per month.Mickey 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 sales price to $340.If so,the variable cost will increase to $230 per unit,and the fixed costs will rise by 50%.If Mickey decides to upgrade,how will operating income be affected?