Exam 25: Short-Term Business Decisions

Top managers of Technowares Manufacturing are alarmed by their operating losses.They are considering dropping the desktop product line.The company accountants have prepared the following analysis to help make this decision. Technowares Manufacturing Income Statement For the Year Ended December $31,20 \times \times$ Total Laptop Desktop Sales Revenue \ 930,000 \ 575,000 \ 355,000 Variable Costs Contribution Margin 423,000 308,000 115,000 Fixed Costs: Manufacturing 375,000 225,000 150,000 Selling and Administrative Total Fixed Costs Operating Income (Loss) \ (52,000 Total fixed manufacturing costs will not change if the company stops selling the desktop product line.The fixed selling and administrative costs,however,will be avoided. Prepare a differential analysis to show whether Technowares Manufacturing should drop the desktop product line.Should the desktop product line be dropped? Explain your answer.

Sicon Containers produces restaurant storage containers.The company makes two sizes of containers: regular (55 gallon)and large (100 gallon).Demand for the products is so high that Sicon can sell as many of each size as it can produce.The company uses the same machinery to produce both sizes.The machinery can be run for only 2,500 hours per period.Sicon can produce 20 regular containers every hour,whereas it can produce 8 large containers in the same amount of time.Fixed costs amount to $250,000 per period.Sales prices and variable costs are as follows: Per Unit Regular Large Sales price \ 105 \ 225 Variable costs 28 42 To maximize profits,how many of each size container should Sicon produce? Given this product mix,what will the company's operating income be?

Rolling Hills Golf Course is planning for the coming golfing season.Investors would like to earn a 10% return on the company's $60,000,000 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 500,000 rounds of golf are expected to be played each year.Variable costs are about $17 per round of golf.Rolling Hills Golf Course has a favorable reputation in the area and,therefore,has some control over the sales price of a round of golf.Using a cost-plus pricing approach,what sales price should Rolling Hills charge for a round of golf to achieve the desired profit?

A company is a price-taker when ________.

Differential analysis is a method that looks at how operating income would differ under each budget scenario.

Which of the following statements is TRUE?

Allen's Ark sells 2100 canoes per year at a sales price of $470 per unit.Allen's sells in a highly competitive market and uses target pricing.The company has calculated its target full product cost at $750,000 per year.Total variable costs are $250,000 per year and cannot be reduced.Assume all products produced are sold.What are the target fixed costs?

Conquest,Inc.produces a special kind of light-weight,recreational vehicle that has a unique design.It allows the company to follow a cost-plus pricing strategy.It has $9,000,000 of average assets,and the desired profit is a 10% return on assets.Assume all products produced are sold.Additional data are as follows: Sales volume 1000 units per year Variable costs \ 1000 per unit Fixed costs \ 3,500,000 per year Using the cost-plus pricing approach,what should be the sales price per unit?

Route Two Tire Company makes a special kind of racing tire.Variable costs are $220 per unit,and fixed costs are $31,000 per month.Route Two sells 500 units per month at a sales price of $300.The company believes that it can increase the price if the tire quality is upgraded.If so,the variable cost will increase to $230 per unit,and the fixed costs will rise by 25%.The CEO wishes to increase the company's operating income by 15%.Which sales price level would give the desired results? (Round your answer to the nearest cent.)

Seekers Company manufactures sonars for fishing boats.Model 70 sells for $250.Seekers produces and sells 5,600 of them per year.Cost data are as follows: Variable manufacturing \ 110 per unit Variable selling and administrative \ 15 per unit Fixed manufacturing \ 290,000 per year Fixed selling and administrative \ 150,000 per year A potential deal has come up for a one-time sale of 30 units at a special price of $115 per unit.The marketing manager states that the sale will not negatively impact the company's regular sales activities and will require the normal variable manufacturing costs and selling and administrative costs.The production manager states that there is plenty of excess capacity and the deal will not impact fixed costs.The controller points out,however,that because the expected increase in revenues are equal to the expected increase in costs to fill the order,the deal will not have any impact on the bottom line.The controller is correct in his statement.

Value Electronics uses a standard part in the manufacture of different types of radios.The total cost of producing 24,000 parts is $90,000,which includes fixed costs of $30,000 and variable costs of $60,000.The company can buy this part from an external supplier for $5 per unit and avoid 10% of the fixed costs.If Value Electronics decides to outsource the production of the part,how will it impact its operating income?

Hadlee Corporation produces two products,P and Q.P sells for $7.00 per unit; Q sells for $6.00 per unit.Variable costs for P and Q are $3.00 and $5.00,respectively.There are 2300 direct labor hours per month available for producing the two products.Product P requires 2.00 direct labor hours per unit,and product Q requires 2.00 direct labor hours per unit.The company can sell up to 600 units of each kind per month.What is the maximum monthly contribution margin that Hadlee can generate under the circumstances? (Round to nearest whole dollar.)

Special pricing orders increase operating income if the special price exceeds the differential costs of filling the special order.

Spotless Naturals manufactures bulk quantities of cleaning fluids.It currently sells 1100 containers a month at a sales price of $20.00 per unit.If a new fragrance is added,$24.00 per unit could be charged for the improved product.It would cost a total of $800 per month to make that alteration.Operating income would ________.

Momentum Rollerblades has three product lines-D,E,and F.The following information is available: $\begin{array}{|l|l|l|l|} \hline& \text { D } & \text { E } & \text { F } \\\hline \text { Sales revenue } & \$ 80,000 & \$ 60,000 & \$ 31,000 \\\hline \text { Variable costs } & (30,000 )& (15,000 )& (12,000) \\\hline \text { Contribution margin } & \$ 50,000 & \$ 45,000 & \$ 19,000 \\\hline \text { Fixed costs } & (10,000) & (5000) & (23,000) \\\hline \text { Operating income (loss) } & \$ 40,000 & \$ 40,000 & \$(4000) \\\hline\end{array}$ The company is deciding whether to drop product line F because it has an operating loss.Assume that $22,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating income?

Differential analysis is a common approach to making short-term business decisions.

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.

Pinewood Furniture manufactures a small table and a large table.The small table sells for $800,has variable costs of $750 per table,and takes 7.50 labor hours to manufacture.The large table sells for $1,700,has variable costs of $900,and takes 10 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.

Which of the following is NOT one of the steps in the managerial decision-making process?