Exam 25: Short-Term Business Decisions

A constraint is a factor that restricts the production or sale of a product,which varies from company to company.

A company produces 200 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 $5000 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 ________.

Louis Company is considering replacing its multi-functional copier system with a new system.Which costs would be relevant to its decision and which costs would be irrelevant?

If a company has limited competition and sells unique products,it is considered a price taker.

Stephens Hardwood Furniture manufactures a small table and a large table.The small table sells for $900,has variable costs of $770 per table,and takes 8.00 labor hours to manufacture.The large table sells for $1,700,has variable costs of $800,and takes 15 direct labor hours to manufacture.The small table has a lower contribution margin per unit,but a higher contribution margin per direct labor hour.

Identify the four steps in the decision-making process.

Voyage Sail Makers manufactures sails for sailboats.The company has the capacity to produce 37,000 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 \ 180 Variable costs per unit: Manufacturing \ 50 Selling and administrative \ 10 Total fixed costs: Manufacturing \ 675,000 Selling and administrative \ 250,000 If a special pricing order is accepted for 5500 sails at a sales price of $150 per unit,and fixed costs remain unchanged,what is the change in operating income? (Assume the special pricing order will require variable manufacturing costs and variable selling and administrative costs.)

Fixed costs are relevant to a special pricing decision if they are subject to change as a result of the special order.

In deciding whether to accept a special pricing order,management should only consider the quantitative data and disregard qualitative factors.

Wheeler Company is a price-taker and uses a target-pricing approach.Refer to the following information: Production volume \ 00,000 units per year Market price \ 34 per unit Desired operating income 17\% of total assets Total assets \ 13,800,000 What is the desired profit for the year?

Explain the difference between price-takers and price-setters.

Aguilar Company is a price-taker and uses target pricing.Refer to the following information: Production volume \ 01,000 units per year Market price \ 30 per unit Desired operating income 17\% of total assets Total assets \ 13,800,000 Variable cost per unit \ 19 per unit Fixed cost per year \ 5,500,000 per year With the current cost structure,Aguilar 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 unit per year? Assume all units produced are sold.(Round your answer to the nearest cent.)

Launch Company sells 2500 paddleboards per year at a sales price of $470 per unit.Launch sells in a highly competitive market and uses target pricing.The company has $800,000 of assets,and the shareholders wish to make a profit of 16% on assets.Variable cost is $190 per unit and cannot be reduced.Assume all products produced are sold.What are the target fixed costs?

The income statement for Eideldown,Inc.is divided by its two product lines,blankets and pillows,as follows: Blankets Pillows Total Sales revenue \ 900,000 \ 500,000 \ 1,400,000 Variable costs Contribution margin 450,000 270,000 720,000 Fixed costs Operating income (loss) \ 365,000 \ 195,000 \ 560,000 If total fixed costs remain unchanged and Eideldown,Inc.drops the pillows line,operating income will decrease by $270,000.

Marisol's Sunglass Company's western territory's forecasted income statement for the upcoming year is as follows: Sales revenue \ 850,000 Variable costs (530,000) Contribution margin \ 320,000 Fixed costs Operating loss \ (170,000 The company's management is considering dropping the western territory and has determined that $310,000 of the fixed expenses is avoidable.What is the change in Marisol's Sunglass Company's forecasted operating for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

Leggero Corporation manufactures two styles of lamps - Bedford Lamp and Lowell Lamp.The following per unit data are available: Bedford Lamp Lowell Lamp Sales price \ 30 \ 50 Variable costs \ 20 \ 25 Machine hours required for one lamp 1 5 Total fixed costs are $42,000,and the machine hour capacity is 30,000 hours per year.The Lowell Lamp has the highest contribution margin per unit and also has the highest contribution margin per machine hour,so the company should focus sales on the Lowell Lamp.

Voltaic Electronics uses a standard part in the manufacture of different types of radios.The total cost of producing 35,000 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 20% 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 Voltaic outsources,what will be the effect on operating income?

Woodstock Furniture manufactures a small table and a large table.The small table sells for $900,has variable costs of $570 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1700,has variable costs of $980,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 product,and the company could choose any proportions of product mix that they wanted,what is the optimum product mix to maximize operating income of the company?

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

Helmsman Products sells a special type of navigation equipment for $1200.Variable costs are $800 per unit.When a special order arrived from a foreign contractor to buy 44 units at a reduced sales price of $1000 per unit,there was a discussion among the managers.The controller said that as long as the special price was greater than the variable costs,the sale would contribute to the company's profits and should be accepted as offered.The vice president,however,decided to decline the order.Which of the following statements supports the decision of the vice president?