Exam 25: Short-Term Business Decisions

A company is planning to replace an old machine with a new one.Which of the following is a sunk cost?

Polynesia Company manufactures sonars for fishing boats.Its Model 70 sells for $300.Polynesia produces and sells 5,700 of them per year.Cost data follow: Arthur Bailey,the sales manager,wants to offer a special sale to a new customer that outfits boats.He proposes a sale of 41 units at a special price of $150 per unit.Arthur 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 $1,700 to operating income.Based on the president's criteria,Polynesia will not make the offer.

Tyler Corporation has provided you with the following budgeted income statement for one of its products: Tyler Corporation believes that 75% of the fixed costs would be avoidable if the product line was dropped.Based on the impact on the company's operating income or loss,Tyler should keep the product line.

Top managers of Computer 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. 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 Computer Manufacturing should drop the desktop product line.Should the desktop product line be dropped? Explain your answer.

Isabelle's Furniture manufactures a small table and a large table.The small table sells for $800,has variable costs of $570 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1,700,has variable costs of $970,and takes eight direct labor hours to manufacture.The company has a maximum of 5,000 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 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 $28 each.Currently,the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $7,000 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 ________.

Blair Stationery Company is a price-taker and uses target pricing.The company has just done an analysis of its revenues,costs,and desired profits and has calculated its target full product cost.Assume all products produced are sold.Refer to the following information: Actual costs are currently higher than target full product cost.Assuming that fixed costs cannot be reduced,what are the target total variable costs?

In making product mix decisions under constraining factors,which of the following is the key to choosing the product type to be maximized?

Federal Furniture manufactures a small table and a large table.The small table sells for $1,000,has variable costs of $560 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1,600,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. )

Verdant Avionics makes aircraft instrumentation.Their basic navigation radio requires $130 in variable costs and requires $3,000 per month in fixed costs.If it processes the radio further to enhance its functionality,it will require an additional $30 per unit of variable costs and $300 per month in fixed costs.The marketing manager believes the sales price of the radio can be increased from $270 to $300.In making this decision,the amount of additional fixed costs per month is a relevant cost.

Mulcahey Automobiles Company fabricates automobiles.Each vehicle includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: An Indonesian factory has offered to supply Mulcahey with ready-made units for a cost of $16 per wiring harness.Assume that Mulcahey's fixed costs could be reduced by $5,000 if it outsources and that Mulcahey will not be able to use the excess capacity in any profitable manner.If Mulcahey decides to outsource,monthly operating income will ________.

A company has two different products that sell to separate markets.Financial data are as follows: Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other.Because the contribution margin of Product B is negative,it should be dropped.

Target full product cost equals the revenue at the market price minus the desired profit.

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

Iver Roller Skates has three product lines-D,E,and F.The following information is available: The company is deciding whether to drop product line F because it has an operating loss.Assuming fixed costs are unavoidable,if Iver drops product line F and rents the space formerly used to produce product F for $17,000 per year,total income will be ________.

CM Company manufactures a component used in the production of one of its main products.The following cost information is available: A supplier has offered to sell the component to CM for $630 per unit.If CM buys the component from the supplier,the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually.Assuming that CM needs 4,000 components annually and that the fixed manufacturing overhead is unavoidable,what would be the impact on operating income if CM outsources?

Define the terms Relevant Cost and Sunk Cost.

The income statement for Sweet Dreams Company is divided by its two product lines,blankets and pillows,as follows: If Sweet Dreams can eliminate total fixed costs of $32,000 by dropping the pillows line,operating income will increase by $46,000.

Meson Productions is a price-taker.Meson produces large spools of electrical wire in a highly competitive market;thus,the company uses target pricing.The current market price of the electric wire is $760 per unit.The company has $3,200,000 in average assets,and the desired profit is a return of 5% on assets.Assume all products produced are sold.The company provides the following information: If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the profit target?

Smash Company has 5,000 machine hours available annually to manufacture badminton racquets.The following information is available for the two different racquets produced by Smash: How many units of each racquet should be manufactured for the company to maximize its operating income? (Round your answer to the nearest whole unit. )