Exam 25: Short-Term Business Decisions

Blue Manufacturing Company is trying to decide whether to trade in equipment used in its manufacturing process for a newer model.The new equipment will save money because it will be more efficient to use.Indicate if the following items are relevant or irrelevant to this decision.

Dell Productions is a price-taker.The company produces large spools of electrical wire in a highly competitive market;thus,it uses target pricing.The current market price is $800 per unit.The company has $3,100,000 in average assets,and the desired profit is a return of 9% on assets.Assume all products produced are sold.The company provides the following information: Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs.If fixed costs cannot be reduced,how much reduction in variable cost per unit will be needed to achieve the desired target? (Round your answer to the nearest cent. )

A company produces 1,000 packages of chicken feed per month.The sales price is $4.00 per pack.Variable cost is $1.60 per unit,and fixed costs are $1,700 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 $6 per pack.How will this affect operating income?

Define joint cost.Should joint costs be considered in the decision to sell or further process the product? Explain your answer.

Priestly 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 Priestly with ready-made units for a price of $13 per wiring harness.Assume that Priestly's fixed costs are unavoidable,but that Priestly could use the vacated production facilities to earn an additional $9,500 of profit per month.If Priestly decides to outsource,monthly operating income will ________.

Home Industries is considering replacing a machine that is presently used in its production process.Which of the following amounts represents a sunk cost?

If a business is considering buying a new vehicle,the cost of the insurance premium is relevant to the business decision.

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?

Pena Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available: Total fixed costs are $30,000,and Pena can sell a maximum of 10,000 units of each style of lamp annually.Machine hour capacity is 25,000 hours per year.What is the contribution margin per machine hour for the Lowell Lamp? (Round your answer to the nearest cent. )

Victory Tire Company makes a special kind of racing tire.Variable costs are $220 per unit,and fixed costs are $10,000 per month.Victory sells 600 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 $350.If so,the variable cost will increase to $240 per unit,and the fixed costs will remain the same.If Victory decides to upgrade,how will it affect operating income?

Henderson Products is a price-setter that uses the cost-plus pricing approach.The products are specialty components used in industrial equipment.The CEO is certain that the company can produce and sell 500,000 units per year,due to the high demand for the product.Variable costs are $3.25 per unit.Total fixed costs are $860,000 per year.The target operating income for the year is $150,000.What sales price would allow the CEO to achieve the target if the cost-plus pricing method is used? (Round your answer to nearest cent. )Show all computations.

A company produces 1,000 packages of chicken feed per month.The sales price is $4 per pack.Variable cost is $1.50 per unit,and fixed costs are $1,800 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 $1.90 per unit,and fixed costs will increase by 20%.The CEO wants to price the new product at a level that will bring operating income up to $4,000 per month.What sales price should be charged? (Round your answer to the nearest cent. )

Melita Sailboats Company manufactures 10 luxury yachts per month.A compact media center is included in each yacht.Melita Sailboats manufactures the media center in-house but is considering the possibility of outsourcing this function.At present,the variable cost per unit is $300,and the fixed costs are $40,000 per month.If it outsources the media centers,fixed costs could be reduced by half,and the vacant facilities could be rented out to earn $3,000 per month of rental income.At what contract cost would outsourcing pay off for Melita?

Australia Company manufactures sonars for fishing boats.Model 70 sells for $250.Australia produces and sells 5,600 of them per year.Cost data are as follows: A potential deal has come up for a one-time sale of 32 units at a special price of $120 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.

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

Hilltop Golf Course is planning for the coming golfing season.Investors would like to earn a 10% return on the company's $50,000,000 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 600,000 rounds of golf are expected to be played each year.Variable costs are about $16 per round of golf.Hilltop 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 Hilltop charge for a round of golf to achieve the desired profit?

Owen's Furniture manufactures a small table and a large table.The small table sells for $1,100,has variable costs of $540 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1,700,has variable costs of $980,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 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 ________.

Lightning Semiconductors produces 300,000 hi-tech computer chips per month.Each chip uses a component that Lightning makes in-house.The variable costs to make the component are $1.30 per unit,and the fixed costs are $1,200,000 per month.The company has been approached by a foreign producer who can supply the component,within acceptable quality standards,for $1.10 each.The fixed costs are unavoidable,and Lightning would have no other use for the facilities currently employed in making the component.What would be the effect on operating income if the company decides to outsource?

Off Road Concepts,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 $10,000,000 of average assets,and the desired profit is a 9% return on assets.Assume all products produced are sold.Additional data are as follows: Using the cost-plus pricing approach,what should be the sales price per unit?

Merrimack Tire Company makes a special kind of racing tire.Variable costs are $220 per unit,and fixed costs are $30,000 per month.Merrimack 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 price to $325.If so,the variable cost will increase to $230 per unit,and the fixed costs will rise by 40%.If Merrimack decides to upgrade,how will operating income be affected?