Exam 25: Short-Term Business Decisions

The income statement for Nighty Night,Inc.is divided into two product lines,blankets and pillows,as follows: Nighty Night,Inc.should eliminate the pillows product line only,if by doing so,they can eliminate more than $70,000 of fixed costs.

The income statement for Eagle,Inc.is divided by its two product lines,blankets and pillows,as follows: If total fixed costs remain unchanged and Eagle,Inc.drops the pillows line,operating income will decrease by $170,000.

Brio Motors Company produces a part that is used in the manufacture of one of its products.The unit manufacturing costs of this part,assuming a production level of 6,000 units,are as follows: Finn Motors Company has offered to sell 6,000 units of the same part to Brio for $17.50 per unit.Assuming the company has no other use for its facilities and that the fixed manufacturing costs are unavoidable,what should Brio do?

A chemical company spent $532,000 to produce150,000 gallons of a chemical that can be sold for $4.80 per gallon.This chemical can be further processed into a weed killer that can be sold for $9.20 per gallon.It will cost $260,000 to process the chemical into the weed killer.Which of the following is true?

Princeton Avionics makes aircraft instrumentation.Its basic navigation radio requires $60 in variable costs and $4,000 per month in fixed costs.Princeton sells 20 radios per month.If the company further processes the radio,to enhance its functionality,it will require an additional $40 per unit of variable costs,plus an increase in fixed costs of $500 per month.The current sales price of the radio is $280.The CEO wishes to improve operating income by $1,200 per month by selling the enhanced version of the radio.In order to meet this target,the sales price to be charged for the enhanced product is ________.

Acton Company is a price-taker and uses target pricing.Refer to the following information: With the current cost structure,Acton 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.

Cheong 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 Cheong Company with ready-made units for a cost of $15 for each harness.Assume that Cheong's fixed costs are unavoidable and that Cheong will not be able to use the excess capacity in any profitable manner.If Cheong decides to outsource,monthly operating income will ________.

Management of Bluebird Manufacturing is considering whether to drop a product line.So far,management has determined that the product has a negative contribution margin and that lost revenues are less than the total cost savings.In making the final decision,what are other questions that the management of Bluebird should consider?

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

Murray Products sells 2,100 kayaks per year at a price of $470 per unit.Murray sells in a highly competitive market and uses target pricing.The company has $990,000 of assets and the shareholders wish to make a profit of 16% on assets.Fixed costs are $500,000 per year and cannot be reduced.Assume all products produced are sold.What are the target variable costs?

Venlite,Inc.produces and sells cosmetic products.Currently,the company is operating at 70% of its capacity.The sales price of its product is $30 per unit,and it incurs a full cost of $25 to produce each unit.Its yearly fixed manufacturing overhead amounts to $20,000.The company has received a one-time order for supplying 5,000 units at $26 per unit.This order can be executed within the excess production capacity and will not involve any additional costs.To make this decision,the management of Venlite should use ________.

A depreciable asset's original cost is relevant when considering whether to replace the asset.

Saffron Foods sells jars of special spices used in Spanish cooking.The variable cost is $2 per unit.Fixed costs are $9,000,000 per year.It has $40,000,000 of average assets,and the desired profit is a 4% return on assets.Saffron Foods sells 4,000,000 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. )

Companies are price-takers when ________.

Rice Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available: Total fixed costs are $50,000.Machine hour capacity is 25,000 hours per year.Assuming that the company can sell as many products as it can make,which product mix would deliver the highest operating income?

Melville Company makes special equipment used in cell towers.Each unit sells for $420.Melville produces and sells 12,700 units per year.They have provided the following income statement data: A foreign company has offered to buy 75 units for a reduced sales price of $320 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 incremental selling and administrative costs,as it is a one-time deal.The production manager reports that it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer.If Melville 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. )

Willow Golf Course is planning for the coming golfing season.Investors would like to earn a 15% return on the company's $58,000,000 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 $17 per round of golf.Willow golf course is a price-taker and will not be able to charge more than its competitors,who charge $75 per round of golf.Compute the operating profit that will be earned.

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 $5,000 per month.Assume the fixed costs are unavoidable but that company could employ the vacated premises to earn rental income of $2,200 per month.If the company outsources,monthly operating income will ________.

If a business is considering the option of processing its product further,it ignores the ________.

Tosh Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: A factory in Indonesia has offered to supply Tosh with ready-made units for a cost of $8 each.Assume that Tosh's fixed costs are unavoidable,but the company could use the vacated production facilities to earn an additional $5,000 of profit per month.In order to maximize operating income,Tosh should outsource.