Exam 25: Short-Term Business Decisions

Nelson Products is a price-setter that uses the cost-plus pricing approach.The products are specialty vacuum tubes used in sound equipment.The CEO is certain that the company can produce and sell 300,000 units per year,due to the high demand for the product.Variable costs are $2.30 per unit.Total fixed costs are $980,000 per year.The CEO will receive stock options if $300,000 of operating income for the year is reported.What sales price would allow the CEO to achieve the target if the cost-plus pricing method is used? (Round your answer to the nearest cent. )

Handbags R Us sells designer and everyday priced handbags.Top management is deciding which product line to emphasize.Company accountants have provided the following data: The store has 5,000 square feet of floor space.If the company emphasizes everyday handbags,it can display 1,000 items in the store.If the store emphasizes designer handbags,it can display only 680 items,These numbers are also the average monthly sales in units. Prepare an analysis to show which product the company should emphasize.Explain your answer.(Do not round intermediate answers. )

Faros Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: What is the effect of dropping football helmets line on the operating income of the company? (Assume that fixed costs remain unchanged and that there would be no adverse effect on other sales. )

Paragon Products sells a special type of navigation equipment for $1,300.Variable costs are $800 per unit.When a special order arrived from a foreign contractor to buy 42 units at a reduced sales price of $900 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?

Sierra Semiconductors produces 300,000 high-tech computer chips per month.Each chip uses a component that Sierra 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 $1.00 each.If the company chooses to outsource,fixed costs can be reduced by 50%.There are no other uses for the facilities currently employed in making the component.What would be the effect on operating income,if the company decides to outsource?

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?

Sherman Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: Assuming the football helmets line is dropped,total fixed costs remain unchanged,and the space formerly used to produce the line is rented for $120,000 per year,how will operating income be affected?

An opportunity cost is ________.

The contribution margin approach helps managers in short-term decision making because it ________.

Which of the following is irrelevant when deciding to upgrade a company's heating and air conditioning system?

Custom Furniture manufactures a small table and a large table.The small table sells for $800,has variable costs of $540 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1,620,has variable costs of $1,000,and takes eight direct labor hours to manufacture.Calculate the contribution margin per direct labor hour for the small table.

Rica Company is a price-taker and uses a target-pricing approach.Refer to the following information: What is the desired profit for the year?

A company produces 1,000 packages of chicken feed per month.The sales price is $6 per pack.Variable cost is $1.50 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 $1.50 to $1.90 per unit,and fixed costs will increase by 10%.At what sales price for the new product will the two alternatives (sell as is or process further)produce the same operating income? (Round your answer to the nearest cent. )

Doro Fill 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 Doro Fill with ready-made units for a cost of $10 each.Assume that Doro Fill's fixed costs are unavoidable and that the company will not be able to use the excess capacity in any profitable manner.In order to maximize operating income,Doro Fill should not outsource.

Murphy Productions is a price-taker.The company produces generators in a highly competitive market;thus,it uses target pricing.The current market price is $600 per unit.The company has $18,500,000 in average assets,and the desired profit is a return of 8% 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 variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the desired target? Show all computations.

Jones Company is considering purchasing a new truck.The decision has been narrowed to two models.The cost of each of these two trucks is relevant to this business decision.

Which of following statements is true of short-term decision making?

Rocca Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: Assuming the football helmet line is dropped,total fixed costs remain unchanged,and the space formerly used to produce the football helmet line is used to double the production of batting helmets,operating income will be ________.

Donnelley Products sells 2,000 kayaks per year at a sales price of $460 per unit.Donnelley sells in a highly competitive market and uses target pricing.The company has $1,000,000 of assets,and the shareholders wish to make a profit of 17% on assets.Variable cost is $200 per unit and cannot be reduced.Assume all products produced are sold.What are the target fixed costs?

When considering whether to replace the building roof,the total amount paid for previous roof repairs is relevant to the business decision.