Question 1

________ refers to the benefit given up by choosing an alternative course of action.

Accepted Answer

A)  Opportunity cost 
B)  Sunk cost 
C)  Relevant cost 
D)  Irrelevant cost

Question 2

A company spent $750,000 to produce 225,000 gallons of a chemical free product that can be sold for $6.00 per gallon.This product can be further processed into a household cleaning solution that can be sold for $8.50 per gallon.It will cost $360,000 to process the chemical free product into the household cleaning solution.
Prepare a differential analysis to determine if the product should be processed further.Discuss the results.

Accepted Answer

The answer of A company spent $750,000 to produce 225,000...

Question 3

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.
 $$\begin{array} { | l | l | } 
\hline \text { Item } & \begin{array} { c } 
\text { Relevant or } \
\text { Irrelevant }
\end{array} \
\hline \text { The price of the new equipment } & \
\hline \text { The price paid for the old equipment } & \
\hline \text { The trade in value of the old equipment } & \
\hline \begin{array} { l } 
\text { The repair costs that will be incurred if } \
\text { the old equipment is kept }
\end{array} & \
\hline \begin{array} { l } 
\text { The expected cost savings of the new } \
\text { equipment }
\end{array} & \
\hline \begin{array} { l } 
\text { The costs that have been incurred on the } \
\text { old equipment }
\end{array} & \
\hline
\end{array}$$

Accepted Answer

The answer of Blue Manufacturing Company is trying to decide...

Question 4

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 ________.

Accepted Answer

A)  $1,062,500 
B)  $612,500 
C)  $1,675,000 
D)  $450,000

Question 5

Seven Seas Sailboats Company manufactures 100 luxury yachts per month.A compact media center is included in each yacht.Seven Seas Sailboats manufactures the media center in-house.The company is considering the possibility of outsourcing the production of the media center in order to close down some of its facilities and reduce administrative costs.At present,the variable cost per unit is $325,and fixed costs are $37,000 per month.Assuming the company outsources the production of media center and the fixed costs could be eliminated entirely,at what contract cost would outsourcing pay off for Seven Seas? (Round to the nearest whole dollar.)

Accepted Answer

A)  at any cost lower than $370 per unit 
B)  at any cost lower than $325 per unit 
C)  at any cost lower than $795 per unit 
D)  at any cost lower than $695 per unit

Question 6

If a company wants to be a price-taker,which of the following strategies should be taken?

Accepted Answer

A)  Enter a competitive market and focus on cost cutting. 
B)  Produce a unique product. 
C)  Exploit the value of a fashionable brand name. 
D)  Differentiate the product clearly from the competitors.

Question 7

Tosh Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
 $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \
\hline
\end{array}$$ 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.

Accepted Answer

A) True 
 B)False

Question 8

Pena Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available: $$\begin{array} { | l | r | r | } 
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sales price } & \$ 27 & \$ 38 \
\hline \text { Variable costs } & \$ 16 & \$ 21 \
\hline \text { Machine hours required for one lamp } & 1 & 4 \
\hline
\end{array}$$ 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.)

Accepted Answer

A)  $11.00 per machine hour 
B)  $27.00 per machine hour 
C)  $4.25 per machine hour 
D)  $38.00 per machine hour

Question 9

Potlatch Company manufactures sonars for fishing boats.Model 100 sells for $400.Potlatch produces and sells 6,000 units per year.Cost data are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Variable manufacturing } & \$ 105 & \text { per unit } \
\hline \text { Variable selling and administrative } & \$ 7 & \text { per unit } \
\hline \text { Fixed manufacturing } & \$ 280,000 & \text { per year } \
\hline \text { Fixed selling and administrative } & \$ 130,000 & \text { per year } \
\hline
\end{array}$$ An offer has come in for a one-time sale of 300 units at a special price of $130 per unit.The marketing manager says that the sale will not affect the company's regular sales activities,and that it will not require any variable selling and administrative costs.The production manager says that there is plenty of excess capacity and the sale will not impact fixed costs in any way.What is the effect of this deal on operating income?

Accepted Answer

A)  Operating income increases by $400. 
B)  Operating income increases by $2,100. 
C)  Operating income decreases by $7,500. 
D)  Operating income increases by $7,500.

Question 10

Haskins Products sells 2,200 kayaks per year at a sales price of $500 per unit.Haskins sells in a highly competitive market and uses target pricing.The company has calculated its target full product cost at $750,000 per year.Total variable costs are $250,000 per year and cannot be reduced.Assume all products produced are sold.What are the target fixed costs?

Accepted Answer

A)  $1,100,000 
B)  $350,000 
C)  $250,000 
D)  $500,000

Question 11

Which of the following statements is true?

Accepted Answer

A)  Companies are price-takers when their products are unique. 
B)  Companies are price-setters for a product when there is intense competition. 
C)  Companies are price-takers for a product when the pricing approach emphasizes cost-plus pricing. 
D)  Companies are price-takers when they have little or no control over the prices of their products or services.

Question 12

Fantabulous Products sells 2,200 kayaks per year at a price of $460 per unit.Fantabulous 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.Assume all products produced are sold.What is the target full product cost?

Accepted Answer

A)  $17,000,000 
B)  $842,000 
C)  $1,184,040 
D)  $1,012,000

Question 13

Management decisions are based primarily on quantitative data because the qualitative factors are usually not relevant to the decision-making process.

Accepted Answer

A) True 
 B)False

Question 14

When replacing an old asset with a new one,the original purchase price of the old asset represents a(n)________ cost.

Accepted Answer

A)  relevant 
B)  differential 
C)  opportunity 
D)  sunk

Question 15

Santora Company manufactures two products-toaster ovens and bread machines.The following data are available: $$\begin{array} { | l | r | r | } 
\hline & \text { Toaster Ovens } & \text { Bread Machines } \
\hline \text { Sales price } & \$ 80 & \$ 170 \
\hline \text { Variable costs } & \$ 50 & \$ 60 \
\hline
\end{array}$$ Santora can manufacture six toaster ovens per machine hour and four bread machines per machine hour.Santora's production capacity is 1,600 machine hours per month,and it can sell as many units of either type as it can produce.Which product and how many units should the company produce in a month to maximize profits? (Round machine hour per unit to two decimal places and your final answer to the nearest whole dollar.)

Accepted Answer

A)  6,400 bread machines 
B)  4,800 toaster ovens and 3,200 bread machines 
C)  6,400 toaster ovens and 4,800 bread machines 
D)  9,600 toaster ovens

Question 16

Star Stationery Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l |r |l| } 
\hline \text { Production volume } & 602,000 &\text { units per year } \
\hline \text { Market price } & \$ 34& \text { per unit } \
\hline \text { Desired operating income } & 17 \% &\text { of total assets } \
\hline \text { Total assets } & \$ 1,600,000 \
\hline
\end{array}$$ What is the target full product cost per year? Assume all units produced are sold.

Accepted Answer

A)  $20,468,000 
B)  $20,196,000 
C)  $27,200,000 
D)  $10,836,000

Question 17

Paradiso Company manufactures dolls that are sold to various distributors.The company produces at full capacity for six months each year to meet peak demand; the manufacturing facility operates at 60% of capacity for the other six months of the year.The company has provided the following data for the year: $$\begin{array} { | l | r |l| } 
\hline \text { No. of units produced and sold } & 500,000& \text { units } \
\hline \text { Sales price } & \$ 30& \text { per unit } \
\hline \text { Variable manufacturing costs } & \$ 20 &\text { per unit } \
\hline \text { Fixed manufacturing costs } & \$ 1,000,000& \text { per year } \
\hline \text { Variable selling and administrative costs } & \$ 3 &\text { per unit } \
\hline \text { Fixed selling and administrative costs } & \$ 600,000& \text { per year } \
\hline
\end{array}$$ Paradiso receives an offer to produce 7,000 dolls for a special event.This is a one-time opportunity during a period when the company has excess capacity.What is the minimum sales price the company should accept for the order?

Accepted Answer

A)  $17 
B)  $30 
C)  $20 
D)  $23

Question 18

Assuming there are no other significant considerations,a product line with a negative contribution margin should be dropped.

Accepted Answer

A) True 
 B)False

Question 19

The income statement for Sweet Dreams Company is divided by its two product lines,blankets and pillows,as follows:
 $$\begin{array} { | l | r | r | r | } 
\hline &  { \text { Blankets } } & { \text { Pillows } } & { \text { Total } } \
\hline \text { Sales revenue } & \$ 720,000 & \$ 320,000 & \$ 1,040,000 \
\hline \text { Variable costs } & \underline { 265,000 } & \underline { 260,000 } & \underline { 525,000 } \
\hline \text { Contribution margin } & 455,000 & 60,000 & 515,000 \
\hline \text { Fixed costs } & \underline { 76,000 } & \underline { 106,000 } & \underline { 182,000 } \
\hline \text { Operating income (loss) } & \$ 379,000 & \underline { \$( 46,000) } & \$ 333,000 \
\hline
\end{array}$$ If Sweet Dreams can eliminate total fixed costs of $32,000 by dropping the pillows line,operating income will increase by $46,000.

Accepted Answer

A) True 
 B)False

Question 20

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: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 1,200 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10.50 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ 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 ________.

Accepted Answer

A)  increase by $5,400 
B)  decrease by $15,000 
C)  increase by $15,000 
D)  decrease by $5,400

Exam 25: Short-Term Business Decisions

________ refers to the benefit given up by choosing an alternative course of action.

If a company wants to be a price-taker,which of the following strategies should be taken?

Which of the following statements is true?

Management decisions are based primarily on quantitative data because the qualitative factors are usually not relevant to the decision-making process.

When replacing an old asset with a new one,the original purchase price of the old asset represents a(n) ________ cost.

Assuming there are no other significant considerations,a product line with a negative contribution margin should be dropped.