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Exam 8: Relevant Costs for Short-Term Decisions

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Question 111

Multiple Choice

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The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows: If Lovely Locks can eliminate fixed costs of $35,000 by discontinuing the Straightener line, then discontinuing it should result in which of the following?

A) Increase in total operating income of $10,000
B) Decrease in total operating income of $15,000
C) Increase in total operating income of $15,000
D) Decrease in total operating income of $10,000

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Question 112

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Simpson Corporation operates two divisions with the following operating results from last year: Management is considering whether the Eastern Division should be discontinued since it incurred an operating loss last year. Allocated common fixed costs would continue for Simpson Corporation whether the division is discontinued or not. If the Eastern Division had been discontinued at the beginning of last year, what would the total operating income for Simpson Corporation have been for the year?

A) $65,000
B) $30,000
C) $15,000
D) $110,000

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Question 113

Multiple Choice

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Which of the following best describes "target costing"?

Posh Pillows manufactures two products, pillows and cushions, from a joint process. Pillows are allocated $7500 of the total joint costs of $25,000. There are 2500 pillows produced and 2500 cushions produced each year. Pillows can be sold at the split-off point for $10 per unit, or they can be processed further into a deluxe pillow for additional processing costs of $8400 and sold for $19 for each deluxe pillow. If the pillows are processed further and made into deluxe pillows, the effect on operating income would be

Cornell Enterprises currently produces several products. Model L78 is showing a net operating loss as indicated by the following condensed income statement prepared for the year ended December 31. You have been hired by Cornell Enterprises to help analyze the decision as to whether to eliminate Model L78. Upon investigation, you discover that if Model L78 is eliminated, $20,000 of the fixed costs shown on the above condensed income statement can be eliminated. The rest of the fixed costs allocated to Model L78 are common fixed costs that will be allocated to the remaining two products produced by Cornell Enterprises. Determine if Cornell Enterprises should discontinue Model L78.

Hill Fabricators manufactures a variety of parts that the company can use to produce metal stud fixtures. The M2 part is a popular universal part used in the production of several other parts at its manufacturing facility in Ohio. At a recent meeting, the managerial accountant reported that 11% of its fixed overhead cots assigned to the M2 part will not continue if Hill Fabricators decides to outsource the production of the M2 part at $44 per unit to its competitor, Mason Manufacturing. The managerial accountant at Hill Fabricators presented the following data that represents the cost to produce 1200 units of the M2 part in-house: Hill Fabricators Monthly Analysis: Part M2 What are the monthly avoidable costs if Hill Fabricators outsources the production of the M2 part to Mason Manufacturing? What is the change in operating income? What is the per unit cost to produce the M2 part?

Management accountants gather and analyze relevant information to compare alternatives.

Which of the following could be a constraint for selling a product?

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to current production of seats: If a special sales order is accepted for 4000 seats at a price of $375 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no change in the number of units produced. What would be the operating income for Item QR?

The cost-plus price is described by which of the following?

Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40: Jackson Corporation can purchase the part from an outside supplier for $4.50 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation buys the part, what is the most Jackson Corporation can spend per unit so that operating income is equal to $98,000?

All of the following are outsourcing considerations, except

Special orders increase income if the revenue from the order does not exceed the incremental variable and fixed costs incurred to fill the order.

Lasso Corporation manufactures a variety of appliances which all use Part B89. Currently, Lasso manufactures Part B89 itself. It has been producing 14,000 units of Part B89 annually. The annual costs of producing Part B89 at the level of 14,000 units include: All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Assume Lasso can purchase 14,000 units of the part from the Nadal Parts Company for $20.40 each, and the facilities currently used to make the part could be used to manufacture 14,000 units of another product that would have a $11 per unit contribution margin. If no additional fixed costs would be incurred, what should Lasso do?

Stoneycreek golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Stoneycreek golf course is a price-taker and won't be able to charge more than $60 per round because of local competition. What will Stoneycreek's expected profit shortfall be if it charges $60/round?

Common fixed costs that are allocated between departments are generally

Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: Assuming fixed costs remain unchanged, how would discontinuing the Sporty line affect operating income?

A product line should be discontinued if the contribution margin lost is

Fixed costs that may be avoided in the future are referred to as