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Exam 25: Short-Term Business Decisions

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Question 1

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Roseland Company is trying to decide whether to continue to manufacture a particular component or to buy the component from an outside supplier. Which of the following is irrelevant with respect to this decision?

A) the quality of the component purchased from the outside supplier
B) the outside supplier's ability to deliver the component on a timely basis
C) the alternative uses of the facilities currently being used to manufacture the component
D) the unavoidable fixed manufacturing costs associated with the manufacture of the component

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Question 2

Multiple Choice

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A company sells two products with information as follows: $\begin{array} { | l | r | r | } \hline & \mathrm { A } & \mathrm { B } \\\hline \text { Sales price per unit } & \$ 12 & \$ 22 \\\hline \text { Variable cost per unit } & \$ 10 & \$ 10 \\\hline\end{array}$ The products are machine made. Four units of product A can be made with one machine hour, and two units of product B can be made with one machine hour. The company has a maximum of 4000 machine hours available per month. Assume there are no constraints on sales of either product, and the company can choose any product mix they wish. What is the maximum amount of contribution margin that the company could earn in a month?

A) $176,000
B) $80,000
C) $96,000
D) $8000

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Question 3

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A company produces 300 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 $30 each. Currently, the cost of producing circuits in-house includes variable costs of $24 per circuit and fixed costs of $14,000 per month. Assume the company could cut fixed costs in half by outsourcing and that there is no alternative use for the facilities presently being used to make circuits. If the company outsources, operating income will ________.

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

Murong Enterprises 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 profit if the cost-plus pricing method is used? (Round your answer to nearest cent.) Show all computations.

Companies that are price-takers have considerable flexibility in setting the prices of their products.

Sanchez Semiconductors produces 200,000 high-tech computer chips per month. Each chip uses a component that Sanchez makes in-house. The variable costs to make the component are $1.40 per unit, and the fixed costs are $1,100,000 per month. The company has been approached by a foreign producer who can supply the component, within acceptable quality standards, for $1.10 each. If the company chooses to outsource, fixed costs can be reduced by 30%. 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?

Peacock Purse sells designer and everyday priced handbags. Top management is deciding which product line to emphasize. Company accountants have provided the following data: $\begin{array} { l r r } & \begin{array} { r } \text { Designer } \\\text { Per Item }\end{array} & \begin{array} { r } \text { Everyday } \\\text { Per Item }\end{array} \\\text { Average Sales Price } & \$ 250 & \$ 95 \\\text { Average Variable Costs } & \underline { 100 } & \underline { 25 } \\\text { Average Contribution Margin } & 150 & 70 \\\text { Average Fixed Costs (allocated) } & \underline { 30 } & \underline { 10 } \\\text { Average Operating Income } & \$ 120 & \$ 60\end{array}$ 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.)

Modern Living Furniture manufactures a small table and a large table. The small table sells for $900, has variable costs of $550 per table, and takes 10 direct labor hours to manufacture. The large table sells for $1500, has variable costs of $980, and takes eight direct labor hours to manufacture. The company has a maximum of 5000 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 ________.

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

A company has two different products that are sold in different markets. Financial data are as follows: $\begin{array} { | l | r | r | r | } \hline & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Revenue } & \$ 15,000 & \$ 9400 & \$ 24,400 \\\hline \text { Variable cost } & ( 7000 ) & ( 9800 ) & ( 16,800 ) \\\hline \text { Fixed cost (allocated) } & \underline { ( 3000 ) } & \underline { ( 2100 ) } & \underline { ( 5100 ) } \\\hline \text { Operating income (loss) } & \$ 5000 & \$ ( 2500 ) & \$ 2500 \\\hline\end{array}$ Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other. If Product B is dropped, what would be the impact on total operating income of the company?

Deeper Clean Company makes bulk quantities of cleaning fluids. They currently sell 1,400 containers a month at a sales price of $25 per unit. If they add a new scent, they could charge $30 per unit for the improved product. It would cost them a total of $1,000 per month to make that alteration. If they decide to process further, it will improve their operating income.

A company spent $750,000 to produce 225,000 gallons of a chemical free cleaning 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.

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

A company produces 1000 packages of cat food per month. The sales price is $4.00 per pack. Variable cost is $1.60 per unit, and fixed costs are $1800 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 $1.80 per unit, and fixed costs will increase by 10%. The company will price the new product at $8 per pack. How will this affect operating income?

Geo Company's western territory's forecasted income statement for the upcoming year is as follows: $\begin{array} { | l | r |} \hline \text { Sales revenue } & \$ 850,000 \\\hline \text { Variable costs } & ( 520,000 ) \\\hline \text { Contribution margin } & \$ 330,000 \\\hline \text { Fixed costs } & ( 490,000 ) \\\hline \text { Operating loss } & \$ ( 160,000 ) \\\hline\end{array}$ The company's management is considering dropping the western territory and has determined that 90% of the fixed costs are avoidable. What is the change in the forecasted operating loss for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

Well-Bread Grain Company is a price-taker and uses target pricing. The company has just done an analysis of its revenues, costs, and desired profits and has calculated its target full product cost. Assume all products produced are sold. Refer to the following information: $\begin{array} { | l | r | l | } \hline \text { Target full product cost } & \$ 500,000 & \text { per year } \\\hline \text { Actual fixed cost } & \$ 280,000 & \text { per year } \\\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \\\hline \text { Production volume } & 150,000 & \text { units per year } \\\hline\end{array}$ Actual costs are currently higher than target full product cost. Assuming that fixed costs cannot be reduced, what is the target variable cost per unit? (Round your answer to the nearest cent.)

Ultimate Travel Company fabricates automobiles. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows: $\begin{array} { | l | r | l | } \hline \text { Volume } & 900 & \text { units per month } \\\hline \text { Variable cost per unit } & \$ 10 & \text { per unit } \\\hline \text { Fixed costs } & \$ 15,000 &\text { per month } \\\hline\end{array}$ A factory in India has offered to supply Ultimate Travel with ready-made units for a cost of $7 each. Assume that Ultimate Travel'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, Ultimate Travel should outsource.

An opportunity cost is ________.

Hadlee Corporation produces two products, P and Q. P sells for $9.50 per unit; Q sells for $5.50 per unit. Variable costs for P and Q are $5.00 and $3.00, respectively. There are 3300 direct labor hours per month available for producing the two products. Product P requires 3.00 direct labor hours per unit, and product Q requires 5.00 direct labor hours per unit. The company can sell up to 900 units of each kind per month. What is the maximum monthly contribution margin that Hadlee can generate under the circumstances? (Round to nearest whole dollar.)