Exam 20: Short-Term Business Decisions

A company sells two products with information as follows: A B Price per unit \ 10.00 \ 16.00 Variable cost per unit \ 8.00 \ 11.00 Products are made by machine. 4 units of Product A can be made with one machine hour and 2 units of Product B can be made with one machine hour. The company has a maximum of 2,000 machine hours available per month. - Assume there are no constraints on sales of either product, and the company could choose any product mix they wish. What is the maximum amount of contribution margin that the company could earn in a month?

Clay Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp. The following per unit data are available: Bedford Lamp Lowell Lamp Sale price \ 25 \ 35 Variable costs \ 17 \ 23 Neching hours required for 1 lamp 2 4 Total fixed costs are $30,000. Machine hour capacity is 25,000 hours per year. The Lowell lamp has the highest contribution margin per unit, and also has the highest contribution margin per machine hour, so the company should focus sales on the Lowell lamp.

Vacuum Products is a price-setter, and they use cost-plus methodology for pricing their products which are specialty vacuum tubes used in sound equipment. The CEO is certain that he can produce and sell 200,000 units per year, due to the high demand for the product. Variable costs are $1.40 per unit. Total fixed costs are $950,000 per year. The CEO will receive stock options if he reports $100,000 of operating income for the year. Using the cost-plus method, what price would allow the CEO to achieve his target? (Please round to nearest cent.)

Clay Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp. The following per unit data are available: Bedford Lamp Lowell Lamp Sale price \ 25 \ 35 Variable costs \ 17 \ 23 Machine hours required for 1 lamp 2 4 - Total fixed costs are $30,000. Marketing data indicate that the company can sell up to 8,000 units of the Bedford lamp and up to 4,000 units of the Lowell lamp. Machine hour capacity is 25,000 hours per year. What product mix will deliver the optimum operating income?

When a company is considering the possibility of processing their product further to achieve higher sales revenues, they must carefully study the production costs needed to make the basic product before processing further in order to come to an informed decision.

A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. At what price for the new product will the two alternatives (sell as is or process further) produce the same operational income? (Please round to nearest cent.)

Grove Company makes special equipment used in cell towers. Each unit sells for $400. Grove uses just-in-time inventory procedures: they produce and sell 10,000 units per year. They have provided the following income statement data: -A European company has offered to buy 50 units for a reduced price of $380 per unit. The marketing manager says the sale will not negatively impact the company's regular sales. The sales manager says that this sale will require the same amount of variable selling & marketing costs as their regular sales. The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs. If Grove accepts the deal, how will this impact operating income?

The benefit foregone by NOT choosing an alternative course of action is referred to as a(n):

Perfect Time Company manufactures and sells watches for $36 each. Great Products Company has offered Perfect Time $21 per watch for a one time order of 5,000 watches. The total manufacturing cost per watch, using standard absorption costing, is $24 per unit, and consists of variable costs of $18 per watch and fixed overhead costs of $6 per watch. Assume that Perfect Time has excess capacity and that the special order would not adversely impact regular sales. What is the change in operating income that would result from accepting the special sales order?

Grove Company makes special equipment used in cell towers. Each unit sells for $400. Grove uses just-in-time inventory procedures: they produce and sell 10,000 units per year. They have provided the following income statement data: -An African cell phone company has offered a one-time deal to buy 200 units for a specially reduced price of $210 per unit. The marketing manager says the sale will not negatively impact the company's regular sales. The sales manager says that this sale will not require any variable selling & marketing costs. The production manager reports that it would require an additional $25,000 of fixed manufacturing costs to accommodate the specifications of the buyer. If Grove accepts the deal, how will this impact operating income?

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: Old Machine Replacement Machine Original cost \ 45,000 \ 35,000 Remaining useful life in years 5 5 Current age in years 5 0 Book value \ 25,000 Current disposal value in cash \ 8,000 Future disposal value in cash (in 5 years) \0 \0 Annual cash operating costs \7 ,000 \4 ,000 - Which of the information provided in the table is irrelevant to the replacement decision?

A chemical company spent $480,000 to produce 144,000 gallons of a chemical, which can be sold for $4.32 per gallon. The chemical can be further processed into a weed killer which can be sold for $6.40 per gallon; it will cost $256,320 to process the chemical into a weed killer. Which of the following is TRUE?

Custom Furniture manufactures a small table and a large table. The small table sells for $800, has variable costs of $520 per table, and takes eight direct labor hours to manufacture. The large table sells for $1,200, has variable costs of $720, and takes sixteen direct labor hours to manufacture. If the company has no sales limitations on either product, they should make and sell as many of the large tables as possible to maximize operating income.

Majestic Products is a price-setter, and they use cost-plus methodology for pricing their products which are unique, artistically designed architectural decorations. They produce and sell 5,000 units per year, at their maximum capacity. Variable costs are $270 per unit. Total fixed costs are $800,000 per year. The CEO has a target of $40,000 operating profit which he wants to hit by year-end. Using the cost-plus method, what price should Majestic use? (Please round to nearest whole dollar.)

If a product line has a negative contribution margin, the product line should probably be dropped, assuming no other significant considerations.

Which of the following is irrelevant when making a decision?

Sports Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: $\begin{array}{|l|r|r|r|}\hline&&&\text { Football } \\&\text { Total } & \text { Baseball Helmets } &\text { Helmets }\\\hline \text { Sales revenue } & \$ 460,000 & \$ 310,000 & \$ 150,000 \\\hline \text { Variable expenses } & 355,000 & 235,000 & 120,000 \\\hline \text { Contribution margin } & 105,000 & 75,000 & 30,000 \\\hline \text { Fixed expenses } & 76,000 & 38,000 & 38,000 \\\hline \text { Operating income (loss) } & \$ 29,000 & \$ 37,000 & \$(8,000) \\\hline\end{array}$ - If $20,000 of fixed costs will be eliminated by dropping the Football Helmets line, how will operating income be affected?

All of the following are relevant to the decision to replace equipment EXCEPT the:

Origami Company is a price-taker and uses target pricing. Please refer to the following information: Production volume 500,000 Units per year Market price \ 24.00 Per unit Desired operating profit 12\% Of total assets Revenue at market price plus the desired operating profit equals the product's target full cost.

In making a short-term decision, which of the following is MOST important?