Deck 10: Short-Term Business Decisions

Question 1

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
How much are the total relevant costs associated with keeping the old machine?

A) $35,000
B) $40,000
C) $47,000
D) $60,000

Answer 1

$35,000

Question 2

Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails per year, and is currently producing and selling 20,000 sails per year. The following information relates to current production:


- If a special sales order is accepted for 2,000 sails at a price of $95 per unit, and fixed costs increase by $10,000, what is the change in operating income affected?

A) Operating income decreases $34,000.
B) Operating income decreases $44,000.
C) Operating income increases $20,000.
D) Operating income increases $25,000.

Answer 2

Operating income increases $20,000.

Question 3

Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails per year, and is currently producing and selling 20,000 sails per year. The following information relates to current production:


-If a special sales order is accepted for 2,500 sails at a price of $70 per unit, fixed costs increase by $10,000, and variable marketing and administrative costs for that order decrease by $5 per unit, what is the change in operating income?

A) Operating income decreases $22,500.
B) Operating income decreases $82,500.
C) Operating income decreases $10,000.
D) Operating income increases $22,500.

Answer 3

Operating income decreases $22,500.

Question 4

Dakoka Corporation provided the following information regarding its only product:


-Assuming there is excess capacity, what would be the change in operating income as a result of accepting a special order for 1,000 units at a sales price of $40 per unit?

A) Operating income decreases $10,000.
B) Operating income decreases $15,000.
C) Operating income increases $10,000.
D) Operating income increases $80,000.

Question 5

Dakoka Corporation provided the following information regarding its only product:


- Assuming there is excess capacity, what would be the change in operating income as a result of accepting a special order for 1,000 units at a sales price of $55 per unit assuming additional fixed manufacturing overhead costs of $7,000 would be incurred?

A) Operating income decreases $2,000.
B) Operating income decreases $5,000.
C) Operating income decreases $87,000.
D) Operating income increases $2,000.

Question 6

Dakoka Corporation provided the following information regarding its only product:
Assuming there is excess capacity, what would be the change in operating income as a result of accepting a special order for 800 units at a sales price of $46 per product? The 800 units would not require any variable selling and administrative expenses.

A) Operating income decreases $800.
B) Operating income decreases $3,200.
C) Operating income increases $800.
D) Operating income increases $3,200.

Question 7

Burr Hill golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $10 per golfer. The Burr Hill golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Burr Hill charge for a round of golf?

A) $50
B) $60
C) $70
D) $80

Question 8

Burr Hill golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $10 per golfer. The Burr Hill golf course is a price-taker and won't be able to charge more than its competitors who charge $65 per round of golf. What profit will it earn in terms of dollars?

A) $2,500,000
B) $25,000,000
C) $30,000,000
D) $32,500,000

Question 9

The management of Garland Inc. is considering whether or not to accept a special sales order for 500
Units of a product that it manufactures. Management has been provided the following data regarding
The manufacturing and selling costs per unit:
Management has been informed that variable selling costs pertaining to the special order will be
Reduced by 20%. Management has also been informed that 250 units of sales to regular customers will
Be lost; the sales to regular customers create a contribution margin of $500 per unit. What is the
Lowest selling price that Garland's management would be willing to accept?

A) $585
B) $600
C) $835
D) $715

Question 10

The management of Garland Inc. is considering whether or not to accept a special sales order for 500 Units of a product at a sales price of $900 per unit. Management has been provided the ollowing data Regarding the manufacturing and selling costs per unit:
Management has been informed that variable selling costs pertaining to the special sales order will be Reduced by 20%. Management has also been informed that 250 units of sales to regular customers will Be lost; the sales to regular customers create a contribution margin of $500 per unit. Should Garland's Management accept the special sales order?

A) Yes, because operating income will increase $157,500.
B) No, because operating income will decrease $92,500.
C) Yes, because operating income will increase $32,500.
D) No, because operating income will decrease $47,000.

Question 11

Gen Company has provided the following per unit information pertaining to the production and sale Of 2,000 units of generators:
Gen has received a special sales order for 1,000 units of this generator. Given that Gen is currently Operating at capacity, Gen will have to increase its fixed costs by 40% in order to accommodate the Special sales order. The variable selling expenses associated with this special sales order will be Reduced by $8 per unit. What is the minimum per unit selling price that Gen is willing to accept?

A) $442
B) $434
C) $464
D) $494

Question 12

Gen Company has provided the following per unit information pertaining to the production and sale For one of its generators:
Gen has received a special sales order for 1,000 units of this generator. If Gen accepts the special sales Order, 300 units of sales to regular customers will have to be given up. The variable selling expenses Associated with this special sales order will be reduced by $8 per unit. What is the minimum per unit Selling price that Gen is willing to accept?

A) $434
B) $650
C) $497
D) $580

Question 13

DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs. If DC Electronics buys the part, what is the most DC Electronics can spend per unit so that operating income equals the operating income from making the part?

A) $2.23
B) $2.34
C) $2.67
D) $3.00

Question 14

Sports Hats, Etc. has two product lines: baseball helmets and football helmets. Income statement data for the most recent year follow:


-Assuming fixed costs remain unchanged how would dropping the Football Helmets line affect operating income?

A) Operating income will increase $8,000.
B) Operating income will increase $38,000.
C) Operating income will decrease $30,000.
D) Operating income will decrease $150,000.

Question 15

Sports Hats, Etc. has two product lines: baseball helmets and football helmets. Income statement data for the most recent year follow:


- Assuming the Football Helmets line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $45,000 per year, how will operating income be affected?

A) Operating income will increase $15,000.
B) Operating income will increase $37,000.
C) Operating income will decrease $7,000.
D) Operating income will decrease $37,000.

Question 16

Sports Hats, Etc. has two product lines: baseball helmets and football helmets. Income statement data for the most recent year follow:


- 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 Baseball Helmets, how will operating income be affected?

A) Operating income will increase $37,000.
B) Operating income will increase $45,000.
C) Operating income will decrease $37,000.
D) Operating income will decrease $45,000.

Question 17

Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are available:
Easy Cook can manufacture five toaster ovens per machine hour and three bread machines per machine Hour. Easy Cook's production capacity is 1,500 machine hours per month.
What is the contribution margin per machine hour for bread machines?

A) $73
B) $110
C) $219
D) $365

Question 18

Shine Bright Company has three product lines: D, E, and F. The following information is available:


-Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assuming Shine Bright Company drops product line F and rents the space formerly used to produce product F for $17,000 per year, what affect will this have on operating income?

A) Operating income will increase $3,000.
B) Operating income will increase $15,000.
C) Operating income will decrease $14,000.
D) Operating income will decrease $3,000.

Question 19

Shine Bright Company has three product lines: D, E, and F. The following information is available:


- Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assuming Shine Bright Company drops line F and is able to double the production and sales of product line E without increasing fixed costs. What affect will this have on operating income?

A) Operating income will increase $6,000.
B) Operating income will increase $20,000.
C) Operating income will decrease $6,000.
D) Operating income will decrease $14,000.

Question 20

Shine Bright Company has three product lines: D, E, and F. The following information is available:


- Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assume Shine Bright Company is able to increase the sales of product F to $30,000 with no change in volume of units sold and no change in variable costs or fixed costs. What affect will this have on operating income?

A) Increase $2,000
B) Increase $4,000
C) Decrease $2,000
D) Decrease $4,000

Question 21

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows:
If Sweet Dreams can eliminate fixed costs of $50,000 and increase the sale of blankets by 3,000 units at a selling price of $20 per unit and a contribution margin of $5 per unit, then dropping the pillows should result in which of the following?

A) An increase in operating income of $25,000.
B) A decrease in operating income of $5,000.
C) No change in total operating income
D) An increase in total operating income of $5,000.

Question 22

Prince Company's racquet division has projected a net operating loss of $190,000 for the upcoming Year; fixed costs for the racquet division total $325,000, of which $115,000 are considered to be Avoidable. As a result of the forecasted loss, Prince is considering dropping the racquet division.
If the racquet division is dropped, Prince estimates that the clothing division's sales will decrease 5% Next year. The clothing division's projected operating income next year is $195,000 while the Projected contribution margin is $525,000. Should Prince Company drop the racquet division?

A) Yes, because operating income will increase $115,000.
B) Yes, because operating income will increase $180,250.
C) No, because operating income will decrease $46,250.
D) No, because operating income will decrease $29,750.

Question 23

DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs.
If DC Electronics makes the part, how much will its operating income be?

A) $6,500 greater than if the company bought the part
B) $8,100 greater than if the company bought the part
C) $5,100 less than if the company bought the part
D) $15,000 less than if the company bought the part

Question 24

Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:


- Assuming Lincoln Company can purchase 5,000 units of the part from Sexton Company for $15 each, and the facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year, what should Lincoln Company do?

A) Make the part and save $1 per unit.
B) Make the part and save $3 per unit.
C) Buy the part and save $1 per unit.
D) Buy the part and save $3 per unit.

Question 25

Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:


-Assume Lincoln Company can purchase 5,000 units of the part from Allgood Company for $14 each, and the facilities currently used to make the part could be used to manufacture 5,000 units of another product that would contribute $5 per unit to fixed costs. If no additional fixed costs would be incurred, what should Lincoln Company do?

A) Make the new product and buy the part to earn an extra $1 per unit contribution to profit.
B) Make the new product and buy the part to earn an extra $3 per unit contribution to profit.
C) Continue to make the part to earn an extra $1 per unit contribution to profit.
D) Continue to make the part to earn an extra $3 per unit contribution to profit.

Question 26

The Ascott Company has in its inventory 3,000 damaged radios that cost $45,000. The radios can be sold in their present condition for $30,000, or repaired at a cost of $41,000 and sold for $75,000. What is the opportunity cost of selling the radios in their present condition?

A) $30,000
B) $34,000
C) $41,000
D) $75,000

Question 27

Billings Corporation has 100 defective chairs in stock which can be sold in their present condition for $50 each. The defective chairs cost Billings $60 to manufacture. Billings is considering repairing the Chairs at a cost of $30 per chair; Billings will be able to sell the repaired chairs for $90 per unit. Should
Billings repair the defective chairs?

A) No, because Billings will not make any profit on the sale of the repaired chairs.
B) Yes, because Billings can sell the repaired chairs at a price greater than what they can be sold For as defective chairs.
C) No, because the cost of repairing the defective chairs increases the total manufacturing costs To $90, which is the selling price of the repaired chairs.
D) Yes, because Billings can increase its overall operating income by $1,000.

Question 28

BWM Motors currently purchases batteries from an outside supplier, which are used in the motorcycles that they manufacture. BWM pays $78 for each battery and uses 1,000 batteries per year. BWM's management team is considering manufacturing the batteries internally and has estimated
The per unit battery cost to be as follows:
BWM has idle capacity and can manufacture the batteries without affecting the manufacture of their Motorcycles. Should BWM manufacture the batteries?

A) Yes, because the annual increase in operating income will be $9,000.
B) No, because the annual decrease in operating income will be $13,000.
C) No, because the annual decrease in operating income will be $9,000.
D) Yes, because the annual increase in operating income will be $13,000.