Deck 20: Short-Term Business Decisions

Question 1

Which of the following is irrelevant when making a decision?

A) The original cost of an asset that the company is considering replacing
B) The fixed overhead costs that differ among decision alternatives
C) The cost of further processing a product that could be sold as is
D) The expected increase in contribution margin of one product line as a result of a decision to drop a separate unprofitable product line

Answer 1

A

Question 2

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

Answer 2

False

Question 3

When considering whether to have a new roof installed on a building, the money spent previously on roof repairs to the old roof is information that is relevant to the business decision.

Answer 3

False

Question 4

Which of the following pieces of information would NOT be relevant in deciding to upgrade a company's heating and air conditioning system?

A) The energy efficiency of the old equipment versus the energy efficiency of the new equipment
B) The safety of the new equipment compared to the old equipment
C) The purchase price of the old equipment compared to the purchase price of the new equipment
D) The productivity of the old equipment compared to that of the new equipment

Question 5

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

A) Separate variable costs from fixed costs
B) Focus on total costs
C) Use a conventional absorption costing approach
D) Focus on the bottom line net income

Question 6

Which of the following is NOT important with respect to short-run decision making?

A) Focusing on relevant revenues and costs
B) Using a contribution margin income statement format
C) Focusing on maximizing the gross profit of each unit sold
D) Focusing on analyzing incremental revenues and costs

Question 7

Fixed costs that do NOT differ between two alternatives are:

A) relevant to the decision.
B) considered opportunity costs.
C) irrelevant to the decision.
D) important only if they represent a material dollar amount.

Question 8

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
$$\begin{array} { | l | r | r | } \hline& \text { Old Machine } &{ \begin{array} { c } \text { Replacement } \\\text { Machine }\end{array} } \\ \hline \text { Original cost } & \$ 45,000 & \$ 35,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 &0 \\\hline \text { Book value } & \$ 25,000 & \\\hline \text { Current disposal value in cash } & \$ 8,000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$0 & \$0\\\hline \text { Annual cash operating costs } & \$7,000&\$4,000 \\\hline\end{array}$$


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For a machine replacement decision which of the information provided in the table is a sunk cost?

A) The original cost of the old machine
B) The current disposal value of the old machine
C) The current annual operating cost of the old machine
D) The price of the new machine

Question 9

When a business is considering whether to replace old equipment with newer equipment, the original cost of the old equipment-compared to the cost of the new equipment-is information relevant to the business decision.

Question 10

Managers' decisions are based primarily on quantitative data because the qualitative factors are NOT usually relevant to the decision making process.

Question 11

In considering the trade-in of a vehicle, which of the following is a sunk cost?

A) Depreciation on new vehicle
B) Trade-in value of old vehicle
C) Purchase price of new vehicle
D) Original purchase price of the old vehicle

Question 12

The effect of a plant closing on employee morale is an example of which of the following?

A) A quantitative factor
B) A qualitative factor
C) A sunk cost
D) A variable cost

Question 13

Which of the following describes a sunk cost?

A) One that is relevant to a decision because it changes depending on different courses of action
B) An outlay expected to be incurred in the future
C) A historical cost that is always irrelevant
D) A historical cost that may be relevant to future events

Question 14

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

A) cost of new equipment.
B) selling price of old equipment.
C) future maintenance costs of old equipment.
D) original cost of old equipment.

Question 15

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

A) opportunity cost.
B) sunk cost.
C) variable cost.
D) incremental cost.

Question 16

A sunk cost is a cost that was previously incurred and is irrelevant to the decision making process.

Question 17

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
$$\begin{array} { | l | r | r | } \hline& \text { Old Machine } &{ \begin{array} { c } \text { Replacement } \\\text { Machine }\end{array} } \\ \hline \text { Original cost } & \$ 45,000 & \$ 35,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 &0 \\\hline \text { Book value } & \$ 25,000 & \\\hline \text { Current disposal value in cash } & \$ 8,000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$0 & \$0\\\hline \text { Annual cash operating costs } & \$7,000&\$4,000 \\\hline\end{array}$$

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Which of the information provided in the table is irrelevant to the replacement decision?

A) The price of the new machine
B) The original cost of the old machine
C) The current disposal value of the old machine
D) Annual operating costs

Question 18

When a business is considering whether to replace old equipment with newer equipment, the cost of operating the old equipment-compared to the cost of operating the new equipment-is information relevant to the business decision.

Question 19

Which of the following is the format of the income statement that is MOST useful in decision-making?

A) Absorption costing format
B) Multiple-step format
C) Single-step format
D) Contribution margin format

Question 20

If a business is considering buying a new vehicle, the cost of insurance on the new vehicle is information that is relevant to the business decision.

Question 21

Origami Company is a price-taker and uses target pricing. Please refer to the following information:
$$\begin{array} { | l | r | r | } \hline \text { Production volume } & 500,000 & \text { Units per year } \\\hline \text { Narket price } & \$ 24.00 & \text { Per unit } \\\hline \text { Pesired aperating profit } & 12 \% & \text { Of total assets } \\\hline \text { Tatal assts } & \$ 12,500,000 & \\\hline\end{array}$$

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How much is the desired profit for the year?

A) $1,440,000
B) $11,000,000
C) $12,000,000
D) $1,500,000

Question 22

Origami Company is a price-taker and uses target pricing. Please refer to the following information:
$\begin{array}{|l|r|r|}\hline \text { Production volume } & 500,000 & \text { Units per year } \\\hline \text { Market price } & \$ 24.00 & \text { Per unit } \\\hline \text { Desired operating profit } & 12 \% & \text { Of total asset } \\\hline \text { Total assets } & \$ 12,500,000 & \\\hline\end{array}$

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How much is the target full cost per unit? (Please round to nearest cent.)

A) $21.00
B) $24.00
C) $22.67
D) $19.33

Question 23

Which of the following business strategies would NOT be consistent with a price setter?

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 24

Origami Company is a price-taker and uses target pricing. Please refer to the following information:
$$\begin{array} { | l | r | r | } \hline \text { Production volume } & 500,000 & \text { Units per year } \\\hline \text { Narket price } & \$ 24.00 & \text { Per unit } \\\hline \text { Pesired aperating profit } & 12 \% & \text { Of total assets } \\\hline \text { Tatal assets } & \$ 12,500,000 & \\\hline \text { Varinble edst per unit } & \$ 17.00 & \text { Per unit } \\\hline \text { Fixed cost per year } & \$ 3,000,000 & \text { Per year } \\\hline\end{array}$$

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With the current cost structure, Origami cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that variable costs CANNOT be reduced, how much will the target fixed costs per year be?

A) $2,000,000
B) $1,500,000
C) $2,500,000
D) $800,000

Question 25

Origami Company is a price-taker and uses target pricing. Please refer to the following information:
$$\begin{array} { | l | r | r | } \hline \text { Production volume } & 500,000 & \text { Units per year } \\\hline \text { Narket price } & \$ 24.00 & \text { Per unit } \\\hline \text { Pesired aperating profit } & 12 \% & \text { Of total assets } \\\hline \text { Tatal assts } & \$ 12,500,000 & \\\hline\end{array}$$

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How much is the target full cost in total for the year?

A) $1,440,000
B) $10,500,000
C) $12,000,000
D) $1,500,000

Question 26

Origami Company is a price-taker and uses target pricing. Please refer to the following information:
$$\begin{array} { | l | r | r | } \hline \text { Production volume } & 500,000 & \text { Units per year } \\\hline \text { Narket price } & \$ 24.00 & \text { Per unit } \\\hline \text { Pesired aperating profit } & 12 \% & \text { Of total assets } \\\hline \text { Tatal assets } & \$ 12,500,000 & \\\hline \text { Varinble edst per unit } & \$ 17.00 & \text { Per unit } \\\hline \text { Fixed cost per year } & \$ 3,000,000 & \text { Per year } \\\hline\end{array}$$

-
With the current cost structure, Origami cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that fixed costs CANNOT be reduced, how much will the target variable costs per year be?

A) $7,500,000
B) $12,500,000
C) $2,500,000
D) $8,000,000

Question 27

When a company is a price-setter, that means that the company has flexibility in setting its price and may choose to use the cost-plus methodology.

Question 28

If a company wishes to be a price-setter, which of the following strategies should they take?

A) Produce a generic mass-market product
B) Enter a competitive market and boost profits by cost cutting
C) Produce a unique product
D) Produce a commodity and outsource the manufacturing operations

Question 29

In deciding whether to accept a special sales order, management should consider the quantitative data ONLY and disregard qualitative factors.

Question 30

Which of the following is NOT a major consideration when analyzing a special order?

A) Will the price be high enough to cover any incremental costs to fill the order?
B) Does the company have excess capacity available?
C) Will the profit margin of the special sale be as high as regular sales?
D) Will the special order negatively impact regular sales?

Question 31

Which of the following are the two most important keys to short-term business decision-making?

A) Focus on costs which do not change under two alternatives and on historic costs
B) Focus on qualitative data only and ignore future cash flows
C) Focus on sunk costs and quantitative data only
D) Focus on future expected data and use the contribution margin approach

Question 32

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

Question 33

Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows:
$$\begin{array} {| l | r | r | } \hline\text { Variable manufarturing } & \$ 105.00 & \text { Per unit } \\\hline \text { Variable marketing } & \$ 5.00 & \text { Per unit } \\\hline \text { Fixed manufacturing } & \$ 270,000 & \text { Per year } \\\hline \text { Fixed marketing \& admin } & \$ 140,000 & \text { Per year } \\\hline\end{array}$$

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The sales manager says he has an opportunity to pitch a special sale to a new Canadian fishing company that is outfitting new boats. He proposes a sale of 30 units at a special price of $140 per unit. He says it will not cannibalize the company's regular sales and is a one-time transaction. It will require the normal amount of variable costs, both marketing and manufacturing, but will not impact fixed costs in any way. The president of the company has some reservations, but finally agrees to make the deal if and only if it adds a minimum of $1,000 to operating income. Based on the president's criteria, Potlatch will decline the offer.

Question 34

Pueblo Products is a price-taker and uses target pricing. Please refer to the following information:
$$\begin{array} { | l | r | r | } \hline \text { Toduction valume } & 250,000 & \text { Units per year } \\\hline \text { Market price } & \$ 2.00 & \text { Per unit } \\\hline \text { Desired aperating profit } & 10 \% & \text { Of total assets } \\\hline \text { Tatal assets } & \$ 1,000,000 & \\\hline\end{array}$$
How much is the target full cost per year?

A) $400,000
B) $410,000
C) $440,000
D) $390,000

Question 35

Fixed costs are relevant to a special sales order decision if those fixed costs are subject to change as a result of the special order.

Question 36

Special sales orders increase operating income if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order.

Question 37

Origami Company is a price-taker and uses target pricing. Please refer to the following information:
$$\begin{array} { | l | r | r | } \hline \text { Production volume } & 500,000 & \text { Units per year } \\\hline \text { Narket price } & \$ 24.00 & \text { Per unit } \\\hline \text { Pesired aperating profit } & 12 \% & \text { Of total assets } \\\hline \text { Tatal assets } & \$ 12,500,000 & \\\hline \text { Varinble edst per unit } & \$ 17.00 & \text { Per unit } \\\hline \text { Fixed cost per year } & \$ 3,000,000 & \text { Per year } \\\hline\end{array}$$

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With the current cost structure, Origami cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that fixed costs CANNOT be reduced, how much will the target variable costs per unit be? (Please round to nearest cent.)

A) $14.67
B) $16.25
C) $15.00
D) $17.50

Question 38

If a company is a price-taker, it has considerable flexibility in setting its products' prices.

Question 39

Pueblo Products is a price-taker and uses target pricing. Pueblo has just done an analysis of their revenues, costs and desired profits, and has calculated its target full cost. Please refer to the following information:
$$\begin{array} { | l | r | r | } \hline \text { Target full cost } & \$ 400,000 & \text { Per year } \\\hline \text { Artual fixed cost } & \$ 160,000 & \text { Per year } \\\hline \text { Artual variable cost } & \$ 1.00 & \text { Per unit } \\\hline \text { Praduction volume } & 250,000 & \text { Units per year } \\\hline\end{array}$$

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Actual costs are currently higher than target full cost. Assuming that variable costs are dependent on commodity prices and CANNOT be reduced, how much is the target fixed cost?

A) $160,000
B) $175,000
C) $150,000
D) $140,000

Question 40

Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows:
$$\begin{array} { |l | r | r | } \hline\text { Variable manufarturing } & \$ 105.00 & \text { Per unit } \\\hline \text { Variable marketing } & \$ 5.00 & \text { Per unit } \\\hline \text { Fixed manufacturing } & \$ 270,000 & \text { Per year } \\\hline \text { Fixed marketing \& admin } & \$ 140,000 & \text { Per year } \\\hline\end{array}$$

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A potential deal has come up for a one time sale of 25 units at a special price of $105 per unit. The marketing manager says that the sale will not negatively impact the company's regular sales activities, but it will require the normal amount of variable marketing costs. The production manager says that there's plenty of excess capacity and the deal will not impact fixed costs in any way. The controller points out, however, that because the incremental revenues are just equal to the incremental costs to fill the order, the deal will not have any impact on the bottom line whatever. The controller is correct in his statement.

Question 41

Polynesian Products sells 1,800 kayaks per year at a price of $480 per unit. Polynesian sells in a highly competitive market and uses target pricing. The company has $900,000 of assets and the shareholders wish to make a profit of 15% on assets. Variable costs are $220 per unit and CANNOT be reduced. How much are the target fixed costs?

A) $265,000
B) $410,000
C) $396,000
D) $333,000

Question 42

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:
$\begin{array}{|l|r|}\hline \text { Sale price per unit } & \$ 150 \\\hline \text { Variable costs per unit: } & \\ \hline \text { Manufacturing } & 55 \\\hline \text { Marketing and administrative } & 25 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 640,000 \\\hline \text { Marketing and administrative } &\$ 280,000 \\\hline\end{array}$



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If a special sales order is accepted for 3,000 sails at a price of $75 per unit, fixed costs remain unchanged, and there are no additional variable marketing and administrative costs for this order, what is the change in operating income?

A) Operating income decreases $5,000.
B) Operating income decreases $36,000.
C) Operating income increases $35,000.
D) Operating income increases $60,000.

Question 43

Able Specialty Foods sells jars of special spices used in Spanish cooking. The variable cost is $0.90 per unit. Fixed costs are $8,400,000 per year. Able has $20,000,000 of assets, and investors expect a return of 10% on their assets. Able sells 4,000,000 units per year. Because they are the only company which produces this kind of product, they use cost-plus pricing. Using cost-plus methodology, how much should the price per unit be? (Please round to the nearest cent.)

A) $3.00
B) $3.50
C) $3.16
D) $3.24

Question 44

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:
$\begin{array}{|l|r|}\hline \text { Sale price per unit } & \$ 150 \\\hline \text { Variable costs per unit: } & \\ \hline \text { Manufacturing } & 55 \\\hline \text { Marketing and administrative } & 25 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 640,000 \\\hline \text { Marketing and administrative } &\$ 280,000 \\\hline\end{array}$



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If a special sales order is accepted for 2,000 sails at a price of $95 per unit, and if the order requires both variable manufacturing and variable marketing and administrative costs, and if incremental fixed costs of $10,000 are required, what will be the impact on operating income?

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

Question 45

Outdoor Recworld produces a special kind of light-weight recreational vehicle that has a unique design, and it allows the company to follow a cost-plus pricing strategy. Outdoor Recworld has $8,000,000 of assets and shareholders expect a 12% return on assets. Additional data are as follows:
$\begin{array}{|l|r|r|}\hline \text { Sales volume } & 5,000 & \text { Units per year } \\\hline \text { Variable costs } & \$ 1,800.00 & \text { Per unit } \\\hline \text { Fixed cost } & \$ 2,200,000 & \text { Per year }\\\hline\end{array}$


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Using the cost-plus approach, what should the price per unit be?

A) $2,432
B) $2,240
C) $2,560
D) $2,232

Question 46

Burr Hill golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $50,000,000 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 rounds of golf are expected to be played each year. Variable costs are about $10 per round of golf.

-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 47

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?

A) Increase of $15,000
B) Decrease of $15,000
C) Increase of $105,000
D) Decrease of $60,000

Question 48

Polynesian Products sells 1,800 kayaks per year at a price of $480 per unit. Polynesian sells in a highly competitive market and uses target pricing. The company has $900,000 of assets and the shareholders wish to make a profit of 15% on assets. How much is the target full cost?

A) $864,000
B) $729,000
C) $135,000
D) $712,500

Question 49

In a special sales order decision, incremental fixed costs which would be incurred because of an additional purchase of equipment would be considered to be:

A) relevant to the decision.
B) irrelevant to the decision.
C) opportunity costs.
D) sunk costs.

Question 50

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:
$\begin{array}{|l|r|}\hline \text { Sale price per unit } & \$ 150 \\\hline \text { Variable costs per unit: } & \\ \hline \text { Manufacturing } & 55 \\\hline \text { Marketing and administrative } & 25 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 640,000 \\\hline \text { Marketing and administrative } &\$ 280,000 \\\hline\end{array}$


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If a special sales order is accepted for 5,000 sails at a price of $125 per unit, and fixed costs remain unchanged, what is the change in operating income? (Assume the special sales order will require variable manufacturing costs and variable marketing and administrative costs.)

A) Operating income decreases $5,000.
B) Operating income increases $190,000.
C) Operating income decreases $125,000.
D) Operating income increases $225,000.

Question 51

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:
$\begin{array}{|l|r|}\hline \text { Sale price per unit } & \$ 150 \\\hline \text { Variable costs per unit: } & \\ \hline \text { Manufacturing } & 55 \\\hline \text { Marketing and administrative } & 25 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 640,000 \\\hline \text { Marketing and administrative } &\$ 280,000 \\\hline\end{array}$



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If a special sales order is accepted for 2,000 sails at a price of $70 per unit, and if the order requires no incremental marketing and administrative costs, and no change in fixed costs, what will the effect on operating income be?

A) Operating income increases $30,000.
B) Operating income decreases $44,000.
C) Operating income increases $20,000.
D) Operating income increases $25,000.

Question 52

Pueblo Products is a price-taker and uses target pricing. Pueblo has just done an analysis of their revenues, costs and desired profits, and has calculated its target full cost. Please refer to the following information:
$$\begin{array} { | l | r | r | } \hline \text { Target full cost } & \$ 400,000 & \text { Per year } \\\hline \text { Artual fixed cost } & \$ 160,000 & \text { Per year } \\\hline \text { Artual variable cost } & \$ 1.00 & \text { Per unit } \\\hline \text { Praduction volume } & 250,000 & \text { Units per year } \\\hline\end{array}$$

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Actual costs are currently higher than target full cost. Assuming that fixed costs are predominantly related to depreciation expense and CANNOT be reduced, how much is the target variable cost per unit?

A) $0.92
B) $1.04
C) $1.00
D) $0.96

Question 53

Polynesian Products sells 1,800 kayaks per year at a price of $480 per unit. Polynesian sells in a highly competitive market and uses target pricing. The company has calculated its target full cost at $729,000 per year. Total variable costs are $396,000 per year and cannot be reduced. How much are the target fixed costs?

A) $265,000
B) $410,000
C) $396,000
D) $333,000

Question 54

Perfect Time Company manufactures and sells watches for $36 each. Value Products Company has offered Perfect Time $16 per watch for a one time order of 1,000 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?

A) Increase of $2,000
B) Decrease of $18,000
C) Increase of $16,000
D) Decrease of $2,000

Question 55

Pueblo Products is a price-taker and uses target pricing. Pueblo has just done an analysis of their revenues, costs and desired profits, and has calculated its target full cost. Please refer to the following information:
$$\begin{array} { | l | r | r | } \hline \text { Target full cost } & \$ 400,000 & \text { Per year } \\\hline \text { Artual fixed cost } & \$ 160,000 & \text { Per year } \\\hline \text { Artual variable cost } & \$ 1.00 & \text { Per unit } \\\hline \text { Praduction volume } & 250,000 & \text { Units per year } \\\hline\end{array}$$

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Actual costs are currently higher than target full cost. Assuming that fixed costs are predominantly related to depreciation expense and CANNOT be reduced, how much is the target variable cost?

A) $200,000 per year
B) $250,000 per year
C) $240,000 per year
D) $214,000 per year

Question 56

Burr Hill golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $50,000,000 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 rounds of golf are expected to be played each year. Variable costs are about $10 per round of golf.

-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 57

Polynesian Products sells 1,800 kayaks per year at a price of $480 per unit. Polynesian sells in a highly competitive market and uses target pricing. The company has $900,000 of assets and the shareholders wish to make a profit of 15% on assets. Fixed costs are $400,000 per year and CANNOT be reduced. How much are the target variable costs?

A) $265,000
B) $410,000
C) $396,000
D) $329,000

Question 58

Paragon Products sells a special kind of navigation equipment for $1,200. Variable costs are $900 per unit. When a special order arrived from a foreign contractor to buy 40 units at a reduced price of $1,000 per unit, there was a discussion among management. The controller said that as long as the special price was less than the variable costs, the sale would contribute to the company's profits, and so it should be accepted as offered. The production manager warned that the company was already working at full capacity, and would have to add staff and equipment to accommodate the order. The sales manager urged caution because if they sold to this contractor, it might adversely affect their regular sales. The vice-president decided to decline the order. Which of the following statements is NOT valid for sound business decision making?

A) The controller was correct in that the only relevant facts are the special sales price and the incremental variable costs.
B) The production manager was correct because the incremental fixed costs of expanding capacity could negate the positive contribution margin of the sale.
C) The sales manager was right because even if this sale generated profit, it may cut into future profits by reducing future sales.
D) The vice-president was wise to be cautious given the concerns about capacity and the effect on regular sales.

Question 59

Dane Metalworks produces a special kind of metal ingots which are unique, and it allows Dane to follow a cost-plus pricing strategy. Dane has $9,000,000 of assets and shareholders expect approximately 8% return on assets. Additional data are as follows:
$$\begin{array} { | l | r | r | } \hline \text { Sales volume } & 200,000 & \text { Units per year } \\\hline \text { Variable costs } & \$ 16.00 & \text { Per unit } \\\hline \text { Fixed cost } & \$ 1,200,000 & \text { Per year } \\\hline\end{array}$$

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Using the cost-plus approach, what should the price per unit be? (Please round to the nearest cent.)

A) $22.00
B) $21.67
C) $25.60
D) $22.50

Question 60

Polynesian Products sells 1,800 kayaks per year at a price of $480 per unit. Polynesian sells in a highly competitive market and uses target pricing. The company has calculated its target full cost at $729,000 per year. Fixed costs are $400,000 per year and CANNOT be reduced. How much are the target variable costs?

A) $265,000
B) $410,000
C) $396,000
D) $329,000

Question 61

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.)

A) $3.75 per unit
B) $6.50 per unit
C) $1.90 per unit
D) $6.15 per unit

Question 62

If a company is a price-taker, which of the following is probably TRUE?

A) The company is in a highly competitive market.
B) The company's product is unique.
C) The company has considerable flexibility in setting prices of its products.
D) The company clearly differentiates its product from the competitors.

Question 63

DM Corporation has provided you with the following budgeted income statement for one of their products:
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 650,000 \\\hline \text { Variable Expenses } & 455,000 \\\hline \text { Contribution margin } & \$ 195,000 \\\hline \text { Fixed Expenses } & 240,000 \\\hline \text { Operating income } & ( \$ 45,000 ) \\\hline\end{array}$$
DM Corporation believes that 70% of the fixed costs would be avoidable if the product line was dropped. Based on impact to the company operating income, DM should NOT drop the product line.

Question 64

Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows:
$$\begin{array} { | l | r | r |} \hline \text { Variable manufarturing } & \$ 105.00 & \text { Per unit } \\\hline \text { Variable marketing } & \$ 5.00 & \text { Per unit } \\\hline \text { Fixed manufacturing } & \$ 270,000 & \text { Per year } \\\hline \text { Fixed marketing \& admin } & \$ 140,000 & \text { Per year } \\\hline\end{array}$$

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A foreign company has offered to make a one-time purchase of 20 units at a price of $150 per unit. The marketing manager says that this sale will not affect Potlatch's normal sales activity, and it will not require any variable marketing costs. The production manager says that the company is working nearly at capacity and will have to take on additional fixed costs of $1,000 per year in order to accommodate the deal. If Potlatch accepts the sale, how will it affect operating income?

A) Decrease by $100
B) Increase by $1,500
C) Increase by $900
D) Decrease by $900

Question 65

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows:
$\begin{array}{|l|r|r|r|}\hline& \text { Bhankets } & \text { Pillows } & \text { Total } \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & \underline{465,000} & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { rixed expenses } & 76,000 & 76,000 & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$(16,000) & \$ 63,000 \\\hline\end{array}$



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Sweet Dreams should eliminate the pillows product line only, if by doing so, they can eliminate more than $60,000 of fixed costs.

Question 66

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?

A) Up $5,000
B) Down $8,000
C) Up $1,000
D) Down $3,000

Question 67

The Squash Company has 5,500 machine hours available annually to manufacture racquets.
The following information is available for the two different racquets produced by Squash:
$\begin{array}{|l|r|}\hline \text { Pro } & \\\hline \text { Unit sales price } & \$ 200 \\\hline \text { Unit variable costs } & \$ 120 \\\hline \text { Annual demand } & 2,000 \text { units }\\\hline \text { Machine time } & \text { 2 hours per unit } \\\hline \text { Mid } & \\\hline \text { Unit sales price } & \$ 120 \\\hline \text { Unit variable costs } & \$ 66 \\\hline\text { Annual demand } & 4,000 \text { units } \\\hline\text { Machine time } & 1.25 \text { hours per unit }\\\hline\end{array}$

How many units of each racquet should be manufactured for Squash to maximize its operating income?

A) 2,000 units of Pro and 1,200 units of Mid
B) 4,000 units of Mid and 250 units of Pro
C) 2,000 units of Pro and 4,000 units of Mid
D) 4,000 units of Mid and 500 units of Pro

Question 68

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 foreign company has offered to buy 80 units for a reduced price of $300 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 incremental selling & administrative costs, as it is a one-time deal. 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?

A) Up $16,000
B) Down $8,000
C) Up $24,000
D) Down $42,000

Question 69

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows:
$\begin{array}{|l|r|r|r|}\hline& \text { Bhankets } & \text { Pillows } & \text { Total } \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & \underline{465,000} & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { rixed expenses } & 76,000 & 76,000 & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$(16,000) & \$ 63,000 \\\hline\end{array}$



-
If Sweet Dreams can eliminate total fixed costs of $20,000 by dropping the pillow line, operating income will go up by $36,000.

Question 70

The income statement for Sweet Dreams Company is divided by its two product lines-blankets and pillows-as follows:
$\begin{array}{|l|r|r|r|}\hline& \text { Bhankets } & \text { Pillows } & \text { Total } \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & \underline{465,000} & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { rixed expenses } & 76,000 & 76,000 & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$(16,000) & \$ 63,000 \\\hline\end{array}$


-
If total fixed costs remain unchanged and Sweet Dreams drops the pillow line, operating income will fall by $60,000.

Question 71

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.

Question 72

Maxi Production is a price-taker. They produce large spools of electrical wire in a highly competitive market, and so they practice target pricing. The current market price is $800 per unit. The company has $2,000,000 in assets and shareholders expect a return of 5% on assets. The company provides the following information:
$$\begin{array} { | l | r | r | } \hline \text { Sales volume } & 90,000 & \text { Units per year } \\\hline \text { Variable costs } & \$ 680 & \text { Per unit } \\\hline \text { Fixed costs } & \$ 12,000,000 & \text { Per year } \\\hline\end{array}$$

-
Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If fixed costs CANNOT be reduced, how much does the variable cost per unit need to be in order to hit the profit goal? (Please round to the nearest cent.)

A) $675.67 per unit
B) $642.00 per unit
C) $665.56 per unit
D) $694.20 per unit

Question 73

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?

A) Up $6,000
B) Down $8,000
C) Up $12,000
D) Down $12,000

Question 74

Clay Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp. The following per unit data are available:
$$\begin{array} { | l | r | r | } \hline & \text { Bedford Lamp } & \text { Lowell Lamp } \\\hline \text { Sale price } & \$ 25 & \$ 35 \\\hline \text { Variable costs } & \$ 17 & \$ 23 \\\hline \text { Neching hours required for 1 lamp } & 2 & 4 \\\hline\end{array}$$
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.

Question 75

A company has two different products that sell to separate markets. Financial data are as follows:
$$\begin{array} { | l | r | r | r | } \hline & \text { Product A } & \text { Product B } & { \text { Total } } \\\hline \text { Revenue } & \$ 12,000 & \$ 8,000 & \$ 20,000 \\\hline \text { Variable cost } & ( \$ 7,500 ) & ( \$ 8,100 ) & ( \$ 15,600 ) \\\hline \text { Fixed cost (allocated) } & ( \$ 3,000 ) & ( \$ 1,000 ) & ( \$ 4,000 ) \\\hline \text { Operating income } & \$ 1,500 & ( \$ 1,100 ) & \$ 400 \\\hline\end{array}$$
Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other. Because the contribution margin of Product B is negative, it should be dropped.

Question 76

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.)

A) $322 per unit
B) $430 per unit
C) $438 per unit
D) $278 per unit

Question 77

Maxi Production is a price-taker. They produce large spools of electrical wire in a highly competitive market, and so they practice target pricing. The current market price is $800 per unit. The company has $2,000,000 in assets and shareholders expect a return of 5% on assets. The company provides the following information:
$$\begin{array} { | l | r | r | } \hline \text { Sales volume } & 90,000 & \text { Units per year } \\\hline \text { Variable costs } & \$ 680 & \text { Per unit } \\\hline \text { Fixed costs } & \$ 12,000,000 & \text { Per year } \\\hline\end{array}$$

-
Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If fixed costs cannot be reduced, how much reduction in total variable costs will be needed to achieve the profit target?

A) Reduce variable costs by $1,300,000
B) Reduce variable costs by $1,050,000
C) Reduce variable costs by $990,000
D) Reduce variable costs by $1,200,000

Question 78

RS Company's western territory's forecasted income statement for the upcoming year is as follows:
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 750,000 \\\hline \text { Variable expenses } & 420,000 \\\hline \text { Contribution margin } & \$ 330,000 \\\hline \text { Fixed experses } & 396,000 \\\hline \text { Operating income } & ( \$ 66,000 ) \\\hline\end{array}$$
RS Company's management is considering dropping the western territory. This move would be financially advantageous only if the company could eliminate $330,000 of fixed costs or more.

Question 79

Maxi Production is a price-taker. They produce large spools of electrical wire in a highly competitive market, and so they practice target pricing. The current market price is $800 per unit. The company has $2,000,000 in assets and shareholders expect a return of 5% on assets. The company provides the following information:
$$\begin{array} { | l | r | r | } \hline \text { Sales volume } & 90,000 & \text { Units per year } \\\hline \text { Variable costs } & \$ 680 & \text { Per unit } \\\hline \text { Fixed costs } & \$ 12,000,000 & \text { Per year } \\\hline\end{array}$$

-
Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If variable costs CANNOT be reduced, how much reduction in fixed costs will be needed to achieve the profit target?

A) Reduce fixed costs by $1,300,000
B) Reduce fixed costs by $1,050,000
C) Reduce fixed costs by $990,000
D) Reduce fixed costs by $1,200,000

Question 80

Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows:
$$\begin{array} { | l | r | r| } \hline \text { Variable manufarturing } & \$ 105.00 & \text { Per unit } \\\hline \text { Variable marketing } & \$ 5.00 & \text { Per unit } \\\hline \text { Fixed manufacturing } & \$ 270,000 & \text { Per year } \\\hline \text { Fixed marketing \& admin } & \$ 140,000 & \text { Per year } \\\hline\end{array}$$

-
An offer has come in for a one time sale of 100 units at a special price of $120 per unit. The marketing manager says that the sale will not negatively impact the company's regular sales activities, and that it will not require any variable marketing costs. The production manager says that there's plenty of excess capacity and the deal will not impact fixed costs in any way. What is the effect of this deal on operating income?

A) Increase $200
B) Increase $500
C) Increase $1,000
D) Increase $1,500