Deck 8: Short-Term Business Decisions

Question 1

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

Answer 1

False

Question 2

Which of the following is the most important key 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
D) focus on relevant costs and use the contribution margin approach

Answer 2

D

Question 3

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 relevant information to the business decision.

Answer 3

True

Question 4

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 5

Which of the following pieces of information would be irrelevant 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 6

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

Question 7

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: $\begin{array}{|l|r|r|}\hline & \text { Old Machine } & \begin{array} { l } \text { Replacement } \\\text { Machine }\end{array} \\\hline \text { Original cost } & \$ 55,000 & \$ 45,000 \\\hline \text { Remaining useful life in years } & 3 & 3 \\\hline \text { Current age in years } & 3 & 0 \\\hline \text { Book value } & \$ 33,000 & \\\hline \text { Current disposal value in cash } & \$ 9,000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \\\hline \text { Annual cash operating costs } & 8,500 & \$ 3,500 \\\hline\end{array}$ Which of the following amounts represent a sunk cost?

A) $55,000
B) $33,000
C) $9,000
D) $45,000

Question 8

A sunk cost is a cost that was incurred in the past and cannot be changed regardless of which future action is taken.

Question 9

Which of the following is a historical cost that is always irrelevant?

A) relevant cost
B) differential cost
C) opportunity cost
D) sunk cost

Question 10

When replacing an old asset with a new one, the original purchase price of the old asset represents:

A) relevant cost.
B) differential costs.
C) opportunity cost.
D) sunk cost.

Question 11

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.

Question 12

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

Question 13

A company is planning to replace an old machine with a new one. Which of the following is a sunk cost in this decision?

A) cost of the new machine
B) selling price of the old machine
C) future maintenance costs of the old machine
D) original cost of the old machine

Question 14

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 15

The contribution margin approach helps managers in short-term decision making because:

A) it treats fixed manufacturing overhead as a product cost.
B) it reports only mixed costs.
C) it reports costs and revenues at present value.
D) it isolates costs by behavior.

Question 16

Fixed costs that do not differ between two alternatives are:

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

Question 17

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

Question 18

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: $\begin{array}{|l|r|r|}\hline & \text { Old Machine } & \begin{array} { l } \text { Replacement } \\\text { Machine }\end{array} \\\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 & 0 \\\hline \text { Book value } & \$ 25,000 & \\\hline \text { Current disposal value in cash } & \$ 8,000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \\\hline \text { Annual cash operating costs } & \$ 7,000 & \$ 4,000 \\\hline\end{array}$ 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 19

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

A) Fixed costs and variable costs must be analyzed separately.
B) All costs behave in the same way.
C) Unit manufacturing costs are variable costs.
D) All costs involved in a decision are considered relevant.

Question 20

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 21

Gotham Products is a price-taker and uses target pricing. Gotham has just done an analysis of their revenues, costs and desired profits, and has calculated its target full product cost. Please refer to the following information: $$\begin{array} { | l | r | r|} \hline \text { Target full product cost } & \$ 500,000& \text { per year } \\\hline \text { Actual fixed cost } & \$ 280,000 &\text { per year } \\\hline \text { Actual variable cost } & \$ 2& \text { per unit } \\\hline \text { Production volume } & 150,000 &\text { units per year } \\\hline\end{array}$$ Actual costs are currently higher than target full product cost.

- Assuming that fixed costs cannot be reduced, how much is the target variable cost?

A) $180,000
B) $300,000
C) $220,000
D) $500,000

Question 22

Gotham Products is a price-taker and uses target pricing. Please refer to the following information: $$\begin{array} { | l | r | l | } \hline \text { Production volume } & 300,000 & \text { units per year } \\\hline \text { Market price } & \$ 3 & \text { per unit } \\\hline \text { Desired operating income } & 15 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 2,000,000 & \\\hline\end{array}$$ How much is the target full product cost per year? Assume all units produced are sold.

A) $900,000
B) $600,000
C) $300,000
D) $390,000

Question 23

Polynesia Company manufactures sonars for fishing boats. Model 70 sells for $300. Polynesia produces and sells 5,500 of them per year. Cost data are as follows:
$$\begin{array} { | l | r | r|} \hline \text { Variable manufacturing } & \$ 100&\text { per unit } \\\hline \text { Variable marketing } & \$ 15&\text { per unit } \\\hline \text { Fixed manufacturing } & \$ 280,000 &\text { per year } \\\hline \text { Fixed marketing \& admin } & \$ 150,000 &\text { per year } \\\hline\end{array}$$ 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 40 units at a special price of $150 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 $1,500 to operating income. Based on the president's criteria, Polynesia will decline the offer.

Question 24

Polynesia Company manufactures sonars for fishing boats. Model 70 sells for $250. Polynesia produces and sells 5,500 of them per year. Cost data are as follows:
$$\begin{array} { | l | r | r|} \hline \text { Variable manufacturing } & \$ 100&\text { per unit } \\\hline \text { Variable marketing } & \$ 15&\text { per unit } \\\hline \text { Fixed manufacturing } & \$ 280,000 &\text { per year } \\\hline \text { Fixed marketing \& admin } & \$ 150,000 &\text { per year } \\\hline\end{array}$$ A potential deal has come up for a one-time sale of 30 units at a special price of $115 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 is 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. The controller is correct in his statement.

Question 25

Fantabulous Products sells 2,000 kayaks per year at a price of $450 per unit. Fantabulous sells in a highly competitive market and uses target pricing. The company has $1,000,000 of assets and the shareholders wish to make a profit of 18% on assets. Fixed costs are $500,000 per year and cannot be reduced. How much is the target variable costs?

A) $265,000
B) $500,000
C) $720,000
D) $220,000

Question 26

Rica Company is a price-taker and uses a target-pricing approach. Refer to the following information: $\begin{array}{|l|r|r|}\hline\text { Production volume } & 600,000& \text { units per year } \\\hline \text { Market price } & \$ 30 &\text { per unit }\\\hline \text { Desired operating income } & 15 \% &\text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000\\\hline\end{array}$

- How much is the target full product cost in total for the year? Assume all units produced are sold.

A) $18,000,000
B) $15,915,000
C) $13,900,000
D) $2,085,000

Question 27

Peacock Inc. sells 2,500 kayaks per year at a price of $500 per unit. It sells in a highly competitive market and uses target pricing. The company has calculated its target full product cost at $820,000 per year. Fixed costs are $350,000 per year and cannot be reduced. How much is the target variable cost per unit?

A) $188
B) $328
C) $360
D) $172

Question 28

Rica Company is a price-taker and uses a target-pricing approach. Refer to the following information: $\begin{array}{|l|r|r|}\hline\text { Production volume } & 600,000& \text { units per year } \\\hline \text { Market price } & \$ 30 &\text { per unit }\\\hline \text { Desired operating income } & 15 \% &\text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000\\\hline\end{array}$

-How much is the desired profit for the year?

A) $1,440,000
B) $18,000,000
C) $2,700,000
D) $2,085,000

Question 29

Rica Company is a price-taker and uses target pricing. Please refer to the following information: $$\begin{array} { | l | r | r|} \hline \text { Production volume } & 600,000& \text { units per year } \\\hline \text { Market price } & \$ 30& \text { per unit } \\\hline \text { Desired operating income } & 15 \% &\text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000 \\\hline \text { Variable cost per unit } & \$ 18 &\text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,600,000 &\text { per year } \\\hline\end{array}$$ With the current cost structure, Rica 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 be the target variable costs per year?

A) $10,315,000
B) $5,115,000
C) $5,600,000
D) $5,200,000

Question 30

Which of the following is a major consideration when analyzing a special order?

A) the price must be high enough to cover any incremental costs to fill the order
B) the company must have a good stock turnover ratio
C) the profit margin of the special sale must be higher than the regular sales
D) the sunk costs of the decision must not exceed the irrelevant costs

Question 31

Fantabulous Products sells 2,000 kayaks per year at a price of $450 per unit. Fantabulous sells in a highly competitive market and uses target pricing. The company has $1,000,000 of assets and the shareholders wish to make a profit of 18% on assets. How much is the target full product cost?

A) $1,800,000
B) $720,000
C) $1,062,000
D) $712,500

Question 32

Price-setters emphasize a cost-plus pricing approach.

Question 33

Rica Company is a price-taker and uses target pricing. Refer to the following information: $$\begin{array} { | l | r | r|} \hline \text { Production volume } & 600,000& \text { units per year } \\\hline \text { Market price } & \$ 30& \text { per unit } \\\hline \text { Desired operating income } & 15 \% &\text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000 \\\hline \text { Variable cost per unit } & \$ 18 &\text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,600,000 &\text { per year } \\\hline\end{array}$$ With the current cost structure, Rica 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 be the target variable costs per unit per year? (Round your answer to the nearest cent.)

A) $26.53
B) $9.33
C) $17.19
D) $18

Question 34

Gotham Products is a price-taker and uses target pricing. Gotham has just done an analysis of their revenues, costs and desired profits, and has calculated its target full product cost. Please refer to the following information: $$\begin{array} { | l | r | r|} \hline \text { Target full product cost } & \$ 500,000& \text { per year } \\\hline \text { Actual fixed cost } & \$ 280,000 &\text { per year } \\\hline \text { Actual variable cost } & \$ 2& \text { per unit } \\\hline \text { Production volume } & 150,000 &\text { units per year } \\\hline\end{array}$$ Actual costs are currently higher than target full product cost.

- Assuming that variable costs are dependent on commodity prices and cannot be reduced, how much is the target fixed cost?

A) $180,000
B) $300,000
C) $200,000
D) $500,000

Question 35

Rica Company is a price-taker and uses target pricing. Refer to the following information: $$\begin{array} { | l | r | r|} \hline \text { Production volume } & 600,000& \text { units per year } \\\hline \text { Market price } & \$ 30& \text { per unit } \\\hline \text { Desired operating income } & 15 \% &\text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000 \\\hline \text { Variable cost per unit } & \$ 18 &\text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,600,000 &\text { per year } \\\hline\end{array}$$ With the current cost structure, Rica 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 be the target fixed costs per year?

A) $5,115,000
B) $5,600,000
C) $10,315,000
D) $5,200,000

Question 36

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

Question 37

Fantabulous Products sells 2,000 kayaks per year at a price of $450 per unit. Fantabulous sells in a highly competitive market and uses target pricing. The company has $1,000,000 of assets and the shareholders wish to make a profit of 18% on assets. Variable cost is $200 per unit and cannot be reduced. How much is the target fixed costs?

A) $265,000
B) $720,000
C) $180,000
D) $320,000

Question 38

Gotham Products is a price-taker and uses target pricing. Gotham has just done an analysis of their revenues, costs and desired profits, and has calculated its target full product cost. Please refer to the following information: $$\begin{array} { | l | r | r|} \hline \text { Target full product cost } & \$ 500,000& \text { per year } \\\hline \text { Actual fixed cost } & \$ 280,000 &\text { per year } \\\hline \text { Actual variable cost } & \$ 2& \text { per unit } \\\hline \text { Production volume } & 150,000 &\text { units per year } \\\hline\end{array}$$ Actual costs are currently higher than target full product cost.

- Assuming that fixed costs cannot be reduced, how much is the target variable cost per unit?

A) $1.20
B) $1.47
C) $1.33
D) $3.33

Question 39

Rica Company is a price-taker and uses target pricing. Refer to the following information: $\begin{array}{|l|r|r|}\hline\text { Production volume } & 600,000& \text { units per year } \\\hline \text { Market price } & \$ 30 &\text { per unit }\\\hline \text { Desired operating income } & 15 \% &\text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000\\\hline\end{array}$

-How much is the target full product cost per unit? (Round your answer to nearest cent.) Assume all units produced are sold.

A) $30
B) $26.53
C) $23.17
D) $19.33

Question 40

Revenue at the market price less the desired operating income equals the product's target full product cost.

Question 41

Sprint Company makes special equipment used in cell towers. Each unit sells for $400. Sprint uses just-in-time inventory procedures; it produces and sells 12,500 units per year. It has provided the following income statement data: A foreign company has offered to buy 100 units for a reduced price of $250 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 Sprint accepts the deal, how will this impact operating income?

A) up $17,000
B) down $8,000
C) up $25,000
D) down $800

Question 42

Sprint Company makes special equipment used in cell towers. Each unit sells for $400. Sprint produces and sells 12,500 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 affect the company's regular sales. The sales manager says that this sale will require 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 Sprint accepts the deal, how will this impact operating income?

A) up $15,040
B) down $15,040
C) up $24,000
D) down $24,000

Question 43

Centric Sail Makers manufacture sails for sailboats. The company has the capacity to produce 35,000 sails per year, and is currently producing and selling 25,000 sails per year. The following information relates to current production: $\begin{array}{|l|l|}\hline \text { Sale price per unit } & \$ 175 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & 60 \\\hline \text { Marketing and administrative } &20 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 700,000 \\\hline \text { Marketing and administrative } &\$ 300,000\\\hline\end{array}$

-If a special sales order is accepted for 5,500 sails at a price of $150 per unit, fixed costs remain unchanged, and there are no variable marketing and administrative costs for this order, what is the change in operating income?

A) Operating income decreases by $385,000.
B) Operating income decreases by $495,000.
C) Operating income increases by $385,000.
D) Operating income increases by $495,000.

Question 44

Gabriel Metalworks produces a special kind of metal ingots which are unique, and it allows Gabriel to follow a cost-plus pricing strategy. Gabriel has $10,000,000 of assets and shareholders expect approximately 9% return on assets. Additional data are as follows: $$\begin{array} { | l | r | l | } \hline \text { Sales volume } & 400,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 15 & \text { per unit } \\\hline \text { Fixed cost } & \$ 1,500,000 & \text { per year } \\\hline\end{array}$$ Using the cost-plus pricing approach, what should be the price per unit?

A) $19
B) $20
C) $21
D) $22

Question 45

Companies are price-takers when:

A) it is operating in a highly competitive market.
B) its product is unique.
C) it has considerable flexibility in setting prices of its products.
D) it has very high fixed costs.

Question 46

Sprint Company makes special equipment used in cell towers. Each unit sells for $400. Sprint produces and sells 12,500 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 affect the company's regular sales. The sales manager says that this sale will require incremental selling & administrative costs, as it is a one-time deal. The production manager reports that it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer. If Sprint accepts the deal, how will this impact operating income?

A) operating income will increase by $5,440
B) operating income will decrease by $14,960
C) operating income will increase by $24,000
D) operating income will decrease by $800

Question 47

Nelson Products is a price-setter, and they use cost-plus pricing methodology for pricing their products which are specialty vacuum tubes used in sound equipment. The CEO is certain that he can produce and sell 300,000 units per year, due to the high demand for the product. Variable costs are $2.40 per unit. Total fixed costs are $980,000 per year. The CEO will receive stock options if he reports $200,000 of operating income for the year. Using the cost-plus pricing method, what price would allow the CEO to achieve his target? (Please round to nearest cent.)

A) $5.67 per unit
B) $6.33 per unit
C) $3.07 per unit
D) $6.15 per unit

Question 48

Fantabulous Products sells 2,000 kayaks per year at a price of $450 per unit. Fantabulous sells in a highly competitive market and uses target pricing. The company has calculated its target full product cost at $720,000 per year. Total variable costs are $330,000 per year and cannot be reduced. How much are the target fixed costs?

A) $570,000
B) $180,000
C) $330,000
D) $390,000

Question 49

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 greater than the variable costs, the sale would contribute to the company's profits, and so it should be accepted as offered. The vice-president, however, decided to decline the order. Which of the following statements, if true, will support the decision of the vice-president?

A) The order is not likely to affect the regular sales.
B) The company is operating at 70% of its production capacity.
C) The variable costs of $900 includes variable costs of packing the product.
D) The company will need to hire additional staff to execute this order.

Question 50

Centric Sail Makers manufacture sails for sailboats. The company has the capacity to produce 35,000 sails per year, and is currently producing and selling 25,000 sails per year. The following information relates to current production: $\begin{array}{|l|l|}\hline \text { Sale price per unit } & \$ 175 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & 60 \\\hline \text { Marketing and administrative } &20 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 700,000 \\\hline \text { Marketing and administrative } &\$ 300,000\\\hline\end{array}$ If a special sales order is accepted for 5,500 sails at a price of $150 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 by $825,000.
B) Operating income increases by $825,000.
C) Operating income decreases by $385,000.
D) Operating income increases by $385,000.

Question 51

Centric Sail Makers manufacture sails for sailboats. The company has the capacity to produce 35,000 sails per year, and is currently producing and selling 25,000 sails per year. The following information relates to current production: $\begin{array}{|l|l|}\hline \text { Sale price per unit } & \$ 175 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & 60 \\\hline \text { Marketing and administrative } &20 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 700,000 \\\hline \text { Marketing and administrative } &\$ 300,000\\\hline\end{array}$

-If a special sales order is accepted for 5,500 sails at a price of $150 per unit, and if the order requires both variable manufacturing and variable marketing and administrative costs, and incremental fixed costs of $400,000, what will be the impact on operating income?

A) Operating income decreases by $385,000.
B) Operating income decreases by $15,000.
C) Operating income increases by $385,000.
D) Operating income increases by $15,000.

Question 52

Grand Products is a price-setter, and they use cost-plus pricing methodology for pricing their products which are unique, artistically designed architectural decorations. They produce and sell 6,000 units per year, at their maximum capacity. Variable costs are $330 per unit. Total fixed costs are $900,000 per year. The CEO has a target of $50,000 operating income which he wants to hit by year-end. Using the cost-plus pricing method, what price should Grand use? (Round to nearest whole dollar.)

A) $338 per unit
B) $480 per unit
C) $488 per unit
D) $378 per unit

Question 53

Fine Arts Inc. produces a special kind of light weight, recreational vehicle that has a unique design. It allows the company to follow a cost-plus pricing strategy. It has $9,000,000 of assets and shareholders expect a 10% return on assets. Additional data are as follows: $$\begin{array} { | l | r | l | } \hline \text { Sales volume } & 4,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 2,000 &\text { per unit } \\\hline \text { Fixed cost } & \$ 3,500,000& \text { per year } \\\hline\end{array}$$ Using the cost-plus pricing approach, what should be the price per unit?

A) $3,100
B) $2,875
C) $2,225
D) $3,015

Question 54

Fox Inc. manufactures and sells pens for $5 each. Wolf Corp. has offered Fox Inc. $3 per pen for a one-time order of 3,500 pens. The total manufacturing cost per pen, using traditional costing, is $1 per unit, and consists of variable costs of $0.85 per pen and fixed overhead costs of $0.15 per watch. Assume that Fox Inc. has excess capacity and that the special order would not adversely affect regular sales. What is the change in operating income that would result from accepting the special sales order?

A) increase of $7,000
B) decrease of $7,000
C) increase of $7,525
D) decrease of $7,525

Question 55

Yummy Foods sells jars of special spices used in Spanish cooking. The variable cost is $1 per unit. Fixed costs are $9,000,000 per year. It has $40,000,000 of assets, and investors expect a return of 5% on their assets. Yummy Foods sells 5,000,000 units per year. They use cost-plus pricing because they are the only company which produces this kind of product. Using cost-plus pricing methodology, determine the price per unit. (Round your answer to the nearest cent)

A) $1.40
B) $3.20
C) $2.80
D) $1.90

Question 56

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

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 57

Felix Time Company manufactures and sells watches for $40 each. Times Products Company has offered Felix Time $25 per watch for a one-time order of 6,000 watches. The total manufacturing cost per watch is $30 per unit, and consists of variable costs of $22 per watch and fixed overhead costs of $8 per watch. Assume that Felix Time has excess capacity and that the special order would not adversely affect regular sales. What is the change in operating income that would result from accepting the special sales order?

A) increase of $18,000
B) decrease of $18,000
C) increase of $150,000
D) decrease of $150,000

Question 58

Centric Sail Makers manufacture sails for sailboats. The company has the capacity to produce 35,000 sails per year, and is currently producing and selling 25,000 sails per year. The following information relates to current production: $\begin{array}{|l|l|}\hline \text { Sale price per unit } & \$ 175 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & 60 \\\hline \text { Marketing and administrative } &20 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 700,000 \\\hline \text { Marketing and administrative } &\$ 300,000\\\hline\end{array}$

- Fixed manufacturing costs increase by $100,000 for every 500 units produced beyond the maximum capacity of the plant. If a special sales order is accepted for 5,500 sails at a price of $150 per unit, and if the order requires no variable and fixed marketing and administrative costs, what will be the effect on operating income?

A) Operating income increases $395,000.
B) Operating income decreases $395,000.
C) Operating income increases $385,000.
D) Operating income decreases $385,000.

Question 59

Hilltop Golf Course is planning for the coming season. Investors would like to earn a 15% return on the company's $60,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $30,000,000 for the golfing season. About 600,000 rounds of golf are expected to be played each year. Variable costs are about $15 per round of golf.

- Hilltop golf course is a price-taker and will not be able to charge more than its competitors, who charge $75 per round of golf. What profit will it earn in terms of dollars?

A) $6,000,000
B) $9,000,000
C) $48,000,000
D) $45,000,000

Question 60

Hilltop Golf Course is planning for the coming season. Investors would like to earn a 15% return on the company's $60,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $30,000,000 for the golfing season. About 600,000 rounds of golf are expected to be played each year. Variable costs are about $15 per round of golf.

-Hilltop 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 pricing approach, what price should Hilltop charge for a round of golf to achieve the desired profit?

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

Question 61

A company sells two products with information as follows:
$\begin{array}{|l|r|r|} \hline&{\text { A }} &{\text { B }} \\\hline \text { Price per unit } & \$ 12 & \$ 10 \\\hline \text { Variable cost per unit } & \$ 4 & \$ 1 \\\hline\end{array}$ Products are made by machine. 4 units of product A can be made with 2 machine hour and 2 units of product B can be made with 0.50 machine hour. If there are no constraints on production or sales of either product, then the company should emphasize sales of Product B.

Question 62

Meson Production is a price-taker. It produces large spools of electrical wire in a highly competitive market, so it practices target pricing. The current market price of the electric wire is $800 per unit. The company has $3,000,000 in assets and its shareholders expect a return of 6% on assets. The company provides the following information: $$\begin{array} { | l | r |r| } \hline \text { Sales volume } & 100,000 &\text { units per year } \\\hline \text { Variable costs } & \$ 700& \text { per unit } \\\hline \text { Fixed costs } & \$ 12,000,000 &\text { per year } \\\hline\end{array}$$ If fixed costs cannot be reduced, how much reduction in variable costs will be needed to achieve the profit target?

A) $180,000
B) $12,000,000
C) $2,180,000
D) $4,200,000

Question 63

Lit Furniture manufactures a small table and a large table. The small table sells for $900, has variable costs of $750 per table, and takes 7.5 labor hours to manufacture. The large table sells for $1,500, has variable costs of $900, and takes 15 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 64

A company has two different products that sell to separate markets. Financial data are as follows:
$\begin{array}{|l|r|r|r|} \hline &{\text { Product A }} &{\text { Product B }} &{\text { Total }} \\\hline \text { Revenue } & \$ 15,000 & \$ 9,000 & \$ 24,000 \\\hline \text { Variable cost } & (8,000) & (9,200) & (17,200) \\\hline \text { Fixed cost (allocated) } & (4,000) & (1,000) &(5,000)\\\hline \text { Operating income } & \$ 3,000 & \$(1,200)&\$1,800 \\\hline\end{array}$ 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 65

The income statement for Eagle Inc. is divided by its two product lines-blankets and pillows-is as follows:
$\begin{array}{|l|r|r|r|} \hline&{\text { Blankets }} &{\text { Pillows }} &{\text { Total }} \\\hline \text { Sales revenue } & \$ 700,000 & \$ 500,000 & \$ 1,200,000 \\\hline \text { Variable expenses } & \underline{450,000} & \underline{430,000} & \underline{880,000} \\\hline \text { Contribution margin } & 250,000 & 70,000&320,000 \\\hline \text { Fixed expenses } & \underline{85,000} & 85,000&170,000 \\\hline \text { Operating income (loss) } & \$ 165,000 & \$(15,000)&\$150,000 \\\hline\end{array}$ If total fixed costs remain unchanged and Eagle Inc. drops the pillows line, operating income will fall by $70,000.

Question 66

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows:
$\begin{array}{|l|r|r|r|} \hline&{\text { Blankets }} & {\text { Pillows }} &{\text { Total }} \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & 465,000 & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { Fixed expenses } & \underline{76,000} & \underline{76,000} & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$(16,000)&\$63,000 \\\hline\end{array}$ If Sweet Dreams can eliminate total fixed costs of $30,000 by dropping the pillows line, operating income will go up by $16,000.

Question 67

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

Question 68

Meson 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 $3,000,000 in assets and shareholders expect a return of 6% on assets. The company provides the following information: $$\begin{array} { | l | r |r| } \hline \text { Sales volume } & 100,000 &\text { units per year } \\\hline \text { Variable costs } & \$ 700& \text { per unit } \\\hline \text { Fixed costs } & \$ 12,000,000 &\text { per year } \\\hline\end{array}$$ 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 variable cost per unit will be needed to hit the profit target?

A) reduction in variable cost per unit by $120
B) reduction in variable cost per unit by $1.80
C) reduction in variable cost per unit by $20.30
D) reduction in variable cost per unit by $21.80

Question 69

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: $\begin{array}{|l|r|r|}\hline\text { Variable manufacturing } & \$ 105& \text { per unit } \\\hline \text { Variable marketing } & \$ 5 &\text { per unit }\\\hline\text { Fixed manufacturing } & \$ 270,000 &\text { per year } \\\hline \text { Fixed marketing \& admin } & \$ 140,000 &\text { per year }\\\hline \end{array}$ 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 affect the company's regular sales activities, and that it will not require any variable marketing costs. The production manager says that there is 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) decrease $1,000
D) increase $1,500

Question 70

The income statement for Eagle Inc. is divided into two product lines, blankets and pillows, as follows:
$\begin{array}{|l|r|r|r|} \hline&{\text { Blankets }} &{\text { Pillows }} &{\text { Total }} \\\hline \text { Sales revenue } & \$ 700,000 & \$ 500,000 & \$ 1,200,000 \\\hline \text { Variable expenses } & \underline{450,000} & \underline{430,000} & \underline{880,000} \\\hline \text { Contribution margin } & 250,000 & 70,000&320,000 \\\hline \text { Fixed expenses } & \underline{85,000} & 85,000&170,000 \\\hline \text { Operating income (loss) } & \$ 165,000 & \$(15,000)&\$150,000 \\\hline\end{array}$ Eagle Inc. should eliminate the pillows product line only, if by doing so, they can eliminate more than $70,000 of fixed costs.

Question 71

Freemen Company's western territory's forecasted income statement for the upcoming year is as follows:
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 800,000 \\\hline \text { Variable expenses } & \underline { 500,000 } \\\hline \text { Contribution margin } & \$ 300,000 \\\hline \text { Fixed expenses } & \underline { 396,000 } \\\hline \text { Operating income } & ( \$ 96,000 ) \\\hline\end{array}$$ Freemen Company's management is considering dropping the western territory. This move would be financially advantageous only if the company could eliminate $96,000 of fixed costs or more.

Question 72

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 73

Tyler Corporation has provided you with the following budgeted income statement for one of their products:
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 750,000 \\\hline \text { Variable expenses } & \underline { 500,000 } \\\hline \text { Contribution margin } & \$ 250,000 \\\hline \text { Fixed expenses } & \underline { 280,000 } \\\hline \text { Operating income } & \underline { \$ 30,000 } \\\hline\end{array}$$ Tyler Corporation believes that 80% of the fixed costs would be avoidable if the product line was dropped. Based on the impact of company's operating income, Tyler should not drop the product line.

Question 74

Lit Furniture manufactures a small table and a large table. The small table sells for $900, has variable costs of $750 per table, and takes 7.5 labor hours to manufacture. The large table sells for $1,500, has variable costs of $900, and takes 15 direct labor hours to manufacture. The small table has a lower contribution margin per unit, but a higher contribution margin per direct labor hour.

Question 75

Which of the following statements is true?

A) Companies are price-takers when their products are unique.
B) Companies are price-setters for a product when there is intense competition.
C) Companies are price-takers for a product when pricing approach emphasizes cost-plus pricing.
D) Companies are price-takers when they have little or no control over the prices of their products or services.

Question 76

In deciding whether to drop its electronics product line, a company's manager should ignore:

A) the variable and fixed costs it could save by dropping the product line.
B) the revenues it would lose from dropping the product line.
C) how dropping the electronics product line would affect sales of its other products, like CDs.
D) the amount of unavoidable fixed costs.

Question 77

Sand Corporation manufactures two styles of lamps: a Bedford Lamp and a Lowell Lamp. The following per unit data are available:
$$\begin{array} { | l | r | r | } \hline & \text { Bedford Lamp } & \text { Lowell Lamp } \\\hline \text { Sale price } & \$ 30 & \$ 40 \\\hline \text { Variable costs } & \$ 18 & \$ 24 \\\hline \text { Machine hours required for 1 lamp } & 2 & 4 \\\hline\end{array}$$ Total fixed costs are $40,000. Machine hour capacity is 30,000 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 78

Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: $\begin{array}{|l|r|r|r|} \hline&{\text { Total }} & \text { Baseball Helmets } & \text { Football Helmets } \\\hline \text { Sales revenue } & \$ 850,000 & \$ 500,000 & \$ 350,000 \\\hline \text { Variable expenses } & (530,000 & (250,000 & (280,000 \\\hline \text { Contribution margin } & \$ 320,000 & \$ 250,000 & \$ 70,000 \\\hline \text { Fixed expenses } & (180,000 & (90,000) & (90,000 \\\hline \text { Operating income (loss) } & \$ 140,000 & \$ 160,000 & \$(20,000 \\\hline\end{array}$ Assuming fixed costs remain unchanged, and that there would be no adverse effect on other sales. What will be the effect of dropping Football Helmets line on the operating income of the company?

A) Operating income will increase by $20,000.
B) Operating income will increase by $90,000.
C) Operating income will decrease by $70,000.
D) Operating income will decrease by $350,000.

Question 79

Meson Production is a price-taker. It produces large spools of electrical wire in a highly competitive market, so it practices target pricing. The current market price of the electric wire is $780 per unit. The company has $3,000,000 in assets and its shareholders expect a return of 6% on assets. The company provides the following information: $$\begin{array} { | l | r |r| } \hline \text { Sales volume } & 100,000 &\text { units per year } \\\hline \text { Variable costs } & \$ 700& \text { per unit } \\\hline \text { Fixed costs } & \$ 12,000,000 &\text { per year } \\\hline\end{array}$$ If variable costs cannot be reduced, how much reduction in fixed costs will be needed to achieve the profit target?

A) $4,180,000
B) $12,000,000
C) $7,820,000
D) $4,200,000

Question 80

In making product mix decisions under constraining factors, a company should maximize sales of the product with the highest contribution margin per unit.