Deck 25: Short-Term Business Decisions

Question 1

Differential analysis is a common approach to making long-term business decisions.

Answer 1

False

Question 2

Smith Industries is considering replacing a machine that is presently used in its production process. Which of the following is irrelevant to the replacement decision?
$$\begin{array} { | l | r | r | } \hline & \text { Old Machine } & \begin{array} { c } \text { Replacement } \\\text { Machine }\end{array} \\\hline \text { Original cost } & \$ 55,000 & \$ 46,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 &0 \\\hline \text { Book value } & \$ 33,000 & \\\hline \text { Current disposal value in cash } & \$ 9,000 & \\\hline \text { Future disposal value in cash (in 5 years) } &\$0&\$0 \\\hline \text { Annual cash operating costs } & \$ 8,000 & \$ 4,000 \\\hline\end{array}$$ Which of the information provided in the table is irrelevant to the replacement decision?

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

Answer 2

the original cost of the old machine

Question 3

When considering whether to replace the building roof,the total amount paid for previous roof repairs is relevant to the business decision.

Answer 3

False

Question 4

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

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

Question 5

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

Question 6

Costs that do not differ between 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 7

Jones Company is considering purchasing a new truck.The decision has been narrowed to two models.The cost of each of these two trucks is relevant to this business decision.

Question 8

Home Industries is considering replacing a machine that is presently used in its production process.Which of the following amounts represents a sunk cost? $$\begin{array} { | l | r | r | } \hline & \text { Old Machine } & \begin{array} { c } \text { Replacement } \\\text { Machine }\end{array} \\\hline \text { Original cost } & \$ 55,000 & \$ 46,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 &0 \\\hline \text { Book value } & \$ 30,000 & \\\hline \text { Current disposal value in cash } & \$ 9,000 & \\\hline \text { Future disposal value in cash (in 5 years) } &\$0&\$0 \\\hline \text { Annual cash operating costs } &\$ 7,000 & \$ 4,500 \\\hline\end{array}$$

A) $55,000
B) $30,000
C) $9,000
D) $46,000

Question 9

If 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 to the business decision.

Question 10

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

Question 11

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

Question 12

Which of the following is always irrelevant to short-term operating decisions?

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

Question 13

Which of the following is irrelevant when 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 14

Regarding relevant nonfinancial information,which of the following statements is incorrect?

A) Nonfinancial, or qualitative, factors play a role in managers' decisions and, as a result, can be relevant.
B) Relevant qualitative information has the same characteristics as relevant financial information.
C) Managers must always consider the potential quantitative and qualitative effects of their decisions.
D) Qualitative factors can be ignored because these factors are difficult to measure.

Question 15

Differential analysis is a method that looks at how operating income would differ under each budget scenario.

Question 16

Differential analysis is a common approach to making short-term business decisions.

Question 17

When replacing an old asset with a new one,the original purchase price of the old asset represents a(n)________ cost.

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

Question 18

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

Question 19

Blue Manufacturing Company is trying to decide whether to trade in equipment used in its manufacturing process for a newer model.The new equipment will save money because it will be more efficient to use.Indicate if the following items are relevant or irrelevant to this decision.
$$\begin{array} { | l | l | } \hline \text { Item } & \begin{array} { c } \text { Relevant or } \\\text { Irrelevant }\end{array} \\\hline \text { The price of the new equipment } & \\\hline \text { The price paid for the old equipment } & \\\hline \text { The trade in value of the old equipment } & \\\hline \begin{array} { l } \text { The repair costs that will be incurred if } \\\text { the old equipment is kept }\end{array} & \\\hline \begin{array} { l } \text { The expected cost savings of the new } \\\text { equipment }\end{array} & \\\hline \begin{array} { l } \text { The costs that have been incurred on the } \\\text { old equipment }\end{array} & \\\hline\end{array}$$

Question 20

Define the terms Relevant Cost and Sunk Cost.

Question 21

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 22

Back Bay Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | r | l | } \hline \text { Production volume } & 602,000 & \text { units per year } \\\hline \text { Market price } & \$ 32 & \text { per unit } \\\hline \text { Desired operating income } & 17 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,700,000 & \\\hline\end{array}$$ What is the target full product cost per unit? (Round your answer to nearest cent.)Assume all units produced are sold.

A) $32.00
B) $28.13
C) $5.44
D) $26.56

Question 23

Cassa Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | r | l | } \hline \text { Production volume } & 601,000 & \text { units per year } \\\hline \text { Market price } & \$ 32 & \text { per unit } \\\hline \text { Desired operating income } & 15 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000 & \\\hline \text { Variable cost per unit } & \$ 20 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \\\hline\end{array}$$ With the current cost structure,Cassa 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,what are the target variable costs per year? Assume all units produced are sold.

A) $11,547,000
B) $12,020,000
C) $5,600,000
D) $17,147,000

Question 24

Murray Products sells 2,100 kayaks per year at a price of $470 per unit.Murray sells in a highly competitive market and uses target pricing.The company has $990,000 of assets and the shareholders wish to make a profit of 16% on assets.Fixed costs are $500,000 per year and cannot be reduced.Assume all products produced are sold.What are the target variable costs?

A) $132,577
B) $990,000
C) $828,600
D) $328,600

Question 25

Fantabulous Products sells 2,200 kayaks per year at a price of $460 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 17% on assets.Assume all products produced are sold.What is the target full product cost?

A) $17,000,000
B) $842,000
C) $1,184,040
D) $1,012,000

Question 26

Sparks Stationery Company is a price-taker and uses target pricing.The company has just done an analysis of its revenues,costs,and desired profits and has calculated its target full product cost.Assume all products produced are sold.Refer to the following information: $$\begin{array} { | l | r | l | } \hline \text { Target full product cost } & \$ 510,000 & \text { per year } \\\hline \text { Actual fixed cost } & \$ 280,000 & \text { per year } \\\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \\\hline \text { Production volume } & 150,000 & \text { units per year } \\\hline\end{array}$$ Actual costs are currently higher than target full product cost.Assuming that fixed costs cannot be reduced,what is the target variable cost per unit? (Round your answer to the nearest cent.)

A) $3.40
B) $1.53
C) $1.87
D) $2.00

Question 27

Rica Company is a price-taker and uses a target-pricing approach.Refer to the following information: $$\begin{array} { | l | r |l| } \hline \text { Production volume } & 600,000& \text { units per year } \\\hline \text { Market price } & \$ 32 &\text { per unit } \\\hline \text { Desired operating income } & 16 \%& \text { of total assets } \\\hline \text { Total assets } & \$ 13,700,000 \\\hline\end{array}$$ What is the desired profit for the year?

A) $96,000
B) $19,200,000
C) $5,500,000
D) $2,192,000

Question 28

Target full product cost equals the revenue at the market price minus the desired profit.

Question 29

The contribution margin approach helps managers in short-term decision making because it ________.

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

Question 30

Star Stationery Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l |r |l| } \hline \text { Production volume } & 602,000 &\text { units per year } \\\hline \text { Market price } & \$ 34& \text { per unit } \\\hline \text { Desired operating income } & 17 \% &\text { of total assets } \\\hline \text { Total assets } & \$ 1,600,000 \\\hline\end{array}$$ What is the target full product cost per year? Assume all units produced are sold.

A) $20,468,000
B) $20,196,000
C) $27,200,000
D) $10,836,000

Question 31

Revolve Company is a price-taker and uses a target-pricing approach.Refer to the following information: $$\begin{array} { | l | r|l| } \hline \text { Production volume } & 602,000 &\text { units per year } \\\hline \text { Market price } & \$ 30 &\text { per unit } \\\hline \text { Desired operating income } & 16 \%& \text { of total assets } \\\hline \text { Total assets } & \$ 13,700,000 \\\hline\end{array}$$ What is the target full product cost in total for the year? Assume all units produced are sold.

A) $96,320
B) $15,868,000
C) $13,700,000
D) $2,192,000

Question 32

Acton Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | r | l | } \hline \text { Production volume } & 602,000 & \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating income } & 15 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,800,000 & \\\hline \text { Variable cost per unit } & \$ 18 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,500,000 & \text { per year } \\\hline\end{array}$$ With the current cost structure,Acton 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,what are the target fixed costs per year? Assume all units produced are sold.

A) $5,154,000
B) $5,500,000
C) $12,560,000
D) $10,836,000

Question 33

Blair Stationery Company is a price-taker and uses target pricing.The company has just done an analysis of its revenues,costs,and desired profits and has calculated its target full product cost.Assume all products produced are sold.Refer to the following information: $$\begin{array} { | l | r | l|} \hline \text { Target full product cost } & \$ 510,000 &\text { per year } \\\hline \text { Actual fixed cost } & \$ 260,000& \text { per year } \\\hline \text { Actual variable cost } & \$ 3 &\text { per unit } \\\hline \text { Production volume } & 151,000 &\text { units per year } \\\hline\end{array}$$ Actual costs are currently higher than target full product cost.Assuming that fixed costs cannot be reduced,what are the target total variable costs?

A) $260,000
B) $453,000
C) $250,000
D) $510,000

Question 34

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

Question 35

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

A) $220,000
B) $300,000
C) $200,000
D) $500,000

Question 36

Differential analysis is a method that ________.

A) evaluates both relevant and irrelevant information
B) considers all areas of the traditional income statement
C) is not used for short-term decision making
D) looks at how operating income would differ under each decision alternative

Question 37

Which of the following provides a key in analyzing short-term business decisions?

A) focus on costs that 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

Question 38

Julian Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | r | l | } \hline \text { Production volume } & 601,000 & \text { units per year } \\\hline \text { Market price } & \$ 32 & \text { per unit } \\\hline \text { Desired operating income } & 16 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,700,000 & \\\hline \text { Variable cost per unit } & \$ 20 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \\\hline\end{array}$$ With the current cost structure,Julian 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,what are the target variable costs per unit per year? Assume all units produced are sold.(Round your answer to the nearest cent.)

A) $5.12
B) $12.00
C) $19.03
D) $20.00

Question 39

The cost-plus pricing approach is emphasized by price-setters.

Question 40

Peacock,Inc.sells 2,100 kayaks per year at a sales 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 $340,000 per year and cannot be reduced.What is the target variable cost per unit assuming units sold are equal to units produced?

A) $229
B) $390
C) $552
D) $162

Question 41

Hilltop Golf Course is planning for the coming golfing 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 $30,000,000 for the season.About 600,000 rounds of golf are expected to be played each year.Variable costs are about $16 per round of golf.Hilltop golf course has a favorable reputation in the area and,therefore,has some control over the sales price of a round of golf.Using a cost-plus pricing approach,what sales price should Hilltop charge for a round of golf to achieve the desired profit?

A) $50
B) $66
C) $34
D) $74

Question 42

Fox,Inc.manufactures and sells pens for $7 each.Walton Corp.has offered Fox,Inc.$3 per pen for a one-time order of 3,500 pens.The total manufacturing cost per pen,using absorption costing,is $1 per unit and consists of variable costs of $0.75 per pen and fixed overhead costs of $0.25 per pen.Assume that Fox,Inc.has excess capacity and that the special pricing order would not adversely affect regular sales.What is the change in operating income that would result from accepting the special pricing order?

A) increase of $14,000
B) decrease of $14,000
C) increase of $7,875
D) decrease of $7,875

Question 43

Nelson Products is a price-setter that uses the cost-plus pricing approach.The products are specialty vacuum tubes used in sound equipment.The CEO is certain that the company can produce and sell 300,000 units per year,due to the high demand for the product.Variable costs are $2.30 per unit.Total fixed costs are $980,000 per year.The CEO will receive stock options if $300,000 of operating income for the year is reported.What sales price would allow the CEO to achieve the target if the cost-plus pricing method is used? (Round your answer to the nearest cent.)

A) $2.30 per unit
B) $6.57 per unit
C) $4.27 per unit
D) $4.57 per unit

Question 44

Meson Productions is a price-taker.Meson produces large spools of electrical wire in a highly competitive market; thus,the company uses target pricing.The current market price of the electric wire is $760 per unit.The company has $3,200,000 in average assets,and the desired profit is a return of 5% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | } \hline \text { Sales volume } & 110,000 &\text { units per year } \\\hline \text { Variable costs } & \$ 670 & \text { per unit } \\\hline \text { Fixed costs } & \$ 13,000,000 & \text { per year } \\\hline\end{array}$$ If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the profit target?

A) $3,260,000
B) $13,000,000
C) $3,100,000
D) $13,160,000

Question 45

If a company wants to be a price-taker,which of the following strategies should be taken?

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 46

Gabriel Metalworks produces a special kind of metal ingots that are unique,which allows Gabriel to follow a cost-plus pricing strategy.Gabriel has $11,000,000 of assets and shareholders expect approximately a 8% return on assets.Assume all products produced are sold.Additional data are as follows: $$\begin{array} { | l | r | l | } \hline \text { Sales volume } & 450,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 15 & \text { per unit } \\\hline \text { Fixed costs } & \$ 1,700,000 & \text { per year } \\\hline\end{array}$$ Using the cost-plus pricing approach,what should be the sales price per unit? (Round your answer to the nearest cent.)

A) $15.00
B) $18.78
C) $20.73
D) $1.96

Question 47

Companies are price-takers when ________.

A) their products are unique
B) there is very little competition
C) pricing approach emphasizes cost-plus pricing
D) they have little or no control over the prices of their products or services

Question 48

Haskins Products sells 2,200 kayaks per year at a sales price of $500 per unit.Haskins sells in a highly competitive market and uses target pricing.The company has calculated its target full product cost at $750,000 per year.Total variable costs are $250,000 per year and cannot be reduced.Assume all products produced are sold.What are the target fixed costs?

A) $1,100,000
B) $350,000
C) $250,000
D) $500,000

Question 49

Grand Products is a price-setter that uses the cost-plus pricing approach for pricing its products.These products are unique,artistically designed architectural decorations.Grand produces and sells 6,200 units per year,which represent maximum capacity.Variable costs are $330 per unit.Total fixed costs are $900,000 per year.The CEO has a target of $50,000 in operating income,which he wants to achieve by year-end.Using the cost-plus pricing method,what sales price should Grand use? (Round your answer to the nearest cent.)

A) $338.06 per unit
B) $475.16 per unit
C) $483.23 per unit
D) $153.23 per unit

Question 50

Off Road Concepts,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 $10,000,000 of average assets,and the desired profit is a 9% return on assets.Assume all products produced are sold.Additional data are as follows: $$\begin{array} { | l | r | l|} \hline \text { Sales volume } & 2,000 &\text { units per year } \\\hline \text { Variable costs } & \$ 2,000& \text { per unit } \\\hline \text { Fixed costs } & \$ 4,000,000& \text { per year } \\\hline\end{array}$$ Using the cost-plus pricing approach,what should be the sales price per unit?

A) $4,450
B) $20,000
C) $2,180
D) $2,000

Question 51

Dell Productions is a price-taker.The company produces large spools of electrical wire in a highly competitive market; thus,it uses target pricing.The current market price is $800 per unit.The company has $3,100,000 in average assets,and the desired profit is a return of 9% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | } \hline \text { Sales volume } & 100,000 &\text { units per year } \\\hline \text { Variable costs } & \$ 750 & \text { per unit } \\\hline \text { Fixed costs } & \$ 12,000,000 & \text { per year } \\\hline\end{array}$$ 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 achieve the desired target? (Round your answer to the nearest cent.)

A) reduction in variable cost per unit by $750.00
B) reduction in variable cost per unit by $50.00
C) reduction in variable cost per unit by $70.00
D) reduction in variable cost per unit by $72.79

Question 52

Willow Golf Course is planning for the coming golfing season.Investors would like to earn a 15% return on the company's $58,000,000 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 season.About 600,000 rounds of golf are expected to be played each year.Variable costs are about $17 per round of golf.Willow golf course is a price-taker and will not be able to charge more than its competitors,who charge $75 per round of golf.Compute the operating profit that will be earned.

A) $4,800,000
B) $8,700,000
C) $85,200,000
D) $45,000,000

Question 53

Henderson Products is a price-setter that uses the cost-plus pricing approach.The products are specialty components used in industrial equipment.The CEO is certain that the company can produce and sell 500,000 units per year,due to the high demand for the product.Variable costs are $3.25 per unit.Total fixed costs are $860,000 per year.The target operating income for the year is $150,000.What sales price would allow the CEO to achieve the target if the cost-plus pricing method is used? (Round your answer to nearest cent.)Show all computations.

Question 54

Donnelley Products sells 2,000 kayaks per year at a sales price of $460 per unit.Donnelley 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 17% on assets.Variable cost is $200 per unit and cannot be reduced.Assume all products produced are sold.What are the target fixed costs?

A) $920,000
B) $750,000
C) $170,000
D) $350,000

Question 55

Murphy Productions is a price-taker.The company produces generators in a highly competitive market; thus,it uses target pricing.The current market price is $600 per unit.The company has $18,500,000 in average assets,and the desired profit is a return of 8% on assets.Assume all products produced are sold.The company provides the following information:
$$\begin{array} { | l | r | l | } \hline \text { Sales volume } & 65,000 &\text { units per year } \\\hline \text { Variable costs } & \$ 500 & \text { per unit } \\\hline \text { Fixed costs } & \$ 7,500,000 & \text { per year } \\\hline\end{array}$$ 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 desired target? Show all computations.

Question 56

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 the 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 57

A company is a price-taker when ________.

A) it operates 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 58

Explain the difference between price-takers and price-setters.

Question 59

Saffron Foods sells jars of special spices used in Spanish cooking.The variable cost is $2 per unit.Fixed costs are $9,000,000 per year.It has $40,000,000 of average assets,and the desired profit is a 4% return on assets.Saffron Foods sells 4,000,000 units per year.The company uses cost-plus pricing because it is the only company that produces this kind of product.Using cost-plus pricing methodology,determine the sales price per unit.(Round your answer to the nearest cent.)

A) $2.50
B) $4.65
C) $4.25
D) $2.00

Question 60

Trina Productions is a price-taker.The company produces large spools of electrical wire in a highly competitive market; thus,it uses target pricing.The current market price of the electric wire is $800 per unit.The company has $3,000,000 in average assets,and the desired profit is a return of 9% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r |l| } \hline \text { Sales volume } & 110,000 &\text { units per year } \\\hline \text { Variable costs } & \$ 690 &\text { per unit } \\\hline \text { Fixed costs } & \$ 14,000,000& \text { per year } \\\hline\end{array}$$ If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the desired target?

A) $270,000
B) $14,000,000
C) $2,170,000
D) $75,900,000

Question 61

Felix Time Company manufactures and sells watches for $44 each.Times Products Company has offered Felix Time $30 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 $21 per watch and fixed overhead costs of $9 per watch.Assume that Felix Time has excess capacity and that the special pricing 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 $54,000
B) decrease of $54,000
C) increase of $180,000
D) decrease of $180,000

Question 62

Backyard Living sells its barbecue sets for $170 each.Suppose the company incurs the following average cost per barbecue set:
$$\begin{array} { l l } \text { Direct materials } & \$ 52 \\\text { Direct labor } & 28 \\\text { Variable manufacturing overhead } & 11 \\\text { Variable selling expenses } & 5 \\\text { Fixed manufarturing overhead* } &\underline{24} \\\text { Total cost } & \underline{\$ 120}\end{array}$$ * $ 1,800,000 / 75,000 units
Backyard Living has enough idle capacity to accept a one-time-only special order from Superstore,Inc.for 2,000 barbecue sets at a sales price of $130 per set.Backyard Living will not incur $2 of variable selling expenses for this order.
How would accepting the order affect Backyard Living's operating income?

Question 63

Paragon Products sells a special type of navigation equipment for $1,300.Variable costs are $800 per unit.When a special order arrived from a foreign contractor to buy 42 units at a reduced sales price of $900 per unit,there was a discussion among the managers.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 should be accepted as offered.The vice president,however,decided to decline the order.Which of the following statements supports 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 $800 includes variable costs of packing the product.
D) The company will need to hire additional staff to execute this order.

Question 64

Venlite,Inc.produces and sells cosmetic products.Currently,the company is operating at 70% of its capacity.The sales price of its product is $30 per unit,and it incurs a full cost of $25 to produce each unit.Its yearly fixed manufacturing overhead amounts to $20,000.The company has received a one-time order for supplying 5,000 units at $26 per unit.This order can be executed within the excess production capacity and will not involve any additional costs.To make this decision,the management of Venlite should use ________.

A) absorption costing as the decision is long-term in nature
B) variable costing as the decision is short-term in nature
C) absorption costing as the decision is short-term in nature
D) variable costing as the decision is long-term in nature

Question 65

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

A) The sales price must be high enough to cover any differential 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 66

Spirit Company makes special equipment used in cell towers.Each unit sells for $420.Spirit produces and sells 12,500 units per year.They have provided the following income statement data: $\begin{array}{c}\begin{array}{|l|r|}\hline \text { Traditional Format }\\\hline \text { Revenue } & \$ 5,250,000 \\\hline \text { Cost of goods sold } &2,800,000 \\\hline \text { Gross profit } & 2,450,000 \\\hline \text { Selling \& admin, expenses } & \underline{625,000} \\\hline & \\\hline & \\\hline &\\\hline &\\\hline \text { Operating income } & \$ 1,825,000 \\\hline\end{array}\begin{array}{l|r|}\hline \text { Contribution Margin Format}\\\hline \text { Revenue } & \$ 5,250,000 \\\hline \text { Variable costs: } &\\\hline \text { Manufacturing } & 800,000 \\\hline \text { Selling \& admin, } & \underline{400,000} \\\hline \text { Contribution margin } &4,050,000 \\\hline \text { Fixed costs: } \\\hline \text { Manufacturing }&2,000,000 \\\hline \text { Selling \& admin. } & 225,000\\\hline\text { Operating income }& \$ 1,825,000\\\hline \end{array}\end{array}$

A foreign company has offered to buy 85 units for a reduced sales price of $320 per unit.The marketing manager says the sale will not affect the company's regular sales.The sales manager says that this sale will require additional selling and 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 Spirit accepts the deal,how will this impact operating income? (Round any intermediate calculations to the nearest cent,and your final answer to the nearest dollar.)

A) Operating income will increase by $19,040.
B) Operating income will decrease by $19,040.
C) Operating income will increase by $27,200.
D) Operating income will decrease by $27,200.

Question 67

Australia Company manufactures sonars for fishing boats.Model 70 sells for $250.Australia produces and sells 5,600 of them per year.Cost data are as follows:
$$\begin{array} { | l | r | l|} \hline \text { Variable manufacturing } & \$ 115 &\text { per unit } \\\hline \text { Variable selling and administrative } & \$ 17 &\text { per unit } \\\hline \text { Fixed manufacturing } & \$ 290,000 &\text { per year } \\\hline \text { Fixed selling and administrative } & \$ 170,000 &\text { per year } \\\hline\end{array}$$ A potential deal has come up for a one-time sale of 32 units at a special price of $120 per unit.The marketing manager states that the sale will not negatively impact the company's regular sales activities and will require the normal variable manufacturing costs and selling and administrative costs.The production manager states that there is plenty of excess capacity and the deal will not impact fixed costs.The controller points out,however,that because the expected increase in revenues are equal to the expected increase in costs to fill the order,the deal will not have any impact on the bottom line.The controller is correct in his statement.

Question 68

Special pricing orders increase operating income if the special price exceeds the differential costs of filling the special order.

Question 69

Potlatch Company manufactures sonars for fishing boats.Model 100 sells for $400.Potlatch produces and sells 6,000 units per year.Cost data are as follows: $$\begin{array} { | l | r | l | } \hline \text { Variable manufacturing } & \$ 105 & \text { per unit } \\\hline \text { Variable selling and administrative } & \$ 7 & \text { per unit } \\\hline \text { Fixed manufacturing } & \$ 280,000 & \text { per year } \\\hline \text { Fixed selling and administrative } & \$ 130,000 & \text { per year } \\\hline\end{array}$$ An offer has come in for a one-time sale of 300 units at a special price of $130 per unit.The marketing manager says that the sale will not affect the company's regular sales activities,and that it will not require any variable selling and administrative costs.The production manager says that there is plenty of excess capacity and the sale will not impact fixed costs in any way.What is the effect of this deal on operating income?

A) Operating income increases by $400.
B) Operating income increases by $2,100.
C) Operating income decreases by $7,500.
D) Operating income increases by $7,500.

Question 70

Centric Sail Makers manufactures sails for sailboats.The company has the capacity to produce 36,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $$\begin{array} { | l | r | } \hline \text { Sales price per unit } & \$ 185 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 60 \\\hline \text { Selling and administrative } & \$ 20 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 675,000 \\\hline \text { Selling and administrative } & \$ 300,000 \\\hline\end{array}$$ If a special pricing order is accepted for 5,600 sails at a sales price of $150 per unit,and fixed costs remain unchanged,what is the change in operating income? (Assume the special pricing order will require variable manufacturing costs and variable selling and administrative costs.)

A) Operating income decreases by $840,000.
B) Operating income increases by $840,000.
C) Operating income decreases by $392,000.
D) Operating income increases by $392,000.

Question 71

Paradiso Company manufactures dolls that are sold to various distributors.The company produces at full capacity for six months each year to meet peak demand; the manufacturing facility operates at 60% of capacity for the other six months of the year.The company has provided the following data for the year: $$\begin{array} { | l | r |l| } \hline \text { No. of units produced and sold } & 500,000& \text { units } \\\hline \text { Sales price } & \$ 30& \text { per unit } \\\hline \text { Variable manufacturing costs } & \$ 20 &\text { per unit } \\\hline \text { Fixed manufacturing costs } & \$ 1,000,000& \text { per year } \\\hline \text { Variable selling and administrative costs } & \$ 3 &\text { per unit } \\\hline \text { Fixed selling and administrative costs } & \$ 600,000& \text { per year } \\\hline\end{array}$$ Paradiso receives an offer to produce 7,000 dolls for a special event.This is a one-time opportunity during a period when the company has excess capacity.What is the minimum sales price the company should accept for the order?

A) $17
B) $30
C) $20
D) $23

Question 72

Bridge Company makes special equipment used in cell towers.Each unit sells for $420.Bridge uses just-in-time inventory procedures; it produces and sells 12,500 units per year.It has provided the following income statement data: $\begin{array}{c}\begin{array}{|l|r|}\hline \text { Traditional Format }\\\hline \text { Sales revenue } & \$ 5,250,000 \\\hline \text { Cost of goods sold } & 3,100,000 \\\hline \text { Gross profit } & 2,150,000 \\\hline \text { Selling \& admin, expenses } & \underline{670,000} \\\hline & \\\hline & \\\hline &\\\hline &\\\hline \text { Operating income } & \$ 1,480,000 \\\hline\end{array}\begin{array}{l|r|}\hline \text { Contribution Margin Format}\\\hline \text { Sales revenue } & \$ 5,250,000 \\\hline \text { Variable costs: } &\\\hline \text { Manufacturing } & 1,200,000 \\\hline \text { Selling \& admin, } & \underline{400,000}\\\hline \text { Contribution margin } & 3,650,000 \\\hline \text { Fixed costs: } & \\\hline \text { Manufacturing } & 1,900,000\\\hline \text { Selling \& admin. } & 270,000\\\hline\text { Operating income }& \$ 1,480,000\\\hline \end{array}\end{array}$
A foreign company has offered to buy 110 units for a reduced sales price of $250 per unit.The marketing manager says the sale will have no negative impact the company's regular sales.The sales manager says that this sale will not require any additional selling and 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 Bridge accepts the deal,how will this impact operating income? (Round any intermediate calculations to the nearest cent,and your final answer to the nearest dollar.)

A) Operating income will increase by $16,940.
B) Operating income will decrease by $16,940.
C) Operating income will increase by $27,500.
D) Operating income will decrease by $27,500.

Question 73

Melville Company makes special equipment used in cell towers.Each unit sells for $420.Melville produces and sells 12,700 units per year.They have provided the following income statement data: $\begin{array}{c}\begin{array}{|l|r|}\hline \text { Traditional Format }\\\hline \text { Revenue } & \$ 5,334,000 \\\hline \text { Cost of goods sold } &2,800,000 \\\hline \text { Gross profit } & 2,534,000 \\\hline \text { Selling \& admin, expenses } & \underline{750,000} \\\hline & \\\hline & \\\hline &\\\hline &\\\hline \text { Operating income } & \$ 1,784,000 \\\hline\end{array}\begin{array}{l|r|}\hline \text { Contribution Margin Format}\\\hline \text { Revenue } & \$ 5,334,000 \\\hline \text { Variable costs: } &\\\hline \text { Manufacturing } & 800,000 \\\hline \text { Selling \& admin, } & \underline{500,000} \\\hline \text { Contribution margin } &4,034,000 \\\hline \text { Fixed costs: } \\\hline \text { Manufacturing }&2,000,000 \\\hline \text { Selling \& admin. } & 250,000\\\hline\text { Operating income }& \$ 1,784,000\\\hline \end{array}\end{array}$

A foreign company has offered to buy 75 units for a reduced sales price of $320 per unit.The marketing manager says the sale will not affect the company's regular sales.The sales manager says that this sale will require incremental selling and 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 Melville accepts the deal,how will this impact operating income? (Round any intermediate calculations to the nearest cent,and your final answer to the nearest dollar.)

A) Operating income will increase by $13,677.
B) Operating income will decrease by $13,677.
C) Operating income will increase by $24,000.
D) Operating income will decrease by $16,323.

Question 74

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

Question 75

Gardner Sail Makers manufactures sails for sailboats.The company has the capacity to produce 36,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $$\begin{array} { | l | r | } \hline \text { Sales price per unit } & \$ 185 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 62 \\\hline \text { Selling and administrative } & \$ 20 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 675,000 \\\hline \text { Selling and administrative } & \$ 250,000 \\\hline\end{array}$$ Assume that a special pricing order is accepted for 5,600 sails at a sales price of $140 per unit.This special order requires both variable manufacturing and variable selling and administrative costs,as well as incremental fixed costs of $401,000.What will be the impact on operating income?

A) Operating income decreases by $324,800.
B) Operating income decreases by $76,200.
C) Operating income increases by $324,800.
D) Operating income increases by $76,200.

Question 76

Lighthouse Sail Makers manufactures sails for sailboats.The company has the capacity to produce 35,000 sails per year and is currently producing and selling 30,000 sails per year.The following information relates to current production: $$\begin{array} { | l | r | } \hline \text { Sales price per unit } & \$ 175 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 62 \\\hline \text { Selling and administrative } & \$ 20 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 700,000 \\\hline \text { Selling and administrative } & \$ 300,000 \\\hline\end{array}$$ The fixed manufacturing costs increase by $102,000 for every 500 units produced beyond the maximum capacity of the plant.If a special pricing order is accepted for 5,500 sails at a sales price of $150 per unit,and if the order requires no variable or fixed selling and administrative costs,what is the effect on operating income?

A) Operating income increases by $382,000.
B) Operating income decreases by $382,000.
C) Operating income increases by $484,000.
D) Operating income decreases by $484,000.

Question 77

High Seas Sail Makers manufactures sails for sailboats.The company has the capacity to produce 37,000 sails per year and is currently producing and selling 25,000 sails per year.The following information relates to current production: $$\begin{array} { | l | r | } \hline \text { Sales price per unit } & \$ 185 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 60 \\\hline \text { Selling and administrative } & \$ 20 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 700,000 \\\hline \text { Selling and administrative } & \$ 300,000 \\\hline\end{array}$$ If a special pricing order is accepted for 5,600 sails at a sales price of $160 per unit,fixed costs remain unchanged,and there are no variable selling and administrative costs for this order,what is the change in operating income?

A) Operating income decreases by $448,000.
B) Operating income decreases by $560,000.
C) Operating income increases by $448,000.
D) Operating income increases by $560,000.

Question 78

Fixed costs are relevant to a special pricing decision if they are subject to change as a result of the special order.

Question 79

Polynesia Company manufactures sonars for fishing boats.Its Model 70 sells for $300.Polynesia produces and sells 5,700 of them per year.Cost data follow:
$$\begin{array} { | l | r | l | } \hline \text { Variable manufacturing } & \$ 100 & \text { per unit } \\\hline \text { Variable selling and administrative } & \$ 16 & \text { per unit } \\\hline \text { Fixed manufacturing } & \$ 290,000 & \text { per year } \\\hline \text { Fixed selling and administrative } & \$ 170,000 & \text { per year } \\\hline\end{array}$$ Arthur Bailey,the sales manager,wants to offer a special sale to a new customer that outfits boats.He proposes a sale of 41 units at a special price of $150 per unit.Arthur believes that it will not affect the company's regular sales in the long run because it is a one-time transaction.The sale will require the normal variable costs,both selling and administrative costs and manufacturing costs,but will not impact the fixed costs.The president of the company has some reservations but finally agrees to make the deal if and only if it adds a minimum of $1,700 to operating income.Based on the president's criteria,Polynesia will not make the offer.

Question 80

A customer of Mason Manufacturing has requested a one-time order at a reduced sales price.Before making the special pricing decision,what are three questions that management of Mason Manufacturing must consider?