Deck 22: Short-Term Business Decisions

Question 1

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 purchase price of the old equipment compared to the purchase price of the new equipment
C) The productivity of the old equipment compared to that of the new equipment
D) The safety of the new equipment compared to the old equipment

Answer 1

B

Question 2

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

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

Answer 2

B

Question 3

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.

Answer 3

True

Question 4

Rica Company is a price-taker and uses a target-pricing approach.Refer to the following information:
$$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 01,000 & \text { units per year } \\\hline \text { Market price } & \$ 32 & \text { per unit } \\\hline \text { Desired operating profit } & 16 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,700,000 & \\\hline\end{array}$$
What is the target full product cost in total for the year? Assume all units produced are sold.

A) $96,160
B) $13,700,000
C) $2,192,000
D) $17,040,000

Question 5

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

Question 6

Fixed costs that do NOT differ between two alternatives are:

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

Question 7

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

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

Question 8

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

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

Question 9

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

Question 10

Rica Company is a price-taker and uses target pricing.Refer to the following information:
$$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 601,000 & \text { units per year } \\\hline \text { Market price } & \$ 34 & \text { per unit } \\\hline \text { Desired operating profit } & 15 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,700,000 & \\\hline\end{array}$$
How much is the target full product cost per unit? (Round your answer to nearest cent.)Assume all units produced are sold.

A) $28.90
B) $34.00
C) $5.10
D) $30.58

Question 11

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

A) Exploit the value of a fashionable brand name
B) Enter a competitive market and focus on cost cutting
C) Produce a unique product
D) Differentiate the product clearly from the competitors

Question 12

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

Question 13

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 14

Rica Company is a price-taker and uses target pricing.Please refer to the following information:
$$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 601,000 & \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating profit } & 16 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000 & \\\hline \text { Variable cost per unit } & \$ 19 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \\\hline\end{array}$$
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) $15,806,000
B) $10,206,000
C) $11,419,000
D) $5,600,000

Question 15

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 16

Smith Industries is considering replacing a machine that is presently used in its production process.The following information is available:
$$\begin{array} { | l | r | r | } \hline& { \text { Old machine } } & { \begin{array} { c } \text { Replacement } \\\text { machine } \end{array} } \\\hline \text { Original cost } & \$ 45000 & \$ 35000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 & 0\\\hline \text { Book value } & \$ 25000 & \\\hline \text { Current disposal value in cash } & \$ 8000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0\\ \hline \text { Annual cash operating costs } & \$ 7000 &\$ 4000 \\\hline\end{array}$$
Which of the information provided in the table is irrelevant to the replacement decision?

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

Question 17

Which of the following is irrelevant when making a decision?

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

Question 18

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 variable cost
D) A sunk cost

Question 19

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

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

Question 20

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

Question 21

Fine Arts Ltd 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 7% return on assets.Additional data are as follows:
$$\begin{array} { | l | l | l | } \hline \text { Sales volume } & 4000 & \text { units per year } \\\hline \text { Variable costs } & \$ 1000 & \text { per unit } \\\hline \text { Fixed cost } & \$ 3,500,000 & \text { per year } \\\hline\end{array}$$
Using the cost-plus pricing approach,what should be the price per unit?

A) $2033
B) $1070
C) $1000
D) $8000

Question 22

Centric Sail Makers manufacture 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:
$$\begin{array} { | l | l | } \hline \text { Sale price per unit } & \$ 180 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 60 \\\hline \text { Marketing and administrative } & \$ 10 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 700,000 \\\hline \text { Marketing and administrative } & \$ 250,000 \\\hline\end{array}$$
If a special sales order is accepted for 5600 sails at a price of $170 per unit,fixed costs remain unchanged and there are no variable marketing and administrative costs for this order,what is the change in operating profit?

A) Operating profit decreases by $560,000.
B) Operating profit decreases by $616,000.
C) Operating profit increases by $616,000.
D) Operating profit increases by $560,000.

Question 23

Hilltop Golf Course is planning for the coming season.Investors would like to earn a 10% 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 $32,000,000 for the golfing 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 is a price-taker and will not be able to charge more than its competitors,who charge $78 per round of golf.What profit will it earn in terms of dollars?

A) $88,400,000
B) $5,200,000
C) $6,000,000
D) $46,800,000

Question 24

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 30,000 sails per year.The following information relates to current production:
$$\begin{array} { | l | l | } \hline \text { Sale price per unit } & \$ 185 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 60 \\\hline \text { Marketing and administrative } & \$ 20 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 675,000 \\\hline \text { Marketing and administrative } & \$ 300,000 \\\hline\end{array}$$
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 5500 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 profit?

A) Operating profit decreases by $495,000
B) Operating profit increases by $395,000
C) Operating profit decreases by $395,000
D) Operating profit increases by $495,000

Question 25

Gotham Products is a price-taker and uses target pricing.Please refer to the following information:
$$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 602,000 & \text { units per year } \\\hline \text { Market price } & \$ 34 & \text { per unit } \\\hline \text { Desired operating profit } & 17 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 1,800,000 & \\\hline\end{array}$$
How much is the target full product cost per year? Assume all units produced are sold.

A) $10,836,000
B) $20,468,000
C) $30,600,000
D) $20,162,000

Question 26

Rica Company is a price-taker and uses target pricing.Refer to the following information:
$$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$601,000 & \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating profit } & 15 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,800,000 & \\\hline \text { Variable cost per unit } & \$ 19 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,500,000 & \text { per year } \\\hline\end{array}$$
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) $19.00
B) $4.50
C) $17.40
D) $11.00

Question 27

Fox Ltd manufactures and sells pens for $5 each.Wolf Company has offered Fox Ltd $4 per pen for a one-time order of 3500 pens.The total manufacturing cost per pen,using traditional costing,is $1 per unit,and consists of variable costs of $0.80 per pen and fixed overhead costs of $0.20 per pen.Assume that Fox Ltd has excess capacity and that the special order would not adversely affect regular sales.What is the change in operating profit that would result from accepting the special sales order?

A) increase of $11,200
B) increase of $3500
C) decrease of $3500
D) decrease of $11,200

Question 28

Fantabulous Products sells 2100 kayaks per year at a price of $480 per unit.Fantabulous 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 17% on assets.Variable cost is $180 per unit and cannot be reduced.How much is the target fixed costs?

A) $855,000
B) $477,000
C) $1,008,000
D) $153,000

Question 29

Peacock Ltd sells 2200 kayaks per year at a price of $480 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 $320,000 per year and cannot be reduced.How much is the target variable cost per unit?

A) $373
B) $145
C) $227
D) $518

Question 30

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.Refer to the following information:
$$\begin{array} { | l | l | l | } \hline \text { Target full product cost } & \$ 520,000 & \text { per year } \\\hline \text { Actual fixed cost } & \$ 281,000 & \text { per year } \\\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \\\hline \text { Production volume } & 152,000 & \text { units per year } \\\hline\end{array}$$
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) $1.85
B) $1.57
C) $2.00
D) $3.42

Question 31

Centric Sail Makers manufacture 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:
$$\begin{array} { | l | l | } \hline \text { Sale price per unit } & \$ 185 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 60 \\\hline \text { Marketing and administrative } & \$ 10 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 675,000 \\\hline \text { Marketing and administrative } & \$ 300,000 \\\hline\end{array}$$
If a special sales order is accepted for 5500 sails at a price of $150 per unit and fixed costs remain unchanged,what is the change in operating profit? (Assume the special sales order will require variable manufacturing costs and variable marketing and administrative costs.)

A) Operating profit increases by $825,000.
B) Operating profit increases by $440,000.
C) Operating profit decreases by $825,000.
D) Operating profit decreases by $440,000.

Question 32

Vodafone Company makes special equipment used in mobile network towers.Each unit sells for $400.Vodafone produces and sells 12,700 units per year.They have provided the following income statement data:

A foreign company has offered to buy 85 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 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 Vodafone accepts the deal,how will this impact operating profit?

A) up $25,500
B) down $25,500
C) up $17,469
D) down $17,469

Question 33

Paragon Products sells a special kind of navigation equipment for $1300.Variable costs are $900 per unit.When a special order arrived from a foreign contractor to buy 42 units at a reduced price of $1000 per unit,there was a discussion among management.The management accountant 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 variable costs of $900 includes variable costs of packing the product
B) the order is not likely to affect the regular sales
C) the company will need to hire additional staff to execute this order
D) the company is operating at 70% of its production capacity

Question 34

Optus Company makes special equipment used in mobile network towers.Each unit sells for $410.Optus produces and sells 12,500 units per year.They have provided the following income statement data:

A foreign company has offered to buy 75 units for a reduced price of $320 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 $25,000 of fixed manufacturing costs to accommodate the specifications of the buyer.If Optus accepts the deal,how will this impact operating profit?

A) operating profit will increase by $9400.
B) operating profit will decrease by $15,600.
C) operating profit will increase by $24,000.
D) operating profit will decrease by $9400.

Question 35

Meson Production is a price-taker.It produces large spools of electrical wire in a highly competitive market,so it practises target pricing.The current market price of the electric wire is $800 per unit.The company has $3,100,000 in assets and its shareholders expect a return of 9% on assets.The company provides the following information:
$$\begin{array} { | l | l | l | } \hline \text { Sales volume } & 120,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 730 & \text { per unit } \\\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \\\hline\end{array}$$
If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the profit target?

A) $279,000
B) $5,879,000
C) $14,000,000
D) $87,600,000

Question 36

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 500,000 rounds of golf are expected to be played each year.Variable costs are about $17 per round of golf.Hilltop Golf Course has a favourable 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) $77
B) $43
C) $60
D) $95

Question 37

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:
$$\begin{array} { | l | l | l | } \hline \text { Target full product cost } & \$ 510,000 & \text { per year } \\\hline \text { Actual fixed cost } & \$ 280,000 & \text { per year } \\\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \\\hline \text { Production volume } & 152,000 & \text { units per year } \\\hline\end{array}$$
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) $230,000
B) $280,000
C) $304,000
D) $510,000

Question 38

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 320,000 units per year,due to the high demand for the product.Variable costs are $2.30 per unit.Total fixed costs are $970,000 per year.The CEO will receive share options if he reports $200,000 of operating profit 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) $4.71 per unit
B) $2.30 per unit
C) $5.96 per unit
D) $3.66 per unit

Question 39

Yummy Foods sells jars of special spices used in Spanish cooking.The variable cost is $2 per unit.Fixed costs are $10,000,000 per year.It has $40,000,000 of assets and investors expect a return of 5% on their assets.Yummy Foods sells 4,000,000 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) $2.00
B) $5.00
C) $4.50
D) $2.40

Question 40

Fantabulous Products sells 2200 kayaks per year at a price of $480 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 16% on assets.How much is the target full product cost?

A) $1,224,960
B) $1,056,000
C) $896,000
D) $16,000,000

Question 41

Shine Bright Company has three product lines-D,E,and F.The following information is available:
$$\begin{array} { | l | r | r | r | } \hline & { \text { D } } & { \text { E } } & { \text { F } } \\\hline \text { Sales } & \$ 60000 & \$ 38000 & \$ 26000 \\\hline \text { Variable costs } & 36000 & 18000 & 12000 \\\hline \text { Contribution margin } & 24000 & 20000 & 14000 \\\hline \text { Fixed expenses } & 12000 & 15000 & 16000 \\\hline \text { Profit (loss) } & \$ 12000 & \$ 5000 & \$ ( 2000 ) \\\hline\end{array}$$
Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss.Assuming fixed costs are unavoidable,if Shine Bright Company drops product line F and does not replace it,what effect will this have on profit?

A) profit will increase $14 000
B) profit will decrease $14 000
C) profit will increase $16 000
D) profit will increase $2 000

Question 42

In making product mix decisions under constraining factors,which of the following is the key to choosing the product type to be maximised?

A) Contribution margin per unit of the constraining factor
B) Gross profit per unit using absorption costing
C) Contribution margin per unit of product
D) Revenue per unit

Question 43

A company has two different products that are sold in different markets.Financial data are as follows:
$$\begin{array} { | l | l | l | l | } \hline & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Revenue } & \$ 15,000 & \$ 9300 & \$ 24,300 \\\hline \text { Variable cost } & ( 7000 ) & ( 9800 ) & ( 16,800 ) \\\hline \text { Fixed cost (allocated) } & \$ 2000 ) & \$ 2100 ) & ( 4100 ) \\\hline \text { Operating income } & \$ 6000 & ( \$ 2600 ) & \$ 3400 \\\hline\end{array}$$
Assume that fixed costs of $2000 could be eliminated if product B was dropped.Assume furthermore that dropping one product would not impact sales of the other.If Product B is dropped,what would be the impact on total operating profit of the company?

A) increase $500
B) increase $2000
C) increase $2500
D) increase $2100

Question 44

Which of the following statements describes a scenario when management should consider dropping a business division?

A) The division's avoidable fixed costs are greater than its contribution margin.
B) The division's avoidable fixed costs are less than its contribution margin.
C) The division has consistently reported an operating loss.
D) The division's unavoidable fixed costs are greater than its operating loss.

Question 45

Faros Hats,Etc.has two product lines-baseball helmets and football helmets.Income statement data for the most recent year follow:
$$\begin{array} { | l | l | l | l | } \hline & { \text { Total } } & { \text { Baseball Helmets } } &{ \text { Football Helmets } } \\\hline \text { Sales revenue } & \$ 860,000 & \$ 500,000 & \$ 360,000 \\\hline \text { Variable expenses } & ( 440,000 ) & ( 150,000 ) & ( \underline { 290,000 ) } \\\hline \text { Contribution margin } & \$ 420,000 & \$ 350,000 & \$ 70,000 \\\hline \text { Fixed expenses } & ( 180,000 ) & ( 80,000 ) & ( 100,000 ) \\\hline \text { Operating profit (loss) } & \$ 240,000 & \$ 270,000 & ( \$ 30,000 ) \\\hline\end{array}$$
If $10,000 of fixed costs will be eliminated by dropping the Football Helmets line,how will dropping Football Helmets affect the operating profit of the company?

A) Operating profit will increase by $70,000.
B) Operating profit will decrease by $100,000.
C) Operating profit will increase by $10,000.
D) Operating profit will decrease by $60,000.

Question 46

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 47

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

Question 48

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 49

In deciding whether to drop its electronics product line,a company's manager should consider all of the following EXCEPT:

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

Question 50

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

Question 51

Polynesia Company manufactures sonars for fishing boats.Model 70 sells for $300.Polynesia produces and sells 5 600 of them per year.Cost data are as follows:
$$\begin{array} { | l | l | l | } \hline \text { Variable manufacturing } & \$ 100 & \text { per unit } \\\hline \text { Variable marketing } & \$ 16 & \text { per unit } \\\hline \text { Fixed manufacturing } & \$ 280000 & \text { per year } \\\hline \text { Fixed marketing \& admin } & \$ 150000 & \text { per year } \\\hline\end{array}$$
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 cannibalise 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 profit.Based on the president's criteria,Polynesia will decline the offer.

Question 52

Polynesia Company manufactures sonars for fishing boats.Model 70 sells for $260.Polynesia produces and sells 5 600 of them per year.Cost data are as follows:
$$\begin{array} { | l | l | l | } \hline \text { Variable manufacturing } & \$ 110 & \text { per unit } \\\hline \text { Variable marketing } & \$ 17 & \text { per unit } \\\hline \text { Fixed manufacturing } & \$ 290000 & \text { per year } \\\hline \text { Fixed marketing \& admin } & \$ 150000 & \text { per year } \\\hline\end{array}$$
A potential deal has come up for a one-time sale of 34 units at a special price of $110 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 management accountant 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 management accountant is correct in his statement.

Question 53

Origami Company is a price-taker and uses target pricing.Please refer to the following information:
$$\begin{array} { | l | r | r | } \hline \text { Production volume } & 500000 & \text { Units per year } \\\hline \text { Market price } & \$ 24.00 & \text { Per unit } \\\hline \text { Desired profit } & 12 \% & \text { Of total assets } \\\hline\end{array}$$
Revenue at market price plus the desired profit equals the product's target full cost.

Question 54

Macaulay Company has three product lines-D,E and F.The following information is available:
$$\begin{array} { | l | l | l | l | } \hline & { \text { D } } & { \text { E } } & { \text { F } } \\\hline \text { Sales } & \$ 70,000 & \$ 60,000 & \$ 30,000 \\\hline \text { Variable costs } & ( 30,000 ) & ( 10,000 ) & ( 12,000 ) \\\hline \text { Contribution margin } & \$ 40,000 & \$ 50,000 & 18,000 \\\hline \text { Fixed expenses } &( 20,000 ) & ( 10,000 ) & ( 23,000 ) \\\hline \text { Operating income (loss) } & \$ 20,000 & \$ 40,000 & (\$ 5000 ) \\\hline\end{array}$$
Macaulay Company is thinking of dropping product line F because it is reporting an operating loss.Assuming fixed costs are unavoidable,if Macaulay Company drops product line F and does not replace it,what effect will this have on operating profit?

A) Operating profit will increase by $5000.
B) Operating profit will decrease by $18,000.
C) Operating profit will increase by $23,000.
D) Operating profit will increase by $18,000.

Question 55

A company has two different products that are sold in different markets.Financial data are as follows:
$$\begin{array} { | l | l | l | l | } \hline & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Revenue } & \$ 18,000 & \$ 9500 & \$ 27,500 \\\hline \text { Variable cost } & ( 9000 ) & ( 9700 ) & ( 18,700 ) \\\hline \text { Fixed cost (allocated) } & \$ 2000 ) & \$ 2000 ) & ( 4000 ) \\\hline \text { Operating profit } & \$ 7000 & ( \$ 2200 ) & \$ 4800 \\\hline\end{array}$$
Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other.If Product B is dropped,what would be the impact on total operating profit of the company?

A) decrease $2000
B) increase $2000
C) decrease $200
D) increase $200

Question 56

Meson Production is a price-taker.They produce large spools of electrical wire in a highly competitive market,so it practises target pricing.The current market price is $825 per unit.The company has $3,100,000 in assets and shareholders expect a return of 6% on assets.The company provides the following information:
$$\begin{array} { | l | l | l | } \hline \text { Sales volume } & 100,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 725 & \text { per unit } \\\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \\\hline\end{array}$$
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 $40.00
B) reduction in variable cost per unit by $725
C) reduction in variable cost per unit by $100
D) reduction in variable cost per unit by $41.86

Question 57

Faros Hats,Etc.has two product lines-baseball helmets and football helmets.Income statement data for the most recent year follow:
$$\begin{array} { | l | l | l | l | } \hline &{ \text { Total } } & { \text { Baseball Helmets } } &{ \text { Football Helmets } } \\\hline \text { Sales revenue } & \$ 950,000 & \$ 600,000 & \$ 350,000 \\\hline \text { Variable expenses } & ( 440,000 ) & ( 150,000 ) & ( \underline { 290,000 ) } \\\hline \text { Contribution margin } & \$ 510,000 & \$ 450,000 & \$ 60,000 \\\hline \text { Fixed expenses } & ( 162,000 ) & ( 70,000 ) & ( 92,000 ) \\\hline \text { Operating profit (loss) } & \$ 348,000 & \$ 380,000 & ( \$ 32,000 ) \\\hline\end{array}$$
Assuming the Football Helmets line is dropped,total fixed costs remain unchanged and the space formerly used to produce the line is rented for $100,000 per year,how will operating profit be affected?

A) Operating profit will decrease by $40,000.
B) Operating profit will increase by $40,000.
C) Operating profit will increase by $60,000.
D) Operating profit will decrease by $60,000.

Question 58

Healthier Cook Company manufactures two products: toaster ovens and bread machines.The following data are available:
$$\begin{array} { | l | l | l | } \hline &{ \text { Toaster Ovens } } &{ \text { Bread Machines } } \\\hline \text { Sale price } & \$ 100 & \$ 150 \\\hline \text { Variable costs } & \$ 40 & \$ 50 \\\hline\end{array}$$
Healthier Cook can manufacture six toaster ovens per machine hour and four bread machines per machine hour.Healthier Cook's production capacity is 1600 machine hours per month.What is the contribution margin per machine hour for toaster ovens?

A) $360
B) $25
C) $400
D) $11

Question 59

Faros Hats,Etc.has two product lines-baseball helmets and football helmets.Income statement data for the most recent year follow:
$$\begin{array} { | l | l | l | l | } \hline &{ \text { Total } } & { \text { Baseball Helmets } } &{ \text { Football Helmets } } \\\hline \text { Sales revenue } & \$ 840,000 & \$ 500,000 & \$ 340,000 \\\hline \text { Variable expenses } & ( 550,000 ) & ( 250,000 ) & ( \underline { 300,000 ) } \\\hline \text { Contribution margin } & \$ 290,000 & \$ 250,000 & \$ 40,000 \\\hline \text { Fixed expenses } & ( 160,000 ) & ( 70,000 ) & ( 90,000 ) \\\hline \text { Operating profit (loss) } & \$ 130,000 & \$ 180,000 & ( \$ 50,000 ) \\\hline\end{array}$$
Assume 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 profit of the company?

A) Operating profit will decrease by $340,000.
B) Operating profit will decrease by $40,000.
C) Operating profit will increase by $50,000.
D) Operating profit will increase by $70,000.

Question 60

Healthier Cook Company manufactures two products: toaster ovens and bread machines.The following data are available:
$$\begin{array} { | l | l | l | } \hline &{ \text { Toaster Ovens } } & { \text { Bread Machines } } \\\hline \text { Sale price } & \$ 70 & \$ 150 \\\hline \text { Variable costs } & \$ 30 & \$ 60 \\\hline\end{array}$$
Healthier Cook can manufacture six toaster ovens per machine hour and four bread machines per machine hour.Healthier Cook's production capacity is 2000 machine hours per month and Healthier Cook can sell as many units of either type as it can produce.What product and how many units should the company produce in a month to maximise profits?

A) 6000 toaster ovens and 4000 bread machines
B) 12,000 toaster ovens
C) 8000 bread machines
D) 8000 toaster ovens and 6000 bread machines

Question 61

Kim Company's western territory's forecasted income statement for the upcoming year is as follows:
$$\begin{array} { | l | l | } \hline \text { Sales } & \$ 850,000 \\\hline \text { Variable expenses } & ( 520,000 ) \\\hline \text { Contribution margin } & \$ 330,000 \\\hline \text { Fixed expenses } & ( 500,000 ) \\\hline \text { Operating loss } & ( \$ 170,000 ) \\\hline\end{array}$$
Kim Company's management is considering dropping the western territory and has determined that $310,000 of the fixed expenses is avoidable.What is the change in Kim Company's forecasted operating profit or loss for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

A) Operating profit will decrease by $330,000.
B) Operating profit will increase by $330,000.
C) Operating loss will increase by $20,000.
D) Operating loss will decrease by $20,000.

Question 62

Kim Company's western territory's forecasted income statement for the upcoming year is as follows:
$$\begin{array} { | l | l | } \hline \text { Sales } & \$ 840,000 \\\hline \text { Variable expenses } & ( 540,000 ) \\\hline \text { Contribution margin } & \$ 300,000 \\\hline \text { Fixed expenses } & ( 480,000 ) \\\hline \text { Operating loss } & ( \$ 180,000 ) \\\hline\end{array}$$
Kim Company's management is considering dropping the western territory and has determined that 90% of the fixed expenses are avoidable.What is the change in Kim Company's forecasted operating loss for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

A) Loss will be increased by $432,000
B) Loss will be increased by $132,000
C) Loss will be reduced by $432,000
D) Loss will be reduced by $132,000

Question 63

Macaulay Company has three product lines-D,E,and F.The following information is available:
$$\begin{array} { | l | c | c | l | } \hline & \text { D } & \text { E } & { \text { F } } \\\hline \text { Sales } & \$ 90,000 & \$ 60,000 & \$ 31,000 \\\hline \text { Variable costs } &( 20,000 ) & ( 15,000 ) & ( 10,000 ) \\\hline \text { Contribution margin } & \$ 70,000 & \$ 45,000 & 21,000 \\\hline \text { Fixed expenses } &( 10,000 ) & ( 10,000 ) & ( 25,000 ) \\\hline \text { Operating profit (loss) } & \$ 60,000 & \$ 35,000 &( \$ 4000 ) \\\hline\end{array}$$
Macaulay Company is thinking of dropping product line F because it is reporting an operating loss.Assume that $23,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating profit?

A) Operating profit will decrease by $2000.
B) Operating profit will decrease by $25,000.
C) Operating profit will increase by $2000.
D) Operating profit will increase by $25,000.

Question 64

Macaulay Company has three product lines-D,E,and F.The following information is available:
$$\begin{array} { | l | c | l | l | } \hline & \text { D } & { \text { E } } & { \text { F } } \\\hline \text { Sales } & \$ 90,000 & \$ 50,000 & \$ 30,000 \\\hline \text { Variable costs } & ( 40,000 ) & ( 10,000 ) & ( 10,000 ) \\\hline \text { Contribution margin } & \$ 50,000 & \$ 40,000 & 20,000 \\\hline \text { Fixed expenses } & (15,000 ) & ( 10,000 ) & ( 24,000 ) \\\hline \text { Operating profit (loss) } & \$ 35,000 & \$ 30,000 & (\$ 4000 ) \\\hline\end{array}$$
Macaulay Company is thinking of dropping product line F because it is reporting an operating loss.Assuming fixed costs are unavoidable,if Macaulay Company drops product line F and rents the space formerly used to produce product F for $20,000 per year,total profit will be:

A) $20,000
B) $24,000
C) $10,000
D) $61,000

Question 65

The Badminton Company has 4000 machine hours available annually to manufacture racquets.The following information is available for the two different racquets produced by Badminton:
$$\begin{array} { | l | l | } \hline \text { Pro } & \\ \hline \text { Unit sales price } & \$ 300 \\\hline \text { Unit variable costs } & \$ 150 \\\hline \text { Annual demand } & 1800 \text { units } \\\hline \text { Machine time } & 1.25 \text { hours per unit } \\\hline \text { Mid } & \\ \hline \text { Unit sales price } & \$ 125 \\\hline \text { Unit variable costs } & \$ 80 \\\hline \text { Annual demand } & 5000 \text { units } \\\hline \text { Machine time } & 6 \text { hours per unit } \\\hline\end{array}$$
How many units of each racquet should be manufactured for the company to maximise its operating profit?

A) 1800 units of Pro and 1508 units of Mid
B) 5000 units of Mid and 292 units of Pro
C) 1800 units of Pro and 5000 units of Mid
D) 1800 units of Pro and 292 units of Mid

Question 66

A company has two different products that sell to separate markets.Financial data are as follows:
$$\begin{array} { | l | r | r | r | } \hline & \text { Product A } & \text { Product B } & { \text { Total } } \\\hline \text { Revenue } & \$ 12000 & \$ 8000 & \$ 20000 \\\hline \text { Variable cost } & ( \$ 7500 ) & ( \$ 8100 ) & ( \$ 15600 ) \\\hline \text { Fixed cost (allocated) } & ( \$ 3000 ) & ( \$ 1000 ) & ( \$ 4000 ) \\\hline \text { Profit } & \$ 1500 & ( \$ 1100 ) & \$ 400 \\\hline\end{array}$$
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 67

Clay Company manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available:
$$\begin{array} { | l | l | l | } \hline& \text { Bedford Lamp } & \text { Lowell Lamp } \\\hline \text { Sale price } & \$ 25 & \$ 36 \\\hline \text { Variable costs } & \$ 18 & \$ 21 \\\hline \text { Machine hours required for 1 lamp } & 1 & 6\\\hline\end{array}$$

Total fixed costs are $31,000,and Clay can sell a maximum of 12,000 units of each style of lamp annually.Machine hour capacity is 25,000 hours per year.What is the contribution margin per machine hour for the Lowell lamp?

A) $25 per machine hour
B) $36 per machine hour
C) $3 per machine hour
D) $7 per machine hour

Question 68

The income statement for Sweet Dreams Company is divided by its two product lines,blankets and pillows as follows:
$$\begin{array} { | l | r | r | r | } \hline & { \text { Bhankets } } &{ \text { Pillows } } & { \text { Total } } \\\hline \text { Sales revenue } & \$ 620000 & \$ 300000 & \$ 920000 \\\hline \text { Variable expenses } & 465000 & 240000 & 705000 \\\hline \text { Contribution margin } & 155000 & 60000 & 215000 \\\hline \text { Fixed expenses } & 76000 & 76000 & 152000 \\\hline \text { Profit (loss) } & \$ 79000 & \$ ( 16000 ) & \$ 63000 \\\hline\end{array}$$
Sweet Dreams should eliminate the pillows product line only,if by doing so,they can eliminate more than $60 000 of fixed costs.

Question 69

Clay Company manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available:
$$\begin{array} { | l | l | l | } \hline& \text { Bedford Lamp } & \text { Lowell Lamp } \\\hline \text { Sale price } & \$ 26 & \$ 37 \\\hline \text { Variable costs } & \$ 16 & \$ 22 \\\hline \text { Machine hours required for 1 lamp } & 2 & 6 \\\hline\end{array}$$

Total fixed costs are $32,000,and Clay can sell a maximum of 12,000 units of each style of lamp annually.Machine hour capacity is 20,000 hours per year.What is the contribution margin per machine hour for the Bedford lamp?

A) $5 per machine hour
B) $13 per machine hour
C) $3 per machine hour
D) $19 per machine hour

Question 70

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

Question 71

DM Company has provided you with the following budgeted income statement for one of their products:
$$\begin{array} { | l | l | } \hline \text { Sales } & \$ 700,000 \\\hline \text { Variable expenses } & ( 430,000 ) \\\hline \text { Contribution margin } & \$ 270,000 \\\hline \text { Fixed expenses } & ( 300,000 ) \\\hline \text { Operating loss } & ( \$ 30,000 ) \\\hline\end{array}$$
DM has just encountered environmental problems with the product and will be forced to drop the product line altogether.They will be able to eliminate 75% of the fixed expenses.What will be the impact on operating profit of the company?

A) Operating profit will decrease by $225,000.
B) Operating profit will increase by $225,000.
C) Operating profit will increase by $45,000.
D) Operating profit will decrease by $45,000.

Question 72

Macaulay Company has three product lines-D,E,and F.The following information is available:
$$\begin{array} { | l | l | l | l | } \hline & \text { D } & { \text { E } } & { \text { F } } \\\hline \text { Sales } & \$ 90,000 & \$ 40,000 & \$ 30,000 \\\hline \text { Variable costs } & ( 30,000 ) & ( 10,000 ) & ( 11,000 ) \\\hline \text { Contribution margin } & \$ 60,000 & \$ 30,000 & 19,000 \\\hline \text { Fixed expenses } &( 10,000 ) & ( 15,000 ) & ( 25,000 ) \\\hline \text { Operating profit (loss) } & \$ 50,000 & \$ 15,000 &( \$ 6000 ) \\\hline\end{array}$$
Macaulay Company is thinking of dropping product line F because it is reporting an operating loss.Assume that $15,000 of total fixed costs could be eliminated by dropping F.What effect would this decision have on operating profit?

A) Operating profit will increase by $19,000.
B) Operating profit will decrease by $15,000.
C) Operating profit will increase by $34,000.
D) Operating profit will decrease by $4000.

Question 73

RS Company's western territory's forecasted income statement for the upcoming year is as follows:
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 750000 \\\hline \text { Variable expenses } & \$ 20000 \\\hline \text { Contribution margin } & \$ 330000 \\\hline \text { Fixed expenses } & \$ 396000 \\\hline \text { rofit } & ( \$ 66000 ) \\\hline\end{array}$$
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 74

Todd Company produces two products,P and Q.P sells for $7.50 per unit; Q sells for $6.50 per unit.Variable costs for P and Q are respectively,$4.00 and $6.00.There are 6300 direct labour hours per month available for producing the two products.Product P requires 5.00 direct labour hours per unit and Product Q requires 5.00 direct labour hours per unit.The company can sell as many of either product as it can produce.What is the maximum monthly contribution margin that Todd can generate under the circumstances? Round to nearest whole dollar.

A) $4410
B) $22,050
C) $3150
D) $630

Question 75

Custom Furniture manufactures a small table and a large table.The small table sells for $900,has variable costs of $580 per table and takes 10 direct labour hours to manufacture.The large table sells for $1500,has variable costs of $980 and takes eight direct labour hours to manufacture.Calculate the contribution margin per direct labour hour for the small table.

A) $58 per direct labour hour
B) $32 per direct labour hour
C) $320 per direct labour hour
D) $52 per direct labour hour

Question 76

Custom Furniture manufactures a small table and a large table.The small table sells for $1000,has variable costs of $560 per table and takes ten direct labour hours to manufacture.The large table sells for $1500,has variable costs of $960 and takes eight direct labour hours to manufacture.Calculate the contribution margin per direct labour hour for the large table.

A) $54 per direct labour hour
B) $55 per direct labour hour
C) $68 per direct labour hour
D) $44 per direct labour hour

Question 77

A company sells two products with information as follows:
$$\begin{array} { | l | r | r | } \hline & \mathrm { A } & \mathbf { B } \\\hline \text { Price per unit } & \$ 12.00 & \$ 28.00 \\\hline \text { Variable cost per unit } & \$ 10.00 & \$ 10.00 \\\hline\end{array}$$
Products are made by machine.4 units of Product A can be made with one machine hour and 2 units of Product B can be made with one machine hour.The company has a maximum of 4000 machine hours available per month.The company can sell up to 7000 units of Product A per month and up to 3000 units of Product B for the month.What is the maximum amount of contribution margin that the company could earn in a month given the stated constraints?

A) $14,000
B) $54,000
C) $126,000
D) $68,000

Question 78

Custom Furniture manufactures a small table and a large table.The small table sells for $800,has variable costs of $570 per table and takes ten direct labour hours to manufacture.The large table sells for $1600,has variable costs of $960 and takes eight direct labour hours to manufacture.The company has a maximum of 5000 direct labour hours per month when operating at full capacity.If there are no constraints on sales of either product and the company could choose any proportions of product mix that they wanted,what is the optimum product mix to maximise operating profit of the company?

A) 625 units of small, 500 units of large
B) Zero units of small, 625 units of large
C) 500 units of small, zero units of large
D) 500 units of small, 625 units of large

Question 79

A company sells two products with information as follows:
$\begin{array}{|l|l|l|} \hline & \text { A } & \text { B } \\\hline \text { Price per unit } & \$ 12 & \$ 22 \\\hline \text { Variable cost per unit } & \$ 10 & \$ 10\\\hline \end{array}$

Products are made by machine.4 units of Product A can be made with one machine hour and 2 units of Product B can be made with one machine hour.The company has a maximum of 5000 machine hours available per month.Assume there are no constraints on sales of either product and the company could choose any product mix they wish.What is the maximum amount of contribution margin that the company could earn in a month?

A) $120,000
B) $100,000
C) $10,000
D) $220,000

Question 80

Clay Company manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available:
$$\begin{array} { | l | l | l | } \hline& \text { Bedford Lamp } & \text { Lowell Lamp } \\\hline \text { Sale price } & \$ 30 & \$ 35 \\\hline \text { Variable costs } & \$ 18 & \$ 23 \\\hline \text { Machine hours required for 1 lamp } & 2 & 4 \\\hline\end{array}$$

Total fixed costs are $40,000.Machine hour capacity is 20,000 hours per year.Assuming that the company can sell as many products as it can make,which product mix would deliver the highest operating profit?

A) 0 Bedford lamps and 5000 Lowell lamps
B) 5000 Bedford lamps and 10,000 Lowell lamps
C) 10,000 Bedford lamps and 10,000 Lowell lamps
D) 10,000 Bedford lamps and 0 Lowell lamps