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Exam 25: Short-Term Business Decisions

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Question 41

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The income statement for Sweet Dreams Company is divided by its two product lines,blankets and pillows,as follows: If Sweet Dreams can eliminate total fixed costs of $32,000 by dropping the pillows line,operating income will increase by $46,000.

A) True
B) False

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Question 42

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A company produces 1000 packages of cat food per month.The sales price is $4.00 per pack.Variable cost is $1.60 per unit,and fixed costs are $1800 per month.Management is considering adding a vitamin supplement to improve the value of the product.The variable cost will increase from $1.60 to $1.80 per unit,and fixed costs will increase by 10%.The company will price the new product at $8 per pack.How will this affect operating income?

A) Operating income will decrease by $3620 per month.
B) Operating income will remain unchanged.
C) Operating income will decrease by $2020 per month.
D) Operating income will increase by $3620 per month.

E) A) and B)
F) B) and C)

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Question 43

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Top managers of Technowares Manufacturing are alarmed by their operating losses.They are considering dropping the desktop product line.The company accountants have prepared the following analysis to help make this decision. Total fixed manufacturing costs will not change if the company stops selling the desktop product line.The fixed selling and administrative costs,however,will be avoided. Prepare a differential analysis to show whether Technowares Manufacturing should drop the desktop product line.Should the desktop product line be dropped? Explain your answer.

A company produces 1000 packages of dog treats per month.The sales price is $5 per pack.Variable cost is $1.50 per unit,and fixed costs are $1800 per month.Management is considering adding a vitamin supplement to improve the value of the product.The variable cost will increase from $1.50 to $1.90 per unit,and fixed costs will increase by 10%.At what sales price for the new product will the two alternatives (sell as is or process further) produce the same operating income? (Round your answer to the nearest cent. )

Emery Products is deciding whether to outsource the production of a certain component that is included in all of its products.It currently costs Emery Products $1.20 to make each component in-house.If Emery Products outsources,it can buy the component ready-made for $0.90 each and can shut down the production facilities it is currently using to manufacture the component and save $20,000 a year in fixed costs.Annual requirement for the component is 12,000 units.What is the effect of outsourcing?

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

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

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

Victor Corporation has provided you with the following budgeted income statement for one of its products: Victor Corporation believes that 65% of the fixed costs would be avoidable if the product line was dropped.Based on the impact on the company's operating income or loss,Victor should keep the product line.

A company sells two products with information as follows: The products are machine made.Four units of product A can be made with one machine hour and two units of product B can be made with one machine hour.The company has a maximum of 3000 machine hours available per month.The company can sell up to 18,000 units of product A per month,and up to 3000 units of product B for the month.What is the optimum product mix to maximize the company's operating income?

Route Two Tire Company makes a special kind of racing tire.Variable costs are $220 per unit,and fixed costs are $30,000 per month.Route Two sells 500 units per month at a sales price of $300.The company believes that it can increase the price if the tire quality is upgraded.If so,the variable cost will increase to $230 per unit,and the fixed costs will rise by 25%.The CEO wishes to increase the company's operating income by 30%.Which sales price level would give the desired results? (Round your answer to the nearest cent. )

Alieia Boat Company manufactures 100 luxury yachts per month.A navigation system is included in each yacht.Alieia Boat manufactures the navigation system in-house but is considering the possibility of outsourcing this function.At present,the variable cost per unit is $280,and the fixed costs are $38,000 per month.If it outsources the security system,fixed costs could be reduced by half,and the vacant facilities could be rented out to earn $3000 per month of rental income.What is the maximum contract cost that Alieia should pay for outsourcing?

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

Costs that do not differ between alternatives are ________.

Woodstock Furniture manufactures a small table and a large table.The small table sells for $800,has variable costs of $580 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1500,has variable costs of $970,and takes eight direct labor hours to manufacture.The company has a maximum of 5000 direct labor 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 maximize operating income of the company?

Merchandisers are constrained by the size of their stores,and managers must choose which products to display.

Marionette 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 70% of capacity for the other six months of the year.The company has provided the following data for the year: Marionette receives an offer to produce 7000 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?

Pegasus Avionics makes aircraft instrumentation.Its basic navigation radio requires $80 in variable costs and $5000 per month in fixed costs.Pegasus sells 10 radios per month.If the company further processes the radio,to enhance its functionality,it will require an additional $29 per unit of variable costs,plus an increase in fixed costs of $290 per month.The current sales price of the radio is $310.The marketing manager is sure that Pegasus can charge a higher sales price for the improved version.At what sales price level would the new,improved radio begin to improve operating earnings? (Round to the nearest whole dollar. )

An opportunity cost is ________.

When analyzing short-term business decisions,what are two important factors?