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Exam 8: Relevant Costs for Short-Term Decisions

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Question 71

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Product differentiation allows companies to become more of a price-setter, and less of a price-taker.

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Question 72

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The contribution margin per unit of constraint is calculated as

A) contribution margin per unit × constraint per unit.
B) contribution margin per unit × units per constraint.
C) contribution margin per unit ÷ units per constraint.
D) contribution margin per unit + constraint per unit.

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Question 73

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Managers should consider the potential effect of a special order on long-run profits and operations.

All other things being equal, if the incremental costs of outsourcing a product exceed the incremental costs of making a product, it should be outsourced.

The benefit foregone by choosing a particular alternative course of action is referred to as a(n)

Hardwood Mulch Company is considering selling premium mulch. It already sells regular for $30/sq yard and would sell premium mulch for $40/sq yard. The cost for termite treatment for the premium mulch would be $2/sq yard. A cost that would not be considered in this decision would be

Widget Inc. manufactures widgets. The company has the capacity to produce 100,000 widgets per year, but it currently produces and sells 75,000 widgets per year. The following information relates to current production: If a special sales order is accepted for 2800 widgets at a price of $36 per unit, fixed costs increase by $9000, and variable marketing and administrative costs for that order are $3 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Percy Productions has three models: D, E, and F. The following information is available: Percy Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed costs are unavoidable. Percy Productions discontinues model F and rents the space formerly used to produce product F for $18,000 per year, what effect will this have on operating income?

Buzz Appliances manufactures two products: Food Processors and Espresso Machines. The following data are available: The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1400 machine hours per month. The company has demand of 2,700 espresso machines. How many espresso machines and food processors should they produce based on demand and available machine hours?

In a sell or process further decision, the company should process further if

High Flying Copters manufactures two types of toy remote control helicopters, small and large. The following per unit data are available: Total fixed costs are $450,000 and the company has a machine hour capacity of 30,000 hours per year. Which helicopter should they emphasis in production?

A special order occurs when a customer requests a one-time order at an increased sales price.

Revved Up Toys manufactures a computer chip used in the production of remote control cars. When 6,000 cars are produced, the costs per part are: Sam's Associates has offered to sell Revved Up Toys 6,000 parts for $5.75 each. If Revved Up Toys accepts the offer, $1.00 of the fixed manufacturing overhead costs can be eliminated. a. What is the relevant per unit cost to manufacture the part? b. Which alternative is best for Revved Up Toys and by how much?

Unavoidable fixed costs are

Define the term constraints and give an example. What product should be made first when resource constraints exist?

A joint production process at Berry Lane Farm results in two products, blackberry syrup and blackberry jam. The following cost and activity data relate to these two products: Blackberry syrup can be sold as-is (at the split-off point) for $2.90 per unit, or it can be processed further into a specialty blackberry juice and then sold for $5.50 per unit. If blackberry syrup is processed further into the specialty blackberry juice, what would be the overall effect on operating income?

Which of the following best describes a "sunk cost"?

Lasso Corporation manufactures a variety of appliances which all use Part B89. Currently, Lasso manufactures Part B89 itself. It has been producing 9000 units of Part B89 annually. The annual costs of producing Part B89 at the level of 9000 units include: All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Lasso has no alternative use for its manufacturing facilities. Nadal Parts Company has offered to sell 9000 units of Part B89 to Lassof or $20.40 per unit. What is the highest price per unit that Lasso should be willing to pay for the part?

Fixed costs that cease to exist after a product line is discontinued are called

Indicate whether each item below is a characteristic of a price-taker or a price-setter. Use PT for price-taker and PS for price-setter. a)Cost-plus pricing b)Product lacks uniqueness c)Less competition d)Target pricing e)Heavy competition