Deck 25: Short-Term Business Decisions

Question 1

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

Answer 1

D

Question 2

Fuller Industries is considering replacing a machine that is presently used in its production process.Which of the following amounts represents a sunk cost? $$\begin{array} { | l | r | r | } \hline & \text { Old Machine } & \begin{array} { l } \text { Replacement } \\\text { Machine }\end{array} \\\hline \text { Original cost } & \$ 55,000 & \$ 45,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 & 0\\\hline \text { Book value } & \$ 30,000 & \\\hline \text { Current disposal value in cash } & \$ 9000 & \$ 0 \\\hline \text { Auture disposal value in cash (in 5 years) } & \$ 8000 & \$ 4500 \\\hline\end{array}$$

A) $55,000
B) $30,000
C) $9000
D) $45,000

Answer 2

$55,000

Question 3

Managerial accountants assist managers in the decision-making process by gathering and analyzing relevant information.

Answer 3

True

Question 4

Identify the four steps in the decision-making process.

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

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
D) the productivity of the old equipment compared to that of the new equipment

Question 7

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

Question 8

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 9

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

Question 10

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 11

Tryniski 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 12

Bradley Industries is considering replacing a machine that is presently used in its production process. Which of the following is irrelevant to the replacement decision?
$$\begin{array} { | l | r | r | } \hline & \text { Old Machine } & \begin{array} { l } \text { Replacement } \\\text { Machine }\end{array} \\\hline \text { Original cost } & \$ 55,000 & \$ 45,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 &0 \\\hline \text { Book value } & \$ 33,000 & \\\hline \text { Current disposal value in cash } & \$ 9000 & \$ 0 \\\hline \text { Auture disposal value in cash (in 5 years) } & \$ 8000 & \$ 4500 \\\hline\end{array}$$ 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 for both machines

Question 13

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

Question 14

Which of the following is NOT one of the steps in the managerial decision-making process?

A) basing decisions on sunk costs
B) defining business goals
C) identifying alternative courses of action
D) gathering and analyzing relevant information

Question 15

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

Question 16

Fletcher 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.
$$\begin{array} { | l | l | } \hline \text { Item } & \begin{array} { c } \text { Relevant or } \\\text { Irrelevant }\end{array} \\\hline \text { The price of the new equipment } & \\\hline \text { The price paid for the old equipment } & \\\hline \text { The trade in value of the old equipment } & \\\hline \text { The repair costs that will be incurred if the old } & \\\text { equipment is kept } & \\\hline \text { The expected cost savings of the new equipment } & \\\hline \text { The costs that have been incurred on the old equipment } & \\\hline\end{array}$$

Question 17

Define the terms Relevant Cost and Sunk Cost.

Question 18

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 19

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

Question 20

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 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

Wheeler Company is a price-taker and uses a target-pricing approach.Refer to the following information: $$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 00,000 & \text { units per year } \\\hline \text { Market price } & \$ 34 & \text { per unit } \\\hline \text { Desired operating income } & 17 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,800,000 & \\\hline\end{array}$$ What is the desired profit for the year?

A) $102,000
B) $20,400,000
C) $6,600,000
D) $2,346,000

Question 23

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

Question 24

If a company has limited competition and sells unique products,it is considered a price taker.

Question 25

Last year,Perkins Company spent $25,000 on employee training to improve customer service.The cost and time spent on training is considered a(n)________.

A) opportunity cost
B) sunk cost
C) relevant cost
D) avoidable costs

Question 26

The process of evaluating relevant information that changes operating income under alternative courses of action is called ________.

A) cost-benefit analysis
B) CVP analysis
C) opportunity cost analysis
D) incremental analysis

Question 27

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

Question 28

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 29

Louis Company is considering replacing its multi-functional copier system with a new system.Which costs would be relevant to its decision and which costs would be irrelevant?

Question 30

Managers should only consider financial information when making a decision.

Question 31

Price-setters emphasize a target-pricing approach while price-takers emphasize a cost-plus pricing approach.

Question 32

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

Question 33

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

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

Question 34

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

Question 35

Managers must consider both financial (quantitative)and nonfinancial (qualitative)factors when making decisions.Identify some possible relevant nonfinancial factors that managers might consider.

Question 36

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

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 37

Qualitative information that a manager might evaluate in making a decision would include all of the following EXCEPT ________.

A) calculating the breakeven point under two different alternatives
B) the effect of layoffs on employee morale
C) the reduction in control over delivery time due to subcontracting
D) upsetting regular customers by offering discounts to selected customers

Question 38

Managers should consider both the potential quantitative and qualitative effects of their decisions.

Question 39

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 40

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

Question 41

Abbott 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: $$\begin{array} { | l | l | l | } \hline \text { Target full product cost } & \$ 510,000 & \text { per year } \\\hline \text { Actual fixed cost } & \$ 280,000 & \text { per year } \\\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \\\hline \text { Production volume } & 152,000 & \text { units per year } \\\hline\end{array}$$ Actual costs are currently higher than target full product cost.Assuming that fixed costs cannot be reduced,what are the target total variable costs?

A) $280,000
B) $304,000
C) $230,000
D) $510,000

Question 42

Outrigger Leisure Products sells 2200 kayaks per year at a price of $450 per unit.Outrigger 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.Fixed costs are $450,000 per year and cannot be reduced.Assume all products produced are sold.What are the target variable costs?

A) $139,401
B) $1,000,000
C) $820,000
D) $370,000

Question 43

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 44

Dugout Water Products sells 2000 kayaks per year at a price of $470 per unit.Dugout 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 18% on assets.Assume all products produced are sold.What is the target full product cost?

A) $17,820,000
B) $761,800
C) $1,109,200
D) $940,000

Question 45

Discourse 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: $$\begin{array} { | l | l | l | } \hline \text { Target full product cost } & \$ 500,000 & \text { per year } \\\hline \text { Actual fixed cost } & \$ 270,000 & \text { per year } \\\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \\\hline \text { Production volume } & 140,000 & \text { units per year } \\\hline\end{array}$$ 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) $230,000
B) $280,000
C) $220,000
D) $500,000

Question 46

Paper Tiger Stationary Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 01,000 & \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating income } & 16 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 1,600,000 & \\\hline\end{array}$$ What is the target full product cost per year? Assume all units produced are sold.

A) $18,030,000
B) $17,774,000
C) $25,600,000
D) $10,217,000

Question 47

Launch Company sells 2500 paddleboards per year at a sales price of $470 per unit.Launch sells in a highly competitive market and uses target pricing.The company has $800,000 of assets,and the shareholders wish to make a profit of 16% on assets.Variable cost is $190 per unit and cannot be reduced.Assume all products produced are sold.What are the target fixed costs?

A) $1,175,000
B) $1,047,000
C) $128,000
D) $572,000

Question 48

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 49

Links 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 500,000 rounds of golf are expected to be played each year.Variable costs are about $15 per round of golf.Links Golf Course is a price-taker and will not be able to charge more than its competitors,who charge $78 per round of golf.Compute the operating profit that will be earned.

A) $1,500,000
B) $8,700,000
C) $76,500,000
D) $39,000,000

Question 50

Well-Bread Grain 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: $$\begin{array} { | l | l | l | } \hline \text { Target full product cost } & \$ 520,000 & \text { per year } \\\hline \text { Actual fixed cost } & \$ 281,000 & \text { per year } \\\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \\\hline \text { Production volume } & 150,000 & \text { units per year } \\\hline\end{array}$$ 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) $3.47
B) $1.59
C) $1.87
D) $2.00

Question 51

Rolling Hills Golf Course is planning for the coming golfing 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 $30,000,000 for the season.About 500,000 rounds of golf are expected to be played each year.Variable costs are about $17 per round of golf.Rolling Hills 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 Rolling Hills charge for a round of golf to achieve the desired profit?

A) $60
B) $77
C) $43
D) $89

Question 52

Aguilar Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 01,000 & \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating income } & 17 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,800,000 & \\\hline \text { Variable cost per unit } & \$ 19 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,500,000 & \text { per year } \\\hline\end{array}$$ With the current cost structure,Aguilar 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) $5.10
B) $11.00
C) $16.95
D) $19.00

Question 53

Inscribe,Inc.manufactures and sells pens for $7 each.Cubby Corp.has offered Inscribe,Inc.$4 per pen for a one-time order of 3600 pens.The total manufacturing cost per pen,using absorption costing,is $1 per unit and consists of variable costs of $0.85 per pen and fixed overhead costs of $0.15 per pen.Assume that Inscribe,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 $10,800
B) decrease of $10,800
C) increase of $11,340
D) decrease of $11,340

Question 54

Titan Metalworks produces a special kind of metal ingots that are unique,which allows Titan to follow a cost-plus pricing strategy.Titan has $10,000,000 of assets and shareholders expect approximately a 8% return on assets.Assume all products produced are sold.Additional data are as follows: $$\begin{array} { | l | l | l | } \hline \text { Sales volume } & 400,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 15 & \text { per unit } \\\hline \text { Fixed costs } & \$ 1,600,000 & \text { per year } \\\hline\end{array}$$ 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) $19.00
C) $21.00
D) $2.00

Question 55

Determinant Company is a price-taker and uses a target-pricing approach.Refer to the following information: $$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 01,000 & \text { units per year } \\\hline \text { Market price } & \$ 34 & \text { per unit } \\\hline \text { Desired operating income } & 15 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000 & \\\hline\end{array}$$ What is the target full product cost in total for the year? Assume all units produced are sold.

A) $90,150
B) $18,349,000
C) $13,900,000
D) $2,085,000

Question 56

Rocky River Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 02,000 & \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating income } & 15 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,700,000 & \\\hline\end{array}$$ What is the target full product cost per unit? (Round your answer to nearest cent.)Assume all units produced are sold.

A) $30.00
B) $26.59
C) $4.50
D) $25.50

Question 57

Allen's Ark sells 2100 canoes per year at a sales price of $470 per unit.Allen's 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) $987,000
B) $237,000
C) $250,000
D) $500,000

Question 58

Paddle Paradise,Inc.sells 2500 canoes per year at a sales price of $470 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 $330,000 per year and cannot be reduced.What is the target variable cost per unit assuming units sold are equal to units produced?

A) $196
B) $328
C) $460
D) $132

Question 59

Ortiz Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 02,000 & \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating income } & 17 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,800,000 & \\\hline \text { Variable cost per unit } & \$ 20 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \\\hline\end{array}$$ With the current cost structure,Ortiz 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) $10,114,000
B) $12,040,000
C) $5,600,000
D) $15,714,000

Question 60

Fowler Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$ 00,000 & \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating income } & 17 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,700,000 & \\\hline \text { Variable cost per unit } & \$ 17 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \\\hline\end{array}$$ With the current cost structure,Fowler 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) $5,471,000
B) $5,600,000
C) $12,400,000
D) $10,200,000

Question 61

Kerr 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 $3,000,000 in average assets,and the desired profit is a return of 7% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | } \hline \text { Sales volume } & 100,000& \text { units per year } \\\hline \text { Variable costs } & \$ 725 & \text { per unit } \\\hline \text { Fixed costs } & \$ 12,000,000 & \text { per year } \\\hline\end{array}$$ 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 $725.00
B) reduction in variable cost per unit by $75.00
C) reduction in variable cost per unit by $45.00
D) reduction in variable cost per unit by $47.10

Question 62

Canvas Company manufactures sonars for fishing boats.Its Model 70 sells for $310.Canvas produces and sells 5,600 of them per year.Cost data follow:
$$\begin{array} { | l | r | c | } \hline \text { Variable manufacturing } & \$ 100 & \text { per unit } \\\hline \text { Variable selling and administrative } & \$ 17 & \text { per unit } \\\hline \text { Fixed manufacturing } & \$ 290,000 & \text { per year } \\\hline \text { Fixed selling and administrative } & \$ 150,000 & \text { per year } \\\hline\end{array}$$ Alejandro Bauista,the sales manager,wants to offer a special sale to a new customer that outfits boats.He proposes a sale of 40 units at a special price of $148 per unit.Alejandro 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 $1,500 to operating income.Based on the president's criteria,Canvas will not make the offer.

Question 63

Seekers Company manufactures sonars for fishing boats.Model 70 sells for $250.Seekers produces and sells 5,600 of them per year.Cost data are as follows:
$$\begin{array} { | l | r | c | } \hline \text { Variable manufacturing } & \$ 110 & \text { per unit } \\\hline \text { Variable selling and administrative } & \$ 15 & \text { per unit } \\\hline \text { Fixed manufacturing } & \$ 290,000 & \text { per year } \\\hline \text { Fixed selling and administrative } & \$ 150,000 & \text { per year } \\\hline\end{array}$$ A potential deal has come up for a one-time sale of 30 units at a special price of $115 per unit.The marketing manager 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 64

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 65

Delish Foods sells jars of special spices used in Italian cooking.The variable cost is $2 per unit.Fixed costs are $10,000,000 per year.It has $42,000,000 of average assets,and the desired profit is a 5% return on assets.Delish Foods sells 5,000,000 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) $2.40
B) $4.42
C) $4.00
D) $2.00

Question 66

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 67

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

Question 68

Sutton 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 310,000 units per year,due to the high demand for the product.Variable costs are $2.40 per unit.Total fixed costs are $970,000 per year.The CEO will receive stock options if $100,000 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) $2.40 per unit
B) $5.85 per unit
C) $3.45 per unit
D) $5.21 per unit

Question 69

Electron Manufacturing is a price-taker.Electron 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 $780 per unit.The company has $3,200,000 in average assets,and the desired profit is a return of 4% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | l | l | } \hline \text { Sales volume } & 100,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 720 & \text { per unit } \\\hline \text { Fixed costs } & \$ 13,000,000 & \text { per year } \\\hline\end{array}$$ If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the profit target?

A) $7,128,000
B) $13,000,000
C) $7,000,000
D) $13,128,000

Question 70

Ignite Products 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 $700 per unit.The company has $3,000,000 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: $$\begin{array} { | l | l | l | } \hline \text { Sales volume } & 120,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 660 & \text { per unit } \\\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \\\hline\end{array}$$ If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the desired target?

A) $240,000
B) $14,000,000
C) $9,440,000
D) $79,200,000

Question 71

Conquest,Inc.produces a special kind of light-weight,recreational vehicle that has a unique design.It allows the company to follow a cost-plus pricing strategy.It has $9,000,000 of average assets,and the desired profit is a 10% return on assets.Assume all products produced are sold.Additional data are as follows: $$\begin{array} { | l | l | l | } \hline \text { Sales volume } & 1000 & \text { units per year } \\\hline \text { Variable costs } & \$ 1000 & \text { per unit } \\\hline \text { Fixed costs } & \$ 3,500,000 & \text { per year } \\\hline\end{array}$$ Using the cost-plus pricing approach,what should be the sales price per unit?

A) $5400
B) $11,000
C) $1100
D) $1000

Question 72

Murong Enterprises 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 profit if the cost-plus pricing method is used? (Round your answer to nearest cent.)Show all computations.

Question 73

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

Question 74

Dynamo Company 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 75

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

Question 76

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: $$\begin{array} { | l | r | c | } \hline \text { No. of units produced and sold } & 600,000 & \text { units } \\\hline \text { Sales price } & \$ 40 & \text { per unit } \\\hline \text { Variable manufacturing costs } & \$ 20 & \text { per unit } \\\hline \text { Fixed manufacturing costs } & \$ 800,000 & \text { per year } \\\hline \text { Variable selling and administrative costs } & \$ 5 & \text { per unit } \\\hline \text { Fixed selling and administrative costs } & \$ 600,000 & \text { per year } \\\hline\end{array}$$ Marionette receives an offer to produce 5000 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) $15
B) $40
C) $20
D) $25

Question 77

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 ratio 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 78

Terra Potteryworks is a price-setter that uses the cost-plus pricing approach for pricing its products.These products are unique,artistically designed architectural decorations.Terra produces and sells 6100 units per year,which represent maximum capacity.Variable costs are $330 per unit.Total fixed costs are $910,000 per year.The CEO has a target of $60,000 in operating income,which he wants to achieve by year-end.Using the cost-plus pricing method,what sales price per unit should Terra use? (Round your answer to the nearest cent.)

A) $339.84 per unit
B) $479.18 per unit
C) $489.02 per unit
D) $159.02 per unit

Question 79

Foundations,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 fixed costs.To make this decision,the management of Foundations 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 80

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