Question 1

Gnome Company is trying to decide whether to continue to manufacture a particular component or to buy the component from a supplier. Which of the following is relevant to this decision?

Accepted Answer

The answer of Gnome Company is trying to decide whether...

Question 2

Wing Company makes a special kind of racing tire. Variable costs are $320, and fixed costs are $35,000 per month. Wing sells 600 units per month at a price of $400. If Wing upgrades the quality of the tire, they believe they can boost the price to $450. If so, the variable cost will go up to $350 and the fixed costs will rise by 30%. The CEO wishes to increase his operational income by 20%. If the company decides to upgrade the product according to the data above, the CEO will reach his goal.

Accepted Answer

The answer of Wing Company makes a special kind of...

Question 3

A chemical company spent $530,000 to produce 150,000 gallons of a chemical, which can be sold for $5.20 per gallon. The chemical can be further processed into a weed killer which can be sold for $7.20 per gallon; it will cost $270,000 to process the chemical into a weed killer. Which of the following is true?

Accepted Answer

The answer of A chemical company spent $530,000 to produce...

Question 4

A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month. Assume the company could not reduce any fixed costs by outsourcing, and that there is no alternative use for the facilities presently being used to make circuits. How will it affect monthly operating income, if the company outsources?

Accepted Answer

The answer of A company produces 100 microwave ovens per...

Question 5

Dong Fang Company fabricates inexpensive automobiles for sale to 3^rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows: $$\begin{array} { | l | r | l | } \hline \text { Volume } & 900 & \text { units per month } \ \hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \ \hline \text { Fixed costs } & \$ 14,000 & \text { per month } \ \hline \end{array}$$ A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14 each. Assume that Dong Fang's fixed costs are unavoidable, but that Dong could use the vacated production facilities to earn an additional $7,500 of profit per month. What will be the impact on Dong Fang's monthly operating income, if Dong Fang decides to outsource?

Accepted Answer

The variable cost of making the harnesses in-house is $8 per unit, and the fixed cost is $14,000 per month. The total cost of making the harnesses in-house is therefore $8 * 900 + $14,000 = $22,600 per month. The cost of buying the harnesses from the Indonesian factory would be $14 * 900 = $12,600 per month. The difference between these two costs is $22,600 - $12,600 = $10,000 per month. However, Dong Fang could also earn an additional $7,500 of profit per month by using the vacated production facilities. Therefore, the total impact on Dong Fang's monthly operating income would be $10,000 + $7,500 = $17,500.

Question 6

Verdant Avionics makes aircraft instrumentation. Their basic navigation radio requires $120 in variable costs and requires $3,000 per month in fixed costs. If they process the radio further to enhance its functionality, it will require an additional $40 per unit of variable costs, and $300 per month in fixed costs. The marketing manager believes they would be able to boost their price of the radio from $260 to $280. In making this decision, the amount of additional fixed costs per month is a relevant piece of information.

Accepted Answer

The additional fixed costs of $300 per month for enhancing the functionality of the radio will affect the overall profitability and should be considered when making the decision to increase the price.

Question 7

Lightening Semiconductors produces 400,000 hi-tech computer chips per month. Each chip uses a component which Lightening makes in-house. The variable costs to make the component are $1.20 per unit, and the fixed costs run $1,200,000 per month. The company has been approached by a foreign producer who can supply the component, ready-made and with acceptable quality standards for $1.10 each. If the company chooses to outsource, it could reduce the fixed costs by 40%. The company does not have any other use for the facilities currently employed in making the component. What is the effect on operating income, if the company decides to outsource?

Accepted Answer

If Lightening Semiconductors chooses to outsource, it would save $0.10 per unit ($1.20 variable cost - $1.10 outsourcing cost).

Current total variable costs = $1.20 x 400,000 = $480,000
Total variable costs with outsourcing = $1.10 x 400,000 = $440,000
Total fixed costs with outsourcing = $1,200,000 x 0.6 = $720,000

Current operating income = (Revenue - Total variable costs - Total fixed costs) = (Revenue - $480,000 - $1,200,000) = Revenue - $1,680,000
New operating income with outsourcing = (Revenue - Total variable costs with outsourcing - Total fixed costs with outsourcing) = (Revenue - $440,000 - $720,000) = Revenue - $1,160,000

To find the effect on operating income, we need to compare the current operating income with the new operating income:

Revenue - $1,680,000 = Revenue - $1,160,000 + $520,000
$520,000 = $520,000

Therefore, operating income would go up by $520,000 if Lightening Semiconductors chooses to outsource.

Question 8

A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month. Assume the fixed costs are unavoidable, but that company could employ the vacated premises to earn rental income of $700 per month. How will it affect monthly operating income, if the company outsources?

Accepted Answer

The answer of A company produces 100 microwave ovens per...

Question 9

Fin Company fabricates inexpensive automobiles for sale to 3^rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows: $$\begin{array} { | l | c |r| } \hline \text { Volume } & 1,200.00& \text { units per month } \ \hline \text { Variable cost per unit } & \$ 12.50& \text { per unit } \ \hline \text { Fixed costs } & \$ 20,000.00 &\text { per month } \ \hline \end{array}$$ A factory in Indonesia has offered to supply Fin Company with ready-made units for a price of $15 each. Assume that Fin's fixed costs are unavoidable, and that Fin will not be able to use the excess capacity in any profitable manner. What will be the impact on Fin's monthly operating income, if Fin decides to outsource?

Accepted Answer

The cost of making in-house is $15,000 (variable) + $20,000 (fixed) = $35,000. Outsourcing costs $18,000. The difference is $3,000, so income decreases by $3,000.

Question 10

CM Manufacturing has provided the following unit costs pertaining to a component they manufacture and use in the production of one of their main products: $$\begin{array} { | l | r | } 
\hline \text { Direct materials } & \$ 420 \
\hline \text { Direct labor (variable) } & 110 \
\hline \text { Variable manufacturing overhead } & 90 \
\hline \text { Fixed manufacturing overhead } & 35 \
\hline
\end{array}$$ A supplier has offered to provide the component to CM manufacturing for $630 per unit. If CM Manufacturing acquire the component from the supplier, they could use the released facilities to manufacture a product which would generate contribution margin of $20,000 annually. Assuming that CM Manufacturing needs 3,000 components annually and the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if the company outsources?

Accepted Answer

If CM Manufacturing outsources the component, they will save the following costs:Direct materials: $420 x 3,000 = $1,260,000Direct labor: $110 x 3,000 = $330,000Variable manufacturing overhead: $90 x 3,000 = $270,000Fixed manufacturing overhead: $35 x 3,000 = $105,000Total savings: $1,260,000 + $330,000 + $270,000 + $105,000 = $1,965,000However, they will incur the following costs:Purchased components: $630 x 3,000 = $1,890,000Therefore, the net savings from outsourcing will be $1,965,000 - $1,890,000 = $75,000.In addition, CM Manufacturing will generate an additional $20,000 in contribution margin from the product they manufacture with the released facilities.Therefore, the total impact on operating income from outsourcing will be $75,000 + $20,000 = $95,000.Since the current operating income is not provided, we cannot determine the exact amount by which operating income will increase. However, we can conclude that operating income will increase by at least $95,000.

Question 11

The benefit foregone by not choosing an alternative course of action is referred to as a(n):

Accepted Answer

The benefit foregone by not choosing an alternative course of action is referred to as an opportunity cost. Sunk cost refers to costs that have already been incurred and cannot be recovered, variable cost refers to costs that vary with the level of production, and incremental cost refers to the change in cost when an additional unit is produced.

Question 12

A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month. Assume the company could eliminate all fixed costs by outsourcing, and that there is no alternative use for the facilities presently being used to make circuits. How will it affect monthly operating income, if the company outsources?

Accepted Answer

Currently, the company is spending a total of ($26 variable cost per circuit x 100 circuits per month) + $5,000 fixed cost per month = $7,600 per month to produce circuits in-house.

If the company outsources, they will pay $28 per circuit for 100 circuits per month = $2,800 per month.

Therefore, the company's monthly operating income will increase by ($7,600 - $2,800) = $4,800 if they outsource.

Question 13

Which of the following phrases most accurately describe opportunity cost?

Accepted Answer

Opportunity cost refers to the benefit that is given up by not choosing an alternative course of action. It is the cost of the next best alternative that is forgone. Option A is incorrect as it refers to the cost incurred to gain an opportunity, not the opportunity cost. Option B is incorrect as it refers to the benefit gained, not the opportunity cost. Option D is incorrect as it refers to costs that have been incurred in the past, which do not relate to opportunity cost.

Question 14

Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures media center in-house, but is considering the possibility of outsourcing that function, in order to close down some of their facilities and reduce the administrative costs. At present, the variable cost per unit is $275 and the fixed costs are $39,000 per month. Assuming that if they outsource, and the fixed costs could be eliminated entirely, at what contract rate would outsourcing pay off for Seven Seas? Round to nearest whole dollar.

Accepted Answer

The answer of Seven Seas Company manufactures 100 luxury yachts...

Question 15

________ refer to the value forgone in order to make one particular investment instead of another.

Accepted Answer

Opportunity costs refer to the value forgone in order to make one particular investment instead of another. Sunk costs are costs that have already been incurred and cannot be recovered. Relevant and irrelevant costs refer to costs that are important or not important in the decision-making process.

Question 16

A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month. Assume the company could cut fixed costs in half by outsourcing, and that there is no alternative use for the facilities presently being used to make circuits. How will it affect monthly operating income, if the company outsources?

Accepted Answer

Currently, the cost of producing 100 circuits in-house is $5,000 + ($26 x 100) = $7,600 per month.
If the company outsources, the cost will be $28 x 100 = $2,800 per month.

If the company outsources, it would save $7,600 – $2,800 = $4,800 per month on circuit production costs. Since the fixed costs would be cut in half, the total monthly operating costs would be reduced by ($5,000 / 2) = $2,500. Therefore, the monthly operating income would increase by $4,800 – $2,500 = $2,300.

Question 17

Shasta Company is trying to decide whether to continue to manufacture a particular component or to buy the component from an outside supplier. Which of the following is irrelevant with respect to this decision?

Accepted Answer

The unavoidable fixed manufacturing costs associated with the manufacture of the component are not relevant to the decision of whether to continue manufacturing the component or to buy it from an outside supplier. The decision should be based on factors such as quality, delivery time, cost, and the opportunity cost of using facilities for other purposes.

Question 18

Lightening Semiconductors produces 400,000 hi-tech computer chips per month. Each chip uses a component which Lightening makes in-house. The variable costs to make the component are $1.20 per unit, and the fixed costs run $1,200,000 per month. The company has been approached by a foreign producer who can supply the component, ready-made and with acceptable quality standards for $1.10 each. The fixed costs are unavoidable, and Lightening would have no other use for the facilities currently employed in making the component. What is the effect on operating income, if the company decides to outsource?

Accepted Answer

The variable cost savings is the difference in cost per unit between making in-house ($1.20) and outsourcing ($1.10), which is $0.10 per unit. Multiplied by the 400,000 chips produced per month, this equals a monthly savings of $40,000. Therefore, the company can save $40,000 per month in costs by outsourcing the component.

Question 19

Valuable Electronics uses a standard part in the manufacture of different types of radios manufactured by it The total cost of producing 25,000 parts is $95,000, which includes fixed costs of $40,000 and variable costs of $55,000. The company can buy the part from an outside supplier for $3 per unit, and avoid 20% of the fixed costs. Assume that free factory space can be used to manufacture another product that can earn profit of $15,000. If Valuable outsources, what will be the effect on operating income?

Accepted Answer

The answer of Valuable Electronics uses a standard part in...

Question 20

Dong Fang Company fabricates inexpensive automobiles for sale to 3^rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows: $$\begin{array} { | l | r | l | } \hline \text { Volume } & 900 & \text { units per month } \ \hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \ \hline \text { Fixed costs } & \$ 14,000 & \text { per month } \ \hline \end{array}$$ A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14 each. Assume that Dong Fang's fixed costs could be reduced by $5,000 if they outsource, and that Dong Fang will not be able to use the excess capacity in any profitable manner. What will be the impact on Dong Fang's monthly operating income, if Dong Fang decides to outsource?

Accepted Answer

The cost of making in-house is $21,200 ($8*900 + $14,000). Outsourcing costs $12,600 ($14*900) with reduced fixed costs of $9,000 ($14,000 - $5,000). The total cost when outsourcing is $21,600, so the operating income decreases by $400 ($21,600 - $21,200).

Quiz 25: Short-Term Business Decisions

Gnome Company is trying to decide whether to continue to manufacture a particular component or to buy the component from a supplier. Which of the following is relevant to this decision?

The benefit foregone by not choosing an alternative course of action is referred to as a(n) :

Which of the following phrases most accurately describe opportunity cost?

________ refer to the value forgone in order to make one particular investment instead of another.

Shasta Company is trying to decide whether to continue to manufacture a particular component or to buy the component from an outside supplier. Which of the following is irrelevant with respect to this decision?