Question 1

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 impact the decision to increase the price to $280. Therefore, it is a relevant piece of information.

Question 2

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 3

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 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 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 5

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:
Variable costs per circuit = $26
Total variable costs = 100 x $26 = $2,600
Fixed costs = $5,000
Total cost = $2,600 + $5,000 = $7,600

If the company outsources the circuits, the variable cost per circuit will be $28, and fixed costs will be reduced to $2,500. Therefore, the new total cost will be:
Total variable costs = 100 x $28 = $2,800
Fixed costs = $2,500
Total cost = $2,800 + $2,500 = $5,300

The monthly operating income will be the revenue from selling 100 microwave ovens minus the cost of producing them:
Operating income = 100 x Revenue per oven - Total cost

Assuming that the selling price of a microwave oven remains the same, the new operating income will be:
Operating income = 100 x Revenue per oven - $5,300

Since the cost of producing a microwave oven has decreased, the operating income will increase. Therefore, the correct answer is A) Operating income will go up by $2,300.

Question 6

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 = $270,000Total savings: $1,260,000 + $330,000 + $270,000 = $1,860,000However, they will incur the following additional costs:Purchased components: $630 x 3,000 = $1,890,000Therefore, the net impact on operating income will be a decrease of $1,890,000 - $1,860,000 = $30,000.However, CM Manufacturing will also generate an additional $20,000 in contribution margin from the product they can manufacture with the released facilities. Therefore, the overall impact on operating income will be a decrease of $30,000 - $20,000 = $10,000.

Question 7

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: $$\begin{array} { | l | r |r| } \hline \text { Volume } & 1,200.00& \text { units per month } \ \hline \text { Variable cost per unit } & \$ 12.50 &\text { per unit } \ \hline \text { Fixed costs } & \$ 20,000.00& \text { per month } \ \hline \end{array}$$ 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 (1,200 units x $12.50) plus $20,000 fixed costs, totaling $35,000. Outsourcing costs $18,000 (1,200 units x $15). The difference is $3,000, so operating income decreases by $3,000.

Question 8

Which of the following phrases most accurately describe opportunity cost?

Accepted Answer

Opportunity cost refers to the benefit that is given up by choosing a certain course of action and not taking alternative actions. This cost is often hidden and is not always easily visible or measurable, but it is still an important concept to consider when making decisions. Options A, B, and D do not accurately describe opportunity cost.

Question 9

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 known as opportunity cost. It's the value of the next best alternative that one would have chosen if they had not made their current choice. Sunk cost refers to the cost that has already been incurred and cannot be recovered. Variable cost refers to costs that vary with changes in output level, and incremental cost refers to the cost of producing an additional unit of a good or service.

Question 10

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 11

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 12

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

Accepted Answer

Opportunity costs refer to the value of the next best alternative forgone in order to pursue a particular investment. Therefore, option A is the correct answer. Sunk costs are costs that have already been incurred and cannot be recovered. Relevant costs are costs that are directly relevant to a particular decision being made. Irrelevant costs are costs that are not relevant to a particular decision being made. However, neither sunk costs nor relevant costs refer to the value forgone by choosing one investment over another.

Question 13

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 14

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

B)
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Question 15

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

C)
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Question 16

Dong Fang Company fabricates inexpensive automobiles for sale to 3S1U1P1rdS1S1P0 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). The cost of outsourcing is $12,600 ($14*900) plus the reduced fixed costs of $9,000 ($14,000 - $5,000), totaling $21,600. The operating income will decrease by $400 ($21,600 - $21,200).

Question 17

Dong Fang Company fabricates inexpensive automobiles for sale to 3S1U1P1rdS1S1P0 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 cost of making in-house is $8 per unit, totaling $7,200 for 900 units. Outsourcing costs $12,600 (900 units x $14). The additional profit from using the facilities is $7,500. The net impact is $7,200 - $12,600 + $7,500 = $2,100 increase in income.

Question 18

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 irrelevant because they will be incurred whether the company continues to manufacture the component or buys it from an outside supplier. The decision should be based on factors such as quality, delivery time, and facility usage.

Question 19

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

D)
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Question 20

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...

Quiz 8: 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?

Which of the following phrases most accurately describe opportunity cost?

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

________ 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?