Question 1

A company sells two products with information as follows: $$\begin{array} { | l | r | r | } 
\hline & \mathrm { A } & \mathrm { B } \
\hline \text { Sales price per unit } & \$ 12.00 & \$ 24.00 \
\hline \text { Variable cost per unit } & \$ 10.00 & \$ 12.00 \
\hline
\end{array}$$ 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 6,000 machine hours available per month.The company can sell up to 18,000 units of product A per month,and up to 3,000 units of product B for the month.What is the optimum product mix to maximize company's operating income?

Accepted Answer

The contribution margin per machine hour is higher for product B ($24 - $12 = $12 per unit, 2 units per hour = $24 per hour) than for product A ($12 - $10 = $2 per unit, 4 units per hour = $8 per hour). Therefore, the company should produce the maximum units of B (3,000 units) and use the remaining machine hours for A (18,000 units).

Question 2

Tosh Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
 $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000 & \text { per month } \
\hline
\end{array}$$ A factory in Indonesia has offered to supply Tosh with ready-made units for a cost of $10 each.Assume that Tosh's fixed costs are unavoidable,but the company could use the vacated production facilities to earn an additional $5,500 of profit per month.In order to maximize operating income,Tosh should outsource.

Accepted Answer

By outsourcing, Tosh can save on variable costs and earn additional profit from using the vacated facilities, which outweighs the fixed costs that are unavoidable.

Question 3

Tonix Corporation produces two products,P and Q.P sells for $7.00 per unit; Q sells for $6.00 per unit.Variable costs for P and Q are $3.00 and $5.00,respectively.There are 3,300 direct labor hours per month available for producing the two products.Product P requires 2.00 direct labor hours per unit,and product Q requires 2.00 direct labor hours per unit.The company can sell up to 300 units of each kind per month.What is the maximum monthly contribution margin that Todd can generate under the circumstances? (Round to nearest whole dollar. )

Accepted Answer

The contribution margin per unit for P is $4 ($7 - $3) and for Q is $1 ($6 - $5). With 3,300 labor hours available and each product requiring 2 hours per unit, a maximum of 1,650 units can be produced. However, sales are limited to 300 units each. Therefore, the maximum contribution margin is (300 units of P * $4) + (300 units of Q * $1) = $1,200 + $300 = $1,500.

Question 4

Doro Fill Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
 $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 6 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000 & \text { per month } \
\hline
\end{array}$$ A factory in Indonesia has offered to supply Doro Fill with ready-made units for a cost of $12 each.Assume that Doro Fill's fixed costs are unavoidable and that the company will not be able to use the excess capacity in any profitable manner.In order to maximize operating income,Doro Fill should not outsource.

Accepted Answer

The total cost of making the harnesses in-house is $17,800 ($4,800 variable + $13,000 fixed), while outsourcing would cost $9,600. However, since fixed costs are unavoidable, the relevant cost for decision-making is the variable cost, which is lower than the outsourcing cost. Therefore, Doro Fill should not outsource.

Question 5

Isabelle's Furniture manufactures a small table and a large table.The small table sells for $700,has variable costs of $560 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1,600,has variable costs of $970,and takes eight direct labor hours to manufacture.The company has a maximum of 5,000 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?

Accepted Answer

B)
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Question 6

Handbags R Us sells designer and everyday priced handbags.Top management is deciding which product line to emphasize.Company accountants have provided the following data:
 $$\begin{array} { l r r } 
& \begin{array} { r } 
\text { Designer } \
\text { Per Item }
\end{array} & \begin{array} { r } 
\text { Everday } \
\text { Per Item }
\end{array} \
\text { Average Sales Price } & \$ 250 & \$ 95 \
\text { Average Variable Costs } & \underline { 100 } & \underline { 25 } \
\text { Average Contribution Margin } & 150 & 70 \
\text { Average Fixed Costs (allocated) } & \underline { 30 } & \underline { 10 } \
\text { Average Operating Income } &\underline {  \$ 120 }&\underline {  \$ 60}
\end{array}$$ The store has 5,000 square feet of floor space.If the company emphasizes everyday handbags,it can display 1,000 items in the store.If the store emphasizes designer handbags,it can display only 680 items,These numbers are also the average monthly sales in units.
Prepare an analysis to show which product the company should emphasize.Explain your answer.(Do not round intermediate answers. )

Accepted Answer

The answer of Handbags R Us sells designer and everyday...

Question 7

________ refers to the benefit given up by choosing an alternative course of action.

Accepted Answer

Opportunity cost refers to the benefit that could have been gained by choosing the next best alternative. In other words, it's the cost of the opportunity that was foregone. This concept is crucial in decision-making because it helps to determine the true cost of a decision or action. Sunk cost, on the other hand, refers to costs that have already been incurred and cannot be recovered. Relevant costs are costs that are pertinent to a specific decision, while irrelevant costs are costs that do not impact a decision.

Question 8

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

Accepted Answer

The potential uses of the facilities that are currently used to manufacture the component are relevant because they represent an opportunity cost. If the facilities could be used for another purpose that generates revenue, this potential income would be foregone if the company continues to manufacture the component in-house.

Question 9

Valuable Electronics uses a standard part in the manufacture of different types of radios.The total cost of producing 42,000 parts is $100,000,which includes fixed costs of $40,000 and variable costs of $60,000.The company can buy the part from an outside supplier for $1 per unit and avoid 20% of the fixed costs.Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $16,000.If Valuable outsources,what will be the effect on operating income?

Accepted Answer

A)
 11ea86d6_829f_4227_92b6_e336c9140918_TB2804_00 Increase in operating income ($60,000 - $18,000)= $42,000

Question 10

Sand Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sales price } & \$ 20 & \$ 36 \
\hline \text { Variable costs } & \$ 5 & \$ 10 \
\hline \text { Machine hours required for one lamp } & 3 & 8 \
\hline
\end{array}$$ Total fixed costs are $42,000,and the machine hour capacity is 32,000 hours per year.The Lowell Lamp has the highest contribution margin per unit and also has the highest contribution margin per machine hour,so the company should focus sales on the Lowell Lamp.

Accepted Answer

The Lowell Lamp has a higher contribution margin per unit, but the Bedford Lamp has a higher contribution margin per machine hour, which is crucial given the machine hour constraint.

Question 11

Todd Corporation produces two products,P and Q.P sells for $7.50 per unit; Q sells for $6.50 per unit.Variable costs for P and Q are $4.00 and $6.00,respectively.There are 7,300 direct labor hours per month available for producing the two products.Product P requires 5.00 direct labor hours per unit,and product Q requires 5.00 direct labor hours per unit.The company can sell as many of either product as it can produce.What is the maximum monthly contribution margin that Todd can generate under the circumstances? (Round to nearest whole dollar. )

Accepted Answer

A)
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Question 12

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 sunk costs and therefore irrelevant to the decision of whether to continue manufacturing the component or to buy it from an outside supplier. The relevant factors are the quality and timeliness of the outside supplier's product and the alternative uses of Shasta Company's facilities.

Question 13

Owen's Furniture manufactures a small table and a large table.The small table sells for $900,has variable costs of $550 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1,600,has variable costs of $970,and takes eight direct labor hours to manufacture.The company has a maximum of 5,000 direct labor hours per month when operating at full capacity.If there are no constraints on sales of either of the products and the company could choose any proportions of product mix that they wanted,the maximum contribution margin that the company could earn will be ________.

Accepted Answer

D)
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Question 14

A company sells two products with information as follows: $$\begin{array} { | l | r | r | } 
\hline & \mathrm { A } & \mathrm { B } \
\hline \text { Sales price per unit } & \$ 12 & \$ 28 \
\hline \text { Variable cost per unit } & \$ 10 & \$ 12 \
\hline
\end{array}$$ 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 6,000 machine hours available per month.Assume there are no constraints on sales of either product,and the company can choose any product mix they wish.What is the maximum amount of contribution margin that the company could earn in a month?

Accepted Answer

The answer of A company sells two products with information...

Question 15

A company produces 300 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract cost of $34 each.Currently,the cost of producing circuits in-house includes variable costs of $28 per circuit and fixed costs of $5,000 per month.The controller says that they could outsource production of the circuit,if it reduces fixed cost more than $1,800 per month.Is this statement true or false?

Accepted Answer

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Question 16

In making product mix decisions under constraining factors,which of the following is the key to choosing the product type to be maximized?

Accepted Answer

When making product mix decisions under constraining factors, it is important to focus on the contribution margin per unit of the constraint. This is because the constraint in production limits the amount of units that can be produced, and therefore the product type that generates the highest contribution margin per unit of the constraint will yield the highest profitability. Choosing the product type that generates the highest revenue per unit or gross profit per unit using traditional costing may not necessarily lead to the highest profitability when there are constraining factors present.

Question 17

A company sells two products with information as follows:
 $$\begin{array} { | l | r | r | } 
\hline & \text { A } & \text { B } \
\hline \text { Sales price per unit } & \$ 15 & \$ 21 \
\hline \text { Variable cost per unit } & \$ 4 & \$ 13 \
\hline
\end{array}$$ Products are made by machine.Four units of product A can be made with three machine hours and five units of product B can be made with 0.7 machine hour.If there are no constraints on production or sales of either product,then the company should emphasize sales of product B.

Accepted Answer

The contribution margin per machine hour is higher for product B. Product A has a contribution margin of $11 per unit, and product B has a contribution margin of $8 per unit. However, product B requires less machine time per unit, making it more efficient in terms of machine hours.

Question 18

Superior Containers produces restaurant storage containers .The company makes two sizes of containers: regular (55 gallon)and large (100 gallon).Demand for the products is so high that Superior can sell as many of each size as it can produce.The company uses the same machinery to produce both sizes.The machinery can be run for only 2,500 hours per period.Superior can produce 20 regular containers every hour,whereas it can produce 8 large containers in the same amount of time.Fixed costs amount to $250,000 per period.Sales prices and variable costs are as follows:
 $\begin{array}{|l|r|r|}
\hline \text { Per Unit } &{\text { Regular }} & {\text { Large }} \
\hline \text { Sales price } & \$ 105 & \$ 225 \
\hline \text { Variable costs } & 28 & 42\\hline
\end{array}$ To maximize profits,how many of each size container should Superior produce?
Given this product mix,what will the company's operating income be?

Accepted Answer

The answer of Superior Containers produces restaurant storage containers .The...

Question 19

Smash Company has 4,000 machine hours available annually to manufacture badminton racquets.The following information is available for the two different racquets produced by Smash: $$\begin{array} { | l | r | } 
\hline \text { Pro } & \
 \hline \text { Unit sales price } & \$ 400 \
\hline \text { Unit variable costs } & \$ 100 \
\hline \text { Annual demand } & 2,000 \text { units } \
\hline \text { Machine time } & \text { 1.5 hours per unit } \ 
\hline \text { Mid } &  \
 \hline \text { Unit sales price } &\$100\
\hline \text { Unit variable costs } &\$70  \
\hline \text { Annual demand } &\text { 5,000 units }\
\hline& \text { 2 hours per unit } \
\hline
\end{array}$$ How many units of each racquet should be manufactured for the company to maximize its operating income?

Accepted Answer

To maximize operating income, prioritize the product with the highest contribution margin per machine hour. Pro racquets have a contribution margin of $300 and require 1.5 hours, giving $200 per hour. Mid racquets have a contribution margin of $30 and require 2 hours, giving $15 per hour. Produce 2,000 Pro units (3,000 hours) and use the remaining 1,000 hours for 500 Mid units.

Question 20

A company sells two products with information as follows: $$\begin{array} { | l | r | r | } 
\hline & \mathrm { A } & \mathrm { B } \
\hline \text { Sales price per unit } & \$ 11.00 & \$ 22.00 \
\hline \text { Variable cost per unit } & \$ 10.00 & \$ 12.00 \
\hline
\end{array}$$ 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 6,000 machine hours available per month.The company can sell up to 7,000 units of product A per month and up to 3,000 units of product B for the month.What is the maximum amount of contribution margin that the company could earn in a month given the stated constraints?

Accepted Answer

The contribution margin per unit for product A is $1 ($11 - $10), and for product B is $10 ($22 - $12). Maximizing contribution margin involves using machine hours efficiently. Product B provides a higher contribution margin per machine hour ($20) compared to product A ($4). With 6,000 machine hours, the company should produce the maximum possible units of product B (3,000 units using 1,500 hours), and then use the remaining 4,500 hours to produce product A (18,000 units). The total contribution margin is $48,000.

Quiz 25: Short-Term Business Decisions

________ refers to the benefit given up by choosing an alternative course of action.

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

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?

In making product mix decisions under constraining factors,which of the following is the key to choosing the product type to be maximized?