Question 1

Lightning Semiconductors produces 200,000 hi-tech computer chips per month.Each chip uses a component that Lightning makes in-house.The variable costs to make the component are $1.20 per unit,and the fixed costs are $1,300,000 per month.The company has been approached by a foreign producer who can supply the component,within acceptable quality standards,for $1.10 each.The fixed costs are unavoidable,and Lightning would have no other use for the facilities currently employed in making the component.What would be the effect on operating income if the company decides to outsource?

Accepted Answer

C)
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Question 2

Sicon 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 Sicon 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.Sicon 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:
  
To maximize profits,how many of each size container should Sicon produce?
Given this product mix,what will the company's operating income be?

Accepted Answer

The answer of Sicon Containers produces restaurant storage containers.The company...

Question 3

Hadlee Corporation produces two products,P and Q.P sells for $9.50 per unit;Q sells for $5.50 per unit.Variable costs for P and Q are $5.00 and $3.00,respectively.There are 3300 direct labor hours per month available for producing the two products.Product P requires 3.00 direct labor hours per unit,and product Q requires 5.00 direct labor hours per unit.The company can sell up to 900 units of each kind per month.What is the maximum monthly contribution margin that Hadlee can generate under the circumstances? (Round to nearest whole dollar. )

Accepted Answer

C)
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Question 4

A company sells two products with information as follows:

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 4000 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

C)
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Question 5

Modern Living 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 $1500,has variable costs of $980,and takes eight direct labor hours to manufacture.The company has a maximum of 5000 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 6

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

Accepted Answer

Opportunity cost refers to the benefit given up by choosing an alternative course of action. It is the cost of the next best alternative foregone. Therefore, option A is the correct answer.

Question 7

Roseland 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 relevant to the decision, as they are a cost that must be considered in the determination of whether it is more cost-effective to manufacture the component or to buy it from an outside supplier. The quality of the component, the outside supplier's ability to deliver the component on a timely basis, and the alternative uses of the facilities are all relevant factors in the decision-making process.

Question 8

Cheong Automobile Company fabricates automobiles.Each vehicle includes one water pump,which is currently made in-house.Details of the water pump assembly are as follows:

An Indonesian factory has offered to supply Cheong Automobile Company with ready-made units for a cost of $16 for each water pump.Assume that Cheong's fixed costs are unavoidable and that Cheong will not be able to use the excess capacity in any profitable manner.If Cheong decides to outsource,monthly operating income will ________.

Accepted Answer

D)
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Question 9

An opportunity cost is ________.

Accepted Answer

Opportunity cost is the benefit given up by choosing an alternative course of action. It is the value of the next best alternative that has to be forgone in order to pursue a certain action. Therefore, the best choice is C.

Question 10

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 11

Sanchez Semiconductors produces 200,000 high-tech computer chips per month.Each chip uses a component that Sanchez makes in-house.The variable costs to make the component are $1.40 per unit,and the fixed costs are $1,100,000 per month.The company has been approached by a foreign producer who can supply the component,within acceptable quality standards,for $1.10 each.If the company chooses to outsource,fixed costs can be reduced by 30%.There are no other uses for the facilities currently employed in making the component.What would be the effect on operating income,if the company decides to outsource?

Accepted Answer

B)
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Question 12

Carver Company manufactures a component used in the production of one of its main products.The following cost information is available:

A supplier has offered to sell the component to Carver for $650 per unit.If Carver buys the component from the supplier,the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually.Assuming that Carver needs 3000 components annually and that the fixed manufacturing overhead is unavoidable,what would be the impact on operating income if Carver outsources?

Accepted Answer

A)
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Question 13

A company sells two products with information as follows:

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 3000 machine hours available per month.The company can sell up to 18,000 units of product A per month,and up to 3000 units of product B for the month.What is the optimum product mix to maximize the company's operating income?

Accepted Answer

B)
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Question 14

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 $6,000 per month.The controller says that they should outsource production of the circuit,if it reduces fixed cost more than $1,800 per month.Is this statement true or false?

Accepted Answer

Fixed cost currently incurred in producing circuits in-house = $6,000 per month
If outsourcing reduces fixed cost by more than $1,800 per month, then the new fixed cost incurred will be less than $4,200 ($6,000 - $1,800)
Contract cost per circuit = $34
Variable cost per circuit currently incurred in producing circuits in-house = $28
Contribution margin per circuit = $34 - $28 = $6
Break-even point in number of circuits = fixed cost ÷ contribution margin per circuit = $6,000 ÷ $6 = 1,000 circuits
If the company outsources the circuits at a cost of $34 each, it will incur a total cost of $10,200 (300 circuits x $34). 
On the other hand, if the company produces the circuits in-house, it will incur a total cost of $9,600 (300 circuits x $32). 
Therefore, outsourcing will increase the company's total cost by $600 per month (i.e. $10,200 - $9,600). 
Since outsourcing does not reduce fixed cost by more than $1,800 per month, the controller's statement is false.

Question 15

A company sells two products with information as follows:

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 3000 machine hours available per month.The company can sell up to 17,000 units of product A per month and up to 3000 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

B)
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Question 16

Ultimate Travel Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
  
A factory in India has offered to supply Ultimate Travel with ready-made units for a cost of $7 each.Assume that Ultimate Travel's fixed costs are unavoidable,but the company could use the vacated production facilities to earn an additional $5,000 of profit per month.In order to maximize operating income,Ultimate Travel should outsource.

Accepted Answer

The cost of making the wiring harness in-house is not given, but it is mentioned that the factory in India is offering to supply it for $7 each. Therefore, it is safe to assume that outsourcing will save some costs for Ultimate Travel. Additionally, by outsourcing, Ultimate Travel can use the vacated production facilities to earn an additional $5,000 of profit per month. As a result, outsourcing will increase Ultimate Travel's operating income and should be the preferred option.

Question 17

Woodstock Furniture manufactures a small table and a large table.The small table sells for $800,has variable costs of $580 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1500,has variable costs of $970,and takes eight direct labor hours to manufacture.The company has a maximum of 5000 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 18

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:
  
A factory in Indonesia has offered to supply Doro Fill with ready-made units for a cost of $10 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

11ea86ed_2b03_0286_8b27_e597cb041776_TB3056_00 As the cost of production in-house is less than outsourcing,the company should produce in-house to maximize operating income.

Question 19

An outsourcing decision is a choice made by management about whether to make a component internally or buy it from an outside source.

Accepted Answer

An outsourcing decision is indeed a choice made by management about whether to make a component internally or buy it from an outside source.

Question 20

Voltaic Electronics uses a standard part in the manufacture of different types of radios.The total cost of producing 36,000 parts is $110,000,which includes fixed costs of $50,000 and variable costs of $60,000.The company can buy the part from an outside supplier for $1 per unit and avoid 30% 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 Voltaic outsources,what will be the effect on operating income?

Accepted Answer

11ea86ed_2b03_77b8_8b27_a76cda4de663_TB3056_00 Increase in operating income ($60,000 - $5000)= $55,000

Quiz 25: Short-Term Business Decisions

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

Roseland 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?

An opportunity cost is ________.

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?

An outsourcing decision is a choice made by management about whether to make a component internally or buy it from an outside source.