Short-Term Business Decisions Chapter 25 Exercises

Short-Term Business Decisions In-Class Exercises: Exercise No. Page E25-10 1564 Special Pricing Decisions

Short-Term Business Decisions Exercise E25-10: The Baseball Hall of Fame has approached Hobby-Cardz with a special order. The Hall of Fame wishes to purchase 57,000 basball card packs for a special promotional campaign and offers $0.41 per pack. Hobby-Cardz’s total production cost is as follows: Direct materials………………$ 0.13 Direct labor…………………… 0.06 Variable overhead…………… 0.12 Fixed overhead………………. 0.30 Total cost…………………….$ 0.61 Hobby-Cardz has enough excess capacity to handle the special order. Requirements: (1) Prepare a differential analysis to determine whether Hobby-Cardz should accept the special sales order. (2) Hall of Fame wants a special hologram for baseball cards. Hobby-Cardz will spend $5,900 to develop this hologram, which will be useless after completion of the special order. Should the special order be accepted if the special pricing remains unchanged at $ 0.41 per pack?

Short-Term Business Decisions Total cost………………..…$ 0.61 Less Fixed overhead…..… (0.30) Variable cost per pack…..$ 0.31 Fixed costs do not change and, therefore, are not relevant.

Short-Term Business Decisions Special order should be accepted because operating income will increase by $5,700.

Short-Term Business Decisions Change in Fixed Costs Special order should not be accepted because operating income will decrease by $ 200.

Short-Term Business Decisions In-Class Exercises: Exercise No. Page E25-13 1566 Dropping Product Line

Short-Term Business Decisions Exercise E25-13: Movie Street is considering dropping the DVD product line since it is currently incurring a lost of $41,000. Product line data is as follows: Sales Revenue………………………………… $ 127,000 Variable Costs….………………………..……. (96,000) Contribution Margin………………………….. $ 31,000 Fixed Costs…………………………………….. (72,000) Operating Income……………………………… $(41,000) Requirements: (1) Prepare a differential analysis to show whether Movie Street should drop DVD product line. (2) Will dropping DVDs add $41,000 to operating income?

Short-Term Business Decisions The DVD product line should not be dropped because operating income will decrease by $31,000.

Short-Term Business Decisions 1. Dropping the DVD line will not add $41,000 to operating income. 2. Since this product line has a positive contribution margin of $31,000, it helps cover fixed costs that will continue to be incurred, even if the company stops selling DVDs.

Short-Term Business Decisions In-Class Exercises: Exercise No. Page E25-15 1567 Product Mix Decisions

Short-Term Business Decisions Exercise E25-15: Lifemaster produces two types of excercise treadmills, regular and deluxe. Lifemaster can use all its available machine hours to produce either model. The two models are processed through the same production departments. Product data is as follows: Per Unit Data Deluxe Regular Selling Price………………………………… $1,020 ….. $ 560 Variable Costs….………………………..… 763 ….. 431 Fixed Manufacturing Overhead (*).……. 138 ….. 46 (*) allocated based on machine hours. Requirements: (1) What is the constraint? (2) Which model should Lifemaster produce? (Use fixed manufacturing overhead allocation to determine machine hours used for each product) (3) Compute the product mix that will maximize operating income.

Short-Term Business Decisions

Short-Term Business Decisions Highest Contribution Margin The Deluxe model is allocated three times the amount of fixed overhead allocated to the Regular model. (75% / 25% = 3). - - Highest Contribution Margin

Short-Term Business Decisions Since the Regular treadmill produces the highest contribution margin ($387) per machine hour, this product should be emphasized.

Short-Term Business Decisions In-Class Exercises: Exercise No. Page E25-18 1569 Outsourcing Decisions

Short-Term Business Decisions Exercise E25-18: Fiber Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit: Direct materials…………………$ 9.00 Direct labor……………………… 1.50 Variable overhead…………....... 5.00 Fixed overhead…………………. 9.00 Manufacturing product cost…. $24.50 Another company has offered to sell Fiber Systems the switch for $18.50 per unit. If Fiber Systems buys the switch from the outside supplier, the manufacturing facilities that will be idled cannot be used for any other purpose, yet none of the fixed cost are avoidable. Requirement: Prepare an outsourcing analysis to determine whether Fiber Systems should make or buy the switch.

Short-Term Business Decisions

Short-Term Business Decisions

Short-Term Business Decisions In-Class Exercises: Exercise No. Page E25-20 1569 Sell or Process Further

Short-Term Business Decisions Exercise E25-20: Naturalmaid processes organic milk into plain yogurt. Naturalmaid sells plain yogurt to hospitals, nursing homes, and restaurants in bulk, one-gallon containers. Each batch, processed at a cost of $800, yields 600 gallons of plain yogurt. Naturalmaid sells the one-gallon tubs for $7 each and spends $0.16 for each plastic tub. Naturalmaid has recently begun to reconsider its strategy and wonders if it would be more profitable to sell individual-size portions of fruited organic yogurt at local food stores. Naturalmaid could further process each batch of plain yogurt into 12,800 individual portions (3/4 cup each) of fruited yogurt. Naturalmaid would sell each individual portion for $0.54. Packaging would cost $0.07 per portion, and fruit would cost $0.11 per portion. Fixed costs would not change. Should Naturalmaid continue to sell only the gallon-size plain yogurt (sell as is) or convert the plain yogurt into individual-size portions of fruited yogurt (process further)? Why?

Short-Term Business Decisions

Short-Term Business Decisions