25. Allen\'s Ark sells 2000 canoes per year at a sales price of $450 per unit. A

Question

25.

Allen's Ark sells 2000 canoes per year at a sales price of $450 per unit. Allen's sells in a highly competitive market and uses target pricing. The company has calculated its target full product cost at $740,000 per year. Total variable costs are $330,000 per year and cannot be reduced. Assume all products produced are sold. What are the target fixed costs?

Select one:

A. $330,000

B. $160,000

C. $900,000

D. $410,000

27.

Protector, Inc. has two product lines—batting helmets and football helmets. The income statement data for the most recent year is as follows:

Assuming the football helmets line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $100,000 per year, how will operating income be affected?

Select one:

A. Operating income will decrease by $40,000.

B. Operating income will increase by $40,000.

C. Operating income will decrease by $60,000.

D. Operating income will increase by $60,000.

29.

Fastec Automobile Company fabricates automobiles. Each vehicle includes one transfer case, which is currently made in-house. Details of the transfer case fabrication are as follows:

A Korean factory has offered to supply Fastec with ready-made units for a price of $13 per transfer case. Assume that Fastec's fixed costs are unavoidable, but that Fastec could use the vacated production facilities to earn an additional $9500 of profit per month. If Fastec decides to outsource, monthly operating income will ________.

Select one:

A. decrease by $26,600

B. increase by $9500

C. decrease by $16,000

D. increase by $3200

? Total Batting Helmets Football Helmets Sales revenue $930,000 $600,000 $330,000 Variable costs (540,000) (250,000) (290,000) Contribution margin $390,000 $350,000 $40,000 Fixed costs (160,000) (70,000) (90,000) Operating income (loss) $230,000 $280,000 $(50,000)

Explanation / Answer

25. Answer is option D i.e. $410,000, since the target full product cost is $740,000 and Total variable cost is $330,000. Therefore Fixed cost will be $410,000.

27. Answer is option D i.e. Operating income will increase by $60,000, since the football helmets line will be droped and the line is rented for $100,000 per year and fixed cost remain the same, then the profit would be $10,000. Therefore Loss of $50,000 will not be anymore.  

29. 27. Answer is option D i.e. Monthly Operating income will increase by $3,200, since earlier the variable cost was $5,400 now after outsourcing the variable cost will be ($11,700 less monthly rent of $9,500) i.e. $2,200. Therefore operating profit will increase by $3,200.

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