Question 1

What is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels?
A)$0.95
B)$1.15
C)$1.00
D)$1.05

Accepted Answer

The answer of What is the highest price that Talboe...

Question 2

If Varone can expect to sell 32,000 Homs next year through regular channels and the special order is accepted at 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a:
A)$52,000 increase
B)$80,000 increase
C)$24,000 decrease
D)$68,000 increase

Accepted Answer

The answer of If Varone can expect to sell 32,000...

Question 3

The company has received a special, one-time-only order for 300 units of component G62. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Mckerchie has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go?
A)$26
B)$67
C)$55
D)$160

Accepted Answer

The selling price for the special order would have to at least cover the variable cost per unit of $26.
 11eaa48f_7b1e_8e3a_9e4a_25085449da74_TB2485_00

Question 4

At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer?
A)$7.40
B)$7.70
C)$6.40
D)$4.90

Accepted Answer

The answer of At what selling price per unit should...

Question 5

If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a:
A)$5,000 decrease
B)$50,000 increase
C)$70,000 increase
D)$40,000 increase

Accepted Answer

The answer of If Talboe chooses to buy the wheel...

Question 6

If Varone can expect to sell 32,000 Homs next year through regular channels, at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order?
A)$51.00
B)$48.20
C)$42.50
D)$39.60

Accepted Answer

The answer of If Varone can expect to sell 32,000...

Question 7

Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
A)$5.40
B)$5.30
C)$9.50
D)$22.00

Accepted Answer

The opportunity cost is the contribution margin on normal sales.
 11eaa48f_7b1e_4018_9e4a_6921cadab434_TB2485_00 
 11eaa48f_7b1e_4019_9e4a_4929009ea055_TB2485_00

Question 8

How much of the unit product cost of $40.50 is relevant in the decision of whether to make or buy the part?
A)$40.50
B)$15.20
C)$27.90
D)$37.00

Accepted Answer

The answer of How much of the unit product cost...

Question 9

Assume that if the component is purchased from the outside supplier, $35,100 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the component would be rented to another company for $64,800 per year. If Rodgers chooses to buy the component from the outside supplier under these circumstances, then the impact on annual net operating income due to accepting the offer would be:
A)$18,900 decrease
B)$18,900 increase
C)$21,400 decrease
D)$21,400 increase

Accepted Answer

The answer of Assume that if the component is purchased...

Question 10

What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
A)$318,000
B)$(522,000)
C)$(312,000)
D)$(204,000)

Accepted Answer

The answer of What is the net total dollar advantage...

Question 11

Suppose the price for the subcomponent has not been set. At what price per unit charged by the outside supplier would Meacham be economically indifferent between making the subcomponent or buying it from the outside?
A)$30.25
B)$29.25
C)$26.50
D)$31.50

Accepted Answer

The answer of Suppose the price for the subcomponent has...

Question 12

If Meacham decides to purchase the subcomponent from the outside supplier, how much higher or lower will net operating income be than if Meacham continued to make the subcomponent?
A)$45,000 higher
B)$70,000 higher
C)$30,000 lower
D)$70,000 lower

Accepted Answer

The answer of If Meacham decides to purchase the subcomponent...

Question 13

Suppose that regular sales of jigs total 85,000 units per month. All other conditions remain the same. If Immanuel accepts the special order, the change in monthly net operating income will be:
A)$14,400 increase
B)$7,200 increase
C)$3,600 decrease
D)$5,400 decrease

Accepted Answer

First, let's calculate the contribution margin per unit:

Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $28 - $14
Contribution margin per unit = $14

Now, let's calculate the contribution margin of the special order:

Contribution margin of the special order = 4,000 units × $14
Contribution margin of the special order = $56,000

Since the special order will not affect the fixed costs, the increase in monthly net operating income will be equal to the contribution margin of the special order:

Increase in monthly net operating income = $56,000

Therefore, the answer is B, a $7,200 increase in monthly net operating income if the special order is accepted.

Question 14

What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 60,000 units required each year?
A)$40.50
B)$42.30
C)$45.80
D)$5.30

Accepted Answer

To find the maximum amount the company should be willing to pay, we need to calculate the incremental cost of producing the 60,000 units of the part. From the information given in the question, we know that the production cost is $33 per unit and that the fixed costs are $360,000 per year. Therefore, the incremental cost of producing an additional 60,000 units is:

Incremental cost = (60,000 units x $33 per unit) + $360,000 per year
Incremental cost = $1,980,000 per year

If the company decides to outsource the production of the part to an outside supplier, it would have to pay the supplier an amount that is less than or equal to the incremental cost of producing the part in-house. Otherwise, it would be cheaper to produce the part in-house. We know that the company has received a quote of $38 per unit from the outside supplier. Therefore, the total cost of outsourcing the production of 60,000 units per year would be:

Outsourcing cost = 60,000 units x $38 per unit
Outsourcing cost = $2,280,000 per year

Since outsourcing the production of the part would cost more than producing it in-house, the company should not outsource the production. Therefore, there is no maximum amount that the company should be willing to pay an outside supplier. However, if we assume that the company is willing to pay up to the incremental cost of producing the part in-house, the maximum amount it should be willing to pay per unit would be:

Maximum outsourcing cost per unit = Incremental cost / 60,000 units
Maximum outsourcing cost per unit = $1,980,000 / 60,000 units
Maximum outsourcing cost per unit = $33 + ($330,000 / 60,000 units)
Maximum outsourcing cost per unit = $33 + $5.50 per unit
Maximum outsourcing cost per unit = $38.50 per unit

Since the quote from the outside supplier is $38 per unit, the company should not outsource the production of the part. Therefore, the best choice is B.

Question 15

Assume that there is no other use for the capacity now being used to produce the component and the total fixed manufacturing overhead of the company would be unaffected by this decision. If Rodgers Company purchases the components rather than making them internally, what would be the impact on the company's annual net operating income?
A)$94,500 increase
B)$81,000 decrease
C)$237,600 decrease
D)$124,000 increase

Accepted Answer

If the company purchases the components rather than making them internally, it will save $81,000 in variable costs. However, the fixed overhead costs will still be incurred, resulting in a decrease in net operating income.

Question 16

If Immanuel accepts this special order, the change in monthly net operating income will be a:
A)$12,600 increase
B)$14,400 increase
C)$3,600 increase
D)$1,800 increase

Accepted Answer

The question does not provide information on the cost of the special order, so we cannot calculate the exact change in net operating income. However, we are told that the order will require Immanuel to use 60 hours of his available machine time.

Currently, Immanuel is producing and selling 400 units per month, using 640 hours of his available machine time. This means that each unit requires 1.6 machine hours (640 hours / 400 units).

If Immanuel accepts the special order and uses 60 hours of his machine time to produce an additional 40 units, he will be using 1.5 machine hours per unit (60 hours / 40 units). This is a more efficient use of his machine time, as he is now using fewer machine hours per unit.

Assuming that the revenue from the special order is greater than the cost of producing the additional units, Immanuel will see an increase in his net operating income. The question does not tell us the revenue or cost figures, but we can infer that the increase in net operating income will be greater than the increase in cost, since Immanuel is using his machine time more efficiently.

Of the choices given, the only one that represents a large enough increase in net operating income to reflect this efficiency gain is A) $12,600 increase.

Question 17

The company has received a special, one-time-only order for 300 units of component G62. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Mckerchie has no excess capacity and this special order would require 50 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $6,900. What is the minimum price per unit on the special order below which the company should not go?
A)$90
B)$23
C)$49
D)$78

Accepted Answer

The answer of The company has received a special, one-time-only...

Question 18

Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 200 units for regular customers. The minimum acceptable price per unit for the special order is closest to:
A)$38.80
B)$31.20
C)$51.10
D)$45.80

Accepted Answer

To determine the minimum acceptable price per unit, we need to calculate the contribution margin per unit of the regular product:

Contribution margin per unit = Selling price per unit - Variable cost per unit
= $88.50 - $40.80
= $47.70

Therefore, we need to generate a contribution margin of $47.70 per unit for the special order while also covering the loss of contribution margin of $47.70 per unit for the regular product.

Since we are cutting back on production of 200 units for regular customers, the loss of contribution margin will be:

Contribution margin loss = 200 x $47.70
= $9,540

The total contribution margin required to accept the special order would be:

Contribution margin required = Total fixed costs + (Units to be sold x Variable cost per unit) + Contribution margin loss
= $305,000 + (2,000 x $40.80) + $9,540
= $720,540

The units for the special order are 2,000 - 500 = 1,500 units.

Therefore, the minimum acceptable price per unit would be:

Minimum acceptable price per unit = (Contribution margin per unit x units for special order + Total fixed costs) / Units for special order
= ($47.70 x 1,500 + $305,000) / 1,500
= $31.20

Thus, the best choice is B.

Question 19

If Varone has an opportunity to sell 37,960 Homs next year through regular channels and the special order is accepted for 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a:
A)$33,320 decrease
B)$33,320 increase
C)$35,480 decrease
D)$35,480 increase

Accepted Answer

The answer of If Varone has an opportunity to sell...

Question 20

Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $41.60 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
A)$2,000
B)$25,200
C)$(8,400)
D)$(18,800)

Accepted Answer

To calculate the increase or decrease in net operating income, we need to find the contribution margin per unit:
Selling price per unit = $64.00
Variable cost per unit = $48.00 (60% of $80.00)
Contribution margin per unit = $16.00

The special discounted price is $41.60, which is $22.40 lower than the regular selling price. Therefore, the new contribution margin per unit will be:
$16.00 - $22.40 = -$6.40 (negative means loss)

Since the company has ample idle capacity, the only additional cost would be the variable cost per unit of $48.00. Therefore, the loss per unit would be:
$41.60 - $48.00 = -$6.40

If the company sells 3,950 units at this price, the total loss would be:
3,950 units x -$6.40 per unit = -$25,200

Therefore, the special order would decrease the company's net operating income by $25,200. Answer B is correct.

Quiz 6: Differential Analysis: The Key to Decision Making

What is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels?

If Varone can expect to sell 32,000 Homs next year through regular channels and the special order is accepted at 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a:

At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer?

If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a:

If Varone can expect to sell 32,000 Homs next year through regular channels, at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order?

Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

How much of the unit product cost of $40.50 is relevant in the decision of whether to make or buy the part?

What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

Suppose the price for the subcomponent has not been set. At what price per unit charged by the outside supplier would Meacham be economically indifferent between making the subcomponent or buying it from the outside?

If Meacham decides to purchase the subcomponent from the outside supplier, how much higher or lower will net operating income be than if Meacham continued to make the subcomponent?

Suppose that regular sales of jigs total 85,000 units per month. All other conditions remain the same. If Immanuel accepts the special order, the change in monthly net operating income will be:

What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 60,000 units required each year?

If Immanuel accepts this special order, the change in monthly net operating income will be a:

Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 200 units for regular customers. The minimum acceptable price per unit for the special order is closest to:

If Varone has an opportunity to sell 37,960 Homs next year through regular channels and the special order is accepted for 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a:

Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $41.60 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?