Deck 12: Relevant Costs for Decision Making

Question 1

Lusk Company produces and sells 15,000 units of Product A each month.The selling price of Product A is $20 per unit,and variable expenses are $14 per unit.A study has been conducted concerning whether Product A should be discontinued.The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product were discontinued.These data indicate that if Product A were discontinued,the company's overall monthly operating income would change by how much?

A) An increase of $10,000.
B) An increase of $20,000.
C) A decrease of $20,000.
D) A decrease of $60,000.

Answer 1

D

Question 2

If Immanuel accepts this special order,what will be the increase in the monthly operating income?

A) $1,800.
B) $3,600.
C) $12,600.
D) $14,400.

Answer 2

C

Question 3

Which of the following best describes a plant operating at capacity?

A) Every machine and person in the plant is working at the maximum possible rate.
B) Only some specific machines or processes are operating at the maximum rate possible.
C) Fixed costs will need to change to accommodate increased demand.
D) Managers should produce those products with the highest contribution margin in order to deal with the constrained resource.

Answer 3

B

Question 4

A study has been conducted to determine if Product A should be dropped.Total sales of the product are $200,000 per year;total variable expenses are $140,000 per year.Total fixed expenses charged to the product are $90,000 per year.The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped.These data indicate that if Product A is dropped,the company's overall operating income per year would change by how much?

A) A decrease of $10,000.
B) An increase of $20,000.
C) A decrease of $20,000.
D) An increase of $30,000.Add avoidable costs (90,000 - 40,000)= $50,000.Operating Income decreased by $10,000.

Question 5

Consider a decision facing a firm of either accepting or rejecting a special offer for one of its products.Which of the following costs is NOT relevant?

A) Direct materials.
B) Variable overhead.
C) Fixed overhead that will be avoided if the special offer is accepted.
D) Common fixed overhead that will continue if the special offer is NOT accepteD.

Question 6

What is the opportunity cost of making a component part in a factory with no excess capacity?

A) Variable manufacturing cost of the component.
B) Fixed manufacturing cost of the component.
C) Cost of the production given up in order to manufacture the component.
D) Net benefit foregone from the alternative use of the capacity requireD.

Question 7

What is a joint product?

A) Any product that consists of several parts.
B) Any product produced by a firm with more than one product line.
C) Any product involved in a make or buy decision.
D) One of several products produced from a common input.

Question 8

Manor Company plans to discontinue a department that has a contribution margin of $25,000 and $50,000 in fixed costs.Of the fixed costs,$21,000 cannot be eliminated.What would be the effect on the operating income of Manor Company of discontinuing this department?

A) An increase of $4,000.
B) A decrease of $4,000.
C) An increase of $25,000.
D) A decrease of $25,000.

Question 9

Assume that Tolar decides to upgrade the calculators.At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition?

A) $8.
B) $30.
C) $53.
D) $67.

Question 10

What is the net advantage or disadvantage to the company from upgrading the calculators?

A) $8,000 disadvantage.
B) $8,800 advantage.
C) $18,000 disadvantage.
D) $20,000 advantage.

Question 11

What should a firm faced with a production constraint do to maximize total contribution margin?

A) Promote those products having the highest unit contribution margins.
B) Promote those products having the highest contribution margin ratios.
C) Promote those products having the highest contribution margin per unit of constrained resource.
D) Promote those products having the highest contribution margins and contribution margin ratios.

Question 12

Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs.Of the fixed costs,$21,000 cannot be avoided.What would be the effect of discontinuing the department on Manor's overall operating income?

A) An increase of $3,000.
B) A decrease of $3,000.
C) An increase of $24,000.
D) A decrease of $24,000.

Question 13

Consider the following statements:
I)A vertically integrated firm is more dependent on its suppliers than a firm that is NOT vertically integrated.
II)Many firms feel they can control quality better by making their own parts.
III)A vertically integrated firm realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations.
Which of the above statements represent advantages to a firm that is vertically integrated?

A) I only.
B) III only.
C) I and II only.
D) II and III only.

Question 14

Gata Co.plans to discontinue a department that has a $48,000 contribution margin and $96,000 of fixed costs.Of these fixed costs,$42,000 cannot be avoided.What would be the effect of discontinuing the department on Gata's overall operating income?

A) An increase of $6,000.
B) A decrease of $6,000.
C) An increase of $48,000.
D) A decrease of $48,000.

Question 15

The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of $20,000.If the lanterns are re-machined for $5,000,they could be sold for $9,000.Alternatively,the lanterns could be sold for scrap for $1,000.Which alternative is more desirable,and what are the total relevant costs for that alternative?

A) Re-machine and $5,000.
B) Re-machine and $25,000.
C) Scrap and $20,000.
D) Scrap and $19,000.

Question 16

Relay Corporation manufactures batons.Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000.Based on Relay's predictions for next year,240,000 batons will be sold at the regular price of $5.00 each.In addition,a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price.Total fixed costs would be unaffected by this order.By what amount would the company's operating income be increased or decreased as a result of the special order?

A) $30,000 increase.
B) $36,000 increase.
C) $60,000 decrease.
D) $180,000 increase.

Question 17

Which of the following costs are always relevant in decision making?

A) Variable costs.
B) Avoidable costs.
C) Sunk costs.
D) Fixed costs.

Question 18

Which of the following is NOT an effective way of dealing with a production constraint (i.e. ,bottleneck)?

A) Reduce the number of defective units produced at the bottleneck.
B) Pay overtime to workers assigned to the bottleneck.
C) Pay overtime to workers assigned to workstations located after the bottleneck in the production process.
D) Subcontract work that would otherwise require use of the bottleneck.

Question 19

What is the sunk cost in this situation?

A) $0.
B) $10,000.
C) $11,200.
D) $26,800.

Question 20

A study has been conducted to determine if one of the departments in Parry Company should be discontinued.The contribution margin in the department is $50,000 per year.Fixed expenses charged to the department are $65,000 per year.It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued.These data indicate that if the department were discontinued,the company's overall operating income per year would change by how much?

A) An increase of $10,000.
B) A decrease of $10,000.
C) An increase of $25,000.
D) A decrease of $25,000.

Question 21

Suppose that total regular sales of jigs are 85,000 units per month,and all other conditions remain the same.If Immanuel accepts the special order,what will be the change in monthly operating income?

A) $3,600 decrease.
B) $5,400 decrease.
C) $7,200 increase.
D) $14,000 increase.

Question 22

Assume that discontinuing Product J would result in a $30,000 increase in the contribution margin of other product lines.If Bingham chooses to discontinue Product J,what will be the change in operating income next year due to this action?

A) $5,000 increase.
B) $120,000 increase.
C) $145,000 increase.
D) $145,000 decrease.

Question 23

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,what would be the effect on operating income next year due to accepting this order?

A) $33,320 increase.
B) $33,320 decrease.
C) $35,480 increase.
D) $35,480 decrease.

Question 24

Assume that discontinuing the Tam product would result in a $120,000 increase in the contribution margin of other product lines.How many Tams would have to be sold next year for the company to be as well off as if it just dropped the line and enjoyed the increase in contribution margin from other products?

A) 5,000 units.
B) 6,000 units.
C) 6,500 units.
D) 7,000 units.Units required = (275,000 + 25,000 + 120,000)/60 = 7,000 units.

Question 25

What would the annual cost of additional supervision have to be in order for Hadley to be economically indifferent to making or buying the component? (Assume all other conditions stay the same. )

A) $17,000.
B) $18,000.
C) $19,000.
D) $20,000.

Question 26

Assume that if the components were to be 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,what would be the impact on annual operating income due to accepting the offer?

A) $18,900 increase.
B) $18,900 decrease.
C) $21,400 increase.
D) $21,400 decrease.

Question 27

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 $76.40 per unit.By how much would this special order increase (decrease)the company's operating income for the month?

A) ($5,000).
B) $13,400.
C) ($17,000).
D) $48,000.

Question 28

If the new product is added next year,what will be the increase in operating income resulting from this decision?

A) $183,000.
B) $207,000.
C) $261,000.
D) $387,000.

Question 29

Assume that discontinuing the manufacture and sale of Product J will not affect the sale of other products.If the company discontinues Product J,what will be the change in annual operating income due to this decision?

A) $25,000 decrease.
B) $145,000 increase.
C) $170,000 decrease.
D) $315,000 decrease.

Question 30

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,what would be the effect on operating income next year due to accepting this order?

A) $24,000 decrease.
B) $52,000 increase.
C) $68,000 increase.
D) $80,000 increase.

Question 31

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) $7.20.
B) $8.40.
C) $9.70.
D) $32.50.

Question 32

Assume that discontinuing Product J would result in a $100,000 increase in the contribution margin of other product lines.How many units of Product J would have to be sold next year for the company to be as well off as if it just dropped Product J and enjoyed the increase in contribution margin from other products?

A) 2,500 units.
B) 11,875 units.
C) 15,500 units.
D) 16,125 units.

Question 33

Which lowest selling price per unit could be charged for the new product that would still make it economically desirable to add the new product?

A) $222.
B) $240.
C) $248.
D) $291.

Question 34

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 not be affected by this decision.If Rodgers Company were to purchase the components rather than making them internally,what would be the impact on the company's annual operating income?

A) $81,000 decrease.
B) $94,500 increase.
C) $124,000 increase.
D) $237,600 decrease.

Question 35

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

A) $4.90.
B) $6.40.
C) $7.40.
D) $7.70.

Question 36

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 700 units for regular customers.The minimum acceptable price per unit for the special order is closest to which of the following?

A) $63.78.
B) $69.10.
C) $78.90.
D) $86.10.

Question 37

How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?

A) $22.70.
B) $35.20.
C) $38.00.
D) $59.90.

Question 38

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) $39.60.
B) $42.50.
C) $48.20.
D) $51.00.

Question 39

What would be the change in the company's overall annual operating income that would result from making the component,rather than buying it?

A) $1,000 decrease.
B) $5,000 increase.
C) $14,000 decrease.
D) $17,000 increase.

Question 40

Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines.If the company discontinues the Tam product line,what will be the change in the annual operating income (loss)?

A) $55,000 decrease.
B) $65,000 decrease.
C) $70,000 increase.
D) $90,000 decrease.Fixed costs avoided = 275,000 + 25,000 = 300,000.

Question 41

(Appendix 12A)Dresser Company uses time and material pricing.The time rate is $30 per hour.The material loading charge is 15% for ordering,handling,and storing materials and 25% for the desired profit on these materials.Given these data,what would be the total charge for a job that requires 3 hours of labour time and $80 in materials?

A) $182.
B) $190.
C) $202.
D) $214.

Question 42

(Appendix 12A)Timax Company,a manufacturer of moderately priced time pieces,would like to introduce a new electronic watch into the market.To compete effectively,the watch could not be priced at more than $50.The company requires a return on investment of 25% on all new products.The plan is to produce and sell 20,000 watches each year.This would require a $500,000 investment.What would be the target cost per watch?

A) $25.00.
B) $39.00.
C) $43.75.
D) $64.00.

Question 43

What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

A) $20,800.
B) $22,400.
C) $43,400.
D) $45,000.

Question 44

What is the net monetary advantage of processing Product Y beyond the split-off point?

A) $3,500.
B) $7,900.
C) $25,500.
D) $29,900.

Question 45

How many minutes of milling machine time would be required to satisfy demand for all four products?

A) 9,000 minutes.
B) 18,400 minutes.
C) 22,600 minutes.
D) 23,700 minutes.

Question 46

What is the net monetary advantage (disadvantage)of processing Product X beyond the split-off point?

A) $1,600.
B) ($3,600).
C) $22,400.
D) $27,600.

Question 47

Given the current capacity what is the greatest total contribution margin Brown Company can earn?

A) $124,500.
B) $329,325.
C) $336,300.
D) $570,903.

Question 48

(Appendix 12A)Magner,Inc.uses the absorption costing approach to cost-plus pricing to set prices for its products.Based on budgeted sales of 34,000 units next year,the unit product cost of a particular product is $61.80.The company's selling,general,and administrative expenses for this product are budgeted to be $809,200 in total for the year.The company has invested $400,000 in this product and expects a return on investment of 9%.The target selling price for this product based on the absorption costing approach would be closest to which of the following?

A) $67.36.
B) $85.60.
C) $86.66.
D) $120.03.

Question 49

(Appendix 12A)The markup on absorption cost is closest to which of the following?

A) 15.0%.
B) 30.0%.
C) 31.2%.
D) 96.5%.Markup = (320,000 * .15 + 60,000 * 1.10 + 1,104,000)/(60,000 * 65)= 31.2%.

Question 50

How many minutes of grinding machine time would be required to satisfy demand for all four products?

A) 10,500 minutes.
B) 10,700 minutes.
C) 10,800 minutes.
D) 11,000 minutes.

Question 51

What maximum amount (rounded to the nearest whole cent)should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity?

A) $0.
B) $10.60.
C) $19.25.
D) $21.90.

Question 52

(Appendix 12A)Under time and material pricing,what is(are)included in the time component?

A) Only the direct costs of the employee,including salary and fringe benefits.
B) A profit element.
C) A loading charge.
D) A charge for ordering and handling inventory items.

Question 53

(Appendix 12A)Watkins Company uses time and material pricing.The time rate is $25 per hour.The material loading charge is 30% for ordering,handling,and storing parts and 10% for the desired profit on materials.Given these data,what would be the total charge for a job that requires 8 hours of labour time and $150 in parts?

A) $260.
B) $410.
C) $430.
D) $490.

Question 54

(Appendix 12A)Straus Company,a manufacturer of electronic products,wants to introduce a new calculator.To compete effectively,the calculator could not be priced at more than $40.The company requires a 20% rate of return on investment on all new products.In order to produce and sell 30,000 calculators each year,the company would have to make an investment of $850,000.What would be the target cost per calculator?

A) $16.50.
B) $23.50.
C) $28.33.
D) $34.33.

Question 55

If Austin chooses to produce 4,000 afghans each month,what will be the change in the monthly net operating income as compared to selling 4,000 spindles of yarn?

A) $16,000 increase.
B) $16,000 decrease.
C) $24,000 increase.
D) $24,000 decrease.

Question 56

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

A) ($64,000).
B) $264,000.
C) ($328,000).
D) ($548,000).

Question 57

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 40,000 units required each year?

A) $6.60.
B) $44.60.
C) $59.90.
D) $66.50.

Question 58

(Appendix 12A)Holding all other things constant,if the unit sales increase,what will happen to the markup under absorption costing?

A) It will increase.
B) It will decrease.
C) It will remain the same.
D) The effect cannot be determineD.

Question 59

If Austin produced and sold 4,000 afghans and zero spindles of yarn the total contribution margin would be closest to:

A) $24,000.
B) $40,000.
C) $60,000.
D) $8,000.

Question 60

(Appendix 12A)Which of the following statements is NOT consistent with target costing?

A) The target cost is the anticipated selling price less the desired profit.
B) The technique is most useful in the manufacturing stage of a product.
C) Effective target costing is an integral part of continuous improvement (Kaizen costing)as a management philosophy.
D) In target costing,the anticipated selling price of a product determines the maximum allowable cost for the product.

Question 61

(Appendix 12A)The target selling price for one unit of the new product is closest to which of the following?

A) $22.00.
B) $26.50.
C) $28.71.
D) $32.67.

Question 62

(Appendix 12A)The target selling price based on the absorption costing approach is closest to which of the following?

A) $56.95.
B) $84.50.
C) $85.30.
D) $110.89.

Question 63

(Appendix 12A)The target selling price based on the absorption costing approach for this product would be closest to which of the following?
Refer To: 12-18

A) $67.04.
B) $81.00.
C) $82.59.
D) $110.76.

Question 64

A sunk cost is a cost that has already been incurred and cannot be avoided regardless of what action is chosen.

Question 65

(Appendix 12A)The markup on absorption cost for this product would be closest to which of the following?

A) 11.0%.
B) 34.1%.
C) 36.7%.
D) 45.1%.

Question 66

Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.

Question 67

(Appendix 12A)What is the markup percentage needed on Product S in order to achieve the company's required return on investment?

A) 29%.
B) 37%.
C) 40%.
D) 50%.Markup = (800,000 * .20 + 40,000 * 5 + 240,000)/(40,000 * 37.50)= 40%.

Question 68

If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin,then the firm is better off economically if the product is dropped.

Question 69

Opportunity costs are recorded in the accounts of an organization.

Question 70

The cost of resources that has no alternative use in a make or buy decision has an opportunity cost of zero.

Question 71

One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.

Question 72

Future costs that do NOT differ among the alternatives are NOT relevant in a decision.

Question 73

The book value of old equipment is NOT a relevant cost in an equipment replacement decision.

Question 74

Variable costs are always relevant costs.

Question 75

(Appendix 12A)What is the target selling price based on the absorption costing approach?

A) $48.38.
B) $51.38.
C) $52.50.
D) $56.25.

Question 76

(Appendix 12A)The markup percentage that would be needed on the new product is closest to which of the following?

A) 12.5%.
B) 24.0%.
C) 51.0%.
D) 59.5%.Markup = (650,000 * ,25 + 60,000 * 3 + 300,000)/(60,000 * 18)= 59.5%.

Question 77

Managers should pay little attention to bottleneck operations because they have limited capacity for producing output.

Question 78

An avoidable cost is a cost that can be eliminated (in whole or in part)by choosing one alternative over another.

Question 79

Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product or not.

Question 80

All other things equal,it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from further processing exceeds the incremental costs of further processing.