Deck 9: Relevant Costs: the Key to Decision Making

Question 1

Reference: 09-01
The following are Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month (which represents the company's capacity): $$\begin{array} { | l | c | } \hline \text { Manufacturing: } & \\\hline \text { Direct materials } & \$ 1.00 \\\hline \text { Direct labour } & 2.00 \\\hline \text { Variable overhead } & 0.50 \\\hline \text { Fixed overhead } & 0.90 \\\hline \text { Selling and administrative: } & \\\hline \text { Variable } & 1.50 \\\hline \text { Fixed } & 0.60 \\\hline\end{array}$$ Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales.
Assume direct labour is a variable cost.

-Assume the company has 50 units left over from last year which have small defects an which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. What cost is relevant as a guide for setting a minimum price on these defective units?

A)$5.00 per unit.
B)$1.50 per unit.
C)$3.50 per unit.
D)$6.50 per unit.

Answer 1

$1.50 per unit.

Question 2

Which of the statements below is correct about sunk costs

A)Sunk costs are relevant to long-run decisions but not to short-run decisions.
B)Sunk costs acts as a substitute for opportunity costs.
C)Sunk costs are always relevant to decision making.
D)Sunk costs are not relevant to decision making.

Answer 2

D

Question 3

Consider a decision facing a firm of either accepting or rejecting a special offer for on of its products. A cost that is not relevant is:

A)fixed overhead that will be avoided if the special offer is accepted.
B)common fixed overhead that will continue if the special offer is not accepted.
C)variable overhead.
D)direct materials.

Answer 3

B

Question 4

The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at ? manufacturing cost of $20,000. If the lanterns are remachined 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)Scrap and $1, 000.
B)Remachine and $25,000.
C)Scrap and $21, 000.
D)Remachine and $5,000.

Question 5

Reference: 09-03
Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: $$\begin{array} { | l | c | } \hline \text { Variable production cost } & \$ 4.60 \\\hline \text { Fixed production cost } & 1.80 \\\hline \text { Variable selling expense } & 1.00 \\\hline\end{array}$$ If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit.

-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 operating income will be?

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

Question 6

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. The effect on the profit of Manor Company of discontinuing this department would be:

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

Question 7

Jimbob Co. is considering offering each of the three products the company manufactures at two levels - "Standard" and "Advanced". Currently all products are processed to the "Standard" level and all products manufactured at this level can be sold. Management believes that it will be possible to generate additional sales revenue and profits by further processing some of units of the "Standard" level products to the "Advanced" level. Fixed costs will not change in total. In making the decision whether it should process products further which decision rule should be followed?

A)If there is a positive contribution margin at the "Advanced" level, then process further.
B)If the projected selling prices at the "Advanced" level are at least 20% greater than those at the "Standard" level, then process further.
C)If the difference in the selling price of units at the "Advanced" level over the selling prices of units at the "Standard" level is greater than the additional unit costs of processing from the "Standard" level to the "Advanced" level, then process further.
D)If the unit costs at the "Advanced" level are greater than the unit costs at the "Standard" level, do not further process.

Question 8

A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $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 net operating income would:

A)decrease by $20,000 per year.
B)increase by $30,000 per year.
C)decrease by $10,000 per year.
D)increase by $20,000 per year.

Question 9

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 net operating income be increased or decreased as a result of the special order?

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

Question 10

Reference: 09-07
Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement. $$\begin{array} { | l | c | l | c | } \hline & \text { Total } & \text { Mall Store } & \text { Town Store } \\\hline \text { Sales } & \$ 200,000 & \$ 80,000 & \$ 120,000 \\\hline \text { Less variable costs } & 116,000 & 32,000 & 84,000 \\\hline \text { Contribution margin } & 84,000 & 48,000 & 36,000 \\\hline \text { Less traceable fixed expenses } & 60,000 & 20,000 & 40,000 \\\hline \text { Store segment margin } & 24,000 & 28,000 & ( 4,000 ) \\\hline \text { Less common fixed expenses } & 10,000 & 4,000 & 6,000 \\\hline \text { Operating income } & \$ 14,000 & \$ 24,000 & \$ ( 10,000 ) \\\hline\end{array}$$ Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be closed. Cosmo allocates common fixed expenses to each store on the basis of sales dollars.
Management estimates that closing the Town Store would result in a ten percent decrease in Mall Store sales, while closing the Mall Store would not affect Town Store sales.
The operating results for November are representative of all months.

-Cosmo is considering a promotional campaign at the Town Store that would not affec? the Mall Store. in Cosmo's operating income of:

A)$(1,400).
B)$3,400.
C)$7,000.
D)$(16,800).

Question 11

Reference: 09-03
Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: $$\begin{array} { | l | c | } \hline \text { Variable production cost } & \$ 4.60 \\\hline \text { Fixed production cost } & 1.80 \\\hline \text { Variable selling expense } & 1.00 \\\hline\end{array}$$ If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit.

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

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

Question 12

Reference: 09-14
Crane Company makes four products in a single facility. Data concerning these products appear below: $$\begin{array} { | l | l | l | l | l | } \hline & \text { Product } & \\\hline & A & B & C & D \\\hline \text { Selling price per unit } & \$ 35.30 & \$ 30.20 & \$ 20.80 & \$ 26.00 \\\hline \text { Variable manuf. cost per unit } & \$ 16.50 & \$ 15.80 & \$ 7.90 & \$ 8.50 \\\hline \text { Variable selling cost per unit } & \$ 3.80 & \$ 1.60 & \$ 1.90 & \$ 3.30 \\\hline \text { Milling machine minutes per unit } & 3.30 & 1.70 & 2.10 & 2.50 \\\hline \text { Monthly demand in units } & 4,000 & 1,000 & 3,000 & 1,000 \\\hline\end{array}$$ The milling machines are potentially the constraint in the production facility. A total of 22,600 minutes are available per month on these machines.

-Which product makes the LEAST profitable use of the milling machines

A)Product D.
B)Product B.
C)Product C.
D)Product A.

Question 13

Reference: 09-05
Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: $$\begin{array} { | l | c | } \hline \text { Direct materials } & \$ 42.60 \\\hline \text { Direct labour } & 8.10 \\\hline \text { Variable manufacturing overhead } & 1.10 \\\hline \text { Fixed manufacturing overhead } & 17.30 \\\hline \text { Variable selling \& administrative expense } & 1.80 \\\hline \text { Fixed selling \& administrative expense } & 8.00 \\\hline\end{array}$$ The normal selling price of the product is $86.10 per unit.
An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company.

-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:

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

Question 14

Lusk Company produces and sells 15,000 units of Product A each month. price of Product A is $20 per unit, and variable expenses are $14 per unit. A study has been made 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 is discontinued, the company's overall net operating income would:

A)decrease by $20,000 per month.
B)increase by $20,000 per month.
C)increase by $10,000 per month.
D)decrease by $60,000 per month.

Question 15

Reference: 09-13
Brown Company makes four products in a single facility. These products have the following unit product costs: $\begin{array}{|l|c|c|c|c|}\hline&\text { Product }\\\hline &A&B&C&D\\\hline \text { Direct materials } & \$ 15.60 & \$ 19.50 & \$ 12.50 & \$ 15.20 \\\hline \text { Direct labour } & 17.60 & 21.00 & 15.40 & 9.40 \\\hline \begin{array}{l}\text { Variable manufacturing } \\\text { overhead }\end{array} & 4.40 & 5.60 & 8.10 & 5.10 \\\hline \begin{array}{l}\text { Fixed manufacturing } \\\text { overhead }\end{array} & 27.50 & 14.40 & 14.50 & 16.50 \\\hline \text { Unit product cost } & \underline{\underline{\$ 65.10}} & \$ 60.50 & \$ 50.50 & \$ 46.20 \\\hline\end{array}$
$\text { Additional data concerning these products are listed below. }$
$\begin{array}{|l|l|l|l|l|}\hline&\text { Product }\\\hline &A&B&C&D\\\hline \text { Grinding minutes per unit } & 2.00 & 1.10 & 0.70 & 0.30 \\\hline \text { Selling price per unit } & \$ 78.70 & \$ 71.10 & \$ 67.90 & \$ 62.60 \\\hline \begin{array}{l}\text { Variable selling cost per } \\\text { unit }\end{array} & \$ 2.60 & \$ 3.10 & \$ 2.80 & \$ 3.50 \\\hline \text { Monthly demand in units } & 3,000 & 2,000 & 2,000 & 4,000 \\\hline\end{array}$ The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company.

-Which product makes the MOST profitable use of the grinding machines

A)product C.
B)product A.
C)product B.
D)product D.

Question 16

To maximize total contribution margin, a firm faced with a production constraint should:

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

Question 17

Reference: 09-15
Madison Company produces three products with the following costs and selling prices: $$\begin{array} { | l | l | l | l | } \hline & A & B & C \\\hline \text { Selling price per unit } & \$ 16 & \$ 21 & \$ 21 \\\hline \text { Variable cost per unit } & 7 & 11 & 13 \\\hline \text { Contribution margin per unit } & \$ 9 & \$ 10 & \$ 8 \\\hline \text { Direct labour hours per unit } & 1.0 & 1.5 & 2.0 \\\hline \text { Machine hours per unit } & 4.5 & 2.0 & 2.5 \\\hline\end{array}$$

-If direct labour-hours are the company's production constraint, then the three products should be produced in which order?

A)C, A. B.
B)A, B, C.
C)A, C, B.
D)B, C, A.

Question 18

Costs that are always relevant in decision-making are:

A)avoidable costs.
B)future costs.
C)fixed costs.
D)sunk costs.

Question 19

Reference: 09-12
Aholt Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: $$\begin{array} { | l | c | } \hline \text { Direct materials } & \$ 11.30 \\\hline \text { Direct labour } & 22.70 \\\hline \text { Variable manufacturing overhead } & 1.20 \\\hline \text { Fixed manufacturing overhead } & 24.70 \\\hline \text { Unit product cost } & \underline { \$ 59.90 } \\\hline\end{array}$$ An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the
company's remaining products.

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

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

Question 20

Reference: 09-04
Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are as follows: $$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 20 \\\hline \text { Direct labour } & 10 \\\hline \text { Variable manufacturing overhead } & 5 \\\hline \text { Fixed manufacturing overhead } & 7 \\\hline \text { Variable selling expense } & 8 \\\hline \text { Fixed selling expense } & 2 \\\hline\end{array}$$ The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost
$12,000 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labour is a
variable cost.

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

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

Question 21

Golden, Inc. has been manufacturing 5,000 units of Part 10541 which is used in one of its products. At this level of production, the unit product cost of Part 10541 is as follows: $$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 2 \\\hline \text { Direct labour } & 8 \\\hline \text { Variable manufacturing overhead } & 4 \\\hline \text { Fixed manufacturing overhead } & 6 \\\hline \text { Unit product cost } & \$ 220 \\\hline\end{array}$$ Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit. Golden has determined that two thirds of the fixed manufacturing overhead will continue even if Part 10541 is purchased from Brown. Assume that direct labour is an avoidable cost in this decision. To determine whether to accept Brown's offer, the relevant costs to Golden of manufacturing the parts internally are:

A)$80,000.
B)$95,000.
C)$70,000.
D)$90,000.

Question 22

Reference: 09-04
Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are as follows: $$\begin{array} { | l | c | } \hline \text { Direct materials } & \$ 20 \\\hline \text { Direct labour } & 10 \\\hline \text { Variable manufacturing overhead } & 5 \\\hline \text { Fixed manufacturing overhead } & 7 \\\hline \text { Variable selling expense } & 8 \\\hline \text { Fixed selling expense } & 2 \\\hline\end{array}$$ The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost
$12,000 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labour is a
variable cost.

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

Question 23

Reference: 09-09
Bingham Company manufactures and sells Product J. Results for last year's manufacture and sale of Product J are as follows: $$\begin{array} { | l | l | l | } \hline \text { Sales: } 10,000 \text { units at } \$ 160 \text { each } & & \$ 1,600,000 \\\hline \text { Less costs: } & & \\\hline \text { Variable production costs } & 960,000 & \\\hline \text { Sales commissions: } 15 \% \text { of sales } & 240,000 & \\\hline \text { Salaries of line supervisors } & 195,000 & \\\hline \text { Traceable fixed advertising expense } & 180,000 & \\\hline \text { Fixed general factory overhead (allocated to } & & \\\hline \text { products on the basis of square feet occupied) } & 170,000 & \\\hline \text { Total costs } & & 1,745,000 \\\hline \text { Net loss } & & \$ ( 145,000 ) \\\hline\end{array}$$ Bingham Company anticipates no change in the operating results for Product J in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision.

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

Question 24

Reference: 09-12
Aholt Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: $$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 11.30 \\\hline \text { Direct labour } & 22.70 \\\hline \text { Variable manufacturing overhead } & 1.20 \\\hline \text { Fixed manufacturing overhead } & \underline { 24.70 } \\\hline \text { Unit product cost } & \underline { \$ 59.90 } \\\hline\end{array}$$ An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the
company's remaining products.

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

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

Question 25

Reference: 09-03
Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: $$\begin{array} { | l | c | } \hline \text { Variable production cost } & \$ 4.60 \\\hline \text { Fixed production cost } & 1.80 \\\hline \text { Variable selling expense } & 1.00 \\\hline\end{array}$$ If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit.

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

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

Question 26

Green Company produces 2,000 parts per year, which are used in the assembly of one of its products. The unit product cost of these parts is: $$\begin{array} { | l | r | } \hline \text { Variable manufacturing cost } & \$ 12 \\\hline \text { Fixed manufacturing cost } & 9 \\\hline \text { Unit product cost } & \underline { \$ 21 } \\\hline\end{array}$$ The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be:

A)$10,000 decrease.
B)$10,000 increase.
C)$2,000 decrease.
D)$2,000 increase.

Question 27

Which of the following best describes relevant cost

A)Sunk costs that differ between alternatives are relevant cost.
B)Future costs that differ between alternatives are relevant cost.
C)Future costs that do not differ between alternatives are relevant cost.
D)Sunk costs that do not differ between alternatives are relevant cost.

Question 28

Wagner Company sells product A for $21 per unit. full capacity of 200,000 units is as follows: $$\begin{array} { | l | c | } \hline \text { Direct materials } & \$ 4 \\\hline \text { Direct labour } & 5 \\\hline \text { Manufacturing overhead } & 6 \\\hline \text { Unit product cost } & \underline { \$ 15 } \\\hline\end{array}$$ A special order offering to buy 20,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $2 per unit for shipping. Wagner has sufficient idle capacity to manufacture the additional units.
Two-thirds of the manufacturing overhead is fixed and would not be affected by this order. Assume that direct labour is an avoidable cost in this decision. In negotiating a price for
The special order, the minimum acceptable selling price per unit should be:

A)$15.
B)$17.
C)$16.
D)$13.

Question 29

Reference: 09-02
Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200.
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)$67.
B)$8.
C)$30.
D)$53.

Question 30

Reference: 09-09
Bingham Company manufactures and sells Product J. Results for last year's manufacture and sale of Product J are as follows: $$\begin{array} { | l | l | l | } \hline \text { Sales: } 10,000 \text { units at } \$ 160 \text { each } && \$ 1,600,000 \\\hline \text { Less costs: } & & \\\hline \text { Variable production costs } & 960,000 & \\\hline \text { Sales commissions: } 15 \% \text { of sales } & 240,000 & \\\hline \text { Salaries of line supervisors } & 195,000 & \\\hline \text { Traceable fixed advertising expense } & 180,000 & \\\hline \text { Fixed general factory overhead (allocated to } & & \\\hline \text { products on the basis of square feet occupied) } & 170,000 & \\\hline \text { Total costs } & & 1,745,000 \\\hline \text { Net loss } & & \$ ( 145,000 ) \\\hline\end{array}$$ Bingham Company anticipates no change in the operating results for Product J in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision.

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

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

Question 31

Reference: 09-09
Bingham Company manufactures and sells Product J. Results for last year's manufacture and sale of Product J are as follows: $$\begin{array} { | l | l | l | } \hline \text { Sales: } 10,000 \text { units at } \$ 160 \text { each } & & \$ 1,600,000 \\\hline \text { Less costs: } & & \\\hline \text { Variable production costs } & 960,000 & \\\hline \text { Sales commissions: } 15 \% \text { of sales } & 240,000 & \\\hline \text { Salaries of line supervisors } & 195,000 & \\\hline \text { Traceable fixed advertising expense } & 180,000 & \\\hline \text { Fixed general factory overhead (allocated to } & & \\\hline \text { products on the basis of square feet occupied) } & 170,000 & \\\hline \text { Total costs } & & 1,745,000 \\\hline \text { Net loss } & & \$ ( 145,000 ) \\\hline\end{array}$$ Bingham Company anticipates no change in the operating results for Product J in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision.

-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, then the change in net income next year due to this action will be a:

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

Question 32

Reference: 09-05
Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: $$\begin{array} { | l | c | } \hline \text { Direct materials } & \$ 42.60 \\\hline \text { Direct labour } & 8.10 \\\hline \text { Variable manufacturing overhead } & 1.10 \\\hline \text { Fixed manufacturing overhead } & 17.30 \\\hline \text { Variable selling \& administrative expense } & 1.80 \\\hline \text { Fixed selling \& administrative expense } & 8.00 \\\hline\end{array}$$ The normal selling price of the product is $86.10 per unit.
An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company.

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

Question 33

Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs.:

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

Question 34

Reference: 09-06
Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. $$\begin{array} { | l | r | } \hline \text { Sales } ( 6,500 \text { Tams at } \$ 130 \text { each } ) & \$ 845,000 \\\hline \text { Variable cost of sales } & 390,000 \\\hline \text { Variable distribution costs } & 65,000 \\\hline \text { Fixed advertising expense } & 275,000 \\\hline \text { Salary of product line manager } & 25,000 \\\hline \text { Fixed manufacturing overhead } & 145,000 \\\hline \text { Net loss } & \$ \$ 55,000 ) \\\hline\end{array}$$ Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturing costs of the company.

-Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines. should be:

A)$70,000 increase.
B)$65,000 decrease.
C)$90,000 decrease.
D)$55,000 decrease.

Question 35

Reference: 09-08
The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: $$\begin{array} { | l | l | l | } \hline \text { Annual sales } & 3,000 & \text { units } \\\hline \text { Selling price per unit } & \$ 309 & \\\hline \text { Variable costs per unit: } & & \\\hline \text { Production } & \$ 130 & \\\hline \text { Selling } & \$ 50 & \\\hline \text { Avoidable fixed costs per year: } & & \\\hline \text { Production } & \$ 51,000 & \\\hline \text { Selling } & \$ 75,000 & \\\hline \text { Unavoidable allocated fixed corporate costs per year } & \$ 54,000 & \\\hline\end{array}$$ If the new product is added to the existing product line, then sales of existing products will decline. As a consequence, the contribution margin of the other existing product lines is expected to drop $78,000 per year.

-If the new product is added next year, the increase in net income resulting from this decision would be:

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

Question 36

Reference: 09-12
Aholt Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: $$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 11.30 \\\hline \text { Direct labour } & 22.70 \\\hline \text { Variable manufacturing overhead } & 1.20 \\\hline \text { Fixed manufacturing overhead } & \underline { 24.70 } \\\hline \text { Unit product cost } & \underline { \$ 59.90 } \\\hline\end{array}$$ An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the
company's remaining products.

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

Question 37

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 $40,000 per year. Fixed expenses charged to the department are $65,000 per year. It is estimated that $30,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, the company's overall net operating income would:

A)decrease by $25,000 per year.
B)decrease by $15,000 per year.
C)increase by $15,000 per year.
D)increase by $25,000 per year.

Question 38

Which statement below is the most correct about the cost-plus approach to pricing

A)If the projected selling price is greater than 125% of the projected cost, the product will not be offered to customers.
B)There is a risk that product developers will create products with expensive features that customers may not pay for.
C)There is considerable pressure to get rid of unnecessary costs.
D)The cost of the product is determined by working backwards from the projected selling price.

Question 39

SP Company makes 40,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: $$\begin{array} { | l | l | } \hline \text { Direct materials } & \$ 5.50 \\\hline \text { Direct labour } & \$ 5.60 \\\hline \text { Variable factory overhead } & \$ 4.75 \\\hline \text { Fixed factory overhead } & \$ 4.45 \\\hline\end{array}$$ An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Company for this motor is $18. If SP Company decides not to make the motors, there would be no other use for the production facilities and total fixed factory overhead costs would not change. If SP Company
Decides to continue making the motor, how much higher or lower would net income be than if the motors are purchased from the outside suppler Assume that direct labour is a variable cost in this company.

A)$86,000 higher.
B)$276,000 higher.
C)$92,000 lower.
D)$178,000 higher.

Question 40

Reference: 09-11
Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: $$\begin{array} { | l | l | } \hline \text { Direct materials } & \$ 4.20 \\\hline \text { Direct labour } & \$ 12.00 \\\hline \text { Variable manufacturing overhead } & \$ 5.80 \\\hline \text { Fixed manufacturing overhead } & \$ 6.50 \\\hline\end{array}$$ Rogers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labour is a variable cost.

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

Question 41

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 this discontinuance on Gata's overall net operating income?

A)Decrease of $48,000.
B)Decrease of $6,000.
C)Increase of $6,000.
D)Increase of $48,000.

Question 42

Reference: 09-05
Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: $$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 42.60 \\\hline \text { Direct labour } & 8.10 \\\hline \text { Variable manufacturing overhead } & 1.10 \\\hline \text { Fixed manufacturing overhead } & 17.30 \\\hline \text { Variable selling \& administrative expense } & 1.80 \\\hline \text { Fixed selling \& administrative expense } & 8.00 \\\hline\end{array}$$ The normal selling price of the product is $86.10 per unit.
An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company.

-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. the company's net operating income for the month?

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

Question 43

Reference: 09-06
Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. $$\begin{array} { | l | c | } \hline \text { Sales } ( 6,500 \text { Tams at } \$ 130 \text { each } ) & \$ 845,000 \\\hline \text { Variable cost of sales } & 390,000 \\\hline \text { Variable distribution costs } & 65,000 \\\hline \text { Fixed advertising expense } & 275,000 \\\hline \text { Salary of product line manager } & 25,000 \\\hline \text { Fixed manufacturing overhead } & 145,000 \\\hline \text { Net loss } & ( \$ 55,000 \\\hline\end{array}$$ Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturing costs of the company.

-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)6,000 units.
B)5,000 units.
C)6,500 units.
D)7,000 units.

Question 44

Reference: 09-07
Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement. $$\begin{array} { | l | c | l | c | } \hline & \text { Total } & \text { Mall Store } & \text { Town Store } \\\hline \text { Sales } & \$ 200,000 & \$ 80,000 & \$ 120,000 \\\hline \text { Less variable costs } & 116,000 & 32,000 & 84,000 \\\hline \text { Contribution margin } & 84,000 & 48,000 & 36,000 \\\hline \text { Less traceable fixed expenses } & 60,000 & 20,000 & 40,000 \\\hline \text { Store segment margin } & 24,000 & 28,000 & ( 4,000 ) \\\hline \text { Less common fixed expenses } & 10,000 & 4,000 & 6,000 \\\hline \text { Operating income } & \$ 14,000 & \$ 24,000 & \$ ( 10,000 ) \\\hline\end{array}$$ Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be closed. Cosmo allocates common fixed expenses to each store on the basis of sales dollars.
Management estimates that closing the Town Store would result in a ten percent decrease in Mall Store sales, while closing the Mall Store would not affect Town Store sales.
The operating results for November are representative of all months.

-A decision by Cosmo Inc. in Cosmo's operating income of:

A)$(10,800).
B)$(6,000).
C)$4,000.
D)$(800).

Question 45

Reference: 09-04
Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are as follows: $$\begin{array} { | l | c | } \hline \text { Direct materials } & \$ 20 \\\hline \text { Direct labour } & 10 \\\hline \text { Variable manufacturing overhead } & 5 \\\hline \text { Fixed manufacturing overhead } & 7 \\\hline \text { Variable selling expense } & 8 \\\hline \text { Fixed selling expense } & 2 \\\hline\end{array}$$ The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost
$12,000 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labour is a
variable cost.

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

Question 46

A plant operating at capacity would suggest that most likely:

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

Question 47

Reference: 09-13
Brown Company makes four products in a single facility. These products have the following unit product costs: $\begin{array}{|l|c|c|c|c|}\hline&\text { Product }\\\hline &A&B&C&D\\\hline \text { Direct materials } & \$ 15.60 & \$ 19.50 & \$ 12.50 & \$ 15.20 \\\hline \text { Direct labour } & 17.60 & 21.00 & 15.40 & 9.40 \\\hline \begin{array}{l}\text { Variable manufacturing } \\\text { overhead }\end{array} & 4.40 & 5.60 & 8.10 & 5.10 \\\hline \begin{array}{l}\text { Fixed manufacturing } \\\text { overhead }\end{array} & 27.50 & 14.40 & 14.50 & 16.50 \\\hline \text { Unit product cost } & \underline{\underline{\$ 65.10}} & \$ 60.50 & \$ 50.50 & \$ 46.20 \\\hline\end{array}$
$\text { Additional data concerning these products are listed below. }$
$\begin{array}{|l|l|l|l|l|}\hline&\text { Product }\\\hline &A&B&C&D\\\hline \text { Grinding minutes per unit } & 2.00 & 1.10 & 0.70 & 0.30 \\\hline \text { Selling price per unit } & \$ 78.70 & \$ 71.10 & \$ 67.90 & \$ 62.60 \\\hline \begin{array}{l}\text { Variable selling cost per } \\\text { unit }\end{array} & \$ 2.60 & \$ 3.10 & \$ 2.80 & \$ 3.50 \\\hline \text { Monthly demand in units } & 3,000 & 2,000 & 2,000 & 4,000 \\\hline\end{array}$ The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company.

-Up to how much should the company be willing to pay for one additional hour of grinding machine time if the company has made the best use of the existing grinding machine capacity

A)$0.00.
B)$21.90.
C)$10.60.
D)$19.25.

Question 48

Reference: 09-14
Crane Company makes four products in a single facility. Data concerning these products appear below: $$\begin{array} { | l | l | l | l | l | } \hline & \text { Product } &\\\hline & A & B & C & D \\\hline \text { Selling price per unit } & \$ 35.30 & \$ 30.20 & \$ 20.80 & \$ 26.00 \\\hline \text { Variable manuf. cost per unit } & \$ 16.50 & \$ 15.80 & \$ 7.90 & \$ 8.50 \\\hline \text { Variable selling cost per unit } & \$ 3.80 & \$ 1.60 & \$ 1.90 & \$ 3.30 \\\hline \text { Milling machine minutes per unit } & 3.30 & 1.70 & 2.10 & 2.50 \\\hline \text { Monthly demand in units } & 4,000 & 1,000 & 3,000 & 1,000 \\\hline\end{array}$$ The milling machines are potentially the constraint in the production facility. A total of 22,600 minutes are available per month on these machines.

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

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

Question 49

Reference: 09-08
The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: $$\begin{array} { | l | l | l | } \hline \text { Annual sales } & 3,000 & \text { units } \\\hline \text { Selling price per unit } & \$ 309 & \\\hline \text { Variable costs per unit: } & & \\\hline \text { Production } & \$ 130 & \\\hline \text { Selling } & \$ 50 & \\\hline \text { Avoidable fixed costs per year: } & & \\\hline \text { Production } & \$ 51,000 & \\\hline \text { Selling } & \$ 75,000 & \\\hline \text { Unavoidable allocated fixed corporate costs per year } & \$ 54,000 & \\\hline\end{array}$$ If the new product is added to the existing product line, then sales of existing products will decline. As a consequence, the contribution margin of the other existing product lines is expected to drop $78,000 per year.

-What is the lowest selling price per unit among those listed below that could be charged for the new product and still make it economically desirable to add the new product?

A)$222.
B)$291.
C)$249.
D)$240.

Question 50

The following standard costs pertain to a component part manufactured by Ashby Company: $$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 2 \\\hline \text { Direct labour } & 5 \\\hline \text { Manufacturing overhead } & \underline { 20 } \\\hline \text { Standard cost per unit } & \underline { \$ 27 } \\\hline\end{array}$$ The company can purchase the part from an outside supplier for $25 per unit. The manufacturing overhead is 60% fixed and this fixed portion would not be affected by this decision. Assume that direct labour is an avoidable cost in this decision. What is the relevant amount of the standard cost per unit to be considered in a decision of whether to make the part internally or buy it from the external supplier?

A)$2.
B)$27.
C)$19.
D)$15.

Question 51

Reference: 09-14
Crane Company makes four products in a single facility. Data concerning these products appear below: $$\begin{array} { | l | l | l | l | l | } \hline & \text { Product } &\\\hline & A & B & C & D \\\hline \text { Selling price per unit } & \$ 35.30 & \$ 30.20 & \$ 20.80 & \$ 26.00 \\\hline \text { Variable manuf. cost per unit } & \$ 16.50 & \$ 15.80 & \$ 7.90 & \$ 8.50 \\\hline \text { Variable selling cost per unit } & \$ 3.80 & \$ 1.60 & \$ 1.90 & \$ 3.30 \\\hline \text { Milling machine minutes per unit } & 3.30 & 1.70 & 2.10 & 2.50 \\\hline \text { Monthly demand in units } & 4,000 & 1,000 & 3,000 & 1,000 \\\hline\end{array}$$ The milling machines are potentially the constraint in the production facility. A total of 22,600 minutes are available per month on these machines.

-Which product makes the MOST profitable use of the milling machines

A)Product A.
B)Product D.
C)Product B.
D)Product C.

Question 52

Cook Company has two divisions-Eastern and Western. of:

A)($155,000).
B)$15,000.
C)($75,000).
D)($60,000).

Question 53

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 work stations located after the bottleneck in the production process.
C)Pay overtime to workers assigned to the bottleneck in the production process.
D)Subcontract work that would otherwise require use of the bottleneck.

Question 54

Manico Company produces three products-X, Y, & Z-with the following characteristics: $$\begin{array} { | l | l | l | l | l | l | l | } \hline & { X } & &Y & &{ Z } \\\hline \text { Selling price per unit } & \$ 20 & 100 \% & \$ 16 & 100 \% & \$ 15 & 100 \% \\\hline \text { Variable cost per unit } & 12 & 60 \% & 12 & 75 \% & 6 & 40 \% \\\hline \text { Contribution margin per unit } & \$ 8 & 40 \% & \$ 4 & 25 \% & \$ 9 & 60 \% \\\hline \text { Machine hours per unit } & 5 & & 3 & & 6 & \\\hline\end{array}$$ The company has only 2,000 machine-hours available each month. If demand exceeds the company's capacity, in what sequence should orders be filled if the company wants to maximize its total contribution margin?

A)Orders for Z first and no orders for X or Y.
B)Orders for X first, Z second, and Y third.
C)Orders for Z first, X second, and Y third.
D)Orders for Y first, X second, and Z third.

Question 55

Reference: 09-15
Madison Company produces three products with the following costs and selling prices: $$\begin{array} { | l | l | l | l | } \hline & A & B & C \\\hline \text { Selling price per unit } & \$ 16 & \$ 21 & \$ 21 \\\hline \text { Variable cost per unit } & 7 & { 11 } & 13 \\\hline \text { Contribution margin per unit } & \$ 9 & \$ 10 & \$ 8 \\\hline \text { Direct labour hours per unit } & 1.0 & 1.5 & 2.0 \\\hline \text { Machine hours per unit } & 4.5 & 2.0 & 2.5 \\\hline\end{array}$$

-If machine-hours are Madison's production constraint, then the three products should be produced in which order?

A)C, A, B.
B)A, C, B.
C)B, C, A.
D)A, B, C.

Question 56

Reference: 09-13
Brown Company makes four products in a single facility. These products have the following unit product costs: $\begin{array}{|l|c|c|c|c|}\hline&\text { Product }\\\hline &A&B&C&D\\\hline \text { Direct materials } & \$ 15.60 & \$ 19.50 & \$ 12.50 & \$ 15.20 \\\hline \text { Direct labour } & 17.60 & 21.00 & 15.40 & 9.40 \\\hline \begin{array}{l}\text { Variable manufacturing } \\\text { overhead }\end{array} & 4.40 & 5.60 & 8.10 & 5.10 \\\hline \begin{array}{l}\text { Fixed manufacturing } \\\text { overhead }\end{array} & 27.50 & 14.40 & 14.50 & 16.50 \\\hline \text { Unit product cost } & \underline{\underline{\$ 65.10}} & \$ 60.50 & \$ 50.50 & \$ 46.20 \\\hline\end{array}$
$\text { Additional data concerning these products are listed below. }$
$\begin{array}{|l|l|l|l|l|}\hline&\text { Product }\\\hline &A&B&C&D\\\hline \text { Grinding minutes per unit } & 2.00 & 1.10 & 0.70 & 0.30 \\\hline \text { Selling price per unit } & \$ 78.70 & \$ 71.10 & \$ 67.90 & \$ 62.60 \\\hline \begin{array}{l}\text { Variable selling cost per } \\\text { unit }\end{array} & \$ 2.60 & \$ 3.10 & \$ 2.80 & \$ 3.50 \\\hline \text { Monthly demand in units } & 3,000 & 2,000 & 2,000 & 4,000 \\\hline\end{array}$ The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company.

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

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

Question 57

The opportunity cost of making a component part in a factory with no excess capacity is the:

A)net benefit foregone from the best alternative use of the capacity required.
B)fixed manufacturing cost of the component.
C)variable manufacturing cost of the component.
D)cost of the production given up in order to manufacture the component.

Question 58

Reference: 09-10
Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be
$18,000 per year. Already existing fixed costs that would be allocated to this part amount to $300,000 per year.
The change in the company's overall annual net operating income that would result from making the component, rather than buying it, would be:

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

Question 59

Reference: 09-13
Brown Company makes four products in a single facility. These products have the following unit product costs: $\begin{array}{|l|c|c|c|c|}\hline&\text { Product }\\\hline &A&B&C&D\\\hline \text { Direct materials } & \$ 15.60 & \$ 19.50 & \$ 12.50 & \$ 15.20 \\\hline \text { Direct labour } & 17.60 & 21.00 & 15.40 & 9.40 \\\hline \begin{array}{l}\text { Variable manufacturing } \\\text { overhead }\end{array} & 4.40 & 5.60 & 8.10 & 5.10 \\\hline \begin{array}{l}\text { Fixed manufacturing } \\\text { overhead }\end{array} & 27.50 & 14.40 & 14.50 & 16.50 \\\hline \text { Unit product cost } & \underline{\underline{\$ 65.10}} & \$ 60.50 & \$ 50.50 & \$ 46.20 \\\hline\end{array}$
$\text { Additional data concerning these products are listed below. }$
$\begin{array}{|l|l|l|l|l|}\hline&\text { Product }\\\hline &A&B&C&D\\\hline \text { Grinding minutes per unit } & 2.00 & 1.10 & 0.70 & 0.30 \\\hline \text { Selling price per unit } & \$ 78.70 & \$ 71.10 & \$ 67.90 & \$ 62.60 \\\hline \begin{array}{l}\text { Variable selling cost per } \\\text { unit }\end{array} & \$ 2.60 & \$ 3.10 & \$ 2.80 & \$ 3.50 \\\hline \text { Monthly demand in units } & 3,000 & 2,000 & 2,000 & 4,000 \\\hline\end{array}$ The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company.

-Which product makes the LEAST profitable use of the grinding machines

A)Product A.
B)Product D.
C)Product B.
D)Product C.

Question 60

Which of the statements below is correct about opportunity costs

A)Always the same as variable cost.
B)An important consideration used for decision making.
C)Always relevant to decision making.
D)All of these answers are correct.

Question 61

In a make or buy decision, which of the costs below are relevant

A)Only conversion costs.
B)Fixed costs that can be avoided in the future if the decision is to buy.
C)Only direct material costs.
D)Fixed costs that will not change regardless of the decision.

Question 62

6 $$\begin{array} { | l | r | } \hline \text { Cost to Cardinal to make the part: } & \\\hline \text { Direct materials } & \$ 4 \\\hline \text { Direct labour } & 16 \\\hline \text { Variable manufacturing overhead } & 8 \\\hline \text { Fixed manufacturing overhead } & 10 \\\hline & \$ 38 \\\hline \text { Cost to buy the part from } & \\\hline \text { the Oriole Company } & \$ 36 \\\hline\end{array}$$ Oriole Company has offered to sell this part to Cardinal company for $36 each. If Cardinal buys the part from Oriole instead of making it, Cardinal would not have any use for the released capacity. In addition, 60% of the fixed manufacturing overhead costs will continue regardless of what decision is made. Assume that direct labour is an avoidable cost in this decision. In deciding whether to make or buy the part, the total relevant costs to make the part are:

A)$720,000.
B)$640,000.
C)$560,000.
D)$760,000.

Question 63

In the target costing approach to pricing, the total cost of a product is first determined and then an expected level of mark-up is added to get the desired selling price.

Question 64

Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate, or to accept the product.

Question 65

Consider the following production and cost data for two products, L and C: $$\begin{array} { | l | l | l | } \hline & \text { Product } L & \text { Product } C \\\hline \text { Contribution margin per unit } & \$ 130 & \$ 120 \\\hline \text { Machine set-ups needed per unit } & 10 \text { set-ups } & 8 \text { set-ups } \\\hline\end{array}$$ The company can only perform 65,000 machine set-ups each period due to limited skilled labour and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period?

A)$975,000.
B)$910,000.
C)$1,820,000.
D)$845,000.

Question 66

Reference: 09-02
Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200.
The sunk cost in this situation is?

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

Question 67

Variable costs are always relevant costs.

Question 68

Managers will always seek to eliminate all unprofitable product lines.

Question 69

Reference: 09-01
The following are Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month (which represents the company's capacity): $$\begin{array} { | l | c | } \hline \text { Manufacturing: } & \\\hline \text { Direct materials } & \$ 1.00 \\\hline \text { Direct labour } & 2.00 \\\hline \text { Variable overhead } & 0.50 \\\hline \text { Fixed overhead } & 0.90 \\\hline \text { Selling and administrative: } & \\\hline \text { Variable } & 1.50 \\\hline \text { Fixed } & 0.60 \\\hline\end{array}$$ Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales.
Assume direct labour is a variable cost.

-How much will the company's net operating income be increased or (decreased)if it prices the 1,000 units in the special order at $6 each?

A)($500)per month.
B)$1,000 per month.
C)$400 per month.
D)$2,500 per month.

Question 70

Which of the following is one of the advantages to the target costing approach

A)The target costing approach approach often leads to higher levels of features included that some customers may want.
B)There is usually a higher level of cost-consciousness in the target costing approach than in the cost plus approach.
C)In the target costing approach, costs are fully known before the product is actually designed.
D)The target costing approach can be completed by marketing department personnel without involving others in the process.

Question 71

Reference: 09-02
Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200.
What is the net advantage or disadvantage to the company from upgrading the calculators?

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

Question 72

Reference: 09-14
Crane Company makes four products in a single facility. Data concerning these products appear below: $$\begin{array} { | l | l | l | l | l | } \hline & \text { Product } & \\\hline & A & B & C & D \\\hline \text { Selling price per unit } & \$ 35.30 & \$ 30.20 & \$ 20.80 & \$ 26.00 \\\hline \text { Variable manuf. cost per unit } & \$ 16.50 & \$ 15.80 & \$ 7.90 & \$ 8.50 \\\hline \text { Variable selling cost per unit } & \$ 3.80 & \$ 1.60 & \$ 1.90 & \$ 3.30 \\\hline \text { Milling machine minutes per unit } & 3.30 & 1.70 & 2.10 & 2.50 \\\hline \text { Monthly demand in units } & 4,000 & 1,000 & 3,000 & 1,000 \\\hline\end{array}$$ The milling machines are potentially the constraint in the production facility. A total of 22,600 minutes are available per month on these machines.

-Up to how much should the company be willing to pay for one additional hour of milling machine time if the company has made the best use of the existing milling machine capacity

A)$11.25.
B)$15.50.
C)$4.55.
D)$0.00.

Question 73

Pitkin Company produces a part used in the manufacture of one of its products. The unit product cost of the part is $33, computed as follows: $$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 12 \\\hline \text { Direct labour } & 8 \\\hline \text { Variable manufacturing overhead } & 3 \\\hline \text { Fixed manufacturing overhead } &10\\\hline \text { Unit product cost } & \underline { 33 } \\\hline\end{array}$$ An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each. The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier. Assume that direct labour is an avoidable cost in this decision. Based on these data, the per unit dollar advantage or disadvantage of purchasing the parts from the outside supplier would be:

A)$1 advantage.
B)$3 advantage.
C)$4 disadvantage.
D)$1 disadvantage.

Question 74

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

Question 75

Opportunity costs are recorded in the accounts of an organization.

Question 76

Reference: 09-10
Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be
$18,000 per year. Already existing fixed costs that would be allocated to this part amount to $300,000 per year.
What would the annual cost of additional supervision have to be in order for Hadley to be economically indifferent between making or buying the component

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

Question 77

Beryl Enterprise is considering closing down its Jamaica location. This location presently has a contribution margin of $1,000,000. Overhead allocated to it is $2,500,000, of which $250,000 cannot be eliminated. If this location were to discontinue operations, by what amount would Beryl's pre-tax income increase?

A)$250,000.
B)$1,000,000.
C)$1,500,000.
D)$1,250,000.

Question 78

The split-off point is the stage in production of joint products at which the different end
products are identified.

Question 79

The manufacturing capacity of Jordan Company's facilities is 30,000 units a year.

A)$705,000.
B)$840,000.
C)$390,000.
D)$855,000.

Question 80

Reference: 09-11
Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: $$\begin{array} { | l | l | } \hline \text { Direct materials } & \$ 4.20 \\\hline \text { Direct labour } & \$ 12.00 \\\hline \text { Variable manufacturing overhead } & \$ 5.80 \\\hline \text { Fixed manufacturing overhead } & \$ 6.50 \\\hline\end{array}$$ Rogers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labour is a variable cost.

-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 Rogers Company purchases the components rather than making them internally, what would be the impact on the company's annual net operating income?

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