Deck 8: Relevant Costs and Short-Term Decision Making

Question 1

The first step in the decision-making process is evaluation, where management looks at the current results of past business activities.

Answer 1

False

Question 2

The decision-making process in a business includes providing feedback from results of activities to help plan future activities.

Answer 2

True

Question 3

Relevant costs are only those that are the same when comparing competing alternatives.

Answer 3

False

Question 4

Assuming there are no negative qualitative factors, if incremental revenues exceed incremental costs, then a special order should generally be accepted.

Question 5

If incremental revenues exceed incremental costs, then a company should always accept a special order.

Question 6

All per-unit costs allocated under absorption costing should be included in determining whether to accept a special order or not.

Question 7

If a company would have to incur additional fixed costs to produce a special order, then those costs are considered relevant.

Question 8

In the decision to make or buy a product, if there is no alternative use for the manufacturing capacity used to make the product, then fixed costs are irrelevant.

Question 9

In the decision to make or buy a new component, if a company is producing at full capacity then the only factors that matter are the costs of materials, direct labor, and variable overhead.

Question 10

In the decision to make or buy a new product, if the differential cost of buying is more than the differential cost of making, the company should buy the product from the outside.

Question 11

Concerns about the quality of a component will most likely lead a company to make the component rather than buy it.

Question 12

If a business segment is unprofitable, it should always be dropped.

Question 13

Generally, a business segment should be discontinued if the cost savings would exceed the revenue that would be lost.

Question 14

Because a business segment represents a significant portion of the company, allocation of fixed overhead is also included in the decision whether to drop a segment or not.

Question 15

Even if a business segment reports a loss, it may still be more profitable to keep the segment rather than drop it.

Question 16

Once a product has been designed and placed into production, a company should not evaluate whether to sell it or process it further.

Question 17

A company should process a part further if the incremental revenues of doing so exceed the incremental costs.

Question 18

A company should process a part further if the total revenues of the finished product will exceed the total cost.

Question 19

Joint costs are irrelevant to the decision whether to process joint products further.

Question 20

When a company has to decide between various production options due to constrained resources, remaining production capacity should be devoted to items that have the highest return per unit of sales.

Question 21

A company should maximize the contribution margin per unit of constraining resource in order to maximize profits.

Question 22

Which of the following best describes the concept of "sunk costs"?

A) Costs that will be incurred regardless of what decision is made
B) Costs that are the same between competing alternatives
C) Costs that are relevant to the decision process
D) Costs that have already been incurred and cannot be avoided
E) None of the above

Question 23

Future benefits foregone when one option is chosen over another are called:

A) Decision Costs
B) Opportunity Costs
C) Relevant Costs
D) Sunk Costs
E) None of the above

Question 24

Which of the following costs would be considered sunk costs?

A) CEO salary, not based on performance
B) Direct Labor wages
C) Yearly depreciation on factory equipment
D) Utilities expense
E) None of the above

Question 25

Which of the following costs would be considered relevant when deciding between two products to produce?

A) Level of direct materials required
B) Additional investment in factory equipment for one product
C) Amount of additional direct and indirect labor
D) The opportunity cost associated with one or the other product
E) All of the above

Question 26

Which of the following are factors to consider when deciding whether to accept a special order?

A) Whether there is sufficient excess production capacity
B) The fixed costs that will be allocated to the units produced
C) The projected salvage value of current production equipment
D) Last year's budgeted level of production
E) All of the above

Question 27

Which of the following is not a factor to consider when deciding whether to accept a special order?

A) Whether this order will hurt the brand name of the company
B) Whether other potential orders would be more profitable
C) Whether additional fixed costs would need to be incurred
D) Whether there is sufficient excess productive capacity
E) None of the above, all are factors that should be considered

Question 28

Which of the following is not a factor to consider when deciding whether to accept a special order?

A) Whether this order will hurt the brand name of the company
B) Whether the offered price is sufficient to cover prime costs and fixed overhead allocated
C) Whether other potential orders would be more profitable
D) Whether additional fixed costs would need to be incurred
E) All of the above

Question 29

Which of the following would be a reason to reject a special order?

A) The incremental revenues exceed the incremental costs
B) The absorption-costing per-unit cost is greater than the price being offered
C) The order exceeds the company's excess production capacity
D) Qualitative factors that would cause the selling price of the product to increase in the future
E) All of the above
F) None of the above

Question 30

If a company is currently operating at full production capacity, which of the following costs are relevant to the decision to make or buy a new product?

A) Direct materials
B) Variable overhead
C) Fixed overhead avoided
D) Costs of buying from the outside vendor
E) All of the above

Question 31

If a company has sufficient excess capacity, which of the following costs are relevant to the decision to make or buy a new product?

A) Direct materials
B) Variable overhead
C) Fixed overhead
D) Costs of buying from the outside vendor
E) A, B, and D only

Question 32

Which of the following factors would lead a company to make a component rather than buy it?

A) Other, more profitable uses for production equipment
B) Concerns that the company is too highly invested in fixed assets
C) Attractive deals offered by suppliers
D) Greater control over production quality
E) All of the above

Question 33

Which of the following factors would lead a company to buy a component rather than make it?

A) Greater control over production quality
B) Employee concerns about outsourcing
C) Excess productive capacity
D) An unpredictable supplier of the component
E) None of the above

Question 34

Which of the following are relevant to the decision of whether to drop a business segment or not?

A) Revenues of the segment
B) Variable costs of goods sold of the segment
C) Variable operating expenses of the segment
D) Fixed overhead applied to the segment
E) A, B, and C only

Question 35

Which of the following are not relevant to the decision of whether to drop a business segment or not?

A) Fixed overhead applied to the segment
B) Revenues of the segment
C) Variable costs of goods sold of the segment
D) Variable operating expenses of the segment
E) B and C only

Question 36

Which of the following are reasons to continue an unprofitable business segment?

A) Potential loss of related business
B) Lack of alternative source of part needed in production
C) Fixed cost application to the segment that exceeds the level of the accounting loss
D) All of the above
E) None of the above

Question 37

Which of the following are reasons to discontinue an unprofitable business segment?

A) Effect of downsizing on employee morale
B) Lack of alternative source of part needed in production
C) Fixed cost application to the segment that exceeds the level of the accounting loss
D) All of the above
E) None of the above

Question 38

Which of the following products could not usually be processed further?

A) Wheat
B) Flour
C) Wristwatch
D) Cloth
E) All of the above

Question 39

Which of the following combinations of products would be considered joint products?

A) Chairs and tables
B) Corn and alfalfa
C) Machine oil and gasoline
D) Hamburgers and hot dogs
E) None of the above

Question 40

How are byproducts costed in a company?

A) They are allocated a portion of the joint costs
B) They are allocated the selling price less any disposal costs
C) They are allocated a portion of the joint costs and any disposal costs
D) They are allocated the selling price
E) They are allocated the disposal costs

Question 41

Byproducts:

A) Are allocated a portion of the joint costs of production
B) Can usually be avoided in the production process
C) Have a similar sales value as the main products produced
D) Reduce the cost of the main product by the net amount generated by their sale
E) All of the above

Question 42

Which of the following would not possibly be a constraining resource for a company?

A) Temporary labor
B) Machine hours
C) Floor space
D) Supervisor hours
E) None of the above would be constraining resources

Question 43

Which of the following would possibly be a constraining resource for a company?

A) Machine hours
B) Floor space
C) Direct labor
D) Specialized materials
E) All of the above could be constraining resources

Question 44

Operating results for Division A of Alpha Company during 2019 are as follows:
Sales $400,000
Cost of goods sold 248,000
Gross profit $152,000
Direct expenses $27,000
Common expenses 45,000
Total expenses $72,000
Net income $80,000
If Division A would maintain the same quantity of product sold while raising selling prices by 5% and making additional advertising expenditures of $30,000, what would be the effect on the Division's net income? (Ignore income taxes in your calculations.)

A) Net income would increase by $10,000.
B) Net income would increase by $20,000.
C) Net income would increase by $30,000.
D) Net income would decrease by $10,000.
E) Net income would decrease by $20,000.

Question 45

Operating results for Division A of Alpha Company during 2019 are as follows:
Sales $400,000
Cost of goods sold 248,000
Gross profit $152,000
Direct expenses $27,000
Common expenses 45,000
Total expenses $72,000
Net income $80,000
If Division A would maintain the same quantity of product sold while raising selling prices by 10%, increasing direct labor costs by $20,000 and implementing a new marketing campaign at a cost of $10,000, what would be the effect on the Division's net income? (Ignore income taxes in your calculations.)

A) Net income would increase by $10,000.
B) Net income would increase by $20,000.
C) Net income would increase by $30,000.
D) Net income would decrease by $10,000.
E) None of the above.

Question 46

Which of the following are factors to consider when deciding whether to accept a special order?

A) The fixed costs that will be allocated to the units produced
B) Whether there is sufficient excess production capacity
C) The projected salvage value of current production equipment
D) Last year's budgeted level of production
E) All of the above

Question 47

Sea Line is a massive cargo ship company that contracts with larger, well-known shippers to provide container shipping by sea to any deep water port in the world. Sea Line owns 50 ships, and currently has contracts for 41 of those ships. The other shippers pay Sea Line $2,500,000 per year to provide shipping services for their customers' containers. Sea Line is considering a new contract where they would provide 5 ships to a new company for $2,250,000 per year. Each Sea Line ship incurs yearly costs of $1,100,000 for labor, $300,000 for fuel, $1,000,000 in fixed overhead, and $500,000 in variable overhead.
What would be the differential gain or loss on this new contract?

A) A differential loss of $3,250,000.
B) A differential loss of $1,250,000.
C) A differential gain of $1,750,000.
D) A differential gain of $4,250,000.
E) Cannot be determined from the information provided.

Question 48

Cargo Line is a massive cargo ship company that contracts with larger, well-known shippers to provide container shipping by sea to any deep water port in the world. Cargo Line owns 50 ships, and currently has contracts for 47 of those ships. The other shippers pay Cargo Line $2,500,000 per year to provide shipping services for their customers' containers. Cargo Line is considering a new 20-year contract where they would provide 5 ships to a new company for $2,250,000 per year. Each Cargo Line ship incurs yearly costs of $1,100,000 for labor, $300,000 for fuel, $1,000,000 in fixed overhead, and $500,000 in variable overhead. Because the contract is for 20 years, Cargo Line may not use any ships currently in use for the new contract. The cost of acquiring a new ship is $25,000,000, which is depreciated over a 20-year life.
What would be the differential gain or loss on this new contract?

A) A differential loss of $63,000,000.
B) A differential loss of $15,000,000.
C) A differential gain of $1,750,000.
D) A differential gain of $45,000,000.
E) None of the above.

Question 49

Scott Corporation produces a part that is used in the production of one of its products. The per-unit costs associated with the annual production of 5,000 units of this part are as follows:
Direct materials $ 1.50
Direct labor $ 3.00
Variable factory overhead $ 2.00
Fixed factory overhead $ 8.00
Total costs $14.50
Smith Company has offered to sell 5,000 units of the same part to Scott Corporation for $8 per unit.
Scott should:

A) Buy the part, thereby saving $6.50 per unit.
B) Buy the part, thereby saving $40,000 annually.
C) Buy the part, thereby saving $1.50 per unit.
D) Make the part, thereby saving $3.50 per unit.
E) Make the part, thereby saving $1.50 per unit.

Question 50

Sunshade produces a special canvas top for its high quality aluminum gazebo. The costs to produce the 1,000 units needed each year are as follows:
Treated canvas fabric $160,000
Aluminum poles 40,000
Aluminum frame fittings 10,000
Direct labor 80,000
Variable manufacturing overhead 25,000
Fixed manufacturing overhead 65,000
Total costs $380,000
Sunshade has offered to make the needed canvas tops of comparable quality for $325 each, FOB shipping point. Sunshade would pay for shipping at a cost of $50 per unit. Sunshade's accountant has estimated that 20% of the fixed overhead can be avoided if the tops are purchased.
Sunshade should:

A) Buy the part, thereby saving $3.00 per unit.
B) Buy the part, thereby saving $5.00 per unit.
C) Buy the part, thereby saving $42.00 per unit.
D) Make the part, thereby saving $47.00 per unit.
E) Make the part, thereby saving $60.00 per unit.

Question 51

DJH Enterprises has 3 departments. Operating results for 2019 are as follows:
DJH is considering eliminating the departments that show losses. Assume that the direct fixed expenses could be avoided if the department is eliminated.
What effect would elimination of Department 2 have on DJH's total operating income?

A) It would increase total operating income by $22,000.
B) It would increase total operating income by $30,000.
C) It would decrease total operating income by $35,000.
D) It would decrease total operating income by $8,000.
E) It would decrease total operating income by $5,000.

Question 52

DJH Enterprises has 3 departments. Operating results for 2019 are as follows:
DJH is considering eliminating the departments that show losses. Assume that the direct fixed expenses could be avoided if the department is eliminated.
What effect would elimination of Department 3 have on DJH's total operating income?

A) It would increase total operating income by $3,000.
B) It would increase total operating income by $94,000.
C) It would decrease total operating income by $254,000.
D) It would decrease total operating income by $91,000.
E) None of the above.

Question 53

Christensen Mfg. produces leather strips for use in making bridles for horses. It normally sells 12,000 feet of one inch strips annually for $72,000. Variable costs for the leather strips are as follows:
Direct material $18,000
Direct labor 40,000
Variable manufacturing overhead 12,000
Christensen is currently using 80% of its normal capacity. Christensen is considering using the other 20% to process the leather further and produce its own finished bridles. Each bridle would use 10 feet of leather strip. Christensen estimates that it could sell the finished bridles for $80. Christensen would incur additional material and labor costs of $10 per bridle and additional variable overhead costs of $4 per bridle. Additional equipment required would increase fixed overhead costs by $2,500 per year.
What would the annual incremental income or loss be if Christensen produces the bridles?

A) $ 700 incremental income
B) $ 700 incremental loss
C) $1,800 incremental income
D) $1,800 incremental loss
E) None of the above

Question 54

Earthworks Co. produces three products from a common raw material. The joint costs for a typical year are as follows:
Direct material $40,000
Direct labor 45,000
Variable manufacturing overhead 20,000
The annual revenues from each product are as follows:
Product X $60,000
Product Y 70,000
Product Z 30,000
Management is considering processing Product Z beyond the split-off point, which would increase the value of Product Z to $57,000. To process Product Z further, Earthworks must rent processing facilities at an annual cost of $17,500 and will incur additional labor of $5,500.
What will be the effect on annual operating income if Earthworks decides to process Product Z further?

A) $23,000 incremental loss
B) $34,000 incremental income
C) $ 4,000 incremental income
D) $14,312.50 incremental income
E) None of the above

Question 55

All Terrain Tires manufactures three different off-road ATV tires: Model A, Model B, and Model C. Plenty of market demand exists for all models. The table below reports the prices and costs per unit of each product:
Assuming that machine hours are limited (i.e., this is the constrained resource), which model is the most profitable to produce?

A) Model A
B) Model B
C) Model C
D) Model A and B would be equally profitable
E) Model B and C would be equally profitable

Question 56

All Terrain Tires manufactures three different off-road ATV tires: Model A, Model B, and Model C. Plenty of market demand exists for all models. The table below reports the prices and costs per unit of each product:
Assuming that machine hours are limited (i.e., this is the constrained resource), at what price does Model A become the most profitable model to produce?

A) Any price above $23
B) Any price above $35
C) Any price above $47
D) Any price above $55
E) None of the above

Question 57

Apex Mfg. produces a variety of consumer goods sold in bargain retail stores. Apex is considering producing a new product, and is deciding between two alternatives. Product A will require 4,000 direct labor hours, 2,000 machine hours, and $100,000 in direct material each year. Product B will require 1,000 direct labor hours, 7,000 machine hours, and $90,000 in direct material each year.
New workers would need to be hired for either project; workers are paid $30 per hour. Electricity for the equipment is $10 per machine hour. The products would be produced on existing manufacturing equipment. Depreciation on this equipment is allocated based on machine hours at a rate of $24 per hour.
Apex will manufacture the same number of units, regardless of the product chosen. Both products would be sold for the same price.
Which product would be more profitable to produce?

Question 58

Asay & Co. provides water treatment supplies to cities and counties. The R&D department has developed two potential new products: one is a new organic chemical compound that will bind with heavy metals and then be filtered out of the water, and the other is a plant-based filter that will actually filter out the metals. The products are similar enough to be produced on existing equipment, but the company would not be able to produce both of them.
Asay projects the following revenue and cost information for each of the products:
Compound:
Sales Price: $1,225/container
Total sales in Year 1: 15,000 containers
Direct materials: $115/container
Direct Labor: $15/hour, each container requires 6 hours of direct labor
Variable overhead allocation: $50/direct labor hour
Filter:
Sales Price: $1,300/filter
Total sales in Year 1: 25,000 filters
Direct materials: $75/filter
Direct Labor: $15/hour, each filter requires 12 hours of direct labor
Variable overhead allocation: $50/direct labor hour
What would be the net difference in income of producing the filter instead of the compound?

Question 59

Asay & Co. provides water treatment supplies to cities and counties. The R&D department has developed two potential new products: one is a new organic chemical compound that will bind with heavy metals and then be filtered out of the water, and the other is a plant-based filter that will actually filter out the metals. The products are similar enough to be produced on existing equipment, but the company would not be able to produce both of them.
Asay projects the following revenue and cost information for each of the products:
Compound:
Sales Price: $1,225/container
Total sales in Year 1: 15,000 containers
Direct materials: $115/container
Direct Labor: $15/hour, each container requires 6 hours of direct labor
Variable overhead allocation: $50/direct labor hour
Fixed overhead allocation: $60/machine hour (each filter only requires 10 machine hours)
Filter:
Sales Price: $1,300/filter
Total sales in Year 1: 25,000 filters
Direct materials: $75/filter
Direct Labor: $15/hour, each filter requires 12 hours of direct labor
Variable overhead allocation: $50/direct labor hour
Fixed overhead allocation: $60/machine hour (each container requires 2 machine hours)
What would be the net difference in income of producing the filter instead of the compound?

Question 60

JetTaxi is a passenger airplane line that contracts with larger, well-known lines to provide transportation across the United States. JetTaxi owns 25 aircraft, and currently has contracts for 17 of those aircraft. The other lines pay JetTaxi $2,500,000 per year to provide carrier services for their passengers.
JetTaxi is considering a new contract where they would provide 5 airplanes to a new company for $1,800,000 per year, per plane. Each JetTaxi plane incurs yearly costs of $600,000 for labor, $200,000 for fuel, $400,000 in fixed overhead, and $800,000 in variable overhead.
What would be the differential gain or loss on this contract?

Question 61

JetTaxi is a passenger airplane line that contracts with larger, well-known lines to provide transportation across the United States. JetTaxi owns 25 aircraft, and currently has contracts for 17 of those aircraft. The other lines pay JetTaxi $7,500,000 per year to provide carrier services for their passengers.
JetTaxi is considering a new contract where they would provide 10 airplanes to a new company for $5,500,000 per year. Each JetTaxi plane incurs yearly costs of $1,800,000 for labor, $600,000 for fuel, $1,200,000 in fixed overhead, and $2,400,000 in variable overhead. Contracts are for 20 years, which will not allow JetTaxi to use planes currently in use for new contracts. The cost of acquiring a new plane is $80,000,000, which is depreciated over the 20-year contract.
What would be the differential gain or loss on this contract?

Question 62

Fizzy Drinks Co. produces a soft drink that they sell to the local fast-food restaurants in their rural community. The drink is popular among the locals, and recently caught the attention of a major restaurant chain headquartered nearby. This company wants to sign a contract with Fizzy Drinks to supply their stores around the country.
Fizzy Drinks' factory has the capacity to produce 100,000 gallons of soft-drink concentrate every year, but they are only currently producing 40,000. The restaurant chains wants to contract with Fizzy Drinks to produce 60,000 gallons for their stores, and is willing to pay $5.00 per gallon. Fizzy Drinks does not have the capacity to expand their facilities.
Local customers pay $9.00 per gallon for the drink. To produce one gallon of soft drink, Fizzy Drinks has to pay $1.00 for direct materials, and about $0.80 for direct labor. Overhead is allocated at a rate of $2.00 per gallon for variable overhead, and $4.00 per gallon for fixed overhead.
What would be the differential gain or loss on this contract?

Question 63

Fizzy Drinks Co. produces a soft drink that they sell to the local fast-food restaurants in their rural community. The drink is popular among the locals, and recently caught the attention of a major restaurant chain headquartered nearby. This company wants to sign a contract with Fizzy Drinks to supply their stores around the country.
Fizzy Drinks' factory has the capacity to produce 100,000 gallons of soft-drink concentrate every year, but they are only currently producing 40,000. The restaurant chains wants to contract with Fizzy Drinks to produce 90,000 gallons for their stores, and is willing to pay $5.00 per gallon. Fizzy Drinks does not have the capacity to expand their facilities.
Local customers pay $9.00 per gallon for the drink. To produce one gallon of soft drink, Fizzy Drinks has to pay $1.00 for direct materials, and about $0.80 for direct labor. Overhead is allocated at a rate of $2.00 per gallon for variable overhead, and $4.00 per gallon for fixed overhead.
What would be the differential gain or loss on this contract?

Question 64

SoftSeats produces chairs and couches for reception areas and executive suites. Historically, SoftSeats has manufactured their own cushions for the chair they sell. However, a cushion manufacturer has recently approached SoftSeats with an offer to produce their cushions for them for $45 per cushion.
SoftSeats incurs the following costs in the production of the seat cushions: $10 for direct materials, $20 for direct labor, $10 for variable overhead, and $10 for fixed overhead. Management is wondering whether they should accept the offer.
What would be the increase or decrease in per-unit costs if the cushions were purchased from the outside supplier?

Question 65

Irasshai, Inc. produces chairs and couches for reception areas and executive suites. Historically, Irasshai has manufactured their own cushions for the chair they sell. However, a cushion manufacturer has recently approached Irasshai with an offer to produce their cushions for them for $90 per cushion.
Irasshai incurs the following costs in the production of the seat cushions: $20 for direct materials, $40 for direct labor, $20 for variable overhead, and $20 for fixed overhead.
Management is wondering whether they should accept the offer. Irasshai is currently at full production capacity: however, if this contract were accepted, the company would use the production equipment for another purpose-making specialty pillows, which return a profit of $30 per unit (the capacity to manufacture one cushion can also be used to manufacture one pillow). Irasshai anticipates needing 15,000 cushions this year to meet demand for their chairs.
What would be the impact on operating income if the cushions were purchased from the outside supplier?

Question 66

Outdoor Products (OP) manufactures outdoors accessories. Management is considering producing the poles for their tents rather than continuing to purchase from their current supplier. The supplier charges $30 per set of poles.
The cost accounting team has estimated that OP would incur the following costs if they were to produce the poles instead: $20 per set for direct materials, $5 per set for direct labor, $3.50 per set for variable overhead, and $10 per set for fixed overhead application.
OP currently has unused production capacity and manufacturing equipment that could be used to manufacture the poles. OP has planned to sell 5,000 tents this year.
What would the change in overall cost be for the company if OP produced the poles rather than purchasing them?

Question 67

Outdoor Products (OP) manufactures outdoors accessories. Management is considering producing the poles for their tents rather than continuing to purchase from their current supplier. The supplier charges $30 per set of poles.
The cost accounting team has estimated that OP would incur the following costs if they were to produce the poles instead: $20 per set for direct materials, $5 per set for direct labor, $3.50 per set for variable overhead, and $10 per set for fixed overhead application.
OP is currently producing at full capacity, and they would need to invest in new manufacturing equipment that could be used to manufacture the poles. The manufacturing equipment would cost $25,000, and it is estimated that it would last long enough to produce 20,000 sets of poles.
What would be the total cost difference if the company produced the poles rather than purchasing them?

Question 68

Desert Adventure Services (DAS) offers guided tours of the deserts of southern Arizona and California. Management is currently concerned about one of their services in particular. Tours of the Sonoran Desert near Tucson, AZ, have recently reflected net losses. The following information relates to the costs involved with the Sonoran tours:
Revenue: $1,000/tour (up to 6 people on the tour)
Direct Labor: 15 hours, @ $32/hour
Supplies (water, gas, food, etc.): $300/tour
Scheduling expenses (treated as variable overhead): $100/tour
Vehicle and equipment depreciation (allocation of a fixed cost): $150/tour
Average number of Sonoran tours per month: 15
Management is considering discontinuing the Sonoran part of their business.
By how much would monthly Operating Income increase or decrease if the Sonoran segment were dropped?

Question 69

Rocky Mountain Maintenance (RMM) is an on-call mechanic and tow company that works in the area surrounding Denver, CO. The majority of RMM's customers have small vehicles that have difficulty with the steep grade of the mountain passes. RMM also currently offers their services to large commercial vehicles. However, the commercial vehicle services have recently reflected net losses. The following information relates to the costs involved servicing commercial vehicles:
Revenue: $250/service
Direct Labor: 5 hours, @ $40/hour
Supplies (gasoline, other vehicle fluids): $55/service
Office scheduling expenses (treated as allocation of fixed overhead): $60/service
Average number of commercial services performed per month: 250
Management is considering discontinuing the commercial vehicle service segment of their business.
By how much would Operating Income per month increase or decrease if this segment were dropped?

Question 70

Full Service Yard Pros is a yard and lawn maintenance company. Up to now, they have received significant business from both commercial and private service contracts. However, management is concerned that the segment that services private homes has been experiencing losses, and is considering discontinuing that segment of the company.
Following is financial information for this past month:
Revenue from commercial: $200,000
Contribution margin percentage from commercial: 50%
Operating income/ (loss) from commercial: $50,000
Revenue from private: $10,000
Contribution margin percentage from private: (5%)
Operating income/ (loss) from private: ($9,000)
Management is concerned that some clients may cancel their commercial contracts if the private service is discontinued, because the owners of several of Full Service's commercial clients use the private service as well. After conducting an analysis, management estimates that 5% of Full Service's commercial revenue would be lost if the private service were discontinued.
By how much would Operating Income change if the private service line were dropped?

Question 71

Data Bank Inc. (DBI) offers web hosting and cloud computing services to businesses and individuals. Management is concerned that offering services to individuals is negatively impacting the profits of the company.
The following information is available relative to DBI's financial position:
Revenue from businesses: $7,500,000
Contribution margin percentage from businesses: 40%
Operating income/ (loss) from businesses: $1,500,000
Revenue from individuals: $500,000
Contribution margin percentage from individuals: (15%)
Operating income/(loss) from individuals: ($250,000)
Management at DBI believes that the storage capacity and other fixed resources currently used for individual services could be used to service more businesses and generate profits similar to current business contracts. Prices charged to businesses are proportional to the fixed cost required by the service.
By how much would Operating Income increase or decrease if the individual services were discontinued?

Question 72

Wang Fabrics is a cloth manufacturing company based in China, which imports threads of various fibers and exports both bolts of cloth and finished products. Wang recently began purchasing and processing Rayon fiber, which is used in many sporting clothes. Wang is considering whether to sell bolts of Rayon cloth or to further process the cloth into sporting outfits.
Information regarding the production process for Rayon is as follows:
To produce a bolt of cloth:
Direct Materials: $500
Direct Labor: 30 hours at $20/hour
Variable Overhead: 50 machine hours at a rate of $13/machine hour
Fixed overhead: $5/machine hour
Selling price of a bolt of cloth: $2,500
Extra costs to further process a bolt of cloth into finished goods:
Direct Materials: $50
Direct Labor: 125 hours, at $20/hour
Variable Overhead: 10 machine hours, at a rate of $13/machine hour
Fixed overhead: $5/machine hour
Selling price of items produced from one bolt of cloth: $5,500
What would be the differential income of processing the cloth further? Should Wang process the cloth further or just sell the bolts of cloth?

Question 73

Green Products Co. recycles plastics to produce a variety of products. One of their processes yields two different outputs: Construction-grade (used in outdoors benches and tables), and Compression-type, used to create ergonomic flooring. One production run produces 200 pounds of Construction-grade plastics, and 100 pounds of Compression-type plastics.
Green Products can process the plastics further, or can sell the raw materials to other companies. The process to produce one batch (before the split-off point) requires $120 of direct materials, $400 of direct labor, and $160 of variable overhead, with an allocation of $100 of fixed overhead. At the split-off point, Construction-grade plastics sell for $4/pound, and Compression-type plastics sell for $2/pound.
Using the relative sales value approach, what is the gross profit that would be realized per batch on Compression-type plastics if sold at the split-off point?

Question 74

Green Products Co. recycles plastics to produce a variety of products. One of their processes yields two different outputs: Construction-grade (used in outdoors benches and tables), and Compression-type, used to create ergonomic flooring. One production run produces 200 pounds of Construction-grade plastics, and 100 pounds of Compression-type plastics.
Green Products can process the plastics further, or can sell the raw materials to other companies. The process to produce one batch (before the split-off point) requires $120 of direct materials, $400 of direct labor, and $160 of variable overhead, with an allocation of $100 of fixed overhead. At the split-off point, Construction-grade plastics sell for $4/pound, and Compression-type plastics sell for $2/pound. Further processing of one batch requires the following:
Construction:
Direct Materials: $80
Direct Labor: $300
Variable Overhead: $100
Fixed Overhead: $20
Selling price of finished product: $1,200 per batch
Compression:
Direct Materials: $60
Direct Labor: $80
Variable Overhead: $40
Fixed Overhead: $20
Selling price of finished product: $500 per batch
Which product(s) should be processed further? If the optimal choices regarding each product are made, what is the Gross Profit realized on one batch?

Question 75

In the process of making hummus, Middle-East Foods is left with a slurry of chickpea husks and other left-over ingredients. Although the slurry has no real commercial value, the company has found that local farmers are willing to pay $4/bucket of the slurry (as a source of feed for livestock).
The manufacture of one batch (100) gallons of hummus requires $25 of direct materials, $60 of direct labor, and $10 of overhead. Making one batch also results in 10 buckets of slurry, which take an additional $10 to process for sale to local farmers. Hummus sells for $20/gallon.
What is the amount charged to Cost of Goods Sold for the sale of one batch of hummus and the byproducts?

Question 76

Core Co. is a company that builds and sells personal computers. In the past, the company was simply a parts supplier for other computer companies. Recently, however, they have been attempting to break into the market with their own personal brand as well. But to ensure a steady revenue stream, Core Co. is still producing a particular part to sell to other companies.
After expanding their production operations, Core Co. has seen great success in sales. They are currently producing at 90% capacity (of total floor space occupied), and are unsure whether to devote that extra capacity to producing more of their own computers or to simply increase the number of parts they supply to other companies. The following is information regarding the two options:
The Core Co. factory has a total of 10,000 square feet of floor space. Which option would return the highest contribution margin per month, and how much would it be?

Question 77

Core Co. is a company that builds and sells personal computers. In the past, the company was simply a parts supplier for other computer companies. Recently, however, they have been attempting to break into the market with their own personal brand as well. But to ensure a steady revenue stream, Core Co. is still producing some parts to sell to other companies.
After expanding their production operations, Core Co. has seen great success in sales. However, they are currently producing at 90% capacity (of total floor space occupied), and are unsure whether to devote that extra capacity to producing more of their own computers or to simply increase the number of parts they supply to other companies. Following is information regarding the three options management is considering:
The Core Co. factory has a total of 10,000 square feet of floor space. Which option would return the highest marginal amount per month, and how much would it be?

Question 78

US Pyrotechnics (USP) is a fireworks manufacturing company. Annual celebrations are rapidly approaching, and USP only has 50 pounds of powder left (and their suppliers have run out as well). USP manufactures two types of fireworks: Aerials (for large venues) and Grounders (for home use).
Management is wondering which fireworks should be produced with the remaining powder, in order to maximize profits. The following information shows the per-unit information regarding the production and sale of these fireworks:
Assume that selling costs are negligible at this point, given the current market for fireworks and USP's established network.
Which type of firework would be the most profitable for USP to produce?

Question 79

US Pyrotechnics (USP) is a fireworks manufacturing company. Annual celebrations are rapidly approaching, and USP only has 50 pounds of powder left (and their suppliers have run out as well). USP manufactures three types of fireworks: Aerials (for large venues) Grounders (for home use), and Poppers (for sale in retail stores).
Management is wondering which fireworks should be produced with the remaining powder, in order to maximize profits. The following information shows the per-unit information regarding the production and sale of these fireworks:
Assume that selling costs are negligible at this point, given the current market for fireworks and USP's established network.
Which type of firework would be the most profitable for USP to produce?

Question 80

Twitch Mfg. produces a variety of consumer goods sold in retail chains. Twitch is considering producing a new product, and is deciding between two alternatives.
$\bullet$ Product A will require 2,000 direct labor hours, 10,000 machine hours, and $70,000 in direct materials each year.
$\bullet$ Product B will require 7,000 direct labor hours, 3,000 machine hours, and $80,000 in direct materials each year.
New workers would need to be hired for either project: workers are paid $20 per hour. Electricity for the equipment is $27 per machine hour. The products would be produced on existing manufacturing equipment: depreciation on this equipment is allocated based on machine hours at a rate of $20 per hour. Twitch will manufacture the same number of units, regardless of the product chosen. Both products would be sold for the same price.
Which product would be more profitable to produce?