Deck 11: Differential Analysis: The Key to Decision Making

Question 1

Sunk costs are considered to be avoidable costs.

Answer 1

False

Question 2

Fixed costs are irrelevant in a decision.

Answer 2

False

Question 3

Avoidable costs are also called relevant costs.

Answer 3

True

Question 4

Iaukea Company makes two products from a common input.Joint processing costs up to the split-off point total $49,600 a year.The company allocates these costs to the joint products on the basis of their total sales values at the split-off point.Each product may be sold at the split-off point or processed further.Data concerning these products appear below:
Required:
a.What is the net monetary advantage (disadvantage)of processing Product X beyond the split-off point?
b.What is the net monetary advantage (disadvantage)of processing Product Y beyond the split-off point?
c.What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?
d.What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

Question 5

When a company has a production constraint,the product with the highest contribution margin per unit of the constrained resource should be given highest priority.

Question 6

Depreciation expense on existing factory equipment is generally relevant to a decision of whether to accept or reject a special offer for a company's product.

Question 7

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

Question 8

Costs which are always relevant in decision making are those costs which are:

A)variable.
B)avoidable.
C)sunk.
D)fixed.

Question 9

Joint costs are not relevant to the decision to sell a product at the split-off point or to process the product further.

Question 10

The book value of a machine,as shown on the balance sheet,is relevant in a decision concerning the replacement of that machine by another machine.

Question 11

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

Question 12

A general rule in relevant cost analysis is:

A)variable costs are always relevant.
B)fixed costs are always irrelevant.
C)differential future costs and revenues are always relevant.
D)depreciation is always irrelevant.

Question 13

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

Question 14

Managers should not authorize working overtime at a work station that contains a bottleneck.

Question 15

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

A)variable manufacturing cost of the component.
B)fixed manufacturing cost of the component.
C)total manufacturing cost of the component.
D)net benefit foregone from the best alternative use of the capacity required.

Question 16

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

Question 17

Vertical integration is the involvement by a company in more than one of the steps from securing basic raw materials to the production and distribution of a finished product.

Question 18

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

Question 19

Generally,a product line should be dropped when the fixed costs that can be avoided by dropping the product line are less than the contribution margin that will be lost.

Question 20

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

Question 21

Product R19N has been considered a drag on profits at Buzzeo Corporation for some time and management is considering discontinuing the product altogether.Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $49,000 of the fixed manufacturing expenses and $30,000 of the fixed selling and administrative expenses are avoidable if product R19N is discontinued.What would be the effect on the company's overall net operating income if product R19N were dropped?

A)Overall net operating income would decrease by $59,000.
B)Overall net operating income would decrease by $22,000.
C)Overall net operating income would increase by $59,000.
D)Overall net operating income would increase by $22,000.

Question 22

Part I51 is used in one of Pries Corporation's products.The company makes 18,000 units of this part each year.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce this part and sell it to the company for $15.80 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company.If the outside supplier's offer were accepted,only $26,000 of these allocated general overhead costs would be avoided. If management decides to buy part I51 from the outside supplier rather than to continue making the part,what would be the annual impact on the company's overall net operating income?

A)Net operating income would decline by $81,800 per year.
B)Net operating income would decline by $55,800 per year.
C)Net operating income would decline by $119,800 per year.
D)Net operating income would decline by $29,800 per year.

Question 23

Which of the following are valid reasons for eliminating a product line?
I.The product line's contribution margin is negative.
II.The product line's traceable fixed costs plus its allocated common corporate costs are less than its contribution margin.

A)Only I
B)Only II
C)Both I and II
D)Neither I nor II

Question 24

Power Systems Inc.manufactures jet engines for the United States armed forces on a cost-plus basis.The production cost of a particular jet engine is shown below: If production of this engine was discontinued,the production capacity would be idle,and the supervisor would be laid off.The depreciation referred to above is for special equipment that would have no resale value and that does not wear out through use.When asked to bid on the next contract for this engine,the minimum unit price that Power Systems should bid is:

A)$408,000
B)$365,000
C)$397,000
D)$385,000

Question 25

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

Question 26

The Kelsh Company has two divisions--North and South.The divisions have the following revenues and expenses: Management at Kelsh is pondering the elimination of North Division.If North Division were eliminated,its traceable fixed expenses could be avoided.The total common corporate expenses would be unaffected.Given these data,the elimination of North Division would result in an overall company net operating income of:

A)$100,000
B)$150,000
C)$(140,000)
D)$50,000

Question 27

Stampka Corporation is a specialty component manufacturer with idle capacity.Management would like to use its extra capacity to generate additional profits.A potential customer has offered to buy 4,200 units of component JJF.Each unit of JJF requires 6 units of material O38 and 9 units of material P56.Data concerning these two materials follow: Material O38 is in use in many of the company's products and is routinely replenished.Material P56 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials,in total,for purposes of determining a minimum acceptable price for the order for product JJF?

A)$146,790
B)$199,080
C)$155,610
D)$212,340

Question 28

In a sell or process further decision,which of the following costs are relevant? I.A variable production cost incurred prior to the split-off point.
II.An avoidable fixed production cost incurred after the split-off point.

A)Only I.
B)Only II.
C)Both I and II.
D)Neither I nor II.

Question 29

Freestone Company is considering renting Machine Y to replace Machine X.It is expected that Y will waste less direct materials than does X.If Y is rented,X will be sold on the open market.For this decision,which of the following factors is (are)relevant?
I.Cost of direct materials used
II.Resale value of Machine X

A)Only I
B)Only II
C)Both I and II
D)Neither I nor II

Question 30

Cung Inc.has some material that originally cost $68,400.The material has a scrap value of $30,100 as is,but if reworked at a cost of $1,400,it could be sold for $30,800.What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?

A)-$69,100
B)-$700
C)$29,400
D)-$39,000

Question 31

When there is a production constraint,a company should emphasize the products with:

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

Question 32

Schemm Inc.regularly uses material F04E and currently has in stock 460 liters of the material for which it paid $2,622 several weeks ago.If this were to be sold as is on the open market as surplus material,it would fetch $5.25 per liter.New stocks of the material can be purchased on the open market for $5.85 per liter,but it must be purchased in lots of 1,000 liters.You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer.The relevant cost of the 800 liters of material F04E is:

A)$5,850
B)$4,200
C)$4,404
D)$4,680

Question 33

Scherer Corporation is preparing a bid for a special order that would require 720 liters of material U48N.The company already has 560 liters of this raw material in stock that originally cost $6.30 per liter.Material U48N is used in the company's main product and is replenished on a periodic basis.The resale value of the existing stock of the material is $5.80 per liter.New stocks of the material can be readily purchased for $6.65 per liter.What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order?

A)$4,592
B)$4,788
C)$4,456
D)$4,176

Question 34

Janus Corporation has in stock 43,700 kilograms of material L that it bought five years ago for $6.10 per kilogram.This raw material was purchased to use in a product line that has been discontinued.Material L can be sold as is for scrap for $3.23 per kilogram.An alternative would be to use material L in one of the company's current products,E99D,which currently requires 2 kilograms of a raw material that is available for $9.45 per kilogram.Material L can be modified at a cost of $0.62 per kilogram so that it can be used as a substitute for this material in the production of product E99D.However,after modification,3 kilograms of material L is required for every unit of product E99D that is produced.Janus Corporation has now received a request from a company that could use material L in its production process.Assuming that Janus Corporation could use all of its stock of material L to make product E99D or the company could sell all of its stock of the material at the current scrap price of $3.23 per kilogram,what is the minimum acceptable selling price of material L to the company that could use material L in its own production process?

A)$3.23
B)$5.68
C)$6.92
D)$2.45

Question 35

Liffick Corporation is a specialty component manufacturer with idle capacity.Management would like to use its extra capacity to generate additional profits.A potential customer has offered to buy 6,200 units of component VFG.Each unit of VFG requires 8 units of material C79 and 6 units of material X70.Data concerning these two materials follow:

Material C79 is in use in many of the company's products and is routinely replenished.Material X70 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials,in total,for purposes of determining a minimum acceptable price for the order for product VFG?

A)$528,551
B)$523,280
C)$476,350
D)$484,455

Question 36

The management of Heider Corporation is considering dropping product J14V.Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $211,000 of the fixed manufacturing expenses and $172,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued.What would be the effect on the company's overall net operating income if product J14V were dropped?

A)Overall net operating income would decrease by $55,000.
B)Overall net operating income would increase by $160,000.
C)Overall net operating income would increase by $55,000.
D)Overall net operating income would decrease by $160,000.

Question 37

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

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

Question 38

Peluso Company,a manufacturer of snowmobiles,is operating at 70% of plant capacity.Peluso's plant manager is considering making the headlights now being purchased from an outside supplier for $11 each.The Peluso plant has idle equipment that could be used to manufacture the headlights.The design engineer estimates that each headlight requires $4 of direct materials,$3 of direct labor,and $6.00 of manufacturing overhead.Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision.A decision by Peluso Company to manufacture the headlights should result in a net gain (loss)for each headlight of:

A)$(2.00)
B)$1.60
C)$0.40
D)$2.80

Question 39

Iwasaki Inc.is considering whether to continue to make a component or to buy it from an outside supplier.The company uses 13,000 of the components each year.The unit product cost of the component according to the company's cost accounting system is given as follows: Assume that direct labor is a variable cost.Of the fixed manufacturing overhead,30% is avoidable if the component were bought from the outside supplier.In addition,making the component uses 1 minute on the machine that is the company's current constraint.If the component were bought,this machine time would be freed up for use on another product that requires 2 minutes on this machine and that has a contribution margin of $5.20 per unit. When deciding whether to make or buy the component,what cost of making the component should be compared to the price of buying the component?

A)$22.40
B)$19.80
C)$17.28
D)$19.88

Question 40

Lampshire Inc.is considering using stocks of an old raw material in a special project.The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company $1,136 in total.If the company were to buy new supplies of this raw material on the open market,it would cost $7.25 per kilogram.However,the company has no other use for this raw material and would sell it at the discounted price of $6.50 per kilogram if it were not used in the special project.The sale of the raw material would involve delivery to the purchaser at a total cost of $75 for all 160 kilograms.What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project?

A)$1,040
B)$965
C)$1,136
D)$1,160

Question 41

Consider the following production and cost data for two products,X and Y: The company has 15,000 machine hours available each period,and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?

A)$120,000
B)$125,000
C)$135,000
D)$150,000

Question 42

Wright Company produces products I,J,and K from a single raw material input.Budgeted data for the next month follows: If the cost of the raw material input is $78,000,which of the products should be processed beyond the split-off point?

A)Option A
B)Option B
C)Option C
D)Option D

Question 43

An automated turning machine is the current constraint at Naik Corporation.Three products use this constrained resource.Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable.In other words,rank the products in the order in which they should be emphasized.

A)OP,KU,YY
B)YY,OP,KU
C)KU,YY,OP
D)YY,KU,OP

Question 44

Ellis Television makes and sells portable televisions.Each television regularly sells for $210.The following cost data per television is based on a full capacity of 10,000 televisions produced each period. A special order has been received by Ellis for a sale of 2,000 televisions to an overseas customer.The only selling costs that would be incurred on this order would be $6 per television for shipping.Ellis is now selling 6,000 televisions through regular channels each period.What should be the minimum selling price per television in negotiating a price for this special order?

A)$174
B)$168
C)$210
D)$180

Question 45

Ethridge Corporation is presently making part H25 that is used in one of its products.A total of 9,000 units of this part are produced and used every year.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to make and sell the part to the company for $15.40 each.If this offer is accepted,the supervisor's salary and all of the variable costs can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company,none of which would be avoided if the part were purchased instead of produced internally.If management decides to buy part H25 from the outside supplier rather than to continue making the part,what would be the annual impact on the company's overall net operating income?

A)Net operating income would increase by $24,300 per year.
B)Net operating income would decline by $24,300 per year.
C)Net operating income would increase by $58,500 per year.
D)Net operating income would decline by $58,500 per year.

Question 46

Zollars Cane Products,Inc. ,processes sugar cane in batches.The company buys a batch of sugar cane from farmers for $70 which is then crushed in the company's plant at a cost of $19.Two intermediate products,cane fiber and cane juice,emerge from the crushing process.The cane fiber can be sold as is for $21 or processed further for $13 to make the end product industrial fiber that is sold for $42.The cane juice can be sold as is for $44 or processed further for $26 to make the end product molasses that is sold for $88.How much profit (loss)does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

A)$26
B)$2
C)$(24)
D)$(128)

Question 47

Kempler Corporation processes sugar cane in batches.The company purchases a batch of sugar cane for $34 from farmers and then crushes the cane in the company's plant at the cost of $15.Two intermediate products,cane fiber and cane juice,emerge from the crushing process.The cane fiber can be sold as is for $26 or processed further for $17 to make the end product industrial fiber that is sold for $41.The cane juice can be sold as is for $32 or processed further for $22 to make the end product molasses that is sold for $51.Which of the intermediate products should be processed further?

A)Cane fiber should be processed into industrial fiber;Cane juice should be processed into molasses
B)Cane fiber should NOT be processed into industrial fiber;Cane juice should NOT be processed into molasses
C)Cane fiber should be processed into industrial fiber;Cane juice should NOT be processed into molasses
D)Cane fiber should NOT be processed into industrial fiber;Cane juice should be processed into molasses

Question 48

Two alternatives, code-named X and Y, are under consideration at Afalava Corporation. Costs associated with the alternatives are listed below.

-Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question. )

A)Only materials costs are relevant
B)Only processing costs are relevant
C)Both materials costs and processing costs are relevant
D)Neither materials costs nor processing costs are relevant

Question 49

Beilke Corporation processes sugar beets in batches that it purchases from farmers for $53 a batch.A batch of sugar beets costs $12 to crush in the company's plant.Two intermediate products,beet fiber and beet juice,emerge from the crushing process.The beet fiber can be sold as is for $20 or processed further for $10 to make the end product industrial fiber that is sold for $26.The beet juice can be sold as is for $30 or processed further for $29 to make the end product refined sugar that is sold for $79.Which of the intermediate products should be processed further?

A)beet fiber should be processed into industrial fiber;beet juice should be processed into refined sugar
B)beet fiber should NOT be processed into industrial fiber;beet juice should be processed into refined sugar
C)beet fiber should NOT be processed into industrial fiber;beet juice should NOT be processed into refined sugar
D)beet fiber should be processed into industrial fiber;beet juice should NOT be processed into refined sugar

Question 50

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: 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 labor 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)$3 advantage
B)$1 advantage
C)$1 disadvantage
D)$4 disadvantage

Question 51

Galluzzo Corporation processes sugar beets in batches.A batch of sugar beets costs $51 to buy from farmers and $14 to crush in the company's plant.Two intermediate products,beet fiber and beet juice,emerge from the crushing process.The beet fiber can be sold as is for $20 or processed further for $18 to make the end product industrial fiber that is sold for $45.The beet juice can be sold as is for $41 or processed further for $21 to make the end product refined sugar that is sold for $62.How much profit (loss)does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

A)$(104)
B)$(4)
C)$7
D)$3

Question 52

Two products,IF and RI,emerge from a joint process.Product IF has been allocated $25,300 of the total joint costs of $46,000.A total of 2,000 units of product IF are produced from the joint process.Product IF can be sold at the split-off point for $11 per unit,or it can be processed further for an additional total cost of $10,000 and then sold for $13 per unit.If product IF is processed further and sold,what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?

A)$31,300 less profit
B)$6,000 less profit
C)$16,000 more profit
D)$19,300 more profit

Question 53

A customer has requested that Inga Corporation fill a special order for 2,000 units of product K81 for $25.00 a unit.While the product would be modified slightly for the special order,product K81's normal unit product cost is $19.90: Direct labor is a variable cost.The special order would have no effect on the company's total fixed manufacturing overhead costs.The customer would like modifications made to product K81 that would increase the variable costs by $1.20 per unit and that would require an investment of $10,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales.The company has ample spare capacity for producing the special order.If the special order is accepted,the company's overall net operating income would increase (decrease)by:

A)$13,000
B)$(9,700)
C)$10,200
D)$(2,200)

Question 54

Part N29 is used by Farman Corporation to make one of its products.A total of 11,000 units of this part are produced and used every year.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to make the part and sell it to the company for $21.20 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including the direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company,none of which would be avoided if the part were purchased instead of produced internally.In addition,the space used to make part N29 could be used to make more of one of the company's other products,generating an additional segment margin of $29,000 per year for that product.What would be the impact on the company's overall net operating income of buying part N29 from the outside supplier?

A)Net operating income would decline by $38,900 per year.
B)Net operating income would increase by $29,000 per year.
C)Net operating income would decline by $32,600 per year.
D)Net operating income would increase by $19,100 per year.

Question 55

Two alternatives, code-named X and Y, are under consideration at Afalava Corporation. Costs associated with the alternatives are listed below.

-What is the differential cost of Alternative Y over Alternative X,including all of the relevant costs?

A)$103,000
B)$39,000
C)$142,000
D)$122,500

Question 56

Fillip Corporation makes 4,000 units of part U13 each year.This part is used in one of the company's products.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to make and sell the part to the company for $21.60 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company.If the outside supplier's offer were accepted,only $3,000 of these allocated general overhead costs would be avoided.In addition,the space used to produce part U13 would be used to make more of one of the company's other products,generating an additional segment margin of $13,000 per year for that product. What would be the impact on the company's overall net operating income of buying part U13 from the outside supplier?

A)Net operating income would increase by $13,000 per year.
B)Net operating income would decline by $42,600 per year.
C)Net operating income would decline by $68,600 per year.
D)Net operating income would increase by $9,200 per year.

Question 57

Coakley Beet Processors,Inc. ,processes sugar beets in batches.A batch of sugar beets costs $48 to buy from farmers and $10 to crush in the company's plant.Two intermediate products,beet fiber and beet juice,emerge from the crushing process.The beet fiber can be sold as is for $24 or processed further for $16 to make the end product industrial fiber that is sold for $36.The beet juice can be sold as is for $44 or processed further for $28 to make the end product refined sugar that is sold for $70.How much profit (loss)does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is?

A)$(31)
B)$(60)
C)$(2)
D)$(12)

Question 58

Pappan Corporation makes three products that use compound W,the current constrained resource.Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable.In other words,rank the products in the order in which they should be emphasized.

A)RH,GY,QF
B)GY,RH,QF
C)QF,GY,RH
D)RH,QF,GY

Question 59

Rojo Corporation has received a request for a special order of 8,000 units of product W68 for $27.20 each.Product W68's unit product cost is $18.50,determined as follows: Direct labor is a variable cost.The special order would have no effect on the company's total fixed manufacturing overhead costs.The customer would like modifications made to product W68 that would increase the variable costs by $7.90 per unit and that would require an investment of $31,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales.The company has ample spare capacity for producing the special order.If the special order is accepted,the company's overall net operating income would increase (decrease)by:

A)$(4,400)
B)$69,600
C)$30,600
D)$(24,600)

Question 60

The constraint at Mcglathery Corporation is time on a particular machine.The company makes three products that use this machine.Data concerning those products appear below: Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product.Up to how much should the company be willing to pay to acquire more of the constrained resource?

A)$75.26 per unit
B)$38.94 per unit
C)$11.80 per minute
D)$15.20 per minute

Question 61

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000.

-The sunk cost in this situation is:

A)$720,000
B)$160,000
C)$50,000
D)$100,000

Question 62

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: 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)$240
B)$222
C)$291
D)$249

Question 63

Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement. 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.to close the Town Store would result in a monthly increase (decrease)in Cosmo's operating income of:

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

Question 64

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000.

-What is the net advantage or disadvantage to the company from upgrading the computers rather than selling them in their present condition?

A)$110,000 advantage
B)$660,000 disadvantage
C)$10,000 advantage
D)$60,000 advantage

Question 65

Knaack Corporation is presently making part R20 that is used in one of its products. A total of 18,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $27.70 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally.

-In addition to the facts given above,assume that the space used to produce part R20 could be used to make more of one of the company's other products,generating an additional segment margin of $27,000 per year for that product.What would be the impact on the company's overall net operating income of buying part R20 from the outside supplier and using the freed space to make more of the other product?

A)Net operating income would increase by $27,000 per year.
B)Net operating income would decline by $135,000 per year.
C)Net operating income would decline by $23,400 per year.
D)Net operating income would decline by $189,000 per year.

Question 66

The management of Freshwater Corporation is considering dropping product C11B. Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $211,000 of the fixed manufacturing expenses and $122,000 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued.

-What would be the effect on the company's overall net operating income if product C11B were dropped?

A)Overall net operating income would decrease by $188,000.
B)Overall net operating income would increase by $74,000.
C)Overall net operating income would decrease by $74,000.
D)Overall net operating income would increase by $188,000.

Question 67

The management of Fries Corporation has been concerned for some time with the financial performance of its product R89H and has considered discontinuing it on several occasions. Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $31,000 of the fixed manufacturing expenses and $46,000 of the fixed selling and administrative expenses are avoidable if product R89H is discontinued.

-What would be the effect on the company's overall net operating income if product R89H were dropped?

A)Overall net operating income would decrease by $66,000.
B)Overall net operating income would decrease by $8,000.
C)Overall net operating income would increase by $66,000.
D)Overall net operating income would increase by $8,000.

Question 68

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000.

-Suppose the selling price of the upgraded computers has not been set.At what selling price per unit would the company be as well off upgrading the computers as if it just sold the computers in their present condition?

A)$100
B)$770
C)$300
D)$210

Question 69

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: 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 operating income resulting from this decision would be:

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

Question 70

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows: If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by $20,000 per year.



-What is the lowest selling price per unit that could be charged for the new cabinets from the following list and still make it economically desirable to add the new product line?

A)$160
B)$164
C)$171
D)$151

Question 71

Zurasky Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below:

-What is the differential cost of Alternative B over Alternative A,including all of the relevant costs?

A)$44,000
B)$149,000
C)$105,000
D)$127,000

Question 72

Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement. 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 affect the Mall Store.Increasing annual promotional expenses at the Town Store by $60,000 in order to increase Town Store sales by ten percent would result in a monthly increase (decrease)in Cosmo's operating income of:

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

Question 73

Knaack Corporation is presently making part R20 that is used in one of its products. A total of 18,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $27.70 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally.

-If management decides to buy part R20 from the outside supplier rather than to continue making the part,what would be the annual impact on the company's overall net operating income?

A)Net operating income would increase by $162,000 per year.
B)Net operating income would increase by $50,400 per year.
C)Net operating income would decline by $50,400 per year.
D)Net operating income would decline by $162,000 per year.

Question 74

Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows: Each month 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans.

-If Austin chooses to produce 4,000 afghans each month,the change in the monthly net operating income as compared to selling 4,000 spindles of yarn is:

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

Question 75

The management of Freshwater Corporation is considering dropping product C11B. Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $211,000 of the fixed manufacturing expenses and $122,000 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued.

-According to the company's accounting system,what is the net operating income earned by product C11B?

A)$74,000
B)$(521,000)
C)$(74,000)
D)$521,000

Question 76

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows: If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by $20,000 per year.



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

A)$80,000
B)$225,000
C)$125,000
D)$105,000

Question 77

The management of Fries Corporation has been concerned for some time with the financial performance of its product R89H and has considered discontinuing it on several occasions. Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $31,000 of the fixed manufacturing expenses and $46,000 of the fixed selling and administrative expenses are avoidable if product R89H is discontinued.

-According to the company's accounting system,what is the net operating income earned by product R89H?

A)$143,000
B)$8,000
C)$(8,000)
D)$(143,000)

Question 78

Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows: Each month 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans.

-What is the lowest price Austin should be willing to accept for one afghan as long as it can sell spindles of yarn to the outside market for $12 each?

A)$32
B)$30
C)$28
D)$26

Question 79

Meltzer Corporation is presently making part O13 that is used in one of its products. A total of 3,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $27.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $3,000 of these allocated general overhead costs would be avoided.

-If management decides to buy part O13 from the outside supplier rather than to continue making the part,what would be the annual impact on the company's overall net operating income?

A)Net operating income would decline by $23,100 per year.
B)Net operating income would decline by $26,100 per year.
C)Net operating income would decline by $20,100 per year.
D)Net operating income would decline by $8,700 per year.

Question 80

Zurasky Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below:

-Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question. )

A)Neither materials costs nor processing costs are relevant
B)Only processing costs are relevant
C)Only materials costs are relevant
D)Both materials costs and processing costs are relevant