Question 1

Part U16 is used by Mcvean Corporation to make one of its products.A total of 13,000 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 $29.80 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 U16 could be used to make more of one of the company's other products,generating an additional segment margin of $25,000 per year for that product.The annual financial advantage (disadvantage)for the company as a result of buying part U16 from the outside supplier should be:
A) $25,000
B) ($79,000)
C) ($35,400)
D) $14,600

Accepted Answer

11ea7761_15f8_04bf_81a5_8b132fe6ff7b_TB2580_00 11ea7761_15f8_04c0_81a5_55dc2356af48_TB2580_00

Question 2

Supler Corporation produces a part used in the manufacture of one of its products.The unit product cost is $18,computed as follows:
 An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only $14 each.The company estimates that 60% of the fixed manufacturing overhead cost above could be eliminated 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 financial advantage (disadvantage)of purchasing the parts from the outside supplier would be:
A) ($1) per unit on average
B) $1 per unit on average
C) $2 per unit on average
D) ($4) per unit on average

Accepted Answer

11ea7761_15f9_6456_81a5_0fd90aca0d0c_TB2580_00 Because the part could be purchased from the outside supplier for $14, but costs $16 to make internally, purchasing the parts from the outside supplier would yield a $2 advantage.

Question 3

The Cook Corporation has two divisions--East and West.The divisions have the following revenues and expenses:
 The management of Cook is considering the elimination of the West Division.If the West Division were eliminated,its traceable fixed costs could be avoided.Total common corporate costs would be unaffected by this decision.Given these data,the elimination of the West Division would result in an overall company net operating income (loss)of:
A) $15,000
B) $(155,000)
C) $(75,000)
D) $(60,000)

Accepted Answer

11ea7761_15f3_bee4_81a5_0df5eeab4e57_TB2580_00 The company currently has a net operating loss of $60,000-the combined effect of the apparent $75,000 loss in the West Division and the apparent $15,000 profit in the East Division. Dropping the West Division would reduce net operating income by $95,000. Therefore, after dropping the West Division, the overall company net operating loss would be $155,000 (= ?$60,000 - $95,000).

Question 4

Norgaard Corporation makes 8,000 units of part G25 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 $21.20 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 $2,000 of these allocated general overhead costs would be avoided.In addition,the space used to produce part G25 would be used to make more of one of the company's other products,generating an additional segment margin of $16,000 per year for that product.
The annual financial advantage (disadvantage)for the company as a result of buying part G25 from the outside supplier should be:
A) ($8,400)
B) $16,000
C) ($8,000)
D) ($40,000)

Accepted Answer

11ea7761_15f5_6ca0_81a5_194c677138d5_TB2580_00 11ea7761_15f5_6ca1_81a5_432cc5b39ce8_TB2580_00

Question 5

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $35,000 and $70,000 in annual fixed costs.Of the fixed costs,$25,000 cannot be avoided.The annual financial advantage (disadvantage)for the company of eliminating this department would be:
A) $10,000
B) ($10,000)
C) $35,000
D) ($35,000)

Accepted Answer

Avoidable fixed costs = $70,000 - $25,000 = $45,000
 11ea7761_15f4_0d06_81a5_231a13825824_TB2580_00 If the department were eliminated, the company would eliminate the department's negative segment margin of $10,000.

Question 6

The management of Furrow Corporation is considering dropping product L07E.Data from the company's budget for the upcoming year appear below:
 In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued.The financial advantage (disadvantage)for the company of eliminating this product for the upcoming year would be:
A) $8,000
B) ($173,000)
C) ($8,000)
D) $173,000

Accepted Answer

11ea7761_15f4_3418_81a5_5f3e7c393b0a_TB2580_00 The segment margin of $173,000 would be lost if product L07E were dropped.

Question 7

The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation:
 If the Children's Division is eliminated,$170,000 of the above fixed expenses could be avoided.The annual financial advantage (disadvantage)for the company of eliminating this division should be:
A) ($300,000)
B) $30,000
C) ($30,000)
D) $300,000

Accepted Answer

11ea7761_15f4_f76d_81a5_c7f26ba41019_TB2580_00 The company would lose the $30,000 positive segment margin if the Children's Division is eliminated.

Question 8

Part S51 is used in one of Haberkorn Corporation's products.The company makes 12,000 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 $37.70 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.If the outside supplier's offer were accepted,only $17,000 of these allocated general overhead costs would be avoided.
The annual financial advantage (disadvantage)for the company as a result of buying the part from the outside supplier would be:
A) ($5,800)
B) ($22,800)
C) ($149,800)
D) ($39,800)

Accepted Answer

11ea7761_15f6_5707_81a5_1995d9ab7df6_TB2580_00 11ea7761_15f6_5708_81a5_1d59f128c56f_TB2580_00

Question 9

The SP Corporation 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:
 An outside supplier recently began producing a comparable motor that could be used in the sewing machine.The price offered to SP Corporation for this motor is $18.If SP Corporation decides not to make the motors,there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided.Direct labor is a variable cost in this company.The annual financial advantage (disadvantage)for the company as a result of making the motors rather than buying them from the outside supplier would be:
A) $276,000
B) $86,000
C) ($92,000)
D) $178,000

Accepted Answer

11ea7761_15f7_687d_81a5_c3a59382e21b_TB2580_00

Question 10

Sardi Inc.is considering whether to continue to make a component or to buy it from an outside supplier.The company uses 17,000 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,70% is avoidable if the component were bought from the outside supplier.In addition,making the component uses 2 minutes on the machine that is the company's current constraint.If the component were bought,time would be freed up for use on another product that requires 4 minutes on this machine and that has a contribution margin of $7.00 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) $24.21 per unit
B) $25.50 per unit
C) $20.71 per unit
D) $22.00 per unit

Accepted Answer

11ea7761_15f8_79f2_81a5_f7c05e1aad80_TB2580_00

Question 11

A study has been conducted to determine if Product A should be dropped.Sales of the product total $500,000; variable expenses total $340,000.Fixed expenses charged to the product total $210,000.The company estimates that $60,000 of these fixed expenses are not avoidable even if the product is dropped.If Product A is dropped,the annual financial advantage (disadvantage)for the company of eliminating this product should be:
A) ($10,000)
B) $10,000
C) ($50,000)
D) $50,000

Accepted Answer

11ea7761_15f4_823a_81a5_7f255f30564b_TB2580_00

Question 12

Vanik Corporation currently has two divisions which had the following operating results for last year:
 Because the Rubber Division sustained a loss,the president of Vanik is considering the elimination of this division.All of the division's traceable fixed costs could be avoided if the division was dropped.None of the allocated common corporate fixed costs could be avoided.If the Rubber Division was dropped at the beginning of last year,the financial advantage (disadvantage)to the company for the year would have been:
A) ($20,000)
B) $20,000
C) $25,000
D) ($25,000)

Accepted Answer

If the Rubber Division had been eliminated, Vanik would have lost its segment margin of $20,000. Consequently, overall net operating income would have been $20,000 lower.

Question 13

A study has been conducted to determine if one of the departments in Carry Corporation should be discontinued.The contribution margin in the department is $80,000 per year.Fixed expenses charged to the department are $95,000 per year.It is estimated that $50,000 of these fixed expenses could be eliminated if the department is discontinued.These data indicate that if the department is discontinued,the yearly financial advantage (disadvantage)for the company would be:
A) ($15,000)
B) $15,000
C) ($30,000)
D) $30,000

Accepted Answer

11ea7761_15f4_5b29_81a5_236a36347f2e_TB2580_00 If the department were eliminated, the company would lose the department's segment margin of $30,000.

Question 14

CoolAir Corporation manufactures portable window air conditioners.CoolAir has the capacity to manufacture and sell 80,000 air conditioners each year but is currently only manufacturing and selling 60,000.The following per unit numbers relate to annual operations at 60,000 units:
 The City of Clearwater would like to purchase 3,000 air conditioners from CoolAir but only if they can get them for $75 each.Variable selling and administrative costs on this special order will drop down to $2 per unit.This special order will not affect the 60,000 regular sales and it will not affect the total fixed costs.The annual financial advantage (disadvantage)for the company as a result of accepting this special order from the City of Clearwater should be:
A) ($21,000)
B) $24,000
C) $144,000
D) ($129,000)

Accepted Answer

11ea7761_15fb_3918_81a5_fb9980bab552_TB2580_00

Question 15

Wallen Corporation is considering eliminating a department that has an annual contribution margin of $80,000 and $160,000 in annual fixed costs.Of the fixed costs,$90,000 cannot be avoided.The annual financial advantage (disadvantage)for the company of eliminating this department would be:
A) $10,000
B) ($10,000)
C) $80,000
D) ($80,000)

Accepted Answer

Avoidable fixed costs = $160,000 - $90,000 = $70,000
 11ea7761_15f3_e5f5_81a5_09697446fa41_TB2580_00 If the department were eliminated, the company would lose the department's segment margin of $10,000.

Question 16

Gordon Corporation produces 1,000 units of a part per year which are used in the assembly of one of its products.The unit cost of producing these parts is:
 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 total fixed costs incurred in producing the part can be avoided.The annual financial advantage (disadvantage)for the company as a result of buying the part from the outside supplier would be:
A) $3,000
B) ($1,000)
C) $7,000
D) ($5,000)

Accepted Answer

11ea7761_15f8_ef24_81a5_bd307b59e0de_TB2580_00

Question 17

Rebelo Corporation is presently making part E07 that is used in one of its products.A total of 17,000 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 $20.80 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,none of which would be avoided if the part were purchased instead of produced internally.If management decides to buy part E07 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) ($6,800)
B) ($163,200)
C) $163,200
D) $6,800

Accepted Answer

11ea7761_15f6_cc3a_81a5_a3fd23f74e2a_TB2580_00 11ea7761_15f6_f34b_81a5_17754799a422_TB2580_00

Question 18

Zouar Computer Corporation currently manufactures the disk drives that it uses in its computers.The costs to produce 5,000 of these disk drives last year were as follows:
 Kidal Electronics has offered to provide Zouar with all of its disk drive needs for $27 per drive.If Zouar accepts this offer,Zouar will be able to use the freed up space to generate an additional $40,000 of income each year to produce more of its computer keyboards.Only $3 per drive of the fixed manufacturing overhead cost above could be avoided.Direct labor is an avoidable cost in this decision.Based on this information,would Zouar be financially better off making the drives or buying the drives and by how much?
A) $15,000 better to buy
B) $20,000 better to buy
C) $35,000 better to buy
D) $60,000 better to make

Accepted Answer

11ea7761_15f5_e1d5_81a5_9d255bf58b8e_TB2580_00

Question 19

Sharp Corporation produces 8,000 parts each year,which are used in the production of one of its products.The unit product cost of a part is $36,computed as follows:
 The parts can be purchased from an outside supplier for only $28 each.The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth.Based on these data,the financial advantage (disadvantage)of purchasing the parts from the outside supplier would be:
A) $24,000
B) ($24,000)
C) $56,000
D) ($56,000)

Accepted Answer

11ea7761_15f5_bac3_81a5_57e6b139a317_TB2580_00

Question 20

Kahn Corporation (a multi-product company)produces and sells 8,000 units of Product X each year.Each unit of Product X sells for $10 and has a contribution margin of $6.If Product X is discontinued,$50,000 of the $60,000 in annual fixed costs charged to Product X could be eliminated.The annual financial advantage (disadvantage)for the company of eliminating this product should be:
A) $2,000
B) ($2,000)
C) $12,000
D) ($12,000)

Accepted Answer

11ea7761_15f5_1e7e_81a5_1f05f11675c4_TB2580_00 If Product X were eliminated, the company would avoid the negative segment margin of $2,000.

Quiz 12: Differential Analysis: The Key to Decision Making

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $35,000 and $70,000 in annual fixed costs.Of the fixed costs,$25,000 cannot be avoided.The annual financial advantage (disadvantage) for the company of eliminating this department would be:

Wallen Corporation is considering eliminating a department that has an annual contribution margin of $80,000 and $160,000 in annual fixed costs.Of the fixed costs,$90,000 cannot be avoided.The annual financial advantage (disadvantage) for the company of eliminating this department would be: