Question 1

A study has been conducted to determine if Product A should be dropped.Total sales of the product are $200,000 per year; total variable expenses are $140,000 per year.Total fixed expenses charged to the product are $90,000 per year.The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped.These data indicate that if Product A is dropped,the company's overall operating income per year would change by how much?
A) A decrease of $10,000.
B) An increase of $20,000.
C) A decrease of $20,000.
D) An increase of $30,000.

Accepted Answer

A

Question 2

Lusk Company produces and sells 15,000 units of Product A each month.The selling price of Product A is $20 per unit,and variable expenses are $14 per unit.A study has been conducted concerning whether Product A should be discontinued.The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product were discontinued.These data indicate that if Product A were discontinued,the company's overall monthly operating income would change by how much?
A) An increase of $10,000.
B) An increase of $20,000.
C) A decrease of $20,000.
D) A decrease of $60,000.

Accepted Answer

If Product A is discontinued, the company would lose the contribution margin of $6 per unit ($20 - $14) for 15,000 units, totaling $90,000. However, $70,000 of fixed expenses would remain, so the net effect on operating income would be a decrease of $90,000 - $70,000 = $20,000.

Question 3

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

Accepted Answer

Statement II is an advantage because by making their own parts, firms can have greater control over quality. Statement III is also an advantage because a firm that is vertically integrated can earn profits from both its regular operations and the parts it produces in-house. Statement I is not necessarily an advantage as it suggests a higher dependency on suppliers, which could create risk and uncertainty in the supply chain.

Question 4

Wagner Company sells Product A for $21 per unit.Wagner's unit product cost based on the full capacity of 200,000 units is as follows:
$$\begin{array} { | l | r | } 
\hline \text { Direct Materials } & \$ 4 \
\hline \text { Direct Labour } & \$ 5 \
\hline \text { Marufacturing Overhead } & \$ 6 \
\hline \text { Unit Product Cost } & \$ 15 \
\hline
\end{array}$$
A special order offering to buy 20,000 units has been received from a foreign distributor.The only selling costs that would be incurred on this order would be $3 per unit for shipping.Wagner has sufficient idle capacity to manufacture the additional units.Two-thirds of the manufacturing overhead is fixed and would not be affected by this order.Assume that direct labour is an avoidable cost in this decision.In negotiating a price for the special order,what should be the minimum acceptable selling price per unit?
A) $14.
B) $15.
C) $16.
D) $18.

Accepted Answer

The minimum acceptable selling price should cover the variable costs. The variable costs per unit are: Direct Materials ($4) + Direct Labour ($5) + Variable Manufacturing Overhead ($2, since 1/3 of $6 is variable) + Shipping Costs ($3) = $14.

Question 5

Relay Corporation manufactures batons.Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000.Based on Relay's predictions for next year,240,000 batons will be sold at the regular price of $5.00 each.In addition,a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price.Total fixed costs would be unaffected by this order.By what amount would the company's operating income be increased or decreased as a result of the special order?
A) $30,000 increase.
B) $36,000 increase.
C) $60,000 decrease.
D) $180,000 increase.

Accepted Answer

The special order price is 60% of the regular price ($5.00), which is $3.00 per baton. The variable cost per baton is $750,000 / 300,000 = $2.50. The contribution margin per baton for the special order is $3.00 - $2.50 = $0.50. For 60,000 batons, the increase in operating income is 60,000 * $0.50 = $30,000.

Question 6

Gata Co.plans to discontinue a department that has a $48,000 contribution margin and $96,000 of fixed costs.Of these fixed costs,$42,000 cannot be avoided.What would be the effect of discontinuing the department on Gata's overall operating income?
A) An increase of $6,000.
B) A decrease of $6,000.
C) An increase of $48,000.
D) A decrease of $48,000.

Accepted Answer

If the department is discontinued, Gata Co. will save $42,000 in fixed costs, which will increase its overall operating income by $6,000.

Question 7

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

Accepted Answer

A joint product is one of several products produced from a common input, where each product has a separate market. Therefore, option D is the correct choice. Option A is incorrect because a product that consists of several parts is a composite product. Option B is incorrect because a firm with more than one product line produces multiple products, but not necessarily joint products. Option C is incorrect because a make or buy decision is related to whether a firm should produce a product in-house or outsource it, and is not necessarily related to joint products.

Question 8

The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of $20,000.If the lanterns are re-machined for $5,000,they could be sold for $9,000.Alternatively,the lanterns could be sold for scrap for $1,000.Which alternative is more desirable,and what are the total relevant costs for that alternative?
A) Re-machine and $5,000.
B) Re-machine and $25,000.
C) Scrap and $20,000.
D) Scrap and $19,000.

Accepted Answer

The relevant cost for the re-machining alternative is the cost of re-machining, which is $5,000, and the opportunity cost of the manufacturing cost, which is $20,000. Therefore, the total relevant cost for the re-machining alternative is $25,000. 
The relevant cost for the scrap alternative is the scrap value, which is $1,000. 
Since the selling price of the re-machined lanterns is $9,000, which is higher than the scrap value, and the relevant cost of re-machining is $25,000, which is less than the manufacturing cost of $20,000 plus the scrap value of $1,000, the more desirable alternative is to re-machine the lanterns and sell them for $9,000.
Therefore, the best choice is to re-machine the lanterns and incur the cost of $5,000, which gives a total relevant cost of $25,000.

Question 9

Consider a decision facing a firm of either accepting or rejecting a special offer for one of its products.Which of the following costs is NOT relevant?
A) Direct materials.
B) Variable overhead.
C) Fixed overhead that will be avoided if the special offer is accepted.
D) Common fixed overhead that will continue if the special offer is NOT accepted.

Accepted Answer

Common fixed overhead that will continue regardless of the decision is not relevant because it does not change based on the acceptance or rejection of the special offer.

Question 10

A study has been conducted to determine if one of the departments in Parry Company should be discontinued.The contribution margin in the department is $50,000 per year.Fixed expenses charged to the department are $65,000 per year.It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued.These data indicate that if the department were discontinued,the company's overall operating income per year would change by how much?
A) An increase of $10,000.
B) A decrease of $10,000.
C) An increase of $25,000.
D) A decrease of $25,000.

Accepted Answer

If the department is discontinued, the company would lose the $50,000 contribution margin but save $40,000 in fixed expenses, resulting in a net decrease of $10,000 in operating income.

Question 11

The Cook Company has two divisions: Eastern and Western.The divisions have the following revenues and expenses:
$\begin{array}{|l|r|r|}
\hline & \text { Eastern } & \text { Western } \
\hline \text { Sales } & \$ 550,000 & \$ 500,000 \
\hline \text { Variable Costs } & \$ 275,000 & \$ 200,000 \
\hline \text { Direct Fixed Costs } & \$ 180,000 & \$ 150,000 \
\hline \text { Allocated Corporate Costs } & \$ 170,000 & \$ 135,000 \
\hline \text { Operating Income (Loss) } & (\$ 75,000) & \$ 15,000 \
\hline
\end{array}$
The management of Cook is considering the elimination of the Eastern Division.If the Eastern Division were eliminated,the direct fixed costs associated with this division could be avoided.However,corporate costs would still be $305,000 in total.Given these data,what would be the overall company's operating income (loss)if the Eastern Division were eliminated?
A) ($155,000).
B) ($75,000).
C) ($60,000).
D) $15,000.

Accepted Answer

If the Eastern Division were eliminated, the overall company's operating income would increase by $75,000 (the Eastern Division's operating loss) and decrease by $35,000 (the Eastern Division's allocated corporate costs). The net effect would be an increase in operating income of $40,000, resulting in an overall operating loss of $155,000.

Question 12

What is the opportunity cost of making a component part in a factory with no excess capacity?
A) Variable manufacturing cost of the component.
B) Fixed manufacturing cost of the component.
C) Cost of the production given up in order to manufacture the component.
D) Net benefit foregone from the alternative use of the capacity required.

Accepted Answer

Opportunity cost is the net benefit foregone from the next best alternative use of resources, in this case, the capacity used to make the component.

Question 13

Which of the following costs are always relevant in decision making?
A) Variable costs.
B) Avoidable costs.
C) Sunk costs.
D) Fixed costs.

Accepted Answer

Avoidable costs are always relevant in decision making because they are costs that can be eliminated if a particular decision is made. They directly impact the outcome of the decision, unlike sunk costs which have already been incurred and cannot be recovered, and fixed costs which do not change with the decision in the short term. Variable costs can be relevant, but not in all scenarios, especially if they do not change with the decision being made.

Question 14

Manor Company plans to discontinue a department that has a contribution margin of $25,000 and $50,000 in fixed costs.Of the fixed costs,$21,000 cannot be eliminated.What would be the effect on the operating income of Manor Company of discontinuing this department?
A) An increase of $4,000.
B) A decrease of $4,000.
C) An increase of $25,000.
D) A decrease of $25,000.

Accepted Answer

The contribution margin of $25,000 would be lost, but $29,000 of fixed costs would be eliminated, resulting in a net increase in operating income of $4,000.

Question 15

Which of the following is NOT an effective way of dealing with a production constraint (i.e.,bottleneck)?
A) Reduce the number of defective units produced at the bottleneck.
B) Pay overtime to workers assigned to the bottleneck.
C) Pay overtime to workers assigned to workstations located after the bottleneck in the production process.
D) Subcontract work that would otherwise require use of the bottleneck.

Accepted Answer

Paying overtime to workers assigned to workstations located after the bottleneck in the production process will not increase the output of the bottleneck and therefore will not effectively deal with the production constraint. The other choices provide ways to reduce the impact of the bottleneck on the overall production process.

Question 16

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

Accepted Answer

The answer of Which of the following best describes a...

Question 17

Green Company produces 1,000 parts per year,which are used in the assembly of one of its products.The unit product cost of these parts is:
$\begin{array}{|l|r|}
\hline \text { Variable Manufacturing Cost } & \$ 12 \
\hline \text { Fixed Manufacturing Cost } & \$ 9 \
\hline \text { Unit Product Cost } & \$ 21 \
\hline
\end{array}$
The part can be purchased from an outside supplier for $20 per unit.If the part is purchased from the outside supplier,two-thirds of the fixed manufacturing costs can be eliminated.What will be the annual impact on the company's operating income of buying the part from the outside supplier? (Do not round intermediate calculations.)
A) $1,000 increase.
B) $1,000 decrease.
C) $2,000 decrease.
D) $5,000 increase.

Accepted Answer

If the part is purchased from the outside supplier, two-thirds of the fixed manufacturing costs can be eliminated. The fixed manufacturing cost is $9 per unit, so two-thirds of that is $6 per unit. The variable manufacturing cost is $12 per unit, so the total cost of producing the part in-house is $21 per unit. The cost of purchasing the part from the outside supplier is $20 per unit. Therefore, the annual impact on the company's operating income of buying the part from the outside supplier will be a decrease of $2,000 (1,000 units x $2 per unit).

Question 18

The manufacturing capacity of Jordan Company's facilities is 30,000 units a year.A summary of operating results for last year follows:
$\begin{array}{|l|r|}
\hline \text { Sales }(18,000 \text { units @ } \$ 100) & \$ 1,800,000 \
\hline \text { Variable Costs } & \$ 990,000 \
\hline \text { Contribution Margin } & \$ 810,000 \
\hline \text { Fixed Costs } & \$ 495,000 \
\hline \text { Operating Income } & \$ 315,000 \
\hline
\end{array}$
A foreign distributor has offered to buy 15,000 units at $90 per unit next year.Jordan expects its regular sales next year to be 18,000 units.If Jordan accepts this offer and rejects some business from regular customers so as not to exceed capacity,what would be the total operating income next year? (Assume that the total fixed costs would be the same no matter how many units are produced and sold.)
A) $390,000.
B) $705,000.
C) $840,000.
D) $855,000.

Accepted Answer

To calculate the total operating income for next year, we first need to determine the contribution margin per unit from the foreign distributor's offer and then calculate the total contribution margin for all units sold (both regular and foreign sales), subtract the fixed costs, and find the operating income.From the given data:- Regular sales price per unit = $100- Variable cost per unit = $990,000 / 18,000 units = $55 per unit- Fixed costs = $495,000 (remains the same)For the foreign distributor's offer:- Sales price per unit = $90- Variable cost per unit remains $55- Contribution margin per unit = $90 - $55 = $35Jordan Company can sell a total of 30,000 units without exceeding capacity. If it sells 18,000 units to regular customers and 12,000 units to the foreign distributor (not 15,000, since that would exceed capacity), the calculation would be as follows:Regular sales (18,000 units):- Contribution margin = ($100 - $55) * 18,000 = $45 * 18,000 = $810,000Foreign distributor sales (12,000 units):- Contribution margin = ($90 - $55) * 12,000 = $35 * 12,000 = $420,000Total contribution margin = $810,000 (regular) + $420,000 (foreign) = $1,230,000Total operating income = Total contribution margin - Fixed costs = $1,230,000 - $495,000 = $735,000However, since $735,000 is not an option and considering the need for recalculating based on the provided choices, it appears there was a mistake in the calculation of how many units can be sold to the foreign distributor or in the interpretation of the options. Given the options provided, the closest correct approach based on the scenario described would involve recalculating the total operating income with the correct allocation of units or correcting the mistake in the calculation process. Since none of the calculations directly lead to the provided choices under the correct method, and acknowledging a mistake in the initial explanation, the correct answer based on the provided options and the scenario (selling up to the capacity of 30,000 units without exceeding it, at the specified prices and costs) would require a reevaluation of the total units sold and their contribution to the operating income. Given this, the correct answer should reflect the total potential operating income considering the maximum sales capacity, the mix of sales to regular and foreign customers within that capacity, and the fixed and variable costs associated with those sales. However, without recalculating based on the exact mix of 18,000 units to regular customers and adjusting for the maximum capacity, the precise answer cannot be determined from the provided explanation. The initial explanation aimed to calculate based on selling to both regular and foreign customers without exceeding capacity, but an error in the calculation or option selection was made.

Question 19

Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs.Of the fixed costs,$21,000 cannot be avoided.What would be the effect of discontinuing the department on Manor's overall operating income?
A) An increase of $3,000.
B) A decrease of $3,000.
C) An increase of $24,000.
D) A decrease of $24,000.

Accepted Answer

The contribution margin of $24,000 would be lost, but only $27,000 ($48,000 - $21,000) of fixed costs would be saved, resulting in a net decrease in operating income of $3,000.

Question 20

What should a firm faced with a production constraint do to maximize total contribution margin?
A) Promote those products having the highest unit contribution margins.
B) Promote those products having the highest contribution margin ratios.
C) Promote those products having the highest contribution margin per unit of constrained resource.
D) Promote those products having the highest contribution margins and contribution margin ratios.

Accepted Answer

When a firm is faced with a production constraint, it should promote those products that have the highest contribution margin per unit of constrained resource. By doing so, the firm can maximize its overall contribution margin while still utilizing its limited resources effectively. Simply promoting products with the highest unit contribution margins or contribution margin ratios could lead to inefficient resource usage and lower overall profitability.

Quiz 12: Relevant Costs for Decision Making

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

What is a joint product?

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

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

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

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

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

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

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

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