Relevant Costs Chapter Quiz

Chapter 11
Relevant Costs for Decision Making

True/False
1.Fixedcostsaresunkcostsandarethereforeirrelevantindecisions.
Level:EasyLO:1Ans:F
2.Acompleteincomestatementmustbepreparedaspartofadifferentialcostanalysis.
Level:MediumLO:1Ans:F
3.Futurecoststhatdonotdifferbetweenthealternativesinadecisionareavoidablecosts.
Level:MediumLO:1Ans:F
4.Thebookvalueofanoldmachineisalwaysconsideredasunkcostinadecision.
Level:EasyLO:1Ans:T
5.Aproductthatdoesnotcoveritsallocatedshareofgeneralcorporateadministrativeexpensesshouldbe
dropped.
Level:EasyLO:2Ans:F
6.Inadecisiontodropaproduct,theproductshouldbechargedforrentinproportiontothespaceit
occupiesevenifthespacehasnoalternativeuseandtherentalpaymentisunavoidable.
Level:EasyLO:2Ans:F
7.Makingratherthanbuyingapartthatgoesintooneofthecompanysproductswouldincreasethe
companysdegreeofverticalintegration.
Level:EasyLO:3Ans:T
8.Inaspecialordersituationthatinvolvesusingexistingidlecapacity,opportunitycostsarezero.
Level:EasyLO:4Ans:T
9.Whenacompanyhasaproductionconstraint,theproductwiththehighestcontributionmarginperunit
oftheconstrainedresourceshouldbegivenhighestpriority.
Level:EasyLO:5Ans:T
Brewer,IntroductiontoManagerialAccounting,3/e
21
10.Paymentofovertimetoaworkerinordertorelaxaproductionconstraintcouldincreasetheprofitsof
acompany.
Level:MediumLO:5Ans:T
22
11.Inaplantoperatingatcapacity,everymachineandpersonintheplantwouldbeworkingatthe
maximumpossiblerate.
Level:HardLO:5Ans:F
MultipleChoice
12.HalEtoesuscurrentlyworksasthefryguyatBurgerBreathDriveThrubutisthinkingofquittinghis
jobtoattendcollegefulltimenextsemester.Whichofthefollowingwouldbeconsideredanopportunity
costinthisdecision?
A)thecostofthetextbooks
B)thecostofthecolathatHalwillconsumeduringclass
C)HalslostwagesatBurgerBreath
D)bothAandBabove
Level:EasyLO:1Ans:C
13.Whichofthefollowingwouldberelevantinthedecisiontosellorthrowoutobsoleteinventory?
A)AAbove
B)BAbove
C)CAbove
D)DAbove
Level:MediumLO:1Ans:D
14.BuffCorp.isconsideringreplacinganoldmachinewithanewmachine.Whichofthefollowing
itemsisrelevanttoBuffsdecision?(Ignoreincometaxconsiderations.)
A)AAbove
B)BAbove
C)CAbove
D)DAbove
Source:CPA,adapted
23
Level:MediumLO:1Ans:B
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15.Inamakeorbuydecision,relevantcostsinclude:
A)unavoidablefixedcosts
B)avoidablefixedcosts
C)fixedfactoryoverheadcostsappliedtoproducts
D)fixedsellingandadministrativeexpenses
Source:CMA,adapted
Level:EasyLO:3Ans:B
16.Insituationswheremanagementmustdecidebetweenacceptingorrejectingaonetimeonlyspecial
orderwherethereissufficientidlecapacitytofilltheorder,whichoneofthefollowingisNOTrelevant
inmakingthedecision?
A)absorptioncostingunitproductcosts
B)variablecosts
C)incrementalcosts
D)differentialcosts
Source:CMA,adapted
Level:EasyLO:4Ans:A
17.Whenamultiproductfactoryoperatesatfullcapacity,decisionsmustbemadeaboutwhatproducts
toemphasize.Inmakingsuchdecisions,productsshouldberankedbasedon:
A)sellingpriceperunit
B)contributionmarginperunit
C)contributionmarginperunitoftheconstrainingresource
D)unitsalesvolume
Source:CMA,adapted
Level:EasyLO:5Ans:C
18.WenigInc.hassomematerialthatoriginallycost$73,500.Thematerialhasascrapvalueof$45,600
asis,butifreworkedatacostof$6,600,itcouldbesoldfor$58,100.Whatwouldbetheincremental
effectonthecompanysoverallprofitofreworkingandsellingthematerialratherthansellingitasisas
scrap?
A)$22,000
B)$67,600
C)$51,500
D)$5,900
Source:CIMA,adapted
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19.BosquesCorporationhasinstock35,800kilogramsofmaterialLthatitboughtfiveyearsagofor
$5.55perkilogram.Thisrawmaterialwaspurchasedtouseinaproductlinethathasbeendiscontinued.
MaterialLcanbesoldasisforscrapfor$1.67perkilogram.AnalternativewouldbetousematerialLin
oneofthecompanyscurrentproducts,Q08C,whichcurrentlyrequires2kilogramsofarawmaterialthat
isavailablefor$9.15perkilogram.MaterialLcanbemodifiedatacostof$0.78perkilogramsothatit
canbeusedasasubstituteforthismaterialintheproductionofproductQ08C.However,after
modification,4kilogramsofmaterialLisrequiredforeveryunitofproductQ08Cthatisproduced.
BosquesCorporationhasnowreceivedarequestfromacompanythatcouldusematerialLinits
productionprocess.AssumingthatBosquesCorporationcoulduseallofitsstockofmaterialLtomake
productQ08Corthecompanycouldsellallofitsstockofthematerialatthecurrentscrappriceof$1.67
perkilogram,whatistheminimumacceptablesellingpriceofmaterialLtothecompanythatcoulduse
materialLinitsownproductionprocess?
A)$5.36
B)$3.80
C)$2.13
D)$1.67
Source:CIMA,adapted
Level:HardLO:1Ans:B
20.MankusInc.isconsideringusingstocksofanoldrawmaterialinaspecialproject.Thespecialproject
wouldrequireall120kilogramsoftherawmaterialthatareinstockandthatoriginallycostthecompany
$816intotal.Ifthecompanyweretobuynewsuppliesofthisrawmaterialontheopenmarket,itwould
cost$7.25perkilogram.However,thecompanyhasnootheruseforthisrawmaterialandwouldsellitat
thediscountedpriceof$6.75perkilogramifitwerenotusedinthespecialproject.Thesaleoftheraw
materialwouldinvolvedeliverytothepurchaseratatotalcostof$50.00forall120kilograms.Whatis
therelevantcostofthe120kilogramsoftherawmaterialwhendecidingwhethertoproceedwiththe
specialproject?
A)$810
B)$870
C)$760
D)$816
Source:CIMA,adapted
Level:HardLO:1Ans:C
21.NarcisoCorporationispreparingabidforaspecialorderthatwouldrequire880litersofmaterial
R19S.Thecompanyalreadyhas280litersofthisrawmaterialinstockthatoriginallycost$6.20perliter.
MaterialR19Sisusedinthecompanysmainproductandisreplenishedonaperiodicbasis.Theresale
valueoftheexistingstockofthematerialis$5.45perliter.Newstocksofthematerialcanbereadily
purchasedfor$6.20perliter.Whatistherelevantcostofthe880litersoftherawmaterialwhendeciding
howmuchtobidonthespecialorder?
A)$5,006
B)$5,456
C)$4,796
D)$5,456
Source:CIMA,adapted
Level:HardLO:1Ans:B
26
27
22.YehleInc.regularlyusesmaterialY51Bandcurrentlyhasinstock460litersofthematerialforwhich
itpaid$2,530severalweeksago.Ifthisweretobesoldasisontheopenmarketassurplusmaterial,it
wouldfetch$4.55perliter.Newstocksofthematerialcanbepurchasedontheopenmarketfor$5.45per
liter,butitmustbepurchasedinlotsof1,000liters.Youhavebeenaskedtodeterminetherelevantcost
of720litersofthematerialtobeusedinajobforacustomer.Therelevantcostofthe720litersof
materialY51Bis:
A)$3,924
B)$5,450
C)$3,510
D)$3,276
Source:CIMA,adapted
Level:HardLO:1Ans:A
23.RoddeyCorporationisaspecialtycomponentmanufacturerwithidlecapacity.Managementwould
liketouseitsextracapacitytogenerateadditionalprofits.Apotentialcustomerhasofferedtobuy2,900
unitsofcomponentGEE.EachunitofGEErequires3unitsofmaterialR39and8unitsofmaterialI59.
Dataconcerningthesetwomaterialsfollow:
MaterialR39isinuseinmanyofthecompanysproductsandisroutinelyreplenished.MaterialI59isno
longerusedbythecompanyinanyofitsnormalproductsandexistingstockswouldnotbereplenished
oncetheyareusedup.
Whatwouldbetherelevantcostofthematerials,intotal,forpurposesofdeterminingaminimum
acceptablepricefortheorderforproductGEE?
A)$224,605
B)$196,765
C)$228,204
D)$193,285
Source:CIMA,adapted
Level:HardLO:1Ans:B
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24.MoyerCorporationisaspecialtycomponentmanufacturerwithidlecapacity.Managementwouldlike
touseitsextracapacitytogenerateadditionalprofits.Apotentialcustomerhasofferedtobuy2,300units
ofcomponentTIB.EachunitofTIBrequires9unitsofmaterialF58and7unitsofmaterialD66.Data
concerningthesetwomaterialsfollow:
MaterialF58isinuseinmanyofthecompanysproductsandisroutinelyreplenished.MaterialD66isno
longerusedbythecompanyinanyofitsnormalproductsandexistingstockswouldnotbereplenished
oncetheyareusedup.
Whatwouldbetherelevantcostofthematerials,intotal,forpurposesofdeterminingaminimum
acceptablepricefortheorderforproductTIB?
A)$189,890
B)$174,215
C)$168,533
D)$200,905
Source:CIMA,adapted
Level:HardLO:1Ans:B
25.KahnCompanyproducesandsells8,000unitsofProductXeachyear.EachunitofProductXsells
for$10andhasacontributionmarginof$6.ItisestimatedthatifProductXisdiscontinued,$50,000of
the$60,000infixedcostschargedtoProductXcouldbeeliminated.ThesedataindicatethatifProductX
isdiscontinued,overallcompanynetoperatingincomeshould:
A)increaseby$2,000peryear
B)decreaseby$2,000peryear
C)increaseby$38,000peryear
D)decreaseby$38,000peryear
Level:EasyLO:2Ans:A
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26.TheMilhamCompanyhastwodivisionsEastandWest.Thedivisionshavethefollowingrevenues
andexpenses:
ManagementatMilhamisponderingtheeliminationoftheWestDivisionsinceithasshownanoperating
lossforthepastseveralyears.IftheWestDivisionwereeliminated,itstraceablefixedcostscouldbe
avoided.Totalcommoncorporatecostswouldbeunaffectedbythisdecision.Giventhesedata,the
eliminationoftheWestDivisionwouldresultinanoverallcompanynetoperatingincomeof:
A)$100,000
B)$80,000
C)$120,000
D)$50,000
27.ThefollowinginformationrelatestonextyearsprojectedoperatingresultsoftheAluminumDivision
ofWroclawCorporation:
IfAluminumDivisionisdropped,$1,000,000oftheabovefixedcostswouldbeeliminated.Whatwillbe
theeffectonWroclawsprofitnextyearifAluminumDivisionisdroppedinsteadofbeingkept?
A)$500,000decrease
B)$800,000increase
C)$1,000,000increase
D)$1,200,000increase
Level:MediumLO:2Ans:A
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28.TeichInc.isconsideringwhethertocontinuetomakeacomponentortobuyitfromanoutside
supplier.Thecompanyuses15,000ofthecomponentseachyear.Theunitproductcostofthecomponent
accordingtothecompanysabsorptioncostaccountingsystemisgivenasfollows:
Assumethatdirectlaborisavariablecost.Ofthefixedmanufacturingoverhead,10%isavoidableifthe
componentwereboughtfromtheoutsidesupplier;theremainderisnotavoidable.Inaddition,makingthe
componentuses3minutesonthemachinethatisthecompanyscurrentconstraint.Ifthecomponentwere
bought,thismachinetimewouldbefreedupforuseonanotherproductthatrequires6minutesonthe
constrainingmachineandthathasacontributionmarginof$8.10perunit.
Whendecidingwhethertomakeorbuythecomponent,whatcostofmakingthecomponentshouldbe
comparedtothepriceofbuyingthecomponent?
A)$15.55
B)$11.50
C)$19.15
D)$15.10
Source:CIMA,adapted
Level:HardLO:3Ans:A
29.JordanCompanybudgetedsalesof400,000calculatorsat$40perunitlastyear.Variable
manufacturingcostswerebudgetedat$16perunit,andfixedmanufacturingcostsat$10perunit.A
specialorderfor40,000calculatorsat$23eachwasreceivedbyJordaninMarch.Jordanhassufficient
plantcapacitytomanufacturetheadditionalquantitywithoutincurringanyadditionalfixed
manufacturingcosts;however,theproductionwouldhavetobedoneonanovertimebasisatanestimated
additionalcostof$3percalculator.AcceptanceofthespecialorderwouldnotaffectJordansnormal
salesandnosellingexpenseswouldbeincurred.Whatwouldbetheeffectonnetoperatingincomeifthe
specialorderwereaccepted?
A)$120,000decrease
B)$160,000increase
C)$240,000decrease
D)$280,000increase
Source:CPA,adapted
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30.MarleyCompanymakesthreeproducts(X,Y,&Z)withthefollowingcharacteristics:
Thecompanyhasacapacityof2,000machinehours,butthereisvirtuallyunlimiteddemandforeach
product.Inordertomaximizetotalcontributionmargin,howmanyunitsofeachproductshouldthe
companyproduce?
A)2,000unitsofX,500unitsofY,and200unitsofZ
B)0unitsofX,0unitsofY,and200unitsofZ
C)0unitsofX,500unitsofY,and0unitsofZ
D)1,000unitsofX,0unitsofY,and0unitsofZ
31.ThemanagementofFanninCorporationisconsideringdroppingproductH58S.Datafromthe
companysaccountingsystemappearbelow:
Inthecompanysaccountingsystemallfixedexpensesofthecompanyarefullyallocatedtoproducts.
Furtherinvestigationhasrevealedthat$90,000ofthefixedmanufacturingexpensesand$42,000ofthe
fixedsellingandadministrativeexpensesareavoidableifproductH58Sisdiscontinued.Whatwouldbe
theeffectonthecompanysoverallnetoperatingincomeifproductH58Sweredropped?
A)Overallnetoperatingincomewoulddecreaseby$137,000.
B)Overallnetoperatingincomewouldincreaseby$137,000.
C)Overallnetoperatingincomewoulddecreaseby$19,000.
D)Overallnetoperatingincomewouldincreaseby$19,000.
Level:EasyLO:2Ans:A
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32.ProductQ77HhasbeenconsideredadragonprofitsatZenkeCorporationforsometimeand
managementisconsideringdiscontinuingtheproductaltogether.Datafromthecompanysaccounting
systemappearbelow:
fixedsellingandadministrativeexpensesareavoidableifproductQ77Hisdiscontinued.Whatwouldbe
theeffectonthecompanysoverallnetoperatingincomeifproductQ77Hweredropped?
C)Overallnetoperatingincomewouldincreaseby$4,000.
D)Overallnetoperatingincomewoulddecreaseby$4,000.
Level:EasyLO:2Ans:A
33.PartS00isusedinoneofMorseyCorporationsproducts.Thecompanymakes6,000unitsofthis
parteachyear.ThecompanysAccountingDepartmentreportsthefollowingcostsofproducingthepart
atthislevelofactivity:
Anoutsidesupplierhasofferedtoproducethispartandsellittothecompanyfor$16.10each.Ifthis
offerisaccepted,thesupervisorssalaryandallofthevariablecosts,includingdirectlabor,canbe
avoided.Thespecialequipmentusedtomakethepartwaspurchasedmanyyearsagoandhasnosalvage
valueorotheruse.Theallocatedgeneraloverheadrepresentsfixedcostsoftheentirecompany.Ifthe
outsidesuppliersofferwereaccepted,only$6,000oftheseallocatedgeneraloverheadcostswouldbe
avoided.
IfmanagementdecidestobuypartS00fromtheoutsidesupplierratherthantocontinuemakingthepart,
whatwouldbetheannualimpactonthecompanysoverallnetoperatingincome?
A)Netoperatingincomewoulddeclineby$3,000peryear.
B)Netoperatingincomewoulddeclineby$71,400peryear.
C)Netoperatingincomewoulddeclineby$77,400peryear.
D)Netoperatingincomewoulddeclineby$65,400peryear.
Level:EasyLO:3Ans:A
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34.RamonCorporationmakes18,000unitsofpartE44eachyear.Thispartisusedinoneofthe
companysproducts.ThecompanysAccountingDepartmentreportsthefollowingcostsofproducingthe
partatthislevelofactivity:
Anoutsidesupplierhasofferedtomakeandselltheparttothecompanyfor$23.30each.Ifthisofferis
accepted,thesupervisorssalaryandallofthevariablecosts,includingdirectlabor,canbeavoided.The
specialequipmentusedtomakethepartwaspurchasedmanyyearsagoandhasnosalvagevalueorother
use.Theallocatedgeneraloverheadrepresentsfixedcostsoftheentirecompany.Iftheoutsidesuppliers
offerwereaccepted,only$5,000oftheseallocatedgeneraloverheadcostswouldbeavoided.Inaddition,
thespaceusedtoproducepartE44wouldbeusedtomakemoreofoneofthecompanysotherproducts,
generatinganadditionalsegmentmarginof$21,000peryearforthatproduct.
WhatwouldbetheimpactonthecompanysoverallnetoperatingincomeofbuyingpartE44fromthe
outsidesupplier?
A)Netoperatingincomewouldincreaseby$21,000peryear.
B)Netoperatingincomewouldincreaseby$18,800peryear.
35.KampmannCorporationispresentlymakingpartZ95thatisusedinoneofitsproducts.Atotalof
5,000unitsofthispartareproducedandusedeveryyear.ThecompanysAccountingDepartmentreports
thefollowingcostsofproducingthepartatthislevelofactivity:
Anoutsidesupplierhasofferedtomakeandselltheparttothecompanyfor$24.10each.Ifthisofferis
accepted,thesupervisorssalaryandallofthevariablecostscanbeavoided.Thespecialequipmentused
tomakethepartwaspurchasedmanyyearsagoandhasnosalvagevalueorotheruse.Theallocated
generaloverheadrepresentsfixedcostsoftheentirecompany,noneofwhichwouldbeavoidedifthepart
werepurchasedinsteadofproducedinternally.IfmanagementdecidestobuypartZ95fromtheoutside
supplierratherthantocontinuemakingthepart,whatwouldbetheannualimpactonthecompanys
overallnetoperatingincome?
C)Netoperatingincomewouldincreaseby$34,000peryear.
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D)Netoperatingincomewouldincreaseby$36,000peryear.
Level:EasyLO:3Ans:A
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36.PartA42isusedbyElginCorporationtomakeoneofitsproducts.Atotalof16,000unitsofthispart
areproducedandusedeveryyear.ThecompanysAccountingDepartmentreportsthefollowingcostsof
producingthepartatthislevelofactivity:
Anoutsidesupplierhasofferedtomakethepartandsellittothecompanyfor$30.40each.Ifthisofferis
accepted,thesupervisorssalaryandallofthevariablecosts,includingthedirectlabor,canbeavoided.
Thespecialequipmentusedtomakethepartwaspurchasedmanyyearsagoandhasnosalvagevalueor
otheruse.Theallocatedgeneraloverheadrepresentsfixedcostsoftheentirecompany,noneofwhich
wouldbeavoidedifthepartwerepurchasedinsteadofproducedinternally.Inaddition,thespaceusedto
makepartA42couldbeusedtomakemoreofoneofthecompanysotherproducts,generatingan
additionalsegmentmarginof$23,000peryearforthatproduct.Whatwouldbetheimpactonthe
companysoverallnetoperatingincomeofbuyingpartA42fromtheoutsidesupplier?
37.WiacekCorporationhasreceivedarequestforaspecialorderof4,000unitsofproductF65for
$26.60each.ProductF65sunitproductcostis$25.80,determinedasfollows:
Directlaborisavariablecost.Thespecialorderwouldhavenoeffectonthecompanystotalfixed
manufacturingoverheadcosts.ThecustomerwouldlikemodificationsmadetoproductF65thatwould
increasethevariablecostsby$3.00perunitandthatwouldrequireaninvestmentof$23,000inspecial
moldsthatwouldhavenosalvagevalue.
Thisspecialorderwouldhavenoeffectonthecompanysothersales.Thecompanyhasamplespare
capacityforproducingthespecialorder.Ifthespecialorderisaccepted,thecompanysoverallnet
operatingincomewouldincrease(decrease)by:
A)($31,800)
B)$3,800
C)$3,200
D)($48,400)
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Level:EasyLO:4Ans:B
37
38.AcustomerhasrequestedthatGambaCorporationfillaspecialorderfor3,000unitsofproductQ41
for$25.00aunit.Whiletheproductwouldbemodifiedslightlyforthespecialorder,productQ41s
normalunitproductcostis$21.40:
manufacturingoverheadcosts.ThecustomerwouldlikemodificationsmadetoproductQ41thatwould
increasethevariablecostsby$7.00perunitandthatwouldrequireaninvestmentof$15,000inspecial
moldsthatwouldhavenosalvagevalue.
Thisspecialorderwouldhavenoeffectonthecompanysothersales.Thecompanyhasamplespare
capacityforproducingthespecialorder.Ifthespecialorderisaccepted,thecompanysoverallnet
operatingincomewouldincrease(decrease)by:
A)($5,700)
B)($21,300)
C)($25,200)
D)$10,800
Level:EasyLO:4Ans:A
39.HoangCorporationmakesthreeproductsthatusecompoundW,thecurrentconstrainedresource.
Dataconcerningthoseproductsappearbelow:
Ranktheproductsinorderoftheircurrentprofitabilityfrommostprofitabletoleastprofitable.Inother
words,ranktheproductsintheorderinwhichtheyshouldbeemphasized.
A)RP,KI,LH
B)RP,LH,KI
C)KI,RP,LH
D)LH,RP,KI
Level:EasyLO:5Ans:B
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40.FahringerCorporationmakesthreeproductsthatusecompoundW,thecurrentconstrainedresource.
Ranktheproductsinorderoftheircurrentprofitabilityfrommostprofitabletoleastprofitable.Inother
words,ranktheproductsintheorderinwhichtheyshouldbeemphasized.
A)XS,BJ,QR
B)QR,BJ,XS
C)BJ,QR,XS
D)QR,XS,BJ
Level:EasyLO:5Ans:D
41.TheconstraintatJohngrassCorporationistimeonaparticularmachine.Thecompanymakesthree
productsthatusethismachine.Dataconcerningthoseproductsappearbelow:
Assumethatsufficienttimeisavailableontheconstrainedmachinetosatisfydemandforallbuttheleast
profitableproduct.Uptohowmuchshouldthecompanybewillingtopaytoacquiremoreofthe
constrainedresource?
A)$11.60perminute
B)$14.10perminute
C)$91.64perunit
D)$22.24perunit
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Usethefollowinginformationtoanswer4243
JebbsLettuceStandcurrentlysells60,000headsoflettuceeachyearfor$1.00perhead.Jebbisthinking
ofexpandingoperationsandservingthecustomerbetterbypurchasingasliceanddicemachinethat
willcutupeachheadoflettuceintobitesizepiecesthatcanbeusedforsalads.Jebbexpectshewillthen
beabletosellhislettucefor$1.70perhead.Jebbhaspreparedthefollowinganalysisforeachoption
basedonsalesof60,000headsoflettuce:
42.Basedontheinformationabove,whatwillbeJebbsincreaseordecreaseinprofitfortheyearifhe
choosestostartslicingupthelettuceinsteadofsellingitwhole?
A)$3,000increase
B)$3,000decrease
C)$12,000decrease
D)$30,000increase
43.AssumethatJebbiscurrentlysellingonly50,000headsoflettuceperyearinsteadof60,000.Under
thisscenario,whatwillbeJebbsincreaseordecreaseinprofitfortheyearifhechoosestostartslicing
upthelettuceinsteadofsellingitwhole?
A)$2,000increase
B)$2,500decrease
C)$3,000increase
D)$3,500decrease
Level:HardLO:1Ans:D
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BayshoreCompanymanufacturesandsellsProductK.Resultsforlastyearareasfollows:
BayshoreisreexaminingallofitsproductlinesandistryingtodecidewhethertodiscontinueProductK.
Droppingtheproductwouldhavenoeffectonthetotalfixedmanufacturingoverheadincurredbythe
company.
44.AssumethatdroppingProductKwillhavenoeffectonthesaleofotherproductlines.Ifthecompany
dropsProductK,thechangeinannualnetoperatingincomeduetothisdecisionwillbea:
A)$10,000decrease
B)$150,000increase
C)$160,000decrease
D)$310,000decrease
45.AssumethatdroppingProductKwouldresultina$15,000increaseinthecontributionmarginof
otherproductlines.IfBayshorechoosestodropProductK,thenthechangeinnetoperatingincomenext
yearduetothisactionwillbea:
A)$150,000increase
B)$150,000decrease
C)$5,000increase
D)$140,000increase
Level:MediumLO:2Ans:C
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TheFlintFanCompanyisconsideringtheadditionofanewmodelfan,theF27,toitscurrentproduct
lines.TheexpectedcostandrevenuedatafortheF27fanareasfollows:
IftheF27modelisaddedasanewproductline,itisexpectedthatthecontributionmarginofother
productlinesatFlintwilldropby$7,000peryear.
46.IftheF27productlineisaddednextyear,thechangeinoperatingincomeshouldbe:
A)$30,000increase
B)$5,000decrease
C)$23,000increase
D)$15,000increase
47.WhatisthelowestunitsellingpricethatcouldbechargedfortheF27modelandstillmakeit
economicallydesirableforFlinttoaddthenewproductline?
A)$52.25
B)$50.50
C)$55.75
D)$49.00
Level:HardLO:2Ans:A
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KeyCompanyisconsideringtheadditionofanewproducttoitscurrentproductlines.Theexpectedcost
andrevenuedataforthenewproductareasfollows:
Ifthenewproductisadded,thecombinedcontributionmarginoftheother,existingproductlinesis
expectedtodrop$65,000peryear.Totalcommoncorporatecostswouldbeunaffectedbythedecisionof
whethertoaddthenewproduct.
48.Ifthenewproductlineisaddednextyear,theincreaseinnetoperatingincomeresultingfromthis
decisionwouldbe:
A)$325,000
B)$200,000
C)$145,000
D)$135,000
49.Whatisthelowestsellingpriceperunitthatcouldbechargedforthenewproductlineandstillmake
iteconomicallydesirabletoaddthenewproductline?
A)$246
B)$250
C)$232
D)$282
Level:HardLO:2Ans:B
TheTalbotCompanymakeswheelsthatitusesintheproductionofbicycles.Talbotscoststoproduce
100,000wheelsannuallyare:
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AnoutsidesupplierhasofferedtosellTalbotsimilarwheelsfor$1.25perwheel.Ifthewheelsare
purchasedfromtheoutsidesupplier,$15,000ofannualfixedoverheadcouldbeavoidedandthefacilities
nowbeingusedcouldberentedtoanothercompanyfor$45,000peryear.
44
50.IfTalbotchoosestobuythewheelfromtheoutsidesupplier,thenthechangeinannualnetoperating
incomeduetoacceptingtheofferisa:
A)$35,000increase
B)$10,000decrease
C)$45,000increase
D)$70,000increase
51.WhatisthehighestpricethatTalbotcouldpaytheoutsidesupplierforthewheelandstillbe
economicallyindifferentbetweenmakingorbuyingthewheels?
A)$1.70
B)$1.60
C)$1.55
D)$1.15
Level:HardLO:3Ans:B
MelbourneCompanyhastraditionallymadeasubcomponentofitsmajorproduct.Annualproductionof
30,000subcomponentsresultsinthefollowingcosts:
Melbournehasreceivedanofferfromanoutsidesupplierwhoiswillingtoprovidethe30,000unitsofthe
subcomponenteachyearatapriceof$28perunit.Melbourneknowsthatthefacilitiesnowbeingusedto
manufacturethesubcomponentcouldberentedtoanothercompanyfor$80,000peryearifthe
subcomponentwerepurchasedfromtheoutsidesupplier.Otherwise,therewouldbenoeffectofthis
decisiononthetotalfixedoverheadofthecompany.
52.IfMelbournedecidestopurchasethesubcomponentfromtheoutsidesupplier,whatwouldbethe
impactonthecompanysnetoperatingincomefortheyear?
A)$120,000higher
B)$20,000higher
C)$120,000lower
D)$20,000lower
53.AtwhatpriceperunitchargedbytheoutsidesupplierwouldMelbournebeeconomicallyindifferent
betweenmakingthesubcomponentorbuyingitfromoutside?
A)$29
B)$25
C)$21
45
D)$24
Level:HardLO:3Ans:D
46
RegisCompanymakestheplugsitusesinoneofitsproductsatacostof$36perunit.Thiscostincludes
$8offixedoverhead.Regisneeds30,000oftheseplugsannually,andOrlanCompanyhasofferedtosell
themtoRegisat$33perunit.IfRegisdecidestopurchasetheplugs,$60,000oftheannualfixed
overheadwillbeeliminated,andthecompanymaybeabletorentthefacilitypreviouslyusedfor
manufacturingtheplugs.
54.IfRegisCompanypurchasestheplugsbutdoesnotrenttheunusedfacility,thecompanywould:
A)save$3.00perunit.
B)lose$6.00perunit.
C)save$6.00perunit.
D)lose$3.00perunit.
Source:CMA,adapted
55.Iftheplugsarepurchasedandthefacilityrented,RegisCompanywishestorealize$100,000in
savingsannually.Toachievethisgoal,theminimumannualrentonthefacilitymustbe:
A)$10,000
B)$40,000
C)$70,000
D)$190,000
Source:CMA,adapted
Level:HardLO:3Ans:D
AhringerCompanymakes50,000unitsperyearofapartitusesintheproductsitmanufactures.Theunit
productcostofthispartiscomputedasfollows:
Anoutsidesupplierhasofferedtosellthecompanyallofthesepartsitneedsfor$50.10aunit.Ifthe
companyacceptsthisoffer,thefacilitiesnowbeingusedtomakethepartcouldbeusedtomakemore
unitsofaproductthatisinhighdemand.Theadditionalcontributionmarginonthisotherproductwould
be$135,000peryear.
Ifthepartwerepurchasedfromtheoutsidesupplier,allofthedirectlaborcostofthepartwouldbe
avoided.However,$9.30ofthefixedmanufacturingoverheadcostbeingappliedtothepartwould
continueevenifthepartwerepurchasedfromtheoutsidesupplier.Thisfixedmanufacturingoverhead
costwouldbeappliedtothecompanysremainingproducts.
47
56.Howmuchoftheunitproductcostof$57.10isrelevantinthedecisionofwhethertomakeorbuythe
part?
A)$57.10
B)$21.70
C)$47.80
D)$42.90
Level:EasyLO:3Ans:C
57.Whatisthenettotaldollaradvantage(disadvantage)ofpurchasingthepartratherthanmakingit?
A)$350,000
B)$135,000
C)$(115,000)
D)$20,000
58.Whatisthemaximumamountthecompanyshouldbewillingtopayanoutsidesupplierperunitfor
thepartifthesuppliercommitstosupplyingall50,000unitsrequiredeachyear?
A)$57.10
B)$50.50
C)$59.80
D)$2.70
Level:HardLO:3Ans:B
DockwillerInc.manufacturesindustrialcomponents.Oneofitsproducts,whichisusedinthe
constructionofindustrialairconditioners,isknownasD53.Dataconcerningthisproductaregiven
below:
Theaboveperunitdataarebasedonannualproductionof8,000unitsofthecomponent.Directlaborcan
beconsideredtobeavariablecost.
48
59.Thecompanyhasreceivedaspecial,onetimeonlyorderfor500unitsofcomponentD53.There
wouldbenovariablesellingexpenseonthisspecialorderandthetotalfixedmanufacturingoverheadand
fixedsellingandadministrativeexpensesofthecompanywouldnotbeaffectedbytheorder.Assuming
thatDockwillerhasexcesscapacityandcanfilltheorderwithoutcuttingbackontheproductionofany
product,whatistheminimumpriceperunitonthespecialorderbelowwhichthecompanyshouldnot
go?
A)$67
B)$30
C)$150
D)$47
Source:CMA,adapted
60.Thecompanyhasreceivedaspecial,onetimeonlyorderfor300unitsofcomponentD53.There
wouldbenovariablesellingexpenseonthisspecialorderandthetotalfixedmanufacturingoverheadand
fixedsellingandadministrativeexpensesofthecompanywouldnotbeaffectedbytheorder.However,
assumethatDockwillerhasnoexcesscapacityandthisspecialorderwouldrequire30minutesofthe
constrainingresource,whichcouldbeusedinsteadtoproduceproductswithatotalcontributionmargin
of$1,800.Whatistheminimumpriceperunitonthespecialorderbelowwhichthecompanyshouldnot
go?
A)$73
B)$36
C)$53
D)$6
Source:CMA,adapted
Level:HardLO:4,5Ans:B
61.Refertotheoriginaldataintheproblem.Whatisthecurrentcontributionmarginperunitfor
componentD53basedonitssellingpriceof$150anditsannualproductionof8,000units?
A)$83
B)$118
C)$32
D)$120
Source:CMA,adapted
Level:EasyLO:4Ans:B
49
ThefollowingaretheJensenCompanysunitcostsofmakingandsellinganitematavolumeof1,000
unitspermonth(whichrepresentsthecompanyscapacity):
Presentsalesamountto700unitspermonth.Anorderhasbeenreceivedfromacustomerinaforeign
marketfor100units.Theorderwouldnotaffectcurrentsales.Jensenstotalfixedcosts,both
manufacturingandsellingandadministrative,areconstantwithintherelevantrangebetween700units
and1,000units.Thevariablesellingandadministrativeexpenseswouldhavetobeincurredonthis
specialorderaswellasforallothersales.
62.Howmuchwillthecompanysprofitsbeincreasedor(decreased)ifitpricesthe100unitsat$7each?
A)$(30)
B)$150
C)$0
D)$310
63.Assumethecompanyhas50unitsleftoverfromlastyearwhichhavesmalldefectsandwhichwill
havetobesoldatareducedpriceforscrap.Thesaleofthesedefectiveunitswillhavenoeffectonthe
companysothersales.Whatcostisrelevantasaguideforsettingaminimumprice?
A)$5.50
B)$5.90
C)$2.00
D)$3.50
Level:HardLO:4Ans:C
50
TheMolisCompanyhasthecapacitytoproduce15,000hakseachmonth.Currentregularproductionand
salesare10,000hakspermonthatasellingpriceof$15each.Basedonthislevelofactivity,the
followingunitcostsareincurred:
Thefixedcosts,bothmanufacturingandadministrative,areconstantintotalwithintherelevantrangeof
10,000to15,000hakspermonth.
TheMolisCompanyhasreceivedaspecialorderfromacustomerwhowantstopayareducedpriceof
$10perhak.Therewouldbenosellingexpenseinconnectionwiththisspecialorder.And,thisorder
wouldhavenoeffectonthecompanysothersales.
64.Supposethespecialorderisfor4,000haksthismonth.IfthisofferisacceptedbyMolis,the
companysoperatingincomeforthemonthwill:
A)increaseby$6,000
B)decreaseby$6,000
C)increaseby$5,000
D)decreaseby$5,000
65.Supposethespecialorderisfor6,000haksthismonthandthussomeregularsaleswouldhavetobe
givenup.IfthisofferisacceptedbyMolis,thecompanysoperatingincomeforthemonthwill:
A)increaseby$6,000
B)increaseby$7,500
C)increaseby$5,000
D)increaseby$1,500
Level:HardLO:4Ans:D
51
ElfertsCompanyproducesasingleproduct.Thecostofproducingandsellingasingleunitofthisproduct
atthecompanysnormalactivitylevelof70,000unitspermonthisasfollows:
Thenormalsellingpriceoftheproductis$85.80perunit.
Anorderhasbeenreceivedfromanoverseascustomerfor4,000unitstobedeliveredthismonthata
specialdiscountedprice.Thisorderwouldhavenoeffectonthecompanysnormalsalesandwouldnot
changethetotalamountofthecompanysfixedcosts.Thevariablesellingandadministrativeexpense
wouldbe$0.60lessperunitonthisorderthanonnormalsales.
Directlaborisavariablecostinthiscompany.
66.Supposethereisampleidlecapacitytoproducetheunitsrequiredbytheoverseascustomerandthe
specialdiscountedpriceonthespecialorderis$80.60perunit.Byhowmuchwouldthisspecialorder
increase(decrease)thecompanysnetoperatingincomeforthemonth?
A)$44,000
B)$(18,400)
C)$117,200
D)$17,200
67.Supposethecompanyisalreadyoperatingatcapacitywhenthespecialorderisreceivedfromthe
overseascustomer.Whatwouldbetheopportunitycostofeachunitdeliveredtotheoverseascustomer?
A)$9.50
B)$10.10
C)$5.20
D)$33.90
Level:HardLO:4Ans:D
68.Supposethereisnotenoughidlecapacitytoproducealloftheunitsfortheoverseascustomerand
acceptingthespecialorderwouldrequirecuttingbackonproductionof100unitsforregularcustomers.
Theminimumacceptablepriceperunitforthespecialorderisclosestto:
A)$69.20
B)$76.30
C)$85.80
D)$52.15
Level:HardLO:4Ans:D
52
TheMelroseCompanyproducesasingleproduct,ProductC.Melrosehasthecapacitytoproduce70,000
unitsofProductCeachyear.IfMelroseproducesatcapacity,theperunitcoststoproduceandsellone
unitofProductCareasfollows:
TheregularsellingpriceofoneunitofProductCis$100.AspecialorderhasbeenreceivedbyMelrose
fromMooreCompanytopurchase7,000unitsofProductCduringtheupcomingyear.Ifthisspecial
orderisaccepted,thevariablesellingexpensewillbereducedby75%.Totalfixedmanufacturing
overheadandfixedsellingexpenseswouldbeunaffectedexceptthatMelrosewillneedtopurchasea
specializedmachinetoengravetheMoorenameoneachunitofproductCinthespecialorder.The
machinewillcost$10,500andwillhavenouseafterthespecialorderisfilled.
69.AssumethatMelroseexpectstosell60,000unitsofProductCtoregularcustomersnextyear.Atwhat
sellingpriceforthe7,000unitswouldMelrosebeeconomicallyindifferentbetweenacceptingand
rejectingthespecialorderfromMoore?
A)$53.00
B)$54.50
C)$75.00
D)$76.50
Level:HardLO:4Ans:B
70.AssumeMelroseexpectstosell60,000unitsofProductCtoregularcustomersnextyear.IfMoore
companyofferstobuythespecialunitsat$90perunit,theeffectofacceptingthespecialorderon
Melrosesnetoperatingincomefornextyearwillbe:
A)$42,000increase
B)$54,000decrease
C)$105,000increase
D)$248,500increase
Level:HardLO:4Ans:D
71.SupposeMelrosecansell68,000unitsofProductCtoregularcustomersnextyear.IfMoore
Companyofferstobuythespecialorderunitsat$95perunit,theeffectofacceptingthespecialorderfor
7,000unitsonMelrosesnetoperatingincomefornextyearwillbea:
A)$93,500increase
B)$104,000increase
C)$114,500increase
D)$294,000increase
Level:HardLO:4Ans:A
53
54
BroylesCompanymakesfourproductsinasinglefacility.Theseproductshavethefollowingunit
productcosts:
Additionaldataconcerningtheseproductsarelistedbelow.
Thegrindingmachinesarepotentiallytheconstraintintheproductionfacility.Atotalof14,400minutes
areavailablepermonthonthesemachines.
72.Howmanyminutesofgrindingmachinetimewouldberequiredtosatisfydemandforallfour
products?
A)13,400
B)15,900
C)10,000
D)14,400
Level:EasyLO:5Ans:B
73.WhichproductmakestheLEASTprofitableuseofthegrindingmachines?
A)ProductA
B)ProductB
C)ProductC
D)ProductD
Level:HardLO:5Ans:A
55
74.WhichproductmakestheMOSTprofitableuseofthegrindingmachines?
A)ProductA
B)ProductB
C)ProductC
D)ProductD
Level:HardLO:5Ans:B
75.Uptohowmuchshouldthecompanybewillingtopayforoneadditionalhourofgrindingmachine
timeifthecompanyhasmadethebestuseoftheexistinggrindingmachinecapacity?(Roundofftothe
nearestwholecent.)
A)$26.40
B)$12.00
C)$14.00
D)$0.00
Level:HardLO:5Ans:C
CravesCompanymakesfourproductsinasinglefacility.Dataconcerningtheseproductsappearbelow:
Themillingmachinesarepotentiallytheconstraintintheproductionfacility.Atotalof10,400minutes
76.Howmanyminutesofmillingmachinetimewouldberequiredtosatisfydemandforallfour
products?
A)9,000
B)10,500
C)10,400
D)9,900
Level:EasyLO:5Ans:B
77.WhichproductmakestheLEASTprofitableuseofthemillingmachines?
A)ProductA
B)ProductB
C)ProductC
D)ProductD
56
57
78.WhichproductmakestheMOSTprofitableuseofthemillingmachines?
A)ProductA
B)ProductB
C)ProductC
D)ProductD
79.Uptohowmuchshouldthecompanybewillingtopayforoneadditionalhourofmillingmachine
timeifthecompanyhasmadethebestuseoftheexistingmillingmachinecapacity?(Roundofftothe
nearestwholecent.)
A)$10.60
B)$0.00
C)$5.15
D)$17.40
TheMadisonCompanyproducesthreeproductswiththefollowingcostsandsellingprices:
80.IfMadisonhasalimitof10,000directlaborhoursbutnolimitonmachinehours,thenthethree
productsshouldbeproducedintheorder:
A)A,B,C
B)B,C,A
C)C,A,B
D)A,C,B
81.IfMadisonhasalimitof15,000machinehoursbutnolimitondirectlaborhours,thenthethree
productsshouldbeproducedintheorder:
A)A,B,C
B)B,C,A
C)A,C,B
D)C,A,B
58
TheWesterCompanyproducesthreeproductswiththefollowingcostsandsellingprices:
Thecompanyhasinsufficientcapacitytofulfillallofthedemandforthesethreeproducts.
82.Ifdirectlaborhoursaretheconstraint,thenthethreeproductsshouldbeproducedintheorder:
A)A,B,C
B)B,A,C
C)C,A,B
D)A,C,B
Level:HardLO:5Ans:B
83.Ifmachinehoursaretheconstraint,thenthethreeproductsshouldbeproducedintheorder:
A)A,B,C
B)B,C,A
C)A,C,B
D)C,A,B
NesmithCorporationisconsideringtwoalternatives:AandB.Costsassociatedwiththealternativesare
listedbelow:
84.ArethematerialscostsandprocessingcostsrelevantinthechoicebetweenalternativesAandB?
(Ignoretheequipmentrentalandoccupancycostsinthisquestion.)
A)Bothmaterialscostsandprocessingcostsarerelevant
B)Onlymaterialscostsarerelevant
C)Neithermaterialscostsnorprocessingcostsarerelevant
D)Onlyprocessingcostsarerelevant
59
Level:EasyLO:1Ans:A
60
85.WhatisthedifferentialcostofAlternativeBoverAlternativeA,includingalloftherelevantcosts?
A)$150,000
B)$100,000
C)$125,000
D)$50,000
Level:EasyLO:1Ans:D
Twoalternatives,codenamedXandY,areunderconsiderationatBrahlerCorporation.Costsassociated
withthealternativesarelistedbelow.
86.ArethematerialscostsandprocessingcostsrelevantinthechoicebetweenalternativesXandY?
(Ignoretheequipmentrentalandoccupancycostsinthisquestion.)
A)Onlyprocessingcostsarerelevant
B)Bothmaterialscostsandprocessingcostsarerelevant
C)Onlymaterialscostsarerelevant
D)Neithermaterialscostsnorprocessingcostsarerelevant
Level:EasyLO:1Ans:A
87.WhatisthedifferentialcostofAlternativeYoverAlternativeX,includingalloftherelevantcosts?
A)$122,000
B)$136,000
C)$108,000
D)$28,000
Level:EasyLO:1Ans:D
ThemanagementofKabanuckCorporationisconsideringdroppingproductV41B.Datafromthe
Allfixedexpensesofthecompanyarefullyallocatedtoproductsinthecompanysaccountingsystem.
fixedsellingandadministrativeexpensesareavoidableifproductV41Bisdiscontinued.
61
62
88.Accordingtothecompanysaccountingsystem,whatisthenetoperatingincomeearnedbyproduct
V41B?
A)$71,000
B)$516,000
C)($516,000)
D)($71,000)
Level:EasyLO:2Ans:D
89.WhatwouldbetheeffectonthecompanysoverallnetoperatingincomeifproductV41Bwere
dropped?
A)Overallnetoperatingincomewouldincreaseby$71,000.
C)Overallnetoperatingincomewoulddecreaseby$132,000.
Level:EasyLO:2Ans:C
ThemanagementofCackowskiCorporationhasbeenconcernedforsometimewiththefinancial
performanceofitsproductI11Sandhasconsidereddiscontinuingitonseveraloccasions.Datafromthe
fixedsellingandadministrativeexpensesareavoidableifproductI11Sisdiscontinued.
90.Accordingtothecompanysaccountingsystem,whatisthenetoperatingincomeearnedbyproduct
I11S?
A)$410,000
B)$46,000
C)($46,000)
D)($410,000)
Level:EasyLO:2Ans:C
91.WhatwouldbetheeffectonthecompanysoverallnetoperatingincomeifproductI11Swere
dropped?
C)Overallnetoperatingincomewouldincreaseby$46,000.
63
Level:EasyLO:2Ans:D
64
HermenegildoCorporationispresentlymakingpartP42thatisusedinoneofitsproducts.Atotalof
10,000unitsofthispartareproducedandusedeveryyear.ThecompanysAccountingDepartment
reportsthefollowingcostsofproducingthepartatthislevelofactivity:
Anoutsidesupplierhasofferedtoproduceandselltheparttothecompanyfor$23.90each.Ifthisoffer
isaccepted,thesupervisorssalaryandallofthevariablecosts,includingdirectlabor,canbeavoided.
otheruse.Theallocatedgeneraloverheadrepresentsfixedcostsoftheentirecompany.Iftheoutside
suppliersofferwereaccepted,only$4,000oftheseallocatedgeneraloverheadcostswouldbeavoided.
92.IfmanagementdecidestobuypartP42fromtheoutsidesupplierratherthantocontinuemakingthe
part,whatwouldbetheannualimpactonthecompanysoverallnetoperatingincome?
Level:EasyLO:3Ans:A
93.Inadditiontothefactsgivenabove,assumethatthespaceusedtoproducepartP42couldbeusedto
makemoreofoneofthecompanysotherproducts,generatinganadditionalsegmentmarginof$13,000
peryearforthatproduct.Whatwouldbetheimpactonthecompanysoverallnetoperatingincomeof
buyingpartP42fromtheoutsidesupplierandusingthefreedspacetomakemoreoftheotherproduct?
65
RamaCorporationispresentlymakingpartJ56thatisusedinoneofitsproducts.Atotalof4,000unitsof
thispartareproducedandusedeveryyear.ThecompanysAccountingDepartmentreportsthefollowing
costsofproducingthepartatthislevelofactivity:
Anoutsidesupplierhasofferedtoproduceandselltheparttothecompanyfor$30.80each.Ifthisoffer
isaccepted,thesupervisorssalaryandallofthevariablecosts,includingdirectlabor,canbeavoided.
otheruse.Theallocatedgeneraloverheadrepresentsfixedcostsoftheentirecompany,noneofwhich
wouldbeavoidedifthepartwerepurchasedinsteadofproducedinternally.
94.IfmanagementdecidestobuypartJ56fromtheoutsidesupplierratherthantocontinuemakingthe
part,whatwouldbetheannualimpactonthecompanysoverallnetoperatingincome?
Level:EasyLO:3Ans:D
95.Inadditiontothefactsgivenabove,assumethatthespaceusedtoproducepartJ56couldbeusedto
makemoreofoneofthecompanysotherproducts,generatinganadditionalsegmentmarginof$13,000
peryearforthatproduct.Whatwouldbetheimpactonthecompanysoverallnetoperatingincomeof
buyingpartJ56fromtheoutsidesupplierandusingthefreedspacetomakemoreoftheotherproduct?
D)Netoperatingincomewouldincreaseby$13,000peryear.
TillisonCorporationmakesthreeproductsthatusethecurrentconstraintaparticulartypeofmachine.
66
67
96.Ranktheproductsinorderoftheircurrentprofitabilityfrommostprofitabletoleastprofitable.In
otherwords,ranktheproductsintheorderinwhichtheyshouldbeemphasized.
A)TC,KA,PA
B)PA,TC,KA
C)TC,PA,KA
D)KA,TC,PA
Level:EasyLO:5Ans:D
97.Assumethatsufficientconstrainttimeisavailabletosatisfydemandforallbuttheleastprofitable
product.Uptohowmuchshouldthecompanybewillingtopaytoacquiremoreoftheconstrained
resource?
A)$10.80perminute
B)$69.44perunit
C)$16.40perminute
D)$14.04perunit
TheconstraintatBonavitaCorporationistimeonaparticularmachine.Thecompanymakesthree
productsthatusethismachine.Dataconcerningthoseproductsappearbelow:
98.Ranktheproductsinorderoftheircurrentprofitabilityfrommostprofitabletoleastprofitable.In
otherwords,ranktheproductsintheorderinwhichtheyshouldbeemphasized.
A)PW,UN,ZG
B)UN,ZG,PW
C)ZG,PW,UN
D)UN,PW,ZG
Level:EasyLO:5Ans:B
99.Assumethatsufficienttimeisavailableontheconstrainedmachinetosatisfydemandforallbutthe
leastprofitableproduct.Uptohowmuchshouldthecompanybewillingtopaytoacquiremoreofthis
constrainedresource?
A)$15.30perminute
B)$18.80perminute
C)$77.08perunit
D)$122.10perunit
68
Essay
100.LakeshoreToursInc.,operatesalargenumberoftoursthroughouttheUnitedStates.Astudyhas
indicatedthatsomeofthetoursarenotprofitable,andconsiderationisbeinggiventodroppingthese
toursinordertoimprovethecompanysoveralloperatingperformance.Onesuchtourisatwoday
BattlefieldsoftheFrenchandIndianWarsbustour.Anincomestatementfromoneofthesetoursisgiven
below:
Droppingthistourwouldnotaffectthenumberofbusesinthecompanysfleetorthenumberofbus
driversonthecompanyspayroll.Busesdonotwearoutthroughuse;rather,theyeventuallybecome
obsolete.Busdriversarepaidfixedannualsalaries;tourguidesarepaidforeachtourconducted.The
Busmaintenanceandpreparationcostaboveisanallocationofthesalariesofmechanicsandother
servicepersonnelwhoareresponsibleforkeepingthecompanysfleetofbusesingoodoperating
condition.Therewouldbenochangeinthenumberofmechanicsandotherservicepersonnelasaresult
ofdroppingthistour.Theliabilityinsurancedependsuponthenumberofbusesinthecompanysfleet
andnotuponhowmuchtheyareused.
Required:
(a.)Prepareananalysisshowingwhattheimpactwillbeoncompanyprofitsifthistourisdiscontinued.
(b.)Thecompanystourdirectorhasbeencriticizedbecauseonlyabout50%oftheseatsonthe
companystoursarebeingfilledascomparedtoanaverageof60%fortheindustry.Thetourdirectorhas
explainedthatthecompanysaverageseatoccupancycouldbeimprovedconsiderablybyeliminating
about10%ofthetours,butthatdoingsowouldreduceprofits.Doyouagreewiththetourdirectors
conclusion?Explainyourresponse.
Level:HardLO:2
69
Ans:
(b.)Theeliminationoftourswithoccupancyrateslowerthantheindustryaveragewouldimprovethe
overallaverageseatoccupancyforthecompanyasawhole.Thisactioncouldreducecompanyprofitsin
twoways.First,thetoursthatareeliminatedcouldhaveacontributionmarginthatishigherthanthe
avoidablecostsofthetouritself.Thisisthecasewiththetourdescribedinpart1above.Eliminating
thesetourswouldreducethecompanystotalcontributionmarginmorethanitwouldreducetotalcosts
resultinginadeclineinprofits.Second,thesetoursmightbeactingasmagnetsinthattheymaybe
drawingtouriststoother,moreprofitabletoursbeingofferedbythecompany.
101.BoaMiningCompanycurrentlyisoperatingatlessthan50%ofpracticalcapacity.Themanagement
ofthecompanyexpectssalestodropbelowthepresentlevelof10,000tonsoforepermonthverysoon.
Thesalespricepertonis$3andthevariablecostpertonis$2.Fixedcostspermonthtotal$10,000.
Managementisconcernedthatafurtherdropinsalesvolumewillgeneratealossandaccordinglyis
consideringtemporarilysuspendingoperationsuntildemandinthemetalsmarketsreboundsandprices
onceagainrise.Managementhasimplementedacostreductionprogramoverthepastyear,butatthis
pointsuspensionofoperationsappearstobetheonlyviablealternative.Managementestimatesthat
suspensionofoperationswouldreducefixedcostsfrom$10,000to$4,000permonth.
Required:
(a.)Whydoesmanagementbelievethatthefixedcostswillpersistat$4,000eventhoughthemineis
temporarilyclosed?
(b.)Atwhatsalesvolumepermonthwillthecompanybeindifferentbetweencontinuingtooperatethe
mineandclosingit?
Level:MediumLO:2
Ans:
(a.)Somenonvariablecostswillcontinuetobeincurreddespitethetemporaryclosingofthemine.
Managementisprobablyreluctanttodischargekeyemployeessincetheseemployeeswillseek
employmentelsewhereandreplacingthemcouldbequitecostly.Askeletonstaffwouldneedtobe
maintainedforcertainadministrativeandmaintenancefunctions.Taxesandinsurancewouldcontinueto
bepaidduringtheshutdownperiod.
(b.)Suspensionofoperationswouldbedesirablewhensalesvolumedropsbelow6,000tonsasshown
below:
70
71
Eachunitcontributes$1.00perunittowardsfixedcosts:
Salesvolumenecessarytorecover$6,000offixedcosts:
$6,000$1.00=6,000tons
102.FothergillCompanymakes40,000unitsperyearofapartitusesintheproductsitmanufactures.
Theunitproductcostofthispartiscomputedasfollows:
Anoutsidesupplierhasofferedtosellthecompanyallofthesepartsitneedsfor$59.20aunit.Ifthe
companyacceptsthisoffer,thefacilitiesnowbeingusedtomakethepartcouldbeusedtomakemore
unitsofaproductthatisinhighdemand.Theadditionalcontributionmarginonthisotherproductwould
be$352,000peryear.
Ifthepartwerepurchasedfromtheoutsidesupplier,allofthedirectlaborcostofthepartwouldbe
avoided.However,$21.90ofthefixedmanufacturingoverheadcostbeingappliedtothepartwould
continueevenifthepartwerepurchasedfromtheoutsidesupplier.Thisfixedmanufacturingoverhead
costwouldbeappliedtothecompanysremainingproducts.
Required:
(a.)Howmuchoftheunitproductcostof$71.70isrelevantinthedecisionofwhethertomakeorbuythe
part?
(b.)Whatisthenettotaldollaradvantage(disadvantage)ofpurchasingthepartratherthanmakingit?
(c.)Whatisthemaximumamountthecompanyshouldbewillingtopayanoutsidesupplierperunitfor
thepartifthesuppliercommitstosupplyingall40,000unitsrequiredeachyear?
Level:HardLO:3
72
Ans:
103.BulanInc.makesarangeofproducts.Thecompanyspredeterminedoverheadrateis$20perdirect
laborhour,whichwascalculatedusingthefollowingbudgeteddata:
ComponentT6isusedinoneofthecompanysproducts.Theunitproductcostofthecomponent
accordingtothecompanyscostaccountingsystemisdeterminedasfollows:
AnoutsidesupplierhasofferedtosupplycomponentT6for$101each.Theoutsidesupplierisknownfor
qualityandreliability.Assumethatdirectlaborisavariablecost,variablemanufacturingoverheadis
reallydrivenbydirectlaborhours,andtotalfixedmanufacturingoverheadwouldnotbeaffectedbythis
decision.Bulanchronicallyhasidlecapacity.
Required:
Istheofferfromtheoutsidesupplierfinanciallyattractive?Why?
Source:CIMA,adapted
Level:HardLO:3
73
Ans:
Directmaterials,directlabor,andvariablemanufacturingoverheadarerelevantinthisdecision.Fixed
manufacturingoverheadisnotrelevantsinceitwouldnotbeaffectedbythedecision.Thevariable
portionofthemanufacturingoverheadrateiscomputedasfollows:
Thedirectlaborhoursperunitforthespecialordercanbedeterminedasfollows:
Consequently,thevariablemanufacturingoverheadforthespecialorderwouldbe:
Puttingthisalltogether:
Sincetheoutsidesupplierhasofferedtosellthecomponentfor$101.00each,butitonlycoststhe
company$85.00tomakethecomponentinternally,thisisnotafinanciallyattractiveoffer.
104.JiambalvoCompanyproducesasingleproduct.Thecostofproducingandsellingasingleunitof
thisproductatthecompanysnormalactivitylevelof40,000unitspermonthisasfollows:
Thenormalsellingpriceoftheproductis$81.10perunit.
Anorderhasbeenreceivedfromanoverseascustomerfor3,000unitstobedeliveredthismonthata
specialdiscountedprice.Thisorderwouldhavenoeffectonthecompanysnormalsalesandwouldnot
74
changethetotalamountofthecompanysfixedcosts.Thevariablesellingandadministrativeexpense
wouldbe$0.20lessperunitonthisorderthanonnormalsales.
75
Required:
(a.)Supposethecompanyhasampleidlecapacitytoproducetheunitsrequiredbytheoverseascustomer
andthespecialdiscountedpriceonthespecialorderis$75.30perunit.Byhowmuchwouldthisspecial
orderincrease(decrease)thecompanysnetoperatingincomeforthemonth?
(b.)Supposethecompanyisalreadyoperatingatcapacitywhenthespecialorderisreceivedfromthe
overseascustomer.Whatwouldbetheopportunitycostofeachunitdeliveredtotheoverseascustomer?
(c.)Supposethecompanydoesnothaveenoughidlecapacitytoproducealloftheunitsfortheoverseas
customerandacceptingthespecialorderwouldrequirecuttingbackonproductionof1,000unitsfor
regularcustomers.Whatwouldbetheminimumacceptablepriceperunitforthespecialorder?
Level:HardLO:4
Ans:
(b.)Theopportunitycostisjustthecontributionmarginonnormalsales:
(c.)Minimumacceptableprice:
76
105.PilgrimCorporationmakesarangeofproducts.Thecompanyspredeterminedoverheadrateis$23
perdirectlaborhour,whichwascalculatedusingthefollowingbudgeteddata:
Managementisconsideringaspecialorderfor800unitsofproductN89Eat$69each.Thenormalselling
priceofproductN89Eis$88andtheunitproductcostisdeterminedasfollows:
Ifthespecialorderwereaccepted,normalsalesofthisandotherproductswouldnotbeaffected.The
companyhasampleexcesscapacitytoproducetheadditionalunits.Assumethatdirectlaborisavariable
cost,variablemanufacturingoverheadisreallydrivenbydirectlaborhours,andtotalfixed
manufacturingoverheadwouldnotbeaffectedbythespecialorder.
Required:
Ifthespecialorderwereaccepted,whatwouldbetheimpactonthecompanysoverallprofit?
Source:CIMA,adapted
Level:HardLO:4
Ans:
Directmaterials,directlabor,andvariablemanufacturingoverheadarerelevantinthisdecision.Fixed
manufacturingoverheadisnotrelevantsinceitwouldnotbeaffectedbythedecision.Thevariable
portionofthemanufacturingoverheadrateiscomputedasfollows:
Thedirectlaborhoursperunitforthespecialordercanbedeterminedasfollows:
Consequently,thevariablemanufacturingoverheadforthespecialorderwouldbe:
77
Puttingthisalltogether:
106.AdamyanCo.manufacturesandsellsmedalsforwinnersofathleticandotherevents.Its
manufacturingplanthasthecapacitytoproduce15,000medalseachmonth;currentmonthlyproduction
is12,750medals.Thecompanynormallycharges$120permedal.Costdataforthecurrentlevelof
productionareshownbelow:
Thecompanyhasjustreceivedaspecialonetimeorderfor700medalsat$83each.Forthisparticular
order,novariablesellingandadministrativecostswouldbeincurred.Thisorderwouldalsohaveno
effectonfixedcosts.
Required:
Shouldthecompanyacceptthisspecialorder?Why?
Source:CMA,adapted
Level:MediumLO:4
Ans:
Onlythedirectmaterialsanddirectlaborcostsarerelevantinthisdecision.Tomakethedecision,we
mustcomputetheaveragedirectmaterialsanddirectlaborcostperunit.
Sincepriceonthespecialorderis$83permedalandtherelevantcostisonly$73,thecompanywould
earnaprofitof$10permedal.Therefore,thespecialordershouldbeaccepted.
78
107.AlbertineCo.manufacturesandsellstrophiesforwinnersofathleticandotherevents.Its
manufacturingplanthasthecapacitytoproduce16,000trophieseachmonth;currentmonthlyproduction
is12,800trophies.Thecompanynormallycharges$113pertrophy.Costdataforthecurrentlevelof
productionareshownbelow:
Thecompanyhasjustreceivedaspecialonetimeorderfor1,200trophiesat$61each.Forthisparticular
order,novariablesellingandadministrativecostswouldbeincurred.Thisorderwouldalsohaveno
effectonfixedcosts.
Required:
Shouldthecompanyacceptthisspecialorder?Why?
Source:CMA,adapted
Level:MediumLO:4
Ans:
Onlythedirectmaterialsanddirectlaborcostsarerelevantinthisdecision.Tomakethedecision,we
mustcomputetheaveragedirectmaterialsanddirectlaborcostperunit.
Sincepriceonthespecialorderis$61pertrophyandtherelevantcostis$68,thecompanywouldsuffera
lossof$7pertrophy.Therefore,thespecialordershouldnotbeaccepted.
108.GluthCompanymakesthreeproductsinasinglefacility.Theseproductshavethefollowingunit
productcosts:
79
Additionaldataconcerningtheseproductsarelistedbelow.
Themixingmachinesarepotentiallytheconstraintintheproductionfacility.Atotalof23,200minutes
Required:
(a.)Howmanyminutesofmixingmachinetimewouldberequiredtosatisfydemandforallfour
products?
(b.)Howmuchofeachproductshouldbeproducedtomaximizenetoperatingincome?(Roundofftothe
nearestwholeunit.)
(c.)Uptohowmuchshouldthecompanybewillingtopayforoneadditionalhourofmixingmachine
timeifthecompanyhasmadethebestuseoftheexistingmixingmachinecapacity?(Roundofftothe
nearestwholecent.)
Level:HardLO:5
Ans:
(a.)Demandonthemixingmachine:
Totaltimerequiredforallproducts:23,800
80
(c.)Thecompanyshouldbewillingtopayuptothecontributionmarginperminuteforthemarginaljob,
whichis$10.24.
81
109.HoltzCompanymakesthreeproductsinasinglefacility.Dataconcerningtheseproductsfollow:
Themixingmachinesarepotentiallytheconstraintintheproductionfacility.Atotalof12,500minutes
Required:
(a.)Howmanyminutesofmixingmachinetimewouldberequiredtosatisfydemandforallfour
products?
(b.)Howmuchofeachproductshouldbeproducedtomaximizenetoperatingincome?(Roundofftothe
nearestwholeunit.)
(c.)Uptohowmuchshouldthecompanybewillingtopayforoneadditionalhourofmixingmachine
timeifthecompanyhasmadethebestuseoftheexistingmixingmachinecapacity?(Roundofftothe
nearestwholecent.)
Level:MediumLO:5
Ans:
Totaltimerequiredforallproducts:12,700
82
(c.)Thecompanyshouldbewillingtopayuptothecontributionmarginperminuteforthemarginaljob,
whichis$6.82.
110.Wright,Inc.producesthreeproducts.Dataconcerningthesellingpricesandunitcostsofthethree
productsappearbelow:
Fixedcostsareappliedtotheproductsonthebasisofdirectlaborhours.
Demandforthethreeproductsexceedsthecompanysproductivecapacity.Thetappingmachineisthe
constraint,withonly2,400minutesoftappingmachinetimeavailablethisweek.
Required:
(a.)Giventhetappingmachineconstraint,whichproductshouldbeemphasized?Supportyouranswer
withappropriatecalculations.
(b.)Assumingthatthereisstillunfilleddemandfortheproductthatthecompanyshouldemphasizein
part(a)above,uptohowmuchshouldthecompanybewillingtopayforanadditionalhouroftapping
machinetime?
Level:HardLO:5
83
Ans:
(a.)Theproducttoemphasizecanbedeterminedbycomputingthecontributionmarginperunitofthe
scarceresource,whichinthiscaseistappingmachinetime.
ProductEshouldbeemphasizedbecauseithasthegreatestcontributionmarginperunitofthescarce
resource.
(b.)IfadditionaltappingmachinetimewouldbeusedtoproducemoreofProductE,thetimewouldbe
worth60$20=$1,200perhour.
111.NicklinCorporationisconsideringtwoalternativesthatarecodenamedMandN.Costsassociated
withthealternativesarelistedbelow:
Required:
(a.)Whichcostsarerelevantandwhicharenotrelevantinthechoicebetweenthesetwoalternatives?
(b.)Whatisthedifferentialcostbetweenthetwoalternatives?
Level:EasyLO:1
Ans:
84
112.Costsassociatedwithtwoalternatives,codenamedQandR,beingconsideredbyHunnicutt
Corporationarelistedbelow:
Required:
(a.)Whichcostsarerelevantandwhicharenotrelevantinthechoicebetweenthesetwoalternatives?
(b.)Whatisthedifferentialcostbetweenthetwoalternatives?
Level:EasyLO:1
Ans:
113.ThemanagementofBercegeayCorporationisconsideringdroppingproductY25C.Datafromthe
fixedsellingandadministrativeexpensesareavoidableifproductY25Cisdiscontinued.
Required:
(a.)WhatisthenetoperatingincomeearnedbyproductY25Caccordingtothecompanysaccounting
system?Showyourwork!
(b.)WhatwouldbetheeffectonthecompanysoverallnetoperatingincomeofdroppingproductY25C?
Shouldtheproductbedropped?Showyourwork!
85
Ans:
(a.)Accordingtothecompanysaccountingsystem,theproductsnetoperatinglossis$31,000.
(b.)Netoperatingincomewoulddeclineby$171,000ifproductY25Cweredropped.Therefore,the
productshouldnotbedropped.
Level:EasyLO:2
114.CostabileCorporationisconsideringdroppingproductG41O.Datafromthecompanysaccounting
systemappearbelow:
fixedsellingandadministrativeexpensesareavoidableifproductG41Oisdiscontinued.
Required:
(a.)Accordingtothecompanysaccountingsystem,whatisthenetoperatingincomeearnedbyproduct
G41O?Showyourwork!
(b.)WhatwouldbetheeffectonthecompanysoverallnetoperatingincomeofdroppingproductG41O?
Level:EasyLO:2
86
Ans:
(a.)Accordingtothecompanysaccountingsystem,theproductsnetoperatingincomeis$3,000.
(b.)Netoperatingincomewoulddeclineby$102,000ifproductG41Oweredropped.Therefore,the
productshouldnotbedropped.
115.ThemanagementofLeinbergerCorporationisconsideringdroppingproductS48J.Datafromthe
fixedsellingandadministrativeexpensesareavoidableifproductS48Jisdiscontinued.
Required:
WhatwouldbetheeffectonthecompanysoverallnetoperatingincomeifproductS48Jweredropped?
Level:EasyLO:2
Ans:
87
Netoperatingincomewoulddeclineby$7,000ifproductS48Jweredropped.Therefore,theproduct
shouldnotbedropped.
88
116.KerbowCorporationusespartB76inoneofitsproducts.ThecompanysAccountingDepartment
reportsthefollowingcostsofproducingthe12,000unitsofthepartthatareneededeveryyear.
offerwereaccepted,only$6,000oftheseallocatedgeneraloverheadcostswouldbeavoided.Inaddition,
thespaceusedtoproducepartB76couldbeusedtomakemoreofoneofthecompanysotherproducts,
generatinganadditionalsegmentmarginof$29,000peryearforthatproduct.
Required:
(a.)PrepareareportthatshowstheeffectonthecompanystotalnetoperatingincomeofbuyingpartB76
fromthesupplierratherthancontinuingtomakeitinsidethecompany.
(b.)Whichalternativeshouldthecompanychoose?
Level:MediumLO:3
Ans:
(b.)Thetotalcostofthemakealternativeislowerby$23,800.Thus,netoperatingincomewoulddecline
by$23,800iftheofferfromthesupplierwereaccepted.Therefore,thecompanyshouldcontinuetomake
thepartitself.
89
117.PartO43isusedinoneofScheetzCorporationsproducts.ThecompanysAccountingDepartment
reportsthefollowingcostsofproducingthe6,000unitsofthepartthatareneededeveryyear.
offerwereaccepted,only$1,000oftheseallocatedgeneraloverheadcostswouldbeavoided.
Required:
(a.)PrepareareportthatshowstheeffectonthecompanystotalnetoperatingincomeofbuyingpartO43
fromthesupplierratherthancontinuingtomakeitinsidethecompany.
(b.)Whichalternativeshouldthecompanychoose?
Level:EasyLO:3
Ans:
(b.)Thetotalcostofthemakealternativeislowerby$32,000.Thus,netoperatingincomewoulddecline
by$32,000iftheofferfromthesupplierwereaccepted.Therefore,thecompanyshouldcontinuetomake
thepartitself.
118.TulliusCorporationhasreceivedarequestforaspecialorderof8,000unitsofproductC64for
$50.00each.Thenormalsellingpriceofthisproductis$53.25each,buttheunitswouldneedtobe
modifiedslightlyforthecustomer.ThenormalunitproductcostofproductC64iscomputedasfollows:
90
91
manufacturingoverheadcosts.ThecustomerwouldlikesomemodificationsmadetoproductC64that
wouldincreasethevariablecostsby$5.00perunitandthatwouldrequireaonetimeinvestmentof
$43,000inspecialmoldsthatwouldhavenosalvagevalue.Thisspecialorderwouldhavenoeffecton
thecompanysothersales.Thecompanyhasamplesparecapacityforproducingthespecialorder.
Required:
Determinetheeffectonthecompanystotalnetoperatingincomeofacceptingthespecialorder.Show
yourwork!
Level:EasyLO:4
Ans:
119.AcustomerhasaskedGoesCorporationtosupply6,000unitsofproductY19,withsome
modifications,for$31.30each.Thenormalsellingpriceofthisproductis$46.50each.Thenormalunit
productcostofproductY19iscomputedasfollows:
manufacturingoverheadcosts.ThecustomerwouldlikesomemodificationsmadetoproductY19that
wouldincreasethevariablecostsby$8.90perunitandthatwouldrequireaonetimeinvestmentof
$20,000inspecialmoldsthatwouldhavenosalvagevalue.Thisspecialorderwouldhavenoeffecton
thecompanysothersales.Thecompanyhasamplesparecapacityforproducingthespecialorder.
Required:
Determinetheeffectonthecompanystotalnetoperatingincomeofacceptingthespecialorder.Show
yourwork!
Level:EasyLO:4
92
Ans:
120.FalsettaCorporationmakesthreeproductsthatusethecurrentconstraint,whichisaparticulartype
ofmachine.Dataconcerningthoseproductsappearbelow:
Required:
(a.)Ranktheproductsinorderoftheircurrentprofitabilityfromthemostprofitabletotheleastprofitable.
Inotherwords,ranktheproductsintheorderinwhichtheyshouldbeemphasized.Showyourwork!
(b.)Assumethatsufficientconstrainttimeisavailabletosatisfydemandforallbuttheleastprofitable
resource?
Level:EasyLO:5
Ans:
Resultingrankingofproducts:JK,DH,ZA
(b.)Thecompanyshouldbewillingtopayupto$14.20perminutetoobtainmoreoftheconstrained
resourcesincethisisthevaluetothecompanyofusingthisconstrainedresourcetomakemoreofproduct
ZA.Byassumption,theotherproductswillalreadyhavebeenproduceduptodemand.
93
121.TheconstraintatFulenaInc.isanexpensivemillingmachine.Thethreeproductslistedbelowuse
thisconstrainedresource.
Required:
(a.)Ranktheproductsinorderoftheircurrentprofitabilityfromthemostprofitabletotheleastprofitable.
Inotherwords,ranktheproductsintheorderinwhichtheyshouldbeemphasized.Showyourwork!
(b.)Assumethatsufficientconstrainttimeisavailabletosatisfydemandforallbuttheleastprofitable
resource?
Level:EasyLO:5
Ans:
Resultingrankingofproducts:WP,LC,PG
(b.)Thecompanyshouldbewillingtopayupto$11.40perminutetoobtainmoreoftheconstrained
resourcesincethisisthevaluetothecompanyofusingthisconstrainedresourcetomakemoreofproduct
PG.Byassumption,enoughoftheothertwoproductswillalreadyhavebeenproducedtofullysatisfy
demand.
94

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Chapter 11

Relevant Costs for Decision Making

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