Chapter 13

Relevant Costs for Decision-Making

True/False
1.
T
Medium

Oneofthedangersofallocatingcommonfixedcoststoaproduct
lineisthatsuchallocationscanmakethelineappearless
profitablethanitreallyis.

2.
T
Medium

Futurecoststhatdonotdifferamongthealternativesarenot
relevantinadecision.

3.
F
Medium

Variablecostsarealwaysrelevantcosts.

4.
T
Easy

Anavoidablecostisacostthatcanbeeliminated(inwholeor
inpart)asaresultofchoosingonealternativeoveranother.

5.
T
Easy

Asunkcostisacostthathasalreadybeenincurredandthat
cannotbeavoidedregardlessofwhatactionischosen.

6.
T
Easy

Thebookvalueofoldequipmentisnotarelevantcostinan
equipmentreplacementdecisionproblem.

7.
F
Medium

Onlythevariablecostsidentifiedwithaproductarerelevantin
adecisionconcerningwhethertoeliminatetheproduct.

8.
T
Easy

Ifbydroppingaproductafirmcanavoidmoreinfixedcosts
thanitlosesincontributionmargin,thenthefirmisbetteroff
economicallyiftheproductisdropped.

9.
T
Easy

Thecostofaresourcethathasnoalternativeuseinamakeor
buydecisionproblemhasanopportunitycostofzero.

10.
F
Hard

Managersshouldpaylittleattentiontobottleneckoperations
sincetheyhavelimitedcapacityforproducingoutput.

ManagerialAccounting,9/e

216

11.
F
Easy

Opportunitycostsarerecordedintheaccountsofan
organization.

12.
T
Easy

Allotherthingsequal,itisprofitabletocontinueprocessinga
jointproductafterthesplitoffpointsolongasthe
incrementalrevenuefromfurtherprocessingexceedsthe
incrementalcostsoffurtherprocessing.

13.
F
Medium

Jointproductioncostsarerelevantcostsindecisionsaboutwhat
todowithaproductfromthesplitoffpointonwardinthe
productionprocess.

14.
F
Medium

Twoormoredifferentproductsthataremanufacturedinthesame
productionperiodareknownasjointproducts.

15.
F
Easy

Amerchandisingfirmwhichbuysallofitsinventoryfromoutside
suppliersisanexampleofafirmthatisverticallyintegrated.

Multiple Choice
16.
B
Easy

Costswhicharealwaysrelevantindecisionmakingarethose
costswhichare:
a.variable.
b.avoidable.
c.sunk.
d.fixed.

17.
D
Easy

Consideradecisionfacingafirmofeitheracceptingor
rejectingaspecialofferforoneofitsproducts.Acostthatis
notrelevantis:
a.directmaterials.
b.variableoverhead.
c.fixedoverheadthatwillbeavoidedifthespecialofferis
accepted.
d.commonfixedoverheadthatwillcontinueifthespecialoffer
isnotaccepted.

18.
C
Easy

Tomaximizetotalcontributionmargin,afirmfacedwitha
productionconstraintshould:
a.promotethoseproductshavingthehighestunitcontribution
margins.
b.promotethoseproductshavingthehighestcontributionmargin
ratios.
c.promotethoseproductshavingthehighestcontributionmargin
perunitofconstrainedresource.
d.promotethoseproductshavethehighestcontributionmargins
andcontributionmarginratios.

217ManagerialAccounting,9/e

19.
B
Hard

Aplantoperatingatcapacitywouldsuggestthat:
a.everymachineandpersonintheplantisworkingatthe
maximumpossiblerate.
b.onlysomespecificmachinesorprocessesareoperatingatthe
maximumratepossible.
c.fixedcostswillneedtochangetoaccommodateincreased
demand.
d.managersshouldproducethoseproductswiththehighest
contributionmargininordertodealwiththeconstrained
resource.

20.
C
Medium

Whichofthefollowingisnotaneffectivewayofdealingwitha
productionconstraint(i.e.,bottleneck)?
a.Reducethenumberofdefectiveunitsproducedatthe
bottleneck.
b.Payovertimetoworkersassignedtothebottleneck.
c.Payovertimetoworkersassignedtoworkstationslocated
afterthebottleneckintheproductionprocess.
d.Subcontractworkthatwouldotherwiserequireduseofthe
bottleneck.

21.
D
Medium

Theopportunitycostofmakingacomponentpartinafactorywith
noexcesscapacityisthe:
a.variablemanufacturingcostofthecomponent.
b.fixedmanufacturingcostofthecomponent.
c.costoftheproductiongivenupinordertomanufacturethe
component.
d.netbenefitforegonefromthebestalternativeuseofthe
capacityrequired.

22.
D
Easy

Ajointproductis:
a.anyproductwhichconsistsofseveralparts.
b.anyproductproducedbyafirmwithmorethanoneproduct
line.
c.anyproductinvolvedinamakeorbuydecision.
d.oneofseveralproductsproducedfromacommoninput.

ManagerialAccounting,9/e

218

23.
D
Medium

Considerthefollowingstatements:
I.Averticallyintegratedfirmismoredependentonits
suppliersthanafirmthatisnotverticallyintegrated.
II.Manyfirmsfeeltheycancontrolqualitybetterbymaking
theirownparts.
III.Averticallyintegratedfirmrealizesprofitsfromthe
partsitis"making"insteadof"buying"aswellas
profitsfromitsregularoperations.
Whichoftheabovestatementsrepresentadvantagestoafirmthat
isverticallyintegrated?
a.OnlyI
b.OnlyIII
c.OnlyIandII
d.OnlyIIandIII

24.
A
Easy
CPAadapted

TheLanternCorporationhas1,000obsoletelanternsthatare
carriedininventoryatamanufacturingcostof$20,000.Ifthe
lanternsareremachinedfor$5,000,theycouldbesoldfor
$9,000.Alternatively,thelanternscouldbesoldforscrapfor
$1,000.Whichalternativeismoredesirableandwhatarethe
totalrelevantcostsforthatalternative?
a.remachineand$5,000.
b.remachineand$25,000.
c.scrapand$20,000.
d.scrapand$19,000.

25.
B
Medium
CPAadapted

RelayCorporationmanufacturesbatons.Relaycanmanufacture
300,000batonsayearatavariablecostof$750,000andafixed
costof$450,000.BasedonRelay'spredictionsfornextyear,
240,000batonswillbesoldattheregularpriceof$5.00each.
Inaddition,aspecialorderwasplacedfor60,000batonstobe
soldata40%discountofftheregularprice.Totalfixedcosts
wouldbeunaffectedbythisorder.Bywhatamountwouldthe
company'snetoperatingincomebeincreasedordecreasedasa
resultofthespecialorder?
a.$60,000decrease.
b.$30,000increase.
c.$36,000increase.
d.$180,000increase.

219ManagerialAccounting,9/e

26.
B
Medium
CPAadapted

ThemanufacturingcapacityofJordanCompany'sfacilitiesis
30,000unitsayear.Asummaryofoperatingresultsforlastyear
follows:
Sales(18,000units@$100)....$1,800,000
Variablecosts.................990,000
Contributionmargin...........810,000
Fixedcosts....................495,000
Netoperatingincome...........$315,000
Aforeigndistributorhasofferedtobuy15,000unitsat$90per
unitnextyear.Jordanexpectsitsregularsalesnextyeartobe
18,000units.IfJordanacceptsthisofferandrejectssome
businessfromregularcustomerssoasnottoexceedcapacity,
whatwouldbethetotalnetoperatingincomenextyear?(Assume
thatthetotalfixedcostswouldbethesamenomatterhowmany
unitsareproducedandsold.)
a.$390,000.
b.$705,000.
c.$840,000.
d.$855,000.

27.
A
Easy
CPAadapted

WagnerCompanysellsproductAfor$21perunit.Wagner'sunit
productcostbasedonthefullcapacityof200,000unitsisas
follows:
Directmaterials.....................$4
Directlabor.........................5
Manufacturingoverhead...............6
Unitproductcost..................$15
Aspecialorderofferingtobuy20,000unitshasbeenreceived
fromaforeigndistributor.Theonlysellingcoststhatwouldbe
incurredonthisorderwouldbe$3perunitforshipping.Wagner
hassufficientidlecapacitytomanufacturetheadditionalunits.
Twothirdsofthemanufacturingoverheadisfixedandwouldnot
beaffectedbythisorder.Assumethatdirectlaborisan
avoidablecostinthisdecision.Innegotiatingapriceforthe
specialorder,theminimumacceptablesellingpriceperunit
shouldbe:
a.$14.
b.$15.
c.$16.
d.$18.

ManagerialAccounting,9/e

220

28.
C
Easy

Astudyhasbeenconductedtodetermineifoneofthedepartments
inParryCompanyshouldbediscontinued.Thecontributionmargin
inthedepartmentis$50,000peryear.Fixedexpenseschargedto
thedepartmentare$65,000peryear.Itisestimatedthat$40,000
ofthesefixedexpensescouldbeeliminatedifthedepartmentis
discontinued.Thesedataindicatethatifthedepartmentis
discontinued,thecompany'soverallnetoperatingincomewould:
a.decreaseby$25,000peryear.
b.increaseby$25,000peryear.
c.decreaseby$10,000peryear.
d.increaseby$10,000peryear.

29.
C
Easy

AstudyhasbeenconductedtodetermineifProductAshouldbe
dropped.Salesoftheproducttotal$200,000peryear;variable
expensestotal$140,000peryear.Fixedexpenseschargedtothe
producttotal$90,000peryear.Thecompanyestimatesthat
$40,000ofthesefixedexpenseswillcontinueeveniftheproduct
isdropped.ThesedataindicatethatifProductAisdropped,the
company'soverallnetoperatingincomewould:
a.decreaseby$20,000peryear.
b.increaseby$20,000peryear.
c.decreaseby$10,000peryear.
d.increaseby$30,000peryear.

30.
A
Easy

LuskCompanyproducesandsells15,000unitsofProductAeach
month.ThesellingpriceofProductAis$20perunit,and
variableexpensesare$14perunit.Astudyhasbeenmade
concerningwhetherProductAshouldbediscontinued.Thestudy
showsthat$70,000ofthe$100,000infixedexpenseschargedto
ProductAwouldcontinueeveniftheproductwasdiscontinued.
ThesedataindicatethatifProductAisdiscontinued,the
company'soverallnetoperatingincomewould:
a.decreaseby$60,000permonth.
b.increaseby$10,000permonth.
c.increaseby$20,000permonth.
d.decreaseby$20,000permonth.

31.
B
Easy
CPAadapted

ManorCompanyplanstodiscontinueadepartmentthathasa
contributionmarginof$24,000and$48,000infixedcosts.Ofthe
fixedcosts,$21,000cannotbeavoided.Theeffectofthis
discontinuanceonManor'soverallnetoperatingincomewouldbe
a(an):
a.decreaseof$3,000.
b.increaseof$3,000.
c.decreaseof$24,000.
d.increaseof$24,000.

221ManagerialAccounting,9/e

32.
C
Easy
CPAadapted

GataCo.planstodiscontinueadepartmentthathasa$48,000
contributionmarginand$96,000offixedcosts.Ofthesefixed
costs,$42,000cannotbeavoided.Whatwouldbetheeffectof
thisdiscontinuanceonGata'soverallnetoperatingincome?
a.Increaseof$48,000
b.Decreaseof$48,000
c.Increaseof$6,000
d.Decreaseof$6,000

33.
B
Medium

TheCookCompanyhastwodivisionsEasternandWestern.The
divisionshavethefollowingrevenuesandexpenses:
EasternWestern
Sales.........................$550,000$500,000
Variablecosts................275,000200,000
Directfixedcosts............180,000150,000
Allocatedcorporatecosts.....170,000135,000
Netincome(loss).............(75,000)15,000
ThemanagementofCookisconsideringtheeliminationofthe
EasternDivision.IftheEasternDivisionwereeliminated,the
directfixedcostsassociatedwiththisdivisioncouldbe
avoided.However,corporatecostswouldstillbe$305,000in
total.Giventhesedata,theeliminationoftheEasternDivision
wouldresultinanoverallcompanynetincome(loss)of:
a.$15,000.
b.($155,000).
c.($75,000).
d.($60,000).

34.
B
Medium

ManorCompanyplanstodiscontinueadepartmentthathasa
contributionmarginof$25,000and$50,000infixedcosts.
Ofthefixedcosts,$21,000cannotbeeliminated.Theeffect
ontheprofitofManorCompanyofdiscontinuingthis
departmentwouldbe:
a.adecreaseof$4,000.
b.anincreaseof$4,000.
c.adecreaseof$25,000.
d.anincreaseof$25,000.

35.
D
Easy

GreenCompanyproduces1,000partsperyear,whichareusedin
theassemblyofoneofitsproducts.Theunitproductcostof
thesepartsis:
Variablemanufacturingcost.....$12
Fixedmanufacturingcost........9
Unitproductcost.............$21
Thepartcanbepurchasedfromanoutsidesupplierat$20per
unit.Ifthepartispurchasedfromtheoutsidesupplier,two
thirdsofthefixedmanufacturingcostscanbeeliminated.The
annualimpactonthecompany'snetoperatingincomeasaresult
ofbuyingthepartfromtheoutsidesupplierwouldbe:
a.$1,000increase.

ManagerialAccounting,9/e

222

b.$1,000decrease.
c.$5,000increase.
d.$2,000decrease.

36.
A
Easy

PitkinCompanyproducesapartusedinthemanufactureofoneof
itsproducts.Theunitproductcostofthepartis$33,computed
asfollows:
Directmaterials.....................$12
Directlabor.........................8
Variablemanufacturingoverhead......3
Fixedmanufacturingoverhead.........10
Unitproductcost..................$33
Anoutsidesupplierhasofferedtoprovidetheannualrequirement
of10,000ofthepartsforonly$27each.Thecompanyestimates
that30%ofthefixedmanufacturingoverheadcostsabovewill
continueifthepartsarepurchasedfromtheoutsidesupplier.
Assumethatdirectlaborisanavoidablecostinthisdecision.
Basedonthesedata,theperunitdollaradvantageor
disadvantageofpurchasingthepartsfromtheoutsidesupplier
wouldbe:
a.$3advantage.
b.$1advantage.
c.$1disadvantage.
d.$4disadvantage.

223ManagerialAccounting,9/e

37.
B
Easy
CPAadapted

CardinalCompanyneeds20,000unitsofacertainparttousein
oneofitsproducts.Thefollowinginformationisavailable:
CosttoCardinaltomakethepart:
Directmaterials.................$4
Directlabor.....................16
Variablemanufacturingoverhead..8
Fixedmanufacturingoverhead.....10
$38
Costtobuythepartfrom
theOrioleCompany.............$36
OrioleCompanyhasofferedtosellthisparttoCardinalcompany
for$36each.IfCardinalbuysthepartfromOrioleinsteadof
makingit,Cardinalwouldnothaveanyuseforthereleased
capacity.Inaddition,60%ofthefixedmanufacturingoverhead
costswillcontinueregardlessofwhatdecisionismade.Assume
thatdirectlaborisanavoidablecostinthisdecision.In
decidingwhethertomakeorbuythepart,thetotalrelevant
coststomakethepartare:
a.$560,000.
b.$640,000.
c.$720,000.
d.$760,000.

38.
B
Easy
CPAadapted

Golden,Inc.,hasbeenmanufacturing5,000unitsofPart10541
whichisusedinoneofitsproducts.Atthislevelof
production,theunitproductcostofPart10541isasfollows:
Directmaterials.....................$2
Directlabor.........................8
Variablemanufacturingoverhead......4
Fixedmanufacturingoverhead.........6
Unitproductcost..................$20
BrownCompanyhasofferedtosellGolden5,000unitsofPart
10541for$19aunit.Goldenhasdeterminedthattwothirdsof
thefixedmanufacturingoverheadwillcontinueevenifPart10541
ispurchasedfromBrown.Assumethatdirectlaborisanavoidable
costinthisdecision.TodeterminewhethertoacceptBrown's
offer,therelevantcoststoGoldenofmanufacturingtheparts
internallyare:
a.$70,000.
b.$80,000.
c.$90,000.
d.$95,000.

ManagerialAccounting,9/e

224

39.
B
Easy
CPAadapted

Thefollowingstandardcostspertaintoacomponentpart
manufacturedbyAshbyCompany:
Directmaterials.................$2
Directlabor.....................5
Manufacturingoverhead...........20
Standardcostperunit........$27
Thecompanycanpurchasethepartfromanoutsidesupplierfor
$25perunit.Themanufacturingoverheadis60%fixedandthis
fixedportionwouldnotbeaffectedbythisdecision.Assumethat
directlaborisanavoidablecostinthisdecision.Whatisthe
relevantamountofthestandardcostperunittobeconsideredin
adecisionofwhethertomakethepartinternallyorbuyitfrom
theexternalsupplier?
a.$2
b.$15
c.$19
d.$27

40.
B
Medium

TheSPCompanymakes40,000motorstobeusedintheproduction
ofitssewingmachines.Theaveragecostpermotoratthislevel
ofactivityis:
Directmaterials............$5.50
Directlabor................$5.60
Variablefactoryoverhead...$4.75
Fixedfactoryoverhead......$4.45
Anoutsidesupplierrecentlybeganproducingacomparablemotor
thatcouldbeusedinthesewingmachine.ThepriceofferedtoSP
Companyforthismotoris$18.IfSPCompanydecidesnottomake
themotors,therewouldbenootherusefortheproduction
facilitiesandtotalfixedfactoryoverheadcostswouldnot
change.IfSPCompanydecidestocontinuemakingthemotor,how
muchhigherorlowerwouldnetincomebethanifthemotorsare
purchasedfromtheoutsidesuppler?Assumethatdirectlaborisa
variablecostinthiscompany.
a.$276,000higher.
b.$86,000higher.
c.$92,000lower.
d.$178,000higher.

225ManagerialAccounting,9/e

41.
B
Medium

ManicoCompanyproducesthreeproductsX,Y,&Zwiththe
followingcharacteristics:

XYZ

o
Sellingpriceperunit......$20100%$16100%$15100%
Variablecostperunit......12601275640
Contributionmarginperunit$840%$425%$960%
Machinehoursperunit......536
Thecompanyhasonly2,000machinehoursavailableeachmonth.If
demandexceedsthecompany'scapacity,inwhatsequenceshould
ordersbefilledifthecompanywantstomaximizeitstotal
contributionmargin?
a.ordersforZfirst,Xsecond,andYthird.
b.ordersforXfirst,Zsecond,andYthird.
c.ordersforYfirst,Xsecond,andZthird.
d.ordersforZfirstandnoordersforXorY.

42.
B
Medium

Considerthefollowingproductionandcostdatafortwoproducts,
LandC:
ProductLProductC
Contributionmarginperunit.......$130$120
Machinesetupsneededperunit....10setups8setups
Thecompanycanonlyperform65,000machinesetupseachperiod
duetolimitedskilledlaborandthereisunlimiteddemandfor
eachproduct.Whatisthelargestpossibletotalcontribution
marginthatcanberealizedeachperiod?
a.$845,000.
b.$975,000.
c.$910,000.
d.$1,820,000.

43.
B
Medium

ProductsA,B,andCareproducedfromasinglerawmaterial
input.Therawmaterialcosts$90,000,fromwhich5,000unitsof
A,10,000unitsofB,and15,000unitsofCcanbeproducedeach
period.ProductAcanbesoldatthesplitoffpointfor$2per
unit,oritcanbeprocessedfurtheratacostof$12,500and
thensoldfor$5perunit.ProductAshouldbe:
a.soldatthesplitoffpoint,sincefurtherprocessingwould
resultinalossof$0.50perunit.
b.processedfurther,sincethiswillincreaseprofitsby$2,500
eachperiod.
c.soldatthesplitoffpoint,sincefurtherprocessingwill
resultinalossof$2,500eachperiod.
d.processedfurther,sincethiswillincreaseprofitsby
$12,500eachperiod.

ManagerialAccounting,9/e

226

44.
C
Easy

TheWyethCompanyproducesthreeproducts,A,B,andC,froma
singlerawmaterialinput.ProductAcanbesoldatthesplitoff
pointfor$40,000,oritcanbeprocessedfurtheratatotalcost
of$15,000andthensoldfor$58,000.Jointproductcoststotal
$60,000annually.ProductAshouldbe:
a.discontinuedsincerevenuesafterfurtherprocessingareless
thantotal jointproductcosts.
b.soldatthesplitoffpoint.
c.processedfurtherandthensold.
d.processedfurtheronlyifitsshareofthetotaljoint
productcostsislessthantheincrementalrevenuesfrom
furtherprocessing.

45.
A
Medium

WPCompanyproducesproductsX,Y,andZfromasingleraw
materialinputinajointproductionprocess.Budgeteddatafor
thenextmonthisasfollows:

XYZ

o
Unitsproduced.............................1,5002,0003,000
Perunitsalesvalueatsplitoff..........$19$21$24
Addedprocessingcostsperunit............$7$7.50$7
Perunitsalesvalueifprocessedfurther..$29$29$30
Thecostofthejointrawmaterialinputis$149,000.Whichof
theproductsshouldbeprocessedbeyondthesplitoffpoint?

XYZo
a.yesyesno
b.noyesno
c.yesnoyes
d.noyesyes

Reference:131
ThefollowingaretheWyethCompany'sunitcostsofmakingandsellinganitem
atavolumeof10,000unitspermonth(whichrepresentsthecompany's
capacity):
Manufacturing:
Directmaterials............$1.00
Directlabor................2.00
Variableoverhead...........0.50
Fixedoverhead..............0.90
Sellingandadministrative:
Variable....................1.50
Fixed.......................0.60
Presentsalesamountto9,000unitspermonth.Anorderhasbeenreceivedfrom
acustomerinaforeignmarketfor1,000units.Theorderwouldnotaffect
currentsales.Fixedcosts,bothmanufacturingandsellingandadministrative,
areconstantwithintherelevantrangebetween8,000and10,000unitsper
month.Thevariablesellingandadministrativecostswouldhavetobeincurred
forthisspecialorderaswellasallothersales.Assumedirectlaborisa
variablecost.
227ManagerialAccounting,9/e

46.
D
Medium
ReferTo:
131

Howmuchwillthecompany'snetoperatingincomebeincreasedor
(decreased)ifitpricesthe1,000unitsinthespecialorderat
$6each?
a.($500)
b.$400
c.$2,500
d.$1,000

47.
C
Medium
ReferTo:
131

Assumethecompanyhas50unitsleftoverfromlastyearwhich
havesmalldefectsandwhichwillhavetobesoldatareduced
priceasscrap.Thiswouldhavenoeffectonthecompany'sother
sales.Whatcostisrelevantasaguideforsettingaminimum
priceonthesedefectiveunits?
a.$6.50
b.$5.00
c.$1.50
d.$3.50

Reference:132
TheTolarCompanyhas400obsoletedeskcalculatorsthatarecarriedin
inventoryatatotalcostof$26,800.Ifthesecalculatorsareupgradedata
totalcostof$10,000,theycanbesoldforatotalof$30,000.Asan
alternative,thecalculatorscanbesoldintheirpresentconditionfor
$11,200.
48.
B
Easy
ReferTo:
132

Thesunkcostinthissituationis:
a.$10,000.
b.$26,800.
c.$11,200.
d.$0

49.
A
Medium
ReferTo:
132

Whatisthenetadvantageordisadvantagetothecompanyfrom
upgradingthecalculators?
a.$8,800advantage
b.$18,000disadvantage
c.$20,000advantage
d.$8,000disadvantage

50.
C
Hard
ReferTo:
132

AssumethatTolardecidestoupgradethecalculators.Atwhat
sellingpriceperunitwouldthecompanybeaswelloffasifit
justsoldthecalculatorsintheirpresentcondition?
a.$8
b.$30
c.$53
d.$67

ManagerialAccounting,9/e

228

Reference:133
TheImmanuelCompanyhasjustobtainedarequestforaspecialorderof6,000
jigstobeshippedattheendofthemonthatasellingpriceof$7each.The
companyhasaproductioncapacityof90,000jigspermonthwithtotalfixed
productioncostsof$144,000.Atpresent,thecompanyisselling80,000jigs
permonththroughregularchannelsatasellingpriceof$11each.Forthese
regularsales,thecostforonejigis:
Variableproductioncost...$4.60
Fixedproductioncost......1.80
Variablesellingexpense...1.00
Ifthespecialorderisaccepted,Immanuelwillnotincuranysellingexpense;
however,itwillincurshippingcostsof$0.30perunit.
51.
A
Medium
ReferTo:
133

IfImmanuelacceptsthisspecialorder,thechangeinthemonthly
netoperatingincomewillbea:
a.$12,600increase.
b.$14,400increase.
c.$3,600increase.
d.$1,800increase.

52.
D
Medium
ReferTo:
133

AtwhatsellingpriceperunitshouldImmanuelbeindifferent
betweenacceptingorrejectingthespecialoffer?
a.$7.40
b.$7.70
c.$6.40
d.$4.90

53.
B
Hard
ReferTo:
133

Supposethatregularsalesofjigstotal85,000unitspermonth.
Allotherconditionsremainthesame.IfImmanuelacceptsthe
specialorder,thechangeinmonthlyoperatingincomewillbe:
a.$14,400increase.
b.$7,200increase.
c.$3,600decrease.
d.$5,400decrease.

Reference:134
TheVaroneCompanymakesasingleproductcalledaHom.Thecompanyhasthe
capacitytoproduce40,000Homsperyear.Perunitcoststoproduceandsell
oneHomatthatactivitylevelfollow:
Directmaterials....................$20
Directlabor........................10
Variablemanufacturingoverhead.....5
Fixedmanufacturingoverhead........7
Variablesellingexpense............8
Fixedsellingexpense...............2
TheregularsellingpriceforoneHomis$60.Aspecialorderhasbeen
receivedatVaronefromtheFairviewCompanytopurchase8,000Homsnextyear
at15%offtheregularsellingprice.Ifthisspecialorderwereaccepted,
variablesellingexpensewouldbereducedby25%.However,Varonewouldhave
229ManagerialAccounting,9/e

topurchaseaspecializedmachinetoengravetheFairviewnameoneachHomin
thespecialorder.Thismachinewouldcost$12,000anditwouldhavenouse
afterthespecialorderwasfilled.Thetotalfixedcosts,bothmanufacturing
andselling,areconstantwithintherelevantrangeof30,000to40,000Homs
peryear.Assumedirectlaborisavariablecost.
54.
D
Medium
ReferTo:
134

IfVaronecanexpecttosell32,000Homsnextyearthrough
regularchannelsandthespecialorderisacceptedat15%offthe
regularsellingprice,theeffectonnetoperatingincomenext
yearduetoacceptingthisorderwouldbea:
a.$52,000increase.
b.$80,000increase.
c.$24,000decrease.
d.$68,000increase.

55.
C
Hard
ReferTo:
134

IfVaronecanexpecttosell32,000Homsnextyearthrough
regularchannels,atwhatspecialorderpricefromFairview
shouldVaronebeeconomicallyindifferentbetweeneither
acceptingornotacceptingthisspecialorder?
a.$51.00
b.$48.20
c.$42.50
d.$39.60

56.
A
Hard
ReferTo:
134

IfVaronehasanopportunitytosell37,960Homsnextyear
throughregularchannelsandthespecialorderisacceptedfor
15%offtheregularsellingprice,theeffectonnetoperating
incomenextyearduetoacceptingthisorderwouldbea:
a.$33,320decrease
b.$33,320increase
c.$35,480decrease
d.$35,480increase

Reference:135
EleyCompanyproducesasingleproduct.Thecostofproducingandsellinga
singleunitofthisproductatthecompany'snormalactivitylevelof40,000
unitspermonthisasfollows:
Directmaterials..........................$42.60
Directlabor..............................8.10
Variablemanufacturingoverhead...........1.10
Fixedmanufacturingoverhead..............17.30
Variableselling&administrativeexpense.1.80
Fixedselling&administrativeexpense....8.00
Thenormalsellingpriceoftheproductis$86.10perunit.
Anorderhasbeenreceivedfromanoverseascustomerfor2,000unitstobe
deliveredthismonthataspecialdiscountedprice.Thisorderwouldhaveno
effectonthecompany'snormalsalesandwouldnotchangethetotalamountof
thecompany'sfixedcosts.Thevariablesellingandadministrativeexpense
wouldbe$1.20lessperunitonthisorderthanonnormalsales.
Directlaborisavariablecostinthiscompany.
ManagerialAccounting,9/e

230

57.
C
Medium
ReferTo:
135

Supposethereisampleidlecapacitytoproducetheunits
requiredbytheoverseascustomerandthespecialdiscounted
priceonthespecialorderis$76.40perunit.Byhowmuchwould
thisspecialorderincrease(decrease)thecompany'snet
operatingincomeforthemonth?
a.($17,000)
b.$13,400
c.$48,000
d.($5,000)

58.
A
Hard
ReferTo:
135

Supposethecompanyisalreadyoperatingatcapacitywhenthe
specialorderisreceivedfromtheoverseascustomer.Whatwould
betheopportunitycostofeachunitdeliveredtotheoverseas
customer?
a.$32.50
b.$8.40
c.$9.70
d.$7.20

59.
D
Hard
ReferTo:
135

Supposethereisnotenoughidlecapacitytoproduceallofthe
unitsfortheoverseascustomerandacceptingthespecialorder
wouldrequirecuttingbackonproductionof700unitsforregular
customers.Theminimumacceptablepriceperunitforthespecial
orderisclosestto:
a.$86.10.
b.$78.90.
c.$69.10.
d.$63.78.

Reference:136
TheClemsonCompanyreportedthefollowingresultslastyearforthe
manufactureandsaleofoneofitsproductsknownasaTam.
Sales(6,500Tamsat$130each)...............$845,000
Variablecostofsales........................390,000
Variabledistributioncosts...................65,000
Fixedadvertisingexpense.....................275,000
Salaryofproductlinemanager................25,000
Fixedmanufacturingoverhead..................145,000
Netloss......................................($55,000)
ClemsonCompanyistryingtodeterminewhetherornottodiscontinuethe
manufactureandsaleofTams.Theoperatingresultsreportedaboveforlast
yearareexpectedtocontinueintheforeseeablefutureiftheproductisnot
dropped.Thefixedmanufacturingoverheadrepresentsthecostsofproduction
facilitiesandequipmentthattheTamproductshareswithotherproducts
producedbyClemson.IftheTaxproductweredropped,therewouldbenochange
inthefixedmanufacturingcostsofthecompany.

231ManagerialAccounting,9/e

60.
C
Medium
ReferTo:
136

AssumethatdiscontinuingthemanufactureandsaleofTamswill
havenoeffectonthesaleofotherproductlines.Ifthecompany
discontinuestheTamproductline,thechangeinannualoperating
income(orloss)shouldbe:
a.$55,000decrease.
b.$65,000decrease.
c.$90,000decrease.
d.$70,000increase.

61.
D
Hard
ReferTo:
136

AssumethatdiscontinuingtheTamproductwouldresultina
$120,000increaseinthecontributionmarginofotherproduct
lines.HowmanyTamswouldhavetobesoldnextyearforthe
companytobeaswelloffasifitjustdroppedthelineand
enjoyedtheincreaseincontributionmarginfromotherproducts?
a.5,000units
b.6,000units
c.6,500units
d.7,000units

Reference:137
CondensedmonthlyoperatingincomedataforCosmoInc.forNovemberis
presentedbelow.AdditionalinformationregardingCosmo'soperationsfollows
thestatement.
MallTown
TotalStoreStore
Sales.......................$200,000$80,000$120,000
Lessvariablecosts.........116,00032,00084,000
Contributionmargin.........84,00048,00036,000
Lesstraceablefixed
expenses..................60,00020,00040,000
Storesegmentmargin........24,00028,000(4,000)
Lesscommonfixed
expenses..................10,0004,0006,000
Operatingincome............$14,000$24,000$(10,000)
Threequartersofeachstore'straceablefixedexpensesareavoidableifthe
storeweretobeclosed.
Cosmoallocatescommonfixedexpensestoeachstoreonthebasisofsales
dollars.
ManagementestimatesthatclosingtheTownStorewouldresultinatenpercent
decreaseinMallStoresales,whileclosingtheMallStorewouldnotaffect
TownStoresales.
TheoperatingresultsforNovemberarerepresentativeofallmonths.

ManagerialAccounting,9/e

232

62.
B
Hard
CMAadapted
ReferTo:
137

AdecisionbyCosmoInc.toclosetheTownStorewouldresultin
amonthlyincrease(decrease)inCosmo'soperatingincomeof:
a.$4,000.
b.$(10,800).
c.$(800).
d.$(6,000).

63.
D
Hard
CMAadapted
ReferTo:
137

CosmoisconsideringapromotionalcampaignattheTownStore
thatwouldnotaffecttheMallStore.Increasingannual
promotionalexpensesattheTownStoreby$60,000inorderto
increaseTownStoresalesbytenpercentwouldresultina
monthlyincrease(decrease)inCosmo'soperatingincomeof:
a.$(16,800).
b.$3,400.
c.$7,000.
d.$(1,400).

Reference:138
TheWesternCompanyisconsideringtheadditionofanewproducttoits
currentproductlines.Theexpectedcostandrevenuedataforthenewproduct
areasfollows:
Annualsales.....................................3,000units
Sellingpriceperunit...........................$309
Variablecostsperunit:
Production.....................................$130
Selling........................................$50
Avoidablefixedcostsperyear:
Production.....................................$51,000
Selling........................................$75,000
Unavoidableallocatedfixedcorporate
costsperyear...............................$54,000
Ifthenewproductisaddedtotheexistingproductline,thensalesof
existingproductswilldecline.Asaconsequence,thecontributionmarginof
theotherexistingproductlinesisexpectedtodrop$78,000peryear.
64.
C
Hard
ReferTo:
138

Ifthenewproductisaddednextyear,theincreaseinnetincome
resultingfromthisdecisionwouldbe:
a.$387,000.
b.$261,000.
c.$183,000.
d.$207,000.

65.
D
Hard
ReferTo:
138

Whatisthelowestsellingpriceperunitamongthoselisted
belowthatcouldbechargedforthenewproductandstillmakeit
economicallydesirabletoaddthenewproduct?
a.$240.
b.$222.
c.$291.
d.$249

233ManagerialAccounting,9/e

Reference:139
BinghamCompanymanufacturesandsellsaproduct,ProductJ.Resultsforlast
yearforthemanufactureandsaleofProductJareasfollows:
Sales10,000unitsat$160each....................$1,600,000
Lesscosts:
Variableproductioncosts.........................960,000
Salescommissions15%ofsales...................240,000
Salariesoflinesupervisors......................195,000
Traceablefixedadvertisingexpense...............180,000
Fixedgeneralfactoryoverhead(allocatedto
productsonthebasisofsquarefeetoccupied)..170,000
Totalcosts.....................................1,745,000
Netloss............................................$(145,000)
BinghamCompanyanticipatesnochangeintheoperatingresultforProductJin
theforeseeablefutureiftheproductisproduced.Binghamisreexaminingall
ofitsproductsandistryingtodecidewhethertodiscontinuethemanufacture
andsaleofProductJ.Thecompany'stotalfixedfactoryoverheadcostwould
notbeaffectedbythisdecision.
66.
A
Medium
ReferTo:
139

AssumethatdiscontinuingthemanufactureandsaleofProductJ
willnotaffectthesaleofotherproducts.Ifthecompany
discontinuesProductJ,thechangeinannualnetincomedueto
thisdecisionwillbea:
a.$25,000decrease.
b.$145,000increase.
c.$170,000decrease.
d.$315,000decrease.

67.
C
Medium
ReferTo:
139

AssumethatdiscontinuingProductJwouldresultina$30,000
increaseinthecontributionmarginofotherproductlines.If
BinghamchoosestodiscontinueProductJ,thenthechangeinnet
incomenextyearduetothisactionwillbea:
a.$145,000increase.
b.$145,000decrease.
c.$5,000increase.
d.$120,000increase.

68.
B
Hard
ReferTo:
139

AssumethatdiscontinuingProductJwouldresultina$100,000
increaseinthecontributionmarginofotherproductlines.How
manyunitsofProductJwouldhavetobesoldnextyearforthe
companytobeaswelloffasifitjustdroppedProductJand
enjoyedtheincreaseincontributionmarginfromotherproducts?
a.2,500units.
b.11,875units.
c.16,125units.
d.15,500units.

ManagerialAccounting,9/e

234

Reference:1310
Hadley,Inc.makesalineofbathroomaccessories.Becauseofadeclinein
sales,thecompanyhas10,000machinehoursofidlecapacityavailableeach
year.Thisidlecapacitycouldbeusedbythecompanytomake,ratherthan
buy,oneofthecomponentsusedinitsproductionprocess.Hadleyneeds5,000
unitsofthiscomponenteachyear.Atpresent,thecomponentisbeing
purchasedfromanoutsidesupplierat$7.50perunit.Variableproductioncost
forthecomponentwouldbe$4.10perunit,andadditionalsupervisorycosts
wouldbe$18,000peryear.Alreadyexistingfixedcoststhatwouldbe
allocatedtothispartamountto$300,000peryear.
69.
B
Medium
ReferTo:
1310

Thechangeinthecompanysoverallannualnetoperatingincome
thatwouldresultfrommakingthecomponent,ratherthanbuying
it,wouldbe:
a.$17,000increase.
b.$1,000decrease.
c.$14,000decrease.
d.$5,000increase.

70.
D
Hard
ReferTo:
1310

Whatwouldtheannualcostofadditionalsupervisionhavetobe
inorderforHadleytobeeconomicallyindifferentbetweenmaking
orbuyingthecomponent?(Assumeallotherconditionsstaythe
same.)
a.$20,000.
b.$19,000.
c.$18,000.
d.$17,000.

Reference:1311
TheRodgersCompanymakes27,000unitsofacertaincomponenteachyearfor
useinoneofitsproducts.Thecostperunitforthecomponentatthislevel
ofactivityisasfollows:
Directmaterials....................$4.20
Directlabor........................$12.00
Variablemanufacturingoverhead.....$5.80
Fixedmanufacturingoverhead........$6.50
Rogershasreceivedanofferfromanoutsidesupplierwhoiswillingto
provide27,000unitsofthiscomponenteachyearatapriceof$25per
component.Assumethatdirectlaborisavariablecost.

235ManagerialAccounting,9/e

71.
B
Medium
ReferTo:
1311

Assumethatthereisnootheruseforthecapacitynowbeingused
toproducethecomponentandthetotalfixedmanufacturing
overheadofthecompanywouldbeunaffectedbythisdecision.If
RogersCompanypurchasesthecomponentsratherthanmakingthem
internally,whatwouldbetheimpactonthecompany'sannualnet
operatingincome?
a.$94,500increase.
b.$81,000decrease.
c.$237,600decrease.
d.$124,000increase.

72.
B
Hard
ReferTo:
1311

Assumethatifthecomponentispurchasedfromtheoutside
supplier,$35,100ofannualfixedmanufacturingoverheadwouldbe
avoidedandthefacilitiesnowbeingusedtomakethecomponent
wouldberentedtoanothercompanyfor$64,800peryear.If
Rogerschoosestobuythecomponentfromtheoutsidesupplier
underthesecircumstances,thentheimpactonannualnet
operatingincomeduetoacceptingtheofferwouldbe:
a.$18,900decrease.
b.$18,900increase.
c.$21,400decrease.
d.$21,400increase.

Reference:1312
AholtCompanymakes40,000unitsperyearofapartitusesintheproductsit
manufactures.Theunitproductcostofthispartiscomputedasfollows:
Directmaterials.................$11.30
Directlabor.....................22.70
Variablemanufacturingoverhead..1.20
Fixedmanufacturingoverhead.....24.70
Unitproductcost..............$59.90
Anoutsidesupplierhasofferedtosellthecompanyallofthesepartsit
needsfor$46.20aunit.Ifthecompanyacceptsthisoffer,thefacilitiesnow
beingusedtomakethepartcouldbeusedtomakemoreunitsofaproductthat
isinhighdemand.Theadditionalcontributionmarginonthisotherproduct
wouldbe$264,000peryear.
Ifthepartwerepurchasedfromtheoutsidesupplier,allofthedirect
laborcostofthepartwouldbeavoided.However,$21.90ofthefixed
manufacturingoverheadcostbeingappliedtothepartwouldcontinueevenif
thepartwerepurchasedfromtheoutsidesupplier.Thisfixedmanufacturing
overheadcostwouldbeappliedtothecompany'sremainingproducts.
73.
A
Easy
ReferTo:
1312

Howmuchoftheunitproductcostof$59.90isrelevantinthe
decisionofwhethertomakeorbuythepart?
a.$38.00
b.$59.90
c.$35.20
d.$22.70

ManagerialAccounting,9/e

236

74.
D
Medium
ReferTo:
1312

Whatisthenettotaldollaradvantage(disadvantage)of
purchasingthepartratherthanmakingit?
a.$264,000
b.($328,000)
c.$548,000
d.($64,000)

75.
B
Hard
ReferTo:
1312

Whatisthemaximumamountthecompanyshouldbewillingtopay
anoutsidesupplierperunitforthepartifthesuppliercommits
tosupplyingall40,000unitsrequiredeachyear?
a.$6.60
b.$44.60
c.$59.90
d.$66.50

Reference:1313
BrownCompanymakesfourproductsinasinglefacility.Theseproductshave
thefollowingunitproductcosts:

Product

o
ABCD
Directmaterials.................$15.60$19.50$12.50$15.20
Directlabor.....................17.6021.0015.409.40
Variablemanufacturingoverhead..4.405.608.105.10
Fixedmanufacturingoverhead.....27.5014.4014.5016.50
Unitproductcost................$65.10$60.50$50.50$46.20
Additionaldataconcerningtheseproductsarelistedbelow.

Product

ABCD
Grindingminutesperunit........2.001.100.700.30
Sellingpriceperunit...........$78.70$71.10$67.90$62.60
Variablesellingcostperunit...$2.60$3.10$2.80$3.50
Monthlydemandinunits..........3,0002,0002,0004,000
Thegrindingmachinesarepotentiallytheconstraintintheproduction
facility.Atotalof10,500minutesareavailablepermonthonthesemachines.
Directlaborisavariablecostinthiscompany.
76.
D
Easy
ReferTo:
1313

Howmanyminutesofgrindingmachinetimewouldberequiredto
satisfydemandforallfourproducts?
a.10,500
b.10,700
c.11,000
d.10,800

237ManagerialAccounting,9/e

77.
A
Hard
ReferTo:
1313

WhichproductmakestheLEASTprofitableuseofthegrinding
machines?
a.ProductA
b.ProductB
c.ProductC
d.ProductD

78.
D
Hard
ReferTo:
1313

WhichproductmakestheMOSTprofitableuseofthegrinding
machines?
a.ProductA
b.ProductB
c.ProductC
d.ProductD

79.
D
Hard
ReferTo:
1313

Uptohowmuchshouldthecompanybewillingtopayforone
additionalhourofgrindingmachinetimeifthecompanyhasmade
thebestuseoftheexistinggrindingmachinecapacity?(Round
offtothenearestwholecent.)
a.$10.60
b.$21.90
c.$0.00
d.$19.25

Reference:1314
CraneCompanymakesfourproductsinasinglefacility.Dataconcerningthese
productsappearbelow:

Product

ABCD
Sellingpriceperunit............$35.30$30.20$20.80$26.00
Variablemanuf.costperunit......$16.50$15.80$7.90$8.50
Variablesellingcostperunit....$3.80$1.60$1.90$3.30
Millingmachineminutesperunit..3.301.702.102.50
Monthlydemandinunits...........4,0001,0003,0001,000
Themillingmachinesarepotentiallytheconstraintintheproduction
facility.Atotalof22,600minutesareavailablepermonthonthesemachines.
80.
B
Easy
ReferTo:
1314

Howmanyminutesofmillingmachinetimewouldberequiredto
satisfydemandforallfourproducts?
a.22,600
b.23,700
c.18,400
d.9,000

ManagerialAccounting,9/e

238

81.
A
Medium
ReferTo:
1314

WhichproductmakestheLEASTprofitableuseofthemilling
machines?
a.ProductA
b.ProductB
c.ProductC
d.ProductD

82.
B
Medium
ReferTo:
1314

WhichproductmakestheMOSTprofitableuseofthemilling
machines?
a.ProductA
b.ProductB
c.ProductC
d.ProductD

83.
C
Medium
ReferTo:
1314

Uptohowmuchshouldthecompanybewillingtopayforone
additionalhourofmillingmachinetimeifthecompanyhasmade
thebestuseoftheexistingmillingmachinecapacity?(Round
offtothenearestwholecent.)
a.$11.00
b.$0.00
c.$4.55
d.$15.00

Reference:1315
TheMadisonCompanyproducesthreeproductswiththefollowingcostsand
sellingprices:

ABC
o
Sellingpriceperunit.............$16$21$21
Variablecostperunit.............71113
Contributionmarginperunit.......$9$10$8
Directlaborhoursperunit........11.52
Machinehoursperunit.............4.522.5
84.
A
Medium
ReferTo:
1315

Ifdirectlaborhoursisthecompany'sproductionconstraint,
thenthethreeproductsshouldbeproducedintheorder:
a.A,B,C.
b.B,C,A.
c.C,A.B.
d.A,C,B.

85.
C
Medium
ReferTo:
1315

IfmachinehoursisMadison'sproductionconstraint,thenthe
threeproductsshouldbeproducedintheorder:
a.A,B,C.
b.A,C,B.
c.B,C,A.
d.C,A,B.

239ManagerialAccounting,9/e

Reference:1316
AustinWoolProductspurchasesrawwoolandprocessesitintoyarn.The
spindlesofyarncanthenbesolddirectlytostoresortheycanbeusedby
AustinWoolProductstomakeafghans.Eachafghanrequiresonespindleof
yarn.Currentcostandrevenuedataforthespindlesofyarnandforthe
afghansareasfollows:
Dataforonespindleofyarn:
Sellingprice....................................$12
Variableproductioncost.........................8
Fixedproductioncost(basedon4,000spindles
ofyarnproduced).............................2
Dataforoneafghan:
Sellingprice....................................$32
Productioncostperspindleofyarn..............10
Variableproductioncosttoprocessthe
yarnintoanafghan............................9
Avoidablefixedproductioncosttoprocess
theyarnintoanafghan(basedon4,000
afghansproduced)..............................5
Eachmonth4,000spindlesofyarnareproducedthatcaneitherbesold
outrightorprocessedintoafghans.
86.
B
Medium
ReferTo:
1316

IfAustinchoosestoproduce4,000afghanseachmonth,thechange
inthemonthlynetoperatingincomeascomparedtoselling4,000
spindlesofyarnis:
a.$24,000decrease.
b.$24,000increase.
c.$16,000decrease.
d.$16,000increase.

87.
D
Hard
ReferTo:
1316

WhatisthelowestpriceAustinshouldbewillingtoacceptfor
oneafghanaslongasitcansellspindlesofyarntotheoutside
marketfor$12each?
a.$32
b.$30
c.$28
d.$26

ManagerialAccounting,9/e

240

Reference:1317
DowchowCompanymakestwoproductsfromacommoninput.Jointprocessingcosts
uptothesplitoffpointtotal$38,400ayear.Thecompanyallocatesthese
coststothejointproductsonthebasisoftheirtotalsalesvaluesatthe
splitoffpoint.Eachproductmaybesoldatthesplitoffpointorprocessed
further.Dataconcerningtheseproductsappearbelow:
ProductXProductYTotal
Allocatedjointprocessingcosts......$20,800$17,600$38,400
Salesvalueatsplitoffpoint........$26,000$22,000$48,000
Costsoffurtherprocessing...........$22,600$20,400$43,000
Salesvalueafterfurtherprocessing..$45,000$45,900$90,900
88.
D
Easy
ReferTo:
1317

Whatisthenetmonetaryadvantage(disadvantage)ofprocessing
ProductXbeyondthesplitoffpoint?
a.$1,600
b.$22,400
c.$27,600
d.($3,600)

89.
A
Medium
ReferTo:
1317

Whatisthenetmonetaryadvantage(disadvantage)ofprocessing
ProductYbeyondthesplitoffpoint?
a.$3,500
b.$7,900
c.$29,900
d.$25,500

90.
A
Hard
ReferTo:
1317

WhatistheminimumamountthecompanyshouldacceptforProduct
Xifitistobesoldatthesplitoffpoint?
a.$22,400
b.$43,400
c.$20,800
d.$45,000

241ManagerialAccounting,9/e

Essay
91.
Hard

FosterCompanymakes20,000unitsperyearofapartitusesin
theproductsitmanufactures.Theunitproductcostofthispart
iscomputedasfollows:
Directmaterials.................$24.70
Directlabor.....................16.30
Variablemanufacturingoverhead..2.30
Fixedmanufacturingoverhead.....13.40
Unitproductcost..............$56.70
Anoutsidesupplierhasofferedtosellthecompanyallof
thesepartsitneedsfor$51.80aunit.Ifthecompanyaccepts
thisoffer,thefacilitiesnowbeingusedtomakethepartcould
beusedtomakemoreunitsofaproductthatisinhighdemand.
Theadditionalcontributionmarginonthisotherproductwouldbe
$44,000peryear.
Ifthepartwerepurchasedfromtheoutsidesupplier,allof
thedirectlaborcostofthepartwouldbeavoided.However,
$5.10ofthefixedmanufacturingoverheadcostbeingappliedto
thepartwouldcontinueevenifthepartwerepurchasedfrom
theoutsidesupplier.Thisfixedmanufacturingoverheadcost
wouldbeappliedtothecompany'sremainingproducts.
Required:
a.Howmuchoftheunitproductcostof$56.70isrelevantin
thedecisionofwhethertomakeorbuythepart?
b.Whatisthenettotaldollaradvantage(disadvantage)of
purchasingthepartratherthanmakingit?
c.Whatisthemaximumamountthecompanyshouldbewillingto
payanoutsidesupplierperunitforthepartifthesupplier
commitstosupplyingall20,000unitsrequiredeachyear?
Answer:
a.Relevantcostperunit:
Directmaterials..................$24.70
Directlabor......................16.30
Variablemanufacturingoverhead...2.30
Fixedmanufacturingoverhead......8.30
Relevantmanufacturingcost...$51.60
b.Netadvantage(disadvantage):
Manufacturingcostsavings........$1,032,000
Additionalcontributionmargin....44,000
Costofpurchasingthepart.......(1,036,000)
Netadvantage(disadvantage)..$40,000

ManagerialAccounting,9/e

242

c.Maximumacceptablepurchaseprice:
Manufacturingcostsavings.......$1,032,000
Additionalcontributionmargin...$44,000
Totalbenefit....................$1,076,000
Numberofunits..................20,000
Benefitperunit.................$53.80
92.
Medium

TheHyattCompanyistryingtodecidewhetheritshouldpurchase
newequipmentandcontinuetomakeitssubassembliesinternally
orifproductionshouldbediscontinuedandthesubassembly
purchasedfromanoutsidesupplier.
Newequipmentforproducingthesubassembliescanbepurchasedat
acostof$400,000.Theequipmentwouldhaveafiveyearuseful
life(thecompanyusesstraightlinedepreciation)anda$50,000
salvagevalue.
Alternatively,thesubassembliescouldbepurchasedfroman
outsidesupplier.Thesupplierhasofferedtoprovidethe
subassembliesfor$9eachunderafiveyearcontract.
HyattCompany'spresentcostsperunitofproducingthe
subassembliesinternally(withtheoldequipment)aregiven
below.Thecostsarebasedonacurrentactivitylevelof
40,000subassembliesperyear:
Directmaterials........................................$3.00
Directlabor............................................4.20
Variableoverhead.......................................0.60
Fixedoverhead($0.80supervision,$0.90depreciation,
and$2generalcompanyoverhead)....................3.70
Totalcostperunit.....................................$11.50
Thenewequipmentwouldbemoreefficientandwouldreducedirect
laborcostsandvariableoverheadcostsby25%.Supervisioncost
($30,000peryear)anddirectmaterialscostperunitwouldnot
beaffectedbythenewequipment.Thecompanyhasnootheruse
forthespacenowbeingusedtoproducethesubassemblies.The
company'stotalgeneralcompanyoverheadwouldnotbeaffectedby
thisdecision.Assumedirectlaborisavariablecost.
Required:
Assumethat40,000subassembliesareneededeachyear.Prepare
ananalysisofthetwoalternativesandmakearecommendation
tothemanagementofthecompanyoftheappropriatecourseof
action.

243ManagerialAccounting,9/e

Answer:
The$2.00perunitgeneraloverheadcostisnotrelevanttothe
decision.Thiscostwillcontinueregardlessofwhichalternative
the
companyshouldselect.Thedepreciationof$0.90perunitis
notarelevantcostsinceitsrepresentsasunkcost(in
additiontothefactthattheoldequipmentiswornoutand
mustbereplaced).Thecostofthenewequipmentisrelevant
sincethenewequipmentwillnotbepurchasedifthecompany
decidestoaccepttheoutsidesupplier'soffer.Thecostof
supervisionisrelevantsincethiscostcanbeavoidedby
purchasingthesubassemblies.
CostPerUnit

MakeBuy

o
Outsidesupplier'sprice.....................$9.00
Directmaterials.............................$3.00
Directlabor($4.20x0.75)..................3.15
Variableoverhead($0.60x0.75).............0.45
Supervision..................................0.80
Depreciation.................................1.75o
Total........................................$9.15$9.00
Differenceinfavorofbuying................$0.15
Depreciation:($400,000$50,000)/5years=$70,000peryear.
$70,000peryear/40,000units=$1.75perunit
Atthelevelof40,000subassembliesperyear,thecompany
shouldpurchasethesubassembliesfromtheoutsidesupplier.
93.
Medium

BenjaminSignalCompanyproducesproductsR,J,andCfroma
jointproductionprocess.Eachproductmaybesoldatthesplit
offpointorbeprocessedfurther.Jointproductioncostsof
$92,000peryearareallocatedtotheproductsbasedonthe
relativenumberofunitsproduced.DataforBenjamin'soperations
forthecurrentyearareasfollows:
UnitsAllocatedJointSalesValue
ProductProducedProductionCostatSplitoff
R8,000$32,000$76,000
J10,00040,00071,000
C5,00020,00048,000
ProductRcanbeprocessedbeyondthesplitoffpointforan
additionalcostof$26,000andcanthenbesoldfor$105,000.
ProductJcanbeprocessedbeyondthesplitoffpointforan
additionalcostof$38,000andcanthenbesoldfor$117,000.
ProductCcanbeprocessedbeyondthesplitoffpointforan
additionalcostof$12,000andcanthenbesoldfor$57,000.

ManagerialAccounting,9/e

244

Required:
Whichproductsshouldbeprocessedbeyondthesplitoffpoint?
Answer:

RJC

o
Salesvalueafterfurther
processing.....................$105,000$117,000$57,000
Salesvalueatsplitoff.........76,00071,00048,000
Addedsalesvaluefromprocessing29,00046,0009,000
Addedprocessingcosts...........26,00038,00012,000
Netgain(loss)fromfurther
processing.....................$3,000$8,000$(3,000)
ProductsRandJshouldbeprocessedbeyondthesplitoffpoint.
ProductCshouldbesoldatsplitoff.Jointproductioncostsare
notrelevanttothedecisiontosellatsplitoffortoprocess
further.
94.
Medium

BowenCompanyproducesproductsP,Q,andRfromajoint
productionprocess.Eachproductmaybesoldatthesplitoff
pointorbeprocessedfurther.Jointproductioncostsof$81,000
peryearareallocatedtotheproductsbasedontherelative
numberofunitsproduced.DataforBowen'soperationsforthe
currentyearareasfollows:
AllocatedJointSalesValue
ProductUnitsProducedProductionCostatSplitoff
P4,000$28,000$38,000
Q7,00049,00047,000
R2,00014,00016,000
ProductPcanbeprocessedbeyondthesplitoffpointforan
additionalcostof$10,000andcanthenbesoldfor$50,000.
ProductQcanbeprocessedbeyondthesplitoffpointforan
additionalcostof$35,000andcanthenbesoldfor$65,000.
ProductRcanbeprocessedbeyondthesplitoffpointforan
additionalcostof$6,000andcanthenbesoldfor$25,000.
Required:
Whichproductsshouldbeprocessedbeyondthesplitoffpoint?
Answer:

PQRo
Salesvalueafterfurther
processing....................$50,000$65,000$25,000
Salesvalueatsplitoff.........38,00047,00016,000
Addedsalesvaluefromprocessing12,00018,0009,000
Addedprocessingcosts...........10,00035,0006,000
Netgain(loss)fromfurther
processing.....................$2,000$(17,000)$3,000
ProductsPandRshouldbeprocessedbeyondthesplitoffpoint.
ProductQshouldbesoldatsplitoff.Jointproductioncostsare
notrelevanttothedecisiontosellatsplitoffortoprocess

245ManagerialAccounting,9/e

further.

95.

(Ignoreincometaxesandthetimevalueofmoneyinthis
problem.)Madisonoptometryisconsideringthepurchaseofanew
lensgrindertoreplaceamachinethatwaspurchasedseveral
yearsago.Selectedinformationonthetwomachinesisgiven
below:
OldNew
MachineMachine
Originalcostwhennew............$80,000$85,000
Accumulateddepreciationtodate..32,000
Currentsalvagevalue.............26,000
Annualoperatingcost.............4,0003,000
Remainingusefullife.............4years4years
Required:
Computethetotaladvantageordisadvantageofusingthenew
machineinsteadoftheoldmachineoverthenextfouryears.
Answer:
Theanalysisofthealternativesappearsbelow:
OldNew
MachineMachine
Purchasecost....................$(85,000)
Salvagevalueofoldmachine.....26,000
Operatingcostfor4years.......$(16,000)(12,000)
Totalcost.......................$(16,000)$(71,000)
Therefore,thenetdisadvantagetopurchasingandusingthenew
machinewouldbe$55,000sinceitstotalcostis$55,000higher
thanthetotalcostofusingtheoldmachine.

ManagerialAccounting,9/e

246

96.
Hard

JuettCompanyproducesasingleproduct.Thecostofproducing
andsellingasingleunitofthisproductatthecompany'snormal
activitylevelof70,000unitspermonthisasfollows:
Directmaterials........................$29.60
Directlabor............................5.80
Variablemanufacturingoverhead.........2.50
Fixedmanufacturingoverhead............17.20
Variableselling&administrativeexpense1.80
Fixedselling&administrativeexpense..6.70
Thenormalsellingpriceoftheproductis$72.90perunit.
Anorderhasbeenreceivedfromanoverseascustomerfor2,000
unitstobedeliveredthismonthataspecialdiscountedprice.
Thisorderwouldhavenoeffectonthecompany'snormalsalesand
wouldnotchangethetotalamountofthecompany'sfixedcosts.
Thevariablesellingandadministrativeexpensewouldbe$1.10
lessperunitonthisorderthanonnormalsales.
Directlaborisavariablecostinthiscompany.
Required:
a.Supposethereisampleidlecapacitytoproducetheunits
requiredbytheoverseascustomerandthespecialdiscounted
priceonthespecialorderis$66.10perunit.Byhowmuch
wouldthisspecialorderincrease(decrease)thecompany's
netoperatingincomeforthemonth?
b.Supposethecompanyisalreadyoperatingatcapacitywhenthe
specialorderisreceivedfromtheoverseascustomer.What
wouldbetheopportunitycostofeachunitdeliveredtothe
overseascustomer?
c.Supposethereisnotenoughidlecapacitytoproduceallof
theunitsfortheoverseascustomerandacceptingthe
specialorderwouldrequirecuttingbackonproductionof
1,300unitsforregularcustomers.Whatwouldbetheminimum
acceptablepriceperunitforthespecialorder?
Answer:
a.
Variablecostperunitonnormalsales:
Directmaterials........................$29.60
Directlabor............................5.80
Variablemanufacturingoverhead.........2.50
Variableselling&administrativeexpense1.80
Variablecostperunitonnormalsales$39.70
Variablecostperunitonspecialorder:
Normalvariablecostperunit...........$39.70
Reductioninvariableselling&admin...1.10
Variablecostperunitonspecialorder$38.60

247ManagerialAccounting,9/e

Sellingpriceforspecialorder...........$66.10
Variablecostperunitonspecialorder...38.60
Unitcontributionmarginonspecialorder27.50
Numberofunitsinspecialorder..........2,000
Increase(decrease)innetoperatingincome$55,000
b.Theopportunitycostisjustthecontributionmarginon
normalsales:
Normalsellingpriceperunit.............$72.90
Variablecostperunitonnormalsales....39.70
Unitcontributionmarginonnormalsales..$33.20
c.Minimumacceptableprice:
Unitcontributionmarginonnormalsales..$33.20
Displacednormalsales....................1,300
Lostcontributionmargindisplacedsales..$43,160
Totalvariablecostonspecialorder......$77,200
$120,360
Numberofunitsinspecialorder..........2,000
Minimumacceptablepriceonspecialorder$60.18
97.
Medium

WhenMr.DingL.Berry,presidentandchiefexecutiveofBerry,
Inc.,firstsawthesegmentedincomestatementbelow,heflew
intohisusualrage:"Whenwillweeverstartshowingareal
profit?I'mstartingimmediatestepstoeliminatethosetwo
unprofitablelines!"

ProductLineso
TotalUVW
Sales.................$250,000$100,000$75,000$75,000
Variableexpenses.....119,00037,50035,00047,000
Contributionmargin...131,00063,00040,00028,000
Traceablefixed
expenses*...........98,00031,00037,00030,000
Commonexpenses,
allocated...........32,90018,00010,5004,400
Operatingincome(loss)$100$14,000$(7,500)$(6,400)
*Thesetraceableexpensescouldbeeliminatediftheproductlines
towhichtheyaretracedwerediscontinued.
Required:
Recommendwhichsegments,ifany,shouldbeeliminated.Preparea
reportingoodformtosupportyouranswer.

ManagerialAccounting,9/e

248

Answer:
Asegmentedincomereport,withouttheallocationofcommonfixed
expenses,willprovidethebasisfordecidingwhichsegmentsto
drop.

ProductLineso
TotalUVW
Sales.................$250,000$100,000$75,000$75,000
Variableexpenses.....119,00037,50035,00047,000
Contributionmargin...131,00063,00040,00028,000
Traceablefixed
expenses*...........98,00031,00037,00030,000
Segmentmargin........33,000$32,000$3,000$(2,000)
Commonexpenses,
allocated...........32,900
Operatingincome(loss)$100
TheonlysegmentthatpossiblyshouldbeeliminatedissegmentW,
whichshowsanegativesegmentmarginof$2,000.
98.
Medium

NorthernStoresisaretailerintheuppermidwest.Themost
recentmonthlyincomestatementforNorthernStoresisgiven
below:

TotalStoreIStoreII

o
Sales....................$2,100,000$1,300,000$800,000
Lessvariableexpenses...1,260,000882,000378,000
Contributionmargin......840,000418,000422,000
Lesstraceablefixed
expenses..............420,000231,000189,000
Segmentmargin...........420,000187,000233,000
Lesscommonfixedexpenses350,000210,000140,000
Netincome...............$70,000$(23,000)$93,000
NorthernisconsideringclosingStoreI.IfStoreIisclosed,
onefourthofitstraceablefixedexpenseswouldcontinuetobe
incurred.Also,theclosingofStoreIwouldresultina20%
decreaseinsalesinStoreII.Northernallocatescommonfixed
expensesonthebasisofsalesdollarsandnoneofthesecosts
wouldbesavedifastorewereshutdown.
Required:
Computetheoverallincreaseordecreaseinthenetincomeof
NorthernStoresifStoreIisclosed.
Answer:
LossincontributionisStoreIisclosed:
StoreIcontributionmarginlost...............$(418,000)
StoreIIcontributionmarginlost
(20%x422,000)...........................(84,400)
Totallostcontribution........................(502,400)
FixedcostsavoidedifStoreIisclosed
(0.75x231,000)..........................173,250_

249ManagerialAccounting,9/e

NetdecreaseinincomeofclosingStoreI............$(329,150)

ManagerialAccounting,9/e

250

99.
Medium

TheAnacondaMiningCompanycurrentlyisoperatingatlessthan
50percentofpracticalcapacity.Themanagementofthecompany
expectssalestodropbelowthepresentlevelof15,000tonsof
orepermonthverysoon.Thesellingpricepertonoforeis$2
andthevariablecostpertonis$1.Fixedcostspermonthtotal
$15,000.
Managementisconcernedthatafurtherdropinsalesvolumewill
generatealossand,accordingly,isconsideringthetemporary
suspensionofoperationsuntildemandinthemetalsmarkets
returnstonormallevelsandpricesrebound.Managementhas
implementedacostreductionprogramoverthepastyearthathas
beensuccessfulinreducingcosts.Nevertheless,suspensionof
operationsappearstobetheonlyviablealternative.Management
estimatesthatsuspensionofoperationswouldreducefixedcosts
from$15,000to$5,000permonth.
Required:
a.Whydoesmanagementestimatethatfixedcostswillpersistat
$5,000permontheventhoughthemineistemporarilyclosed?
b.Atwhatsalesvolumeshouldmanagementsuspendoperationsat
themine?
Answer:
a.Somefixedcostswillcontinuetoincurreddespitethe
temporaryclosingofthemine.Keyemployeescannotbe
dischargedsincetheseemployeeswillseekemployment
elsewhereandreplacingthemcouldprovetobequitecostly.
Askeletonstaffwouldbeneededtoperformsome
administrativefunctions.Additionally,themaintenanceof
buildingandequipmentwouldneedtocontinuetoprevent
damagethatwouldbecostlytorepair.Taxesandinsurance
wouldcontinuetobepaidduringtheshutdownperiod.
b.Suspensionofoperationswouldbedesirablewhensalesvolume
dropsbelow10,000tonsasshownbelow:
Fixedcostsifminecontinuestooperate...........$15,000
Fixedcostsifmineisshutdown...................5,000
Fixedcoststoberecoveredifmineisoperated....$10,000
Eachtonextractedcontributes$1.00pertontowards
fixedcosts:
Sellingpriceperton..............................$2.00
Variablecostperton..............................1.00
Contributionmargin................................$1.00
Salesvolumenecessarytorecover$10,000offixedcosts:
$10,000$1.00=10,000tons

251ManagerialAccounting,9/e

100.
Hard

KramerCompanymakes4,000unitsperyearofapartcalledan
axialtapforuseinoneofitsproducts.Dataconcerningthe
unitproductioncostsoftheaxialtapfollow:
Directmaterials......................$35
Directlabor..........................10
Variablemanufacturingoverhead.......8
Fixedmanufacturingoverhead..........20
Totalmanufacturingcostperunit.....$73
AnoutsidesupplierhasofferedtosellKramerCompanyallofthe
axialtapsitrequires.IfKramerCompanydecidedtodiscontinue
makingtheaxialtaps,40%oftheabovefixedmanufacturing
overheadcostscouldbeavoided.Assumethatdirectlaborisa
variablecost.
Required:
a.AssumeKramerCompanyhasnoalternativeuseforthe
facilitiespresentlydevotedtoproductionoftheaxialtaps.
Iftheoutsidesupplierofferstoselltheaxialtapsfor$65
each,shouldKramerCompanyaccepttheoffer?Fullysupport
youranswerwithappropriatecalculations.
b.AssumethatKramerCompanycouldusethefacilitiespresently
devotedtoproductionoftheaxialtapstoexpandproduction
ofanotherproductthatwouldyieldanadditionalcontribution
marginof$80,000annually.WhatisthemaximumpriceKramer
Companyshouldbewillingtopaytheoutsidesupplierfor
axialtaps?
Answer:
a.Theanalysisofthealternativesfollowsbelow:
MakeBuy
Purchasecost....................$65
Directmaterials.................$35
Directlabor.....................10
Variablemanufacturingoverhead..8
Fixedmanufacturingoverhead.....8*
Totalcost.......................$61$65
*40%x$20
Thecompanyshouldmakethepartratherthanbuyitfromthe
outsidesuppliersinceitcosts$4lessunderthat
alternative.
b.Themaximumacceptablepriceis$81sincethatisthecostto
thecompanyofmakingthepartitselfwhentheopportunity
costisincluded:
Totalcostofmakingthepartinternally.....$61
Opportunitycostperunit($80,0004,000)..20
Total........................................$81

ManagerialAccounting,9/e

252

101.
Medium

GlockerCompanymakesthreeproductsinasinglefacility.These
productshavethefollowingunitproductcosts:

Productso
ABC
Directmaterials.................$10.90$15.80$8.00
Directlabor.....................12.5012.609.90
Variablemanufacturingoverhead..2.401.201.40
Fixedmanufacturingoverhead.....11.607.207.80
Unitproductcost................$37.40$36.80$27.10
Additionaldataconcerningtheseproductsarelistedbelow.

Productso
ABC
Mixingminutesperunit..........2.001.000.50
Sellingpriceperunit...........$55.80$54.60$43.10
Variablesellingcostperunit...$2.10$1.40$1.90
Monthlydemandinunits..........2,0001,0003,000
Themixingmachinesarepotentiallytheconstraintinthe
productionfacility.Atotalof5,900minutesareavailableper
monthonthesemachines.
Directlaborisavariablecostinthiscompany.
Required:
a.Howmanyminutesofmixingmachinetimewouldberequiredto
satisfydemandforallfourproducts?
b.Howmuchofeachproductshouldbeproducedtomaximizenet
operatingincome?(Roundofftothenearestwholeunit.)
c.Uptohowmuchshouldthecompanybewillingtopayforone
additionalhourofmixingmachinetimeifthecompanyhas
madethebestuseoftheexistingmixingmachinecapacity?
(Roundofftothenearestwholecent.)

253ManagerialAccounting,9/e

Answer:
a.Demandonthemixingmachine:

Productso
ABC
Mixingminutesperunit..........2.001.000.50
Monthlydemandinunits..........2,0001,0003,000
Totalminutesrequired.........4,0001,0001,500
Totaltimerequiredforallproducts:6,500
b.Optimalproductionplan:

Productso
ABC
Sellingpriceperunit...........$55.80$54.60$43.10
Directmaterials.................$10.90$15.80$8.00
Directlabor.....................12.5012.609.90
Variablemanufacturingoverhead..2.401.201.40
Variablesellingcostperunit...2.101.401.90
Totalvariablecostperunit..$27.90$31.00$21.20
Contributionmarginperunit.....$27.90$23.60$21.90
Mixingminutesperunit..........2.001.000.50
Contributionmarginperminute...$13.95$23.60$43.80
Rankintermsofprofitability...321
Optimalproduction...............1,7001,0003,000
c.Thecompanyshouldbewillingtopayuptothecontribution
marginperminuteforthemarginaljob,whichis$13.95.

ManagerialAccounting,9/e

254

102.
Medium

HoltCompanymakesthreeproductsinasinglefacility.Data
concerningtheseproductsfollow:

Productso
ABC
Sellingpriceperunit...........$67.90$57.70$43.90
Directmaterials.................$12.10$10.30$8.60
Directlabor.....................$14.10$8.00$6.80
Variablemanufacturingoverhead..$2.60$2.20$1.80
Variablesellingcostperunit...$2.50$2.20$2.50
Mixingminutesperunit..........2.703.304.70
Monthlydemandinunits..........1,0003,0003,000
Themixingmachinesarepotentiallytheconstraintinthe
productionfacility.Atotalof25,800minutesareavailableper
monthonthesemachines.
Directlaborisavariablecostinthiscompany.
Required:
a.Howmanyminutesofmixingmachinetimewouldberequiredto
satisfydemandforallfourproducts?
b.Howmuchofeachproductshouldbeproducedtomaximizenet
operatingincome?(Roundofftothenearestwholeunit.)
c.Uptohowmuchshouldthecompanybewillingtopayforone
additionalhourofmixingmachinetimeifthecompanyhas
madethebestuseoftheexistingmixingmachinecapacity?
(Roundofftothenearestwholecent.)
Answer:
a.Demandonthemixingmachine:

Productso
ABC
Mixingminutesperunit..........2.703.304.70
Monthlydemandinunits..........1,0003,0003,000
Totalminutesrequired.........2,7009,90014,100
Totaltimerequiredforallproducts:26,700

255ManagerialAccounting,9/e

b.Optimalproductionplan:

Productso
ABC
Sellingpriceperunit...........$67.90$57.70$43.90
Directmaterials.................$12.10$10.30$8.60
Directlabor.....................14.108.006.80
Variablemanufacturingoverhead..2.602.201.80
Variablesellingcostperunit...2.502.202.50
Totalvariablecostperunit..$31.30$22.70$19.70
Contributionmarginperunit.....$36.60$35.00$24.20
Mixingminutesperunit..........2.703.304.70
Contributionmarginperminute...$13.56$10.61$5.15
Rankintermsofprofitability...123
Optimalproduction...............1,0003,0002,809
c.Thecompanyshouldbewillingtopayuptothecontribution
marginperminuteforthemarginaljob,whichis$5.15.
103.
Hard

Redner,Inc.producesthreeproducts.Dataconcerningtheselling
pricesandunitcostsofthethreeproductsappearbelow:

Product

JKL
Sellingprice..........$80$60$90
Variablecosts.........504055
Fixedcosts............25822
Grindingmachinetime..10min.5min.7min.
Fixedcostsareappliedtotheproductsonthebasisofdirect
laborhours.
Demandforthethreeproductsexceedsthecompany'sproductive
capacity.Thegrindingmachineistheconstraint,withonly2,400
minutesofgrindingmachinetimeavailablethisweek.
Required:
a.Giventhegrindingmachineconstraint,whichproductshould
beemphasized?Supportyouranswerwithappropriate
calculations.
b.Assumingthatthereisstillunfilleddemandfortheproduct
thatthecompanyshouldemphasizeinpart(a)above,upto
howmuchshouldthecompanybewillingtopayforan
additionalhourofgrindingmachinetime?

ManagerialAccounting,9/e

256

Answer:
a.Theproducttoemphasizecanbedeterminedbycomputingthe
contributionmarginperunitofthescarceresource,whichin
thiscaseisgrindingmachinetime.

Product

JKL
Sellingprice..........$80$60$90
Variablecosts.........504055
Contributionmargin....$30$20$35
Grindingmachinetime..10min.5min.7min.
Contributionmargin
perminute...........$3.00$4.00$5.00
ProductLshouldbeemphasizedbecauseithasthegreatest
contributionmarginperunitofthescarceresource.
b.Ifadditionalgrindingmachinetimewouldbeusedtoproduce
moreofProductL,thetimewouldbeworth60x$5=$300per
hour.
104.
hard

IaciCompanymakestwoproductsfromacommoninput.Joint
processingcostsuptothesplitoffpointtotal$42,000ayear.
Thecompanyallocatesthesecoststothejointproductsonthe
basisoftheirtotalsalesvaluesatthesplitoffpoint.Each
productmaybesoldatthesplitoffpointorprocessedfurther.
Dataconcerningtheseproductsappearbelow:
ProductXProductYTotal
Allocatedjointprocessingcosts..$22,400$19,600$42,000
Salesvalueatsplitoffpoint....$32,000$28,000$60,000
Costsoffurtherprocessing.......$11,600$25,300$36,900
Salesvalueafterfurther
processing......................$40,800$54,200$95,000
Required:
a.Whatisthenetmonetaryadvantage(disadvantage)of
processingProductXbeyondthesplitoffpoint?
b.Whatisthenetmonetaryadvantage(disadvantage)of
processingProductYbeyondthesplitoffpoint?
c.Whatistheminimumamountthecompanyshouldacceptfor
ProductXifitistobesoldatthesplitoffpoint?
d.Whatistheminimumamountthecompanyshouldacceptfor
ProductYifitistobesoldatthesplitoffpoint?

257ManagerialAccounting,9/e

Answer:
a.&b.
ProductXProductY
Salesvalueafterfurtherprocessing$40,800$54,200
Costsoffurtherprocessing........11,60025,300
Benefitoffurtherprocessing......29,20028,900
Less:Salesvalueatsplitoffpoint32,00028,000
Netadvantage(disadvantage).........($2,800)$900
c.&d.
Minimumsellingpriceatsplitoff...$29,200$28,900
105.
Medium

HarrisCorp.manufacturesthreeproductsfromacommoninputina
jointprocessingoperation.Jointprocessingcostsuptothe
splitoffpointtotal$200,000peryear.Thecompanyallocates
thesecoststothejointproductsonthebasisoftheirtotal
salesvalueatthesplitoffpoint.
Eachproductmaybesoldatthesplitoffpointorprocessed
further.Theadditionalprocessingcostsandsalesvalueafter
furtherprocessingforeachproduct(onanannualbasis)are:
SalesValue
SalesValueFurtherAfterFurther
ProductatSplitOffProcessingCostsProcessing
J$180,000$60,000$230,000
K$135,000$105,000$280,000
L$95,000$85,000$160,000
The"FurtherProcessingCosts"consistofvariableandavoidable
fixedcosts.
Required:
Whichproductorproductsshouldbesoldatthesplitoffpoint,
andwhichproductorproductsshouldbeprocessedfurther?Show
computations.
Answer:

Product

JKL
Salesvalueafter
furtherprocessing..$230,000$280,000$160,000
Salesvalueat
splitoff...........180,000135,00095,000
Incrementalrevenue....50,000145,00065,000
Furtherprocessingcosts60,000105,00085,000
Incrementalincome(loss)$(10,000)$40,000$(20,000)
ProductKshouldbesoldafterfurtherprocessingbeyondthe
splitoffpoint.ProductsJandLshouldbesoldatthesplit
offpointwithoutanyfurtherprocessing.

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258