Managerial Accounting CH 8

Managerial Accounting, 3e (Braun/Tietz)
Chapter 8 Relevant Costs for Short-Term Decisions

1) Irrelevant costs are costs that do not affect short-term decisions.
Answer: TRUE
Diff: 1
LO: 8-1
EOC: S8-1
AACSB: Reflective Thinking
Learning Outcome: Distinguish between relevant and irrelevant costs
2) Relevant information is future data that do not differ among alternatives.
Answer: FALSE
Diff: 1
LO: 8-1
EOC: S8-1
3) Management accountants gather and analyze relevant information to compare alternatives.
Answer: TRUE
Diff: 1
LO: 8-1
EOC: S8-1
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant
and irrelevant costs.
4) One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits.
Answer: TRUE
Diff: 1
LO: 8-1
EOC: S8-1
5) One key to analyzing short-term business decisions is to use a contribution margin approach that
separates variable costs from fixed costs.
Answer: TRUE
Diff: 1
LO: 8-1
EOC: S8-1
Learning Outcome: Use incremental analysis to make short-term decisions
1
Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall
6) Relevant information is expected future data that will not differ among alternatives.
Answer: FALSE
Diff: 1
LO: 8-1
EOC: S8-1
7) Costs that differ between alternatives are irrelevant.
Answer: FALSE
Diff: 1
LO: 8-1
EOC: S8-1
8) One cost that is irrelevant in decision making is a sunk cost.
Answer: TRUE
Diff: 1
LO: 8-1
EOC: E8-15
9) Managers' decisions are based solely on quantitative factors.
Answer: FALSE
Diff: 1
LO: 8-1
EOC: E8-15
10) Which of the following best describes a "sunk cost"?
A) Costs that were incurred in the past and cannot be changed
B) Benefits foregone by choosing a particular alternative course of action
C) A factor that restricts the production or sale of a product
D) Expected future data that differ among alternatives
Answer: A
Diff: 2
LO: 8-1
EOC: S8-1
2
11) An "opportunity cost" is best described by which of the following?

A) Benefits foregone by choosing a particular alternative course of action
B) Costs that were incurred in the past and cannot be changed
C) The distribution of all products to be sold
D) Expected future costs that differ among alternatives
Answer: A
Diff: 2
LO: 8-1
EOC: S8-1
12) A "relevant cost" is best described by which of the following?
A) A factor that restricts production or sales of a product
B) Cost of developing, producing, and delivering a product or service
C) Costs that were incurred in the past and can not be changed
Answer: D
Diff: 2
LO: 8-1
EOC: S8-1
13) "Contribution margin per unit" is best described by which of the following?
A) Sales price per unit minus fixed cost per unit
B) Sales price per unit minus variable cost unit
C) Sales price per unit minus fixed and variable costs per unit
D) Units sold time contribution margin ratio
Answer: B
Diff: 2
LO: 8-1
EOC: S8-1
14) Expected future data that differs among alternative courses of action are referred to as
A) relevant information.
B) historical information.
C) predictable information.
D) irrelevant information.
Answer: A
Diff: 1
LO: 8-1
EOC: E8-15
3
15) Which of the following is irrelevant when making a decision?

A) Fixed overhead costs that differ among alternatives
B) The cost of an asset that the company is considering replacing
C) The cost of further processing a product that could be sold as is
D) The expected increase in contribution margin of one product line as a result of a decision to
discontinue a separate unprofitable product line
Answer: B
Diff: 1
LO: 8-1
EOC: E8-15
16) Fixed costs that do not differ between two alternatives are
A) irrelevant to the decision.
B) considered opportunity costs.
C) relevant to the decision.
D) important only if they represent a material dollar amount.
Answer: A
Diff: 1
LO: 8-1
EOC: E8-15
17) Which of the following is a sunk cost?
A) Operating costs for a new vehicle
B) Trade in value of old vehicle
C) Purchase price of vehicle to be traded in
D) Purchase price of new vehicle
Answer: C
Diff: 1
LO: 8-1
EOC: E8-15
18) Fixed costs that may be avoided in the future are referred to as
A) relevant costs.
B) opportunity costs.
C) replacement costs.
D) sunk costs.
Answer: A
Diff: 2
LO: 8-1
EOC: E8-15
4
19) A sunk cost is described as which of the following?

A) One that is relevant to a decision because it changes depending on the alternative course of action
selected
B) A historical cost that is always irrelevant
C) An outlay expected to be incurred in the future
D) A historical cost that may be relevant
Answer: B
Diff: 1
LO: 8-1
EOC: E8-15
20) The effect of a plant closing on employee morale is an example of which of the following?
A) A qualitative factor
B) A quantitative factor
C) A sunk cost
D) A variable cost
Answer: A
Diff: 1
LO: 8-1
EOC: E8-15
21) The format of the income statement most useful in decision-making is which of the following?
A) Absorption costing format
B) Traditional format
C) Contribution margin format
D) Single-step format
Answer: C
Diff: 2
LO: 8-1
EOC: E8-15
5
22) Ida Enterprises is considering replacing a machine that is presently used in its production process.
The following information is available:
Original cost
Remaining useful life in years
Current age in years
Book value
Current disposal value in cash
Future disposal value in cash (in 5 years)
Annual cash operating costs
Old Machine
$60,000
5
5
$25,000
$8,000
$0
$7,000
Replacement Machine
$35,000
5
0
$0
$4,000
Which of the information provided in the table is irrelevant to the replacement decision?
A) The annual operating cost of the old machine
B) The original cost of the old machine
C) The current disposal value of the old machine
D) Both A and C
Answer: B
Diff: 2
LO: 8-1
EOC: S8-1
AACSB: Analytical Thinking
23) All of the following are relevant to the decision to replace equipment except the
A) cost of old equipment.
B) selling price of old equipment.
C) future maintenance costs of old equipment.
D) cost of new equipment.
Answer: A
Diff: 2
LO: 8-1
EOC: S8-1
24) Which of the following is most important in making a short-term special decision?
A) Focus on total costs
B) Separate variable from fixed costs
C) Use a conventional absorption costing approach
D) Calculating the fixed cost per unit
Answer: B
Diff: 2
LO: 8-1
EOC: S8-1
6
25) Managers should consider ________ when making any sort of decision.
A) only fixed costs
B) sunk costs
C) only variable costs
D) revenues that differ among alternatives
Answer: D
Diff: 2
LO: 8-1
EOC: S8-1
26) Label each item below as relevant or irrelevant in making a decision.
a) Cost of roof repair made on rental property last year
b) The cost of insurance on a new vehicle when deciding to buy a new vehicle
c) Cost of new equipment under evaluation to replace used equipment
d) Original cost of old equipment that is being evaluated for replacement
e) Cost of previous year's insurance policy on old equipment being evaluated for replacement
f) Accumulated depreciation on old equipment being evaluated for replacement
Answer:
a) irrelevant
b) relevant
c) relevant
d) irrelevant
e) irrelevant
f) irrelevant
Diff: 1
LO: 8-1
EOC: S8-1
27) What is the difference between relevant and irrelevant information for making decisions. Provide
examples of each.
Answer: Relevant information affects a decision and irrelevant information does not. Relevant
information differs between alternatives and affects the future. For example, the cost of insurance for a
car will differ depending upon the make, model, year, etc of the car. Therefore, this information is
relevant when deciding upon which car to purchase. The cost of a parking sticker to park in the school lot
is not relevant, since it is the same regardless of the make, model, year, etc. of car.
Diff: 1
LO: 8-1
EOC: E8-15
7
28) A special order occurs when a customer requests a one-time order at an increased sales price.
Answer: FALSE
Diff: 1
LO: 8-2
EOC: S8-2
29) Special orders increase income if the revenue from the order does not exceed the incremental variable
and fixed costs incurred to fill the order.
Answer: FALSE
Diff: 1
LO: 8-2
EOC: S8-2
30) In deciding whether to accept a special sales order, any fixed costs that would remain unchanged are
considered relevant data.
Answer: FALSE
Diff: 1
LO: 8-2
EOC: S8-2
31) Variable costs are irrelevant to a special decision when those variable costs differ between
alternatives.
Answer: FALSE
Diff: 1
LO: 8-2
EOC: S8-2
32) Managers should consider the potential effect of a special order on long-run profits and operations.
Answer: TRUE
Diff: 1
LO: 8-2
EOC: S8-2
8
33) When deciding whether to accept a special order, managers need to consider whether they have
available excess capacity.
Answer: TRUE
Diff: 1
LO: 8-2
EOC: S8-2
34) If the expected increase in revenues from a special order is greater than the expected increase in
variable and fixed costs, then the special order should be accepted.
Answer: TRUE
Diff: 1
LO: 8-2
EOC: S8-2
35) In a special sales order decision, the special price must exceed the variable cost of filling the order. In
other words, the special order must have ________.
A) sunk costs
B) a positive contribution margin
C) opportunity costs
D) a negative contribution margin
Answer: B
Diff: 2
LO: 8-2
EOC: S8-2
36) In a special sales order decision, incremental fixed costs that will be incurred if the special order is
accepted are considered to be
A) opportunity costs.
B) irrelevant to the decision.
C) relevant to the decision.
D) sunk costs.
Answer: C
Diff: 2
LO: 8-2
EOC: S8-2
9
37) Managers should consider all of the following when deciding whether to accept a special order,
except
A) available excess capacity.
B) the variable costs associated with the special order.
C) the effect of the order on regular sales.
D) fixed costs that will not be affected by the order.
Answer: D
Diff: 2
LO: 8-1
EOC: S8-2
38) A manager should always reject a special order if
A) the special order price is less than the variable costs of the order.
B) there is available excess capacity.
C) the special order price is less than the regular sales price.
D) the special order will require variable nonmanufacturing expenses.
Answer: A
Diff: 2
LO: 8-1
EOC: S8-2
39) Which would be a consideration for making special orders?
A) Available capacity to fill the order
B) If price will cover incremental costs of filling the order
C) If the order will affect regular sales in the long run
D) All of the above
Answer: D
Diff: 2
LO: 8-2
EOC: S8-2
10
40) A company should ________ when making a short-term special decision.

A) focus on qualitative factors only
B) focus on quantitative factors only
C) separate variable costs from fixed costs
D) use a traditional direct costing approach
Answer: C
Diff: 2
LO: 8-2
EOC: S8-2
11
41) Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000
seats per year, but is currently producing and selling 75,000 seats per year. The following information
relates to current production:
Sale price per unit
$400
Variable costs per unit:

Manufacturing
Marketing and administrative
$220
$50
Total fixed costs:

Manufacturing
$750,000
$200,000
If a special sales order is accepted for 7,000 seats at a price of $350 per unit, and fixed costs remain
unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by
the special order.)
A) Increase by $560,000
B) Decrease by $560,000
C) Increase by $2,450,000
D) Increase by $8,000,000
Answer: A
Explanation: A)
Variable Mfg. Cost
$ 220
Variable Marketing
$ 50
Total Variable
$ 270
NOW
Sales Price
Less Total Variable Cost
= Contribution Margin
$ 350
270
$ 80
Times units sold

7,000
= Additional Profit
$ 560,000
Diff: 2
LO: 8-2
EOC: E8-18A
12
Sale price per unit
$400

Manufacturing
$220
$50
Total fixed costs:

Manufacturing
$750,000
$200,000
If a special sales order is accepted for 4,000 seats at a price of $325 per unit, fixed costs remain unchanged,
and no variable marketing and administrative costs will be incurred for this order, how would operating
income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A) Increase by $2,180,000
B) Increase by $420,000
C) Increase by $220,000
D) Decrease by $420,000
Answer: B
Explanation: B)
Sales Price
$ 325
220
$ 105
Times units sold
4,000
= Additional Profit
$ 420,000
Diff: 2
LO: 8-2
EOC: E8-18A
13
Sale price per unit
$400

Manufacturing
$220
$50
Total fixed costs:

Manufacturing
$750,000
$200,000
If a special sales order is accepted for 3,000 seats at a price of $300 per unit, and fixed costs increase by
$10,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the
special order.)
A) Decrease by $80,000
D) Increase by $80,000
Answer: D
Explanation: D)
Special sales order volume
3,000
Special order price per unit
Additional revenue from order
Variable manufacturing costs per unit
Variable marketing and administrative costs per
unit
Total variable costs per unit
$ 900,000
$
220.00
270.00
3,000

Additional variable expenses from order
$ 810,000

$ 900,000
$ (810,000)
Special order increase in fixed expense

Change in operating income
Diff: 2
LO: 8-2
EOC: E8-18A
14
Sale price per unit
$400

Manufacturing
$220
$50
Total fixed costs:

Manufacturing
$750,000
$200,000
If a special sales order is accepted for 2,500 seats at a price of $320 per unit, fixed costs increase by $5,000,
and variable marketing and administrative costs for that order are $25 per unit, how would operating
Answer: C
Explanation: C) Variable Mfg. Cost
$ 220
Variable Marketing
$ 25
Total Variable
$ 245
Now
Sales Price
$ 320
245
$ 75
Times units sold
2,500
$ 187,500
Less: add'l fixed cost
5,000
= Add'l Profit
$ 182,500
Diff: 2
LO: 8-2
EOC: E8-18A
15
45) Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000
Sale price per unit
$400

Manufacturing
$220
$50
Total fixed costs:

Manufacturing
$750,000
$200,000
If a special sales order is accepted for 6,500 seats at a price of $325 per unit, and fixed costs remain
unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by
the special order.)
C) Increase by $2,112,500
D) Increase by $5,500,000
Answer: B
Explanation: B)
Variable Mfg. Cost
$ 220
Variable Marketing
$ 50
Total Variable
$ 270
NOW
Sales Price
$ 325
270
$ 55
Times units sold

6,500
= Additional Profit
$ 357,500
Diff: 2
LO: 8-2
EOC: E8-18A
16
46) Comfort Cloud manufactures seats for airplanes. The company has the capacity to prroduce 100,000
Sale price per unit
$400

Manufacturing
$220
$50
Total fixed costs:

Manufacturing
$750,000
$200,000
If a special sales order is accepted for 5,500 seats at a price of $325 per unit, fixed costs remain unchanged,
and no variable marketing and administrative costs will be incurred for this order, how would operating
A) Increase by $2,997,500
Answer: C
Explanation: C) Sales Price
$ 325
220
$ 105
Times units sold
5,500
= Additional Profit
$ 577,500
Diff: 2
LO: 8-2
EOC: E8-18A
17
Sale price per unit
$400

Manufacturing
$220
$50
Total fixed costs:

Manufacturing
$750,000
$200,000
If a special sales order is accepted for 3,200 seats at a price of $350 per unit, and fixed costs increase by
$12,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the
special order.)
Answer: D
Explanation: D)
3,200
unit
$ 1,120,000
$
220.00
270.00
3,200

$ 864,000

$ 1,120,000
$ (864,000)
Special order increase in fixed expenses

Diff: 2
LO: 8-2
EOC: E8-18A
18
Sale price per unit
$400

Manufacturing
$220
$50
Total fixed costs:

Manufacturing
$750,000
$200,000
If a special sales order is accepted for 2,500 seats at a price of $310 per unit, fixed costs increase by $6,500,
and variable marketing and administrative costs for that order are $25 per unit, how would operating
Answer: D
Explanation: D)
Variable Mfg. Cost
Variable Marketing
Total Variable
Now
Sales Price
$ 220
$ 25
$ 245
$ 310
245
$ 65
Times units sold

2,500
$ 162,500
Less: add'l fixed cost
6,500
= Add'l Profit
$ 156,000
Diff: 2
LO: 8-2
EOC: E8-18A
19
49) Samson Incorporated provided the following information regarding its only product:
Sale price per unit
Direct materials used
Direct labor incurred
Variable manufacturing overhead
Variable selling and administrative expenses
Fixed manufacturing overhead
Fixed selling and administrative expenses
Units produced and sold
$50.00
$160,000
$185,000
$120,000
$70,000
$65,000
$12,000
20,000
Assume no beginning inventory

Assuming there is excess capacity, what would be the effect on operating income of accepting a special
order for 5,000 units at a sale price of $40 per product? (NOTE: Assume regular sales are not affected by
the special order.)
Answer: B
Explanation: B)
Direct Materials
$ 160,000
Direct Labor
185,000
Variable Mfg. O/H
120,000
Variable Selling
70,000
Total Mfg. Cost
$ 535,000 / units produced 20,000 = $ 26.75 Mfg. cost per unit
Then
Sales Price
$ 40
Less Mfg cost per Unit
26.75
$ 13.25
Times units sold
5,000
Profit
= $66,250
Diff: 2
LO: 8-2
EOC: E8-18A
20
Sale price per unit
$50.00
$160,000
$185,000
$120,000
$70,000
$65,000
$12,000
20,000

order for 3,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead
costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.)
Answer: C
Explanation: C)
Direct Materials
$ 160,000
Direct Labor
185,000
Variable Mfg. O/H
120,000
Variable Selling
70,000
Total Mfg. Cost
Then
Sales Price
$ 45.00
26.75
$ 18.25
Times units sold
3,000
Total Contribution Margin
=
$54,750
Less Add'l Fixed cost
- 5,000
Add'l Profit
49,750
Diff: 3
LO: 8-2
EOC: E8-18A
21
Sale price per unit
$50.00
$160,000
$185,000
$120,000
$70,000
$65,000
$12,000
20,000

order for 1,200 units at a sale price of $47 per product? The 1,200 units would not require any variable
selling and administrative expenses. (NOTE: Assume regular sales are not affected by the special order.)
Answer: D
Explanation: D)
Direct Materials
Direct Labor
Variable Mfg. O/H
Variable Selling
Total Mfg. Cost
$ 160,000
185,000
120,000
70,000
Then
Sales Price
$ 47
23.25
$ 23.75
Times units sold
1,200
Profit
=
$28,500
Diff: 2
LO: 8-2
EOC: E8-18A
22
52) Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue
Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30
per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14
per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no
effect on regular sales.)
How much are the expected increase (decrease) in revenues and expenses from the special sales order?
A) Expected increase in revenues $220,000; expected increase in expenses $140,000
B) Expected increase in revenues $220,000; expected increase in expenses $40,000
C) Expected increase in revenues $300,000; expected increase in expenses $140,000
D) Expected increase in revenues $220,000; expected increase in expenses $120,000
Answer: A
Explanation: A) $ 22 10,000 = $ 220,000 Add'l Revenue
$ 14 10,000 = $ 140,000 Add'l Expense
Diff: 2
LO: 8-2
EOC: E8-18A
53) Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue
Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30
per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14
per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no
effect on regular sales.)
Should Blue Technologies accept or reject the special sales order?
A) Accept, because operating income would increase $360,000.
B) Reject, because operating income would decrease $80,000.
C) Accept, because operating income would increase $80,000.
D) Reject, because operating income would decrease $160,000.
Answer: C
Explanation: C) $ 22 10,000 = $ 220,000 Add'l Revenue
Less $ 14 10,000 = 140,000 Add'l Expense
= $ 80,000 Operating Income
Diff: 2
LO: 8-2
EOC: E8-18A
23
54) ABC Toys manufactures and sells wooden toys for $15 each. The company has the capacity to
produce 25,000 toys in a year, but is currently producing and selling 20,000 toys per year. The company
currently is incurring the following costs at its current production level of 20,000 toys:
Variable manufacturing costs
Fixed manufacturing costs
Variable selling and administrative costs
Fixed selling and administrative costs
$ 70,000
$ 90,000
$ 75,000
$ 50,000
A retailer is interested in purchasing the excess capacity of 5,000 toys if it can receive a special price. This
special order would not affect ABC Toys' regular sales or its cost structure. ABC Toys' profits would
increase from this special order if the special order price per toy is greater than
A) $8.00.
B) $5.80.
C) $7.25.
D) $14.25.
Answer: C
Explanation: C)
Variable Mfg Cost
$ 70,000
Variable Selling Cost
+ 75,000
Total Cost
$ 145,000/ 20,000 produced = $ 7.25 Contribution Margin
Diff: 2
LO: 8-2
EOC: E8-18A
24
55) Apex Company produces artificial Christmas trees. A local shopping mall recently made a special
order offer; the shopping mall would like to purchase 200 extra large white trees. Apex Company is
currently producing and selling 20,000 trees; the company has the excess capacity to handle this special
order. The shopping mall has offered to pay $120 for each tree. An accountant at Apex Company
provides an estimate of the unit product cost as follows:
Direct materials
Direct labor (variable)
Total unit cost
$ 50.00
$ 3.50
$ 1.00
$ 4.00
$ 14.50
This special order would require an investment of $10,000 for the molds required for the extra large trees.
These molds would have no other purpose and would have no salvage value. The special order trees
would also have an additional variable cost of $5.00 per unit associated with having a white tree. This
special order would not have any effect on the company's other sales. If the special order is accepted, the
company's operating income would increase (decrease) by
A) $2,300 decrease.
B) $13,100 decrease.
C) $2,100 increase.
D) $13,100 increase.
Answer: C
Explanation: C)
Direct materials
$ 50.00
Direct Labor
3.50
Variable MOH
1.00
Add'l variable cost
5.00
Total Mfg cost
$ 59.50
Now Selling Price
$ 120.00
Mfg cost
59.50
Contribution Margin $ 60.50 200 units = 12,100 - 10,000 Add'l Fixed = $ 2,100
Diff: 2
LO: 8-2
EOC: E8-18A
25
56) The following information relates to current production of outdoor chaise lounges at Backyard Posh:
Total fixed manufacturing costs
Variable marketing and administrative costs per unit
Total fixed marketing and administrative costs
$ 102.00
$ 525,000
$ 30.00
$ 250,000
The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept
a special sales order for 1,200 chaise lounges at a price of $225.00 per unit. Fixed costs would remain
unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently
producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special
order. If the company were to accept this special order, how would operating income be affected?
C) Decrease by $111,600
Answer: B
Explanation: B)
1,200
unit
$ 270,000
$
102.00
132.00
1,200

Additional expenses from order
$ 158,400
$ 270,000

Diff: 2
LO: 8-2
EOC: E8-18A
26
$ 102.00
$ 525,000
$ 30.00
$ 250,000
a special sales order for 800 chaise lounge at a price of $250.00 per unit. Fixed costs would remain
unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently
Answer: D
Explanation: D)
800
$ 200,000
800

$ 200,000
81,600

Diff: 2
LO: 8-2
EOC: E8-18A
27
58) The following information relates to current production of outdoor chaise lounges Backyard Posh:
$ 102.00
$ 525,000
$ 30.00
$ 250,000
a special sales order for 200 chaise lounges at a price of $200.00 per unit. Fixed costs would increase by
$20,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently
Answer: A
Explanation: A)
200
unit
$ 40,000
$
102.00
132.00

200
$
26,400
$ 40,000
$ (26,400)

Diff: 2
LO: 8-2
EOC: E8-18A
28
$ 102.00
$ 525,000
$ 30.00
$ 250,000
a special sales order for 500 chaise lounges at a price of $200.00 per unit. Variable marketing and
administrative costs would be $10 per unit lower than on regular sales. Fixed costs would increase by
$15,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently
Answer: D
Explanation: D)
unit
500
$ 100,000
$
102.00
122.00
500

61,000

$
$
100,000
(61,000)

Diff: 2
LO: 8-2
EOC: E8-18A
29
60) Pluto Incorporated provided the following information regarding its single product:
$ 240,000
$ 420,000
$ 160,000
$ 100,000
$ 60,000
$ 20,000
The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000
units (the costs above relate to the 40,000 units production level). The company has excess capacity and
regular sales will not be affected by this special order. There was no beginning inventory.
What would be the effect on operating income of accepting a special order for 3,500 units at a sale price of
$55 per product?
Answer: A
Explanation: A)
Direct Materials
$ 240,000
Direct Labor
420,000
Variable Overhead
160,000
Variable Selling
60,000
Total
$ 880,000
Total
Divided by production
Cost per unit
$880,000
40,000
$ 22.00
Selling Price
Less cost per unit
Contribution Margin
units sold
Operating Income
$ 55.00
22.00
$ 33.00
3,500
$ 115,500
Diff: 2
LO: 8-2
EOC: E8-18A
30
$ 240,000
$ 420,000
$ 160,000
$ 100,000
$ 60,000
$ 20,000
$50 per product assuming additional fixed manufacturing overhead costs of $10,000 are incurred?
Answer: C
Explanation: C)
Direct Materials
Direct Labor
Variable Overhead
Variable Selling
Total
$ 240,000
420,000
160,000
60,000
$ 880,000
Total
Divided by production
Cost per unit
$880,000
40,000
$ 22.00
Selling Price
Less cost per unit
Contribution Margin
units sold
Operating Income
Less Addd Fixed Cost
Operating (loss)
$ 50.00
22.00
$ 28.00
1,500
$ 42,000
10,000
$32,000
Diff: 2
LO: 8-2
EOC: E8-18A
31
$ 240,000
$ 420,000
$ 160,000
$ 100,000
$ 60,000
$ 20,000
$40 per product? The special order units would not require any variable selling and administrative
expenses.
Answer: D
32
Explanation: D)
Divide by
$ 240,000
Divide by

Direct materials cost per unit
Divide by
6.00
$ 420,000
Divide by

Direct labor costs per unit
Divide by
10.50
$ 160,000
Divide by

Variable manufacturing overhead cost per unit
4.00
Direct materials cost per unit

Direct labor costs per unit
$
$
6.00
10.50
Variable manufacturing overhead per unit

20.50
Special order volume
1,000
Special order sales price per unit

$ 40,000
Special order volume
1,000
Special order sales price per unit

$ 20,500
$ 40,000
Additional variable costs per unit

Diff: 2
LO: 8-2
EOC: E8-18A
33
63) Indicate whether each item below is a characteristic of a price-taker or a price-setter. Use PT for pricetaker and PS for price-setter.
a) Cost-plus pricing
b) Product lacks uniqueness
c) Less competition
d) Target pricing
e) Heavy competition
Answer:
a) PS
b) PT
c) PS
d) PT
e) PT
Diff: 1
LO: 8-2
EOC: E8-17A
34
64) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return
on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens
and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are
expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course has a favorable
reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus
approach, what price should Mountaintop charge for a round of golf?
Answer:
Variable costs per unit
$
8.00
Expected volume
Total variable costs
3,200,000
Investors' return (% of assets)
12%
Total assets
Desired profit
6,000,000
Total fixed costs
25,000,000
Total assets
Total costs
$ 28,200,000
Desired profit
Target revenue
Divide by
$ 34,200,000
Divide by
Expected volume
Cost-plus price per round of
golf
Diff: 3
LO: 8-2
EOC: E8-17A
35
65) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return
on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens
and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are
expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course is a price-taker
and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will
it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit
level?
Answer: Market price per unit
$
75.00
Expected volume
Revenue at market price
30,000,000
8.00
Expected volume
3,200,000
Revenue at market price

Less: total fixed costs
$ 30,000,000
$ (25,000,000)
total variable costs

Operating income
Investors' return (% of
ssets)
12%
Total assets
Desired profit
6,000,000
Operating income
Profit expectation shortfall
4,200,000
4,200,000
Divide by
Profit expectation shortfall

Divide by
Total assets
Percent of assets
No, investors will not be happy. They wanted 12% ROI.

Diff: 3
LO: 8-2
EOC: E8-17A
36
66) Extreme Sports received a special order for 1,000 units of its extreme motorbike at a selling price of
$250 per motorbike. Extreme Sports has enough extra capacity to accept the order. No additional selling
costs will be incurred.
Unit costs to make and sell this product are as follows: Direct materials, $100; direct labor, $50; variable
manufacturing overhead, $14; fixed manufacturing overhead, $10, and variable selling costs, $2.
A) List the relevant costs.
B) What will be the change in operating income if Extreme Sports accepts the special order?
C) Should Extreme Sports accept the special order?
Answer:
A)
Relevant costs:
Direct material
Direct labor
Total relevant costs
$ 100.00
$ 50.00
$ 14.00
$ 164.00
B)
Special offer volume
Special offer price
1,000
$ 250.00
$ 250,000
Relevant costs:
Direct material
Direct labor
$ 100.00
$ 50.00
$ 14.00
$ 164.00
1,000
$ 164,000

$ 250,000
$ (164,000)
$ 86,000
C) Yes, Extreme Sports should accept the order.

Diff: 2
LO: 8-2
EOC: S8-2
37
67) Jeff's Widget Corporation produces and sells a part used in the production of bicycles. The unit costs
associated with this part are as follows:
Direct materials
Direct labor
Total cost
$.14
.30
.20
.05
$.69
Saturn Company has approached Jeff's Widget Corporation with an offer to purchase 20,000 units of this
part at a price of $.80. Accepting this special sales order will put idle manufacturing capacity to use and
will not affect regular sales. Total fixed costs will not change.
Determine whether or not the special order should be accepted. Justify your conclusion.
Answer:
Special offer price
20,000
$ 0.80
$ 16,000
Direct material
Direct labor
Total costs
$ 0.14
$ 0.30
$ 0.20
$ 0.64
20,000
$ 12,800

$ 16,000
$ (12,800)
$ (3,200)
The company should accept the special order since total operating income would increase if the special
order were to be accepted.
Diff: 2
LO: 8-2
EOC: E8-18A
38
68) Revved Up Toys manufactures a computer chip used in the production of remote control cars. When
6,000 cars are produced, the costs per part are:
Direct materials
Direct labor
Total
$2.50
1.50
1.00
1.75
$6.75
Sam's Associates has offered to sell Revved Up Toys 6,000 parts for $5.75 each. If Sarah accepts the offer,
$1.00 of the fixed manufacturing overhead costs can be eliminated.
a. What is the relevant per unit cost to manufacture the part?
b. Which alternative is best for Revved Up Toys and by how much?
Answer:
a. Relevant costs to manufacture the part include direct materials, direct labor, variable manufacturing
overhead, and fixed manufacturing overhead that can be eliminated, or:
Direct materials
Direct labor
Traceable fixed cost per unit
Relevant cost to produce each unit
$2.50
$1.50
$1.00
$1.00
$6.00
b.
Direct materials
Direct labor
Traceable fixed cost per unit
Relevant cost to produce each unit
Offer price by supplier
Savings per unit if bought
Production level
Total increase in operating income if bought
$2.50
$1.50
$1.00
$1.00
$6.00
$(5.75)
$0.25
6,000
$1,500
Diff: 2
LO: 8-2
EOC: P8-43A
39
69) Elite Office Furniture received a special order for 1,200 units of its executive chair at a selling price of
$90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs
will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor
$19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling
Costs $5.
List the relevant costs (and amount) to Elite Office Furniture for this special order.
Answer:
Direct material
$ 45.00
Direct labor
$ 19.00
$ 6.00
$ 70.00
Diff: 2
LO: 8-2
EOC: S8-2
40
70) Elite Office Furniture received a special order for 1,200 units of its executive chairs at a selling price of
$90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs
will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor
$19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling
Costs $5.
What will be Elite Office Furniture's change in operating income if they accept the special order? Should
Elite Office Furniture accept the order? Explain why or why not.
Answer:
1,200
Special offer price
$ 90.00
$ 108,000
Direct material
Direct labor
$ 45.00
$ 19.00
$ 6.00
$ 70.00
1,200
$ 84,000

Increase in operating income
$ 108,000
$ (84,000)
$ 24,000
Yes, they should accept the order as it results in additional operating income since the company has the
additional capacity.
Diff: 2
LO: 8-2
EOC: P8-43A
41
71) Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling
price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run
includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into
Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed
manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no
change in the number of units produced.
What would be the operating income for Item Q?
Answer:
Production volume
100,000
Product Q selling price
$ 15.00
Product Q revenue
$ 1,500,000
Production volume
Product Q variable costs
Product Q total variable costs
Product Q revenue
Fixed manufacturing overhead for product
Q
Operating income for Q
100,000
$ 12.00
$ 1,200,000
$ 1,500,000
$ (1,200,000)
$ (72,000)
$ 228,000
Diff: 2
LO: 8-2
EOC: P8-43A
42
What would be the operating income for Item QR?
Answer:
Production volume
100,000
Product QR selling price
$ 24.00
Product QR revenue
$ 2,400,000
Product QR additional costs
Product QR variable costs
Production volume
Product QR total variable costs
Fixed manufacturing overhead for product Q
Additional fixed manufacturing overhead
QR
Product QR revenue
QR
Operating income for QR
$ 12.00
$ 7.00
$ 19.00
100,000
$ 1,900,000
$ 72,000
$ 4,500
$ 76,500
$ 2,400,000
$ (1,900,000)
$ (76,500)
$ 423,500
Diff: 2
LO: 8-2
EOC: P8-43A
By what percent would Heinz Manufacturing's operating income improve if the change is made?
43
Answer:
Production volume
Product Q selling price
Product Q revenue
100,000
$ 15.00
$ 1,500,000
Production volume
100,000
$ 12.00
$ 1,200,000
Product Q revenue
$ 1,500,000
$(1,200,000)
$ (72000)
$ 228,000
Product QR:
Production volume
Product QR selling price
Product QR revenue
100,000
$ 24.00
$ 2,400,000

Product QR additional costs
Product QR variable costs
Production volume
$ 12.00
$ 7.00
$ 19.00
100,000
$ 1,900,000

QR
$ 72,000
$ 4,500
$ 76,500
Product QR revenue
QR
$ 2,400,000
$(1,900,000)
$ (76,500)
$ 423,500

Divide by
$ 423,500
Divide by
$ 228,000
1.857
(1)
85.75%
Subtract
Increase in income
Diff: 2
LO: 8-2
EOC: P8-43A
44

74) Companies operating in highly competitive industries are generally price-setters.
Answer: FALSE
Diff: 1
LO: 8-3
EOC: S8-3
75) When setting prices, a company need not consider whether it is a price-taker or a price-setter for each
product that it sells.
Answer: FALSE
Diff: 1
LO: 8-3
EOC: S8-3
76) A price-setter company emphasizes a cost-plus approach to pricing.
Answer: TRUE
Diff: 1
LO: 8-3
EOC: S8-3
77) For a product, revenue at market price plus desired operating profit equals target total cost.
Answer: FALSE
Diff: 1
LO: 8-3
EOC: S8-4
78) When a company is a price-setter, it emphasizes a target costing approach to pricing.
Answer: FALSE
Diff: 1
LO: 8-3
EOC: S8-4
45
79) When making a pricing decision, it is not necessary to separate costs into fixed and variable.
Answer: FALSE
Diff: 1
LO: 8-3
EOC: S8-4
80) Cost-plus price minus desired profit equals total cost.
Answer: TRUE
Diff: 2
LO: 8-3
EOC: S8-4
81) When using a target costing approach, the company starts with revenue at market price, and then
subtracts its desired profit, to yield the target total cost.
Answer: TRUE
Diff: 2
LO: 8-3
EOC: S8-4
82) Companies often try to gain more control over pricing by attempting to differentiate their products.
Answer: TRUE
Diff: 2
LO: 8-3
EOC: S8-4
83) Product differentiation allows companies to become more of a price-setter, and less of a price-taker.
Answer: TRUE
Diff: 2
LO: 8-3
EOC: S8-4
84) When setting prices, managers need to consider all costs.
Answer: TRUE
Diff: 2
LO: 8-3
EOC: S8-4
46
85) Managers need to consider variable costs, fixed costs, inventoriable product costs and period costs
when setting prices.
Answer: TRUE
Diff: 2
LO: 8-3
EOC: S8-4
86) Cost-plus pricing is essentially the opposite of target-costing.
Answer: TRUE
Diff: 2
LO: 8-3
EOC: S8-4
87) Which of the following best describes "target costing"?
A) An approach to pricing that begins with revenue at market price and subtracts desired profit to arrive
at target total cost
B) A factor that restricts production or sales of a product
C) All costs incurred along the value chain in connection with the product or service
D) An approach to pricing that begins with the product's total cost and adds desired profit
Answer: A
Diff: 2
LO: 8-3
EOC: S8-3
88) "Total cost of product or service" is best described as which of the following?
A) Benefits foregone by choosing a particular alternative course of action
C) Costs that were incurred in the past and can not be changed
D) All costs incurred along the value chain in connection with the product or service
Answer: D
Diff: 2
LO: 8-3
EOC: S8-3
47
89) Which of the following describes the products and services of companies that are price-setters?
A) They tend to be unique.
B) They are priced by managers using a target-costing emphasis.
C) They tend to have a lot of competitors.
D) They tend to be commodities.
Answer: A
Diff: 2
LO: 8-3
EOC: S8-3
90) Stockholders' expectations of company profits are affected by which of the following?
A) Industry risk
B) Historical company earnings
C) General economic conditions
D) All of the above
Answer: D
Diff: 2
LO: 8-3
EOC: S8-3
91) The cost-plus price is described by which of the following?
A) Target total cost plus desired profit
B) Total cost plus desired profit
C) Revenue at market price plus desired profit
D) Variable cost plus desired profit
Answer: B
Diff: 2
LO: 8-3
EOC: S8-3
92) Target total cost is described by which of the following?
A) Total cost plus desired profit
B) Revenue at market price plus desired profit
C) Revenue at market price minus desired profit
D) Total cost minus actual cost
Answer: C
Diff: 2
LO: 8-3
EOC: S8-3
48
93) Managers must consider which of the following when pricing a product or service?
A) All costs
B) Only period costs
C) Only manufacturing costs
D) Only variable costs
Answer: A
Diff: 2
LO: 8-3
EOC: S8-3
94) Which of the following pairs are characteristics of price-takers?
A) Less competition and target pricing
B) Cost-plus pricing and less competition
C) Target costing and heavy competition
D) Cost-plus pricing and lack of product uniqueness
Answer: C
Diff: 2
LO: 8-3
EOC: S8-3
95) Which of the following pairs are characteristics of price-setters?
A) Less competition and target costing
B) Cost-plus pricing and less competition
C) Lack of product uniqueness and heavy competition
D) Less competition and lack of product uniqueness
Answer: B
Diff: 2
LO: 8-3
EOC: S8-3
96) Big-box retailers such as Lowe's are considered price-takers because
A) their products are not unique.
B) there is less competition in the home improvement retail sector.
C) their products are unique.
D) they emphasize cost-plus pricing.
Answer: A
Diff: 2
LO: 8-3
EOC: S8-3
49
97) Target total cost is defined as

A) cost of goods sold less desired profit.
B) revenue at market price less desired profit.
C) revenue at market price less variable costs.
D) revenue at market price less fixed costs.
Answer: B
Diff: 2
LO: 8-3
EOC: S8-3
98) Methods for a company to meet target total cost and the profit goals if the current cost of the product
is higher than the target cost include which of the following?
A) Accept a lower profit
B) Cut fixed costs, cut variable costs
C) Cut fixed costs
D) Any of the above
Answer: D
Diff: 2
LO: 8-3
EOC: S8-3
99) In pricing a product, managers should consider which of the following?
A) Only fixed costs
B) Only variable costs
C) Only period costs
D) None of the above
Answer: D
Diff: 2
LO: 8-3
EOC: S8-3
50
100) All of the following factors affect the amount a customer is willing to pay for a product, except
A) the selling company's costs.
B) the competition's price.
C) the product's uniqueness.
D) general economic conditions.
Answer: A
Diff: 2
LO: 8-3
EOC: S8-3
101) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12%
return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the
greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000
golfers are expected each year. Variable costs are about $15 per golfer. Mountaintop golf course has a
favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a
cost-plus approach, what price should Mountaintop charge for a round of golf?
A) $51.50
B) $71.00
C) $78.50
D) $ 0.21
Answer: C
Explanation: C)
$ 15.00
Expected volume
400,000
$ 6,000,000
Total assets
Desired profit
12%
$45,000,000
$ 5,400,000
Total fixed costs

Total costs
Desired profit
Target revenue
Divide by
Expected volume
Cost-plus price per round of golf
$20,000,000
$ 6,000,000
$26,000,000
$ 5,400,000
$31,400,000
Divide by
400,000
$ 78.50
Diff: 3
LO: 8-3
EOC: S8-4
51
golfers are expected each year. Variable costs are about $15 per golfer. The Mountaintop golf course is a
price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What
profit will it earn in terms of dollars?
A) $16,000,000
B) $(4,000,000)
C) $ 4,000,000
D) $(20,000,000)
Answer: C
Explanation: C)
Market price per unit
$
75.00
Expected volume
Revenue
30,000,000
Expected volume
400,000

6,000,000
Total fixed costs
20,000,000

Total product costs
$ 26,000,000
Revenue
$ 30,000,000
Total product costs

Expected profit
Diff: 3
LO: 8-3
EOC: E8-19A
52
golfers are expected each year. Variable costs are about $15 per golfer. Mountaintop golf course is a pricetaker and won't be able to charge more than its competitors who charge $75 per round of golf. What
profit will it earn as a percent of assets?
A) Loss of 8.89%
B) Profit of 35.56%
C) Profit of 8.89%
D) Loss of 57.67%
Answer: C
Explanation: C)
Expected volume
Revenue
75.00
30,000,000
Expected volume
400,000

6,000,000
Total fixed costs
20,000,000

Total product costs
$ 26,000,000
Revenue
$ 30,000,000
Total product costs

Expected profit
4,000,000
4,000,000
Divide by
Expected profit
Divide by
Total assets
Expected profit as a percent of
assets
Diff: 3
LO: 8-3
EOC: E8-19A
53
104) Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return
on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the
swimming pool. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are
expected to swim each year. Variable costs are about $10 per swimmer. The Philadelphia Swim Club has
a favorable reputation in the area and therefore, has some control over the membership price. Using a
cost-plus approach, what price should Philadelphia Swim Club charge for a membership?
A) $41.00
B) $37.50
C) $29.00
D) $ 0.17
Answer: A
Explanation: A)
$ 10.00
Expected volume
500,000
$ 5,000,000
Total assets
Desired profit
10%
$30,000,000
$ 3,000,000
Total fixed costs

Total costs
Desired profit
Target revenue
Divide by
Expected volume
Cost-plus price per round of golf
$12,500,000
$ 5,000,000
$17,500,000
$ 3,000,000
$20,500,000
Divide by
500,000
$ 41.00
Diff: 3
LO: 8-3
EOC: E8-19A
54
swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are
expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club is a
price-taker and won't be able to charge more than its competitors who charge $37.00 for a membership.
What profit will it earn in terms of dollars?
A) $11,000,000
B) $(12,500,000)
C) $1,000,000
D) $(1,000,000)
Answer: C
Explanation: C)
$
37.00
Expected volume
Revenue
18,500,000
Expected volume
500,000

5,000,000
Total fixed costs
12,500,000

Total product costs
$ 17,500,000
Revenue
$ 18,500,000
Total product costs

Expected profit
Diff: 3
LO: 8-3
EOC: E8-19A
55
swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are
expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club is a
price-taker and won't be able to charge more than its competitors who charge $37.00 per hour of court
time. What profit will it earn as a percent of assets?
A) Profit of 3.33%
B) Loss of 3.33%
C) Loss of 58.17%
D) Profit of 36.67%
Answer: A
Explanation: A)
Expected volume
Revenue
37.00
18,500,000
Expected volume
500,000

5,000,000
Total fixed costs
12,500,000

Total product costs
$ 17,500,000
Revenue
$ 18,500,000
Total product costs

Expected profit
1,000,000
1,000,000
Divide by
Expected profit
Divide by
Total assets
Expected profit as a percent of
assets
Diff: 3
LO: 8-3
EOC: E8-19A
56
107) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12%
greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000
golfers are expected each year. Variable costs are about $12 per golfer. The Green Pastures course has a
favorable reputation in the area and therefore, has some control over the price of a round of golf.
Based on these numbers, what are Green Pasture's total costs?
Answer: $20,000, 000 in fixed costs + (500,000 golfers $12 variable cost/golfer) = $26,000,000
Diff: 2
LO: 8-3
EOC: S8-4; E8-19A
golfers are expected each year. Variable costs are about $12 per golfer. The Green Pastures course has a
favorable reputation in the area and therefore, has some control over the price of a round of golf.
Based on these numbers, what is Green Pasture's target revenue?
Answer: $20,000, 000 in fixed costs + (500,000 golfers $12 variable cost/golfer) = $26,000,000
$26,000, 000 in total costs + ($40,000,000 12% return) = $30,800,000
Diff: 2
LO: 8-3
EOC: E8-19A
golfers are expected each year. Variable costs are about $12 per golfer. Green Pastures golf course is a
price-taker and won't be able to charge more than $60 per round because of local competition.
What will Green Pasture's revenue be at a market price of $60/round?
Answer: 500,000 golfers $60/round = $30,000,000
Diff: 2
LO: 8-3
EOC: E8-19A
57
golfers are expected each year. Variable costs are about $12 per golfer. Green Pastures golf course is a
price-taker and won't be able to charge more than $60 per round because of local competition.
What will Green Pasture's expected profit shortfall be if it charges $60/round?
Answer: $20,000,000 in fixed costs + (500,000 golfers $12 variable cost/golfer) = $26,000,000
$26,000,000 in total costs + ($40,000,000 12% return) = $30,800,000
$30,000,000 - 26,000,000 = 4,000,000
$4,800,000 desired operating income - $4,000,000 operating income at $60/round equals a shortfall of
$800,000
Diff: 2
LO: 8-3
EOC: E8-19A
111) If a product line has a negative contribution margin, the product is not covering its fixed costs and
should be discontinued.
Answer: TRUE
Diff: 1
LO: 8-4
EOC: S8-5
112) If the cost savings from discontinuing a product exceed the lost revenues from discontinuing the
product, it should be retained.
Answer: FALSE
Diff: 1
LO: 8-4
EOC: S8-5
113) From a purely financial standpoint, if a product line has a negative contribution margin, the product
line should be discontinued.
Answer: TRUE
Diff: 2
LO: 8-4
EOC: S8-5
58
114) Fixed costs that exist even after a product is discontinued are called unavoidable fixed costs.
Answer: TRUE
Diff: 2
LO: 8-4
EOC: S8-5
115) When deciding whether to discontinue a product, managers should only consider the costs that will
be saved.
Answer: FALSE
Diff: 2
LO: 8-4
EOC: S8-5
116) If a product has a negative contribution margin, it should not be discontinued.
Answer: FALSE
Diff: 2
LO: 8-4
EOC: S8-5
117) Fixed costs that will continue to exist if a product is discontinued are relevant.
Answer: FALSE
Diff: 2
LO: 8-4
EOC: S8-5
59
118) Unavoidable fixed costs are

A) irrelevant to the decision of whether to discontinue a product line because they will differ between
alternatives.
B) relevant to the decision of whether to discontinue the department.
C) irrelevant to the decision of whether to discontinue a product line because they will not differ between
alternatives.
D) none of the above.
Answer: C
Diff: 2
LO: 8-4
EOC: S8-5
119) Common fixed costs that are allocated between departments are generally
A) direct fixed costs of the department.
B) relevant to the decision of whether to discontinue the department.
C) irrelevant to the decision of whether to discontinue the department.
D) direct fixed costs of other departments.
Answer: C
Diff: 2
LO: 8-4
EOC: S8-5
120) Fixed costs that are allocated among all departments are known as
A) direct fixed costs.
B) relevant fixed costs.
C) general fixed costs.
D) common fixed costs.
Answer: D
Diff: 2
LO: 8-4
EOC: S8-5
60
121) A company's manager would consider which of the following in deciding whether to discontinue its
electronics product line?
A) The costs it could save by discontinuing the product line
B) The revenues it would lose from discontinuing the product line
C) How discontinuing the electronics product line would affect sales of its other products (like CDs)
D) All of the above
Answer: D
Diff: 2
LO: 8-4
EOC: S8-5
122) All of the following are considerations for discontinuing a product or product line, except
A) whether the product has a positive or negative contribution margin.
B) not having any free capacity.
C) if discontinuing the product or product line will affect sales of remaining products.
D) determining if direct fixed costs could be avoided if the product or product line is discontinued.
Answer: B
Diff: 2
LO: 8-4
EOC: S8-5
123) A drug store decides to discontinue its health and beauty section of products because it has been
unprofitable. This strategy could backfire because
A) the store can readily fill the available space.
B) the store's sales may suffer by not having this convenience category of products.
C) it has automatically saved that department's fixed costs.
Answer: B
Diff: 2
LO: 8-4
EOC: S8-5
61
124) Fixed costs that continue to exist even after a product line is discontinued are called
A) unavoidable fixed costs.
B) avoidable fixed costs.
C) variable fixed costs.
D) relevant fixed costs.
Answer: A
Diff: 2
LO: 8-4
EOC: S8-5
125) Each month, Burrel Incorporated produces 500 units of a product that has unit variable costs of
$17.00. Total fixed costs for the month are $4,375. A special sales order is received for 200 units of the
product at a price of $20 per unit. In deciding to accept or reject the special sales order, it is appropriate to
consider the
A) new fixed cost per unit of $6.25.
B) current fixed cost per unit of $8.75.
C) difference between the offered price and the variable cost per unit.
D) difference between the two fixed costs per unit, or $2.50.
Answer: C
Diff: 2
LO: 8-4
EOC: S8-5
62
126) Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the
most recent year follow:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Operating income (loss)
Total
$480,000
355,000
125,000
76,000
$49,000
Hiking
$340,000
235,000
105,000
38,000
$67,000
Fashion
$140,000
120,000
20,000
38,000
$(18,000)
Assuming fixed costs remain unchanged, how would discontinuing the Fashion line affect operating
income?
A) Increase in total operating income of $29,000
B) Increase in total operating income of $132,000
C) Decrease in total operating income of $78,000
D) Decrease in total operating income of $20,000
Answer: D
Diff: 3
LO: 8-4
EOC: E8-20A
63
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$480,000
355,000
125,000
76,000
$49,000
Hiking
$340,000
235,000
105,000
38,000
$67,000
Fashion
$140,000
120,000
20,000
38,000
$(18,000)
If $25,000 of fixed costs will be eliminated by discontinuing the Fashion line, how will operating income
be affected?
A) Increase $5,000
B) Decrease $45,000
C) Increase $54,000
D) Increase $103,000
Answer: A
Explanation: A)
Contribution Margin $ 105,000
Less Fixed Expenses
51,000
New Net income
54,000
Less original OI
49,000
Increase in OI
$ 5,000
Diff: 3
LO: 8-4
EOC: E8-20A
64
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$480,000
355,000
125,000
76,000
$49,000
Hiking
$340,000
235,000
105,000
38,000
$67,000
Fashion
$140,000
120,000
20,000
38,000
$(18,000)
Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly
used to produce the line is rented for $30,000 per year, how will operating income be affected?
A) Decrease $10,000
B) Increase $59,000
C) Increase $10,000
Answer: C
Explanation: C)
Sales Revenue
340,000
Plus Additional Revenue
30,000
Total Revenu
370,000
Less Variable Expenses
(235,000)
Contribution Margin
135,000
Less Fixed Expenses
(76,000)
New Net OI
59,000
Less original OI
(49,000)
Increase in OI
$ 10,000
Diff: 3
LO: 8-4
EOC: E8-20A
65
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$480,000
355,000
125,000
76,000
$49,000
Hiking
$340,000
235,000
105,000
38,000
$67,000
Fashion
$140,000
120,000
20,000
38,000
$(18,000)
Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly
used to produce the Fashion line is used to increase the production of Hiking boots by 250%, how will
operating income be affected?
A) Increase $137,500
B) Increase $235,500
C) Increase $186,500
D) Decrease $137,500
Answer: A
Explanation: A)
Add'l Hiking Revenue$ 340,000 2.5 =
$ 850,000
Less Hiking Variable Expenses $ 235,000 2.5 = (587,500)
Contribution Margin
262,500
Less: Fixed Expense
(76,000)
Operating Income
186,500
Less old OI
49,000
Difference
$ 137,500
Diff: 3
LO: 8-4
EOC: E8-20A
66
130) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data
for the most recent year follow:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$490,000
355,000
135,000
76,000
$59,000
Luxury
$360,000
235,000
125,000
38,000
$87,000
Sporty
$130,000
120,000
10,000
38,000
$(28,000)
Assuming fixed costs remain unchanged, how would discontinuing the Sporty line affect operating
income?
Answer: C
Diff: 3
LO: 8-4
EOC: E8-20A
67
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$490,000
355,000
135,000
76,000
$59,000
Luxury
$360,000
235,000
125,000
38,000
$87,000
Sporty
$130,000
120,000
10,000
38,000
$(28,000)
If $20,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be
affected?
A) Decrease $30,000
B) Increase $10,000
C) Increase $69,000
Answer: B
Explanation: B)
Contribution Margin $ 125,000
Less Fixed Expenses
56,000
New Net income
69,000
Less original OI
59,000
Increase in OI
$ 10,000
Diff: 3
LO: 8-4
EOC: E8-20A
68
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$490,000
355,000
135,000
76,000
$59,000
Luxury
$360,000
235,000
125,000
38,000
$87,000
Sporty
$130,000
120,000
10,000
38,000
$(28,000)
Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly
used to produce the line is rented for $32,000 per year, how will operating income be affected?
A) Increase $22,000
C) Decrease $22,000
D) Increase $81,000
Answer: A
Explanation: A)
Sales Revenue
360,000
Plus Additional Revenue
32,000
Total Revenue
392,000
Less Variable Expenses
(235,000)
Contribution Margin
157,000
Less Fixed Expenses
(76,000)
New Net OI
81,000
Less original OI
(59,000)
Increase in OI
$ 22,000
Diff: 3
LO: 8-4
EOC: E8-20A
69
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$490,000
355,000
135,000
76,000
$59,000
Luxury
$360,000
235,000
125,000
38,000
$87,000
Sporty
$130,000
120,000
10,000
38,000
$(28,000)
Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly
used to produce the Sporty line is used to increase the production of Luxury watches by 250%, how will
operating income be affected?
D) Decrease $177,500
Answer: B
Explanation: B)
Add'l Hiking Revenue $ 360,000 2.5 =
$ 900,000
Less Hiking Variable Expenses $ 235,000 2.5 = (587,500)
Contribution Margin
312,500
Less: Fixed Expense
(76,000)
Operating Income
236,500
Less old OI
59,000
Difference
$ 177,500
Diff: 3
LO: 8-4
EOC: E8-20A
70
134) Jim Bean Company has three product lines: D, E, and F. The following information is available:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
$
$
$
$
$
D
80,000
40,000
40,000
12,000
28,000
E
$42,000
$21,000
$21,000
$15,000
$46,000
F
$20,000
$12,000
$ 8,000
$17,000
$(9,000)
Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss.
All fixed expenses are unavoidable. Assuming Jim Bean Company discontinues product line F and does
not replace it, what affect will this have on operating income?
A) Increase $9,000
B) Increase $17,000
C) Increase $8,000
D) Decrease $8,000
Answer: D
71
Explanation: D)
Sales revenue, D
80,000
Sales revenue, E
Sales revenue from D and E
122,000
Variable expenses, D
40,000
Variable expenses, E
Variable expenses from D and E
61,000
Fixed expenses, D
Fixed expenses, E
$
$
12,000
15,000
Fixed expenses, F
Fixed expenses for all products
44,000
122,000

Contribution margin from D and E
61,000

Operating income (loss) from D and E
17,000
Operating income (loss), D

Operating income (loss), E
$
$
28,000
6,000
Operating income (loss), F

Operating income (loss) from all
products
25,000
17,000

products
Difference in operating income

Diff: 2
LO: 8-4
EOC: E8-34A
72
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
$
$
$
$
$
D
80,000
40,000
40,000
12,000
28,000
E
$42,000
$21,000
$21,000
$15,000
$46,000
F
$20,000
$12,000
$ 8,000
$17,000
$(9,000)
All fixed costs are unavoidable. Jim Bean Company discontinues product line F and rents the space
formerly used to produce product F for $20,000 per year, what affect will this have on operating income?
A) Increase $29,000
B) Increase $12,000
C) Decrease $12,000
D) Increase $37,000
Answer: B
73
Explanation: B)
Sales revenue, D
Sales revenue, E
$
$
80,000
42,000
Rental revenue from discontinuing F

Revenue from D and E only
142,000
40,000
61,000
Fixed expenses, D
Fixed expenses, E
$
$
12,000
15,000
Fixed expenses, F
44,000
Revenue from D and E only
142,000

81,000

37,000

$
$
28,000
6,000

products
25,000
37,000

products

Diff: 3
LO: 8-4
EOC: E8-34A
74
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
$
$
$
$
$
D
80,000
40,000
40,000
12,000
28,000
E
$42,000
$21,000
$21,000
$15,000
$46,000
F
$20,000
$12,000
$ 8,000
$17,000
$(9,000)
All fixed costs are unavoidable. Assuming Jim Bean Company discontinues line F and is able to double
the production and sales of product line E without increasing fixed costs. What affect will this have on
operating income?
A) Decrease $13,000
B) Increase $13,000
C) Increase $30,000
D) Increase $34,000
Answer: B
75
Explanation: B)
Sales revenue, E
Discontinue F, increase in production of
42,000
E
New sales revenue for E
84,000
Sales revenue, D
164,000
21,000
E
New variable expenses for E
42,000
82,000
Fixed expenses, D
Fixed expenses, E
$
$
12,000
15,000
Fixed expenses, F
44,000
164,000

82,000

38,000

$
$
28,000
6,000

products
25,000
38,000

products
Diff: 3
LO: 8-4
EOC: E8-34A
76
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
$
$
$
$
$
D
80,000
40,000
40,000
12,000
28,000
E
$42,000
$21,000
$21,000
$15,000
$46,000
F
$20,000
$12,000
$ 8,000
$17,000
$(9,000)
All fixed costs are unavoidable. Assume Jim Bean Company is able to increase the sale price of product F
to $32,000 with no change in volume of units sold and no change in variable costs or fixed costs. What
affect will this have on operating income?
A) Increase $37,000
B) Increase $12,000
C) Decrease $12,000
D) Decrease $20,000
Answer: B
77
Explanation: B)
Sales revenue, D
Sales revenue, E
$
$
80,000
42,000
New revenue for F

Sales revenue for all products
154,000
$
$
40,000
21,000
Variable expenses, F
Variable expenses for all products
73,000
Fixed expenses, D
Fixed expenses, E
$
$
12,000
15,000
Fixed expenses, F
44,000
154,000

Contribution margin for all products
81,000

New operating income (loss) for all products
37,000

$
$
28,000
6,000

Original operating income (loss) from all
products
25,000
37,000

products

Diff: 3
LO: 8-4
EOC: E8-34A
78
138) The income statement for Germain Appliances is divided by its two product lines, Toasters and
Microwaves, as follows:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Toaster
$600,000
$450,000
$150,000
$75,000
$75,000
Microwave
$255,000
$210,000
$45,000
$75,000
$(30,000)
Total
$855,000
$660,000
$195,000
$150,000
$45,000
If fixed costs remain unchanged and Germain Appliances discontinues the Microwave line, how will
operating income change?
A) Will decrease by $150,000
B) Will increase by $45,000
C) Will decrease by $45,000
D) Will increase by $150,000
Answer: C
Explanation: C)
Sales revenue, Toasters
$
600,000
Variable expenses, Toasters
Contribution margin for Toasters only
150,000
Total fixed expenses for both products

Operating income (loss) for Toasters only
Operating income (loss) for Toasters only
Operating income (loss) for both products

Diff: 3
LO: 8-4
EOC: P8-45A
79
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Toaster
$600,000
$450,000
$150,000
$75,000
$75,000
Microwave
$255,000
$210,000
$45,000
$75,000
$(30,000)
Total
$855,000
$660,000
$195,000
$150,000
$145,000
If Germain Appliances can eliminate fixed costs of $32,000 by discontinuing the Microwave line, then
discontinuing it should result in which of the following?
Answer: C
Explanation: C)
150,000
Avoided fixed costs

Unavoidable fixed costs
118,000
600,000

150,000

Operating income (loss) from Toasters
only
32,000
Operating income (loss) from Toasters

only
32,000

Diff: 3
LO: 8-4
EOC: P8-45A
80
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Toaster
$600,000
$450,000
$150,000
$75,000
$75,000
Microwave
$255,000
$210,000
$45,000
$75,000
$(30,000)
Total
$855,000
$660,000
$195,000
$150,000
$45,000
If Germain Appliances can eliminate fixed costs of $32,000 and increase the sale of Toasters by 6,000 units
at a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the
Microwaves should result in which of the following?
Answer: A
81
Explanation: A)
Increased volume of Toasters
6,000
Sale price per unit of new volume

Additional revenue
180,000

Total sales revenue fot Toasters
780,000
30.00
unit
Variable expense per unit for new volume
22.00
Increased volume of Toasters

Additional variable expenses
132,000

Total variable expenses for Toasters
582,000
150,000
Avoidable fixed costs

118,000
Total sales revenue for Toasters
780,000
Total variable expenses for Toasters

198,000
Uavoidable fixed costs

Operating income (loss) from Toasters only
80,000
Operating income (loss) from Toasters only
80,000

Contribution margin for each new volume

Diff: 3
LO: 8-4
EOC: P8-45A
82
141) The income statement for Lovely Locks is divided by its two product lines, Curling Irons and
Straighteners, as follows:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Curling Irons
$600,000
$450,000
$150,000
$75,000
$75,000
Straighteners
$260,000
$210,000
$50,000
$75,000
$(25,000)
Total
$860,000
$660,000
$200,000
$150,000
$50,000
If fixed costs remain unchanged and Lovely Locks discontinues the Straightener line, how will operating
income change?
A) Will decrease by $150,000
B) Will increase by $50,000
C) Will increase by $150,000
D) Will decrease by $50,000
Answer: D
Explanation: D)
Sales revenue, Curling Irons
$
600,000
Variable expenses, Curling Irons
Contribution margin for Curling Irons only
150,000

Operating income (loss) for Curling Irons
only

only

Diff: 3
LO: 8-4
EOC: P8-45A
83
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Curling Irons
$600,000
$450,000
$150,000
$75,000
$75,000
Straighteners
$260,000
$210,000
$50,000
$75,000
$(25,000)
Total
$860,000
$660,000
$200,000
$150,000
$50,000
If Lovely Locks can eliminate fixed costs of $32,000 by discontinuing the Straightener line, then
discontinuing it should result in which of the following?
B) Decrease in total operating income of $18,000
C) Increase in total operating income of $18,000
Answer: B
Explanation: B)
$
150,000
118,000
600,000

150,000
Unavoidable fixes costs

only
32,000
Operating income (loss) for Curling

Irons only
32,000

Diff: 3
LO: 8-4
EOC: P8-45A
84
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Curling Irons
$600,000
$450,000
$150,000
$75,000
$75,000
Straighteners
$260,000
$210,000
$50,000
$75,000
$(25,000)
Total
$860,000
$660,000
$200,000
$150,000
$50,000
If Lovely Locks can eliminate fixed costs of $32,000 and increase the sale of Curling Irons by 6,000 units at
a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the
Straighteners should result in which of the following?
A) Decrease in total operating income of $30,000
Answer: C
85
Explanation: C)
Increased volume of Curling Irons
6,000

Additional revenue
180,000

Total sales revenue for Curling Irons
780,000
30.00
unit
Variable expense per unit for new volume
22.00
Increased volume of Curling Irons

Additional variable expenses
132,000

Total variable expenses for Curling Irons
582,000
150,000

118,000
Total sales revenue for Curling Irons
780,000
Total variable expenses for Curling Irons

198,000
Uavoidable fixed costs

Operating income (loss) from Curling Irons
only
80,000
Operating income (loss) from Curling Irons

only
80,000

Contribution margin for each new volume

Diff: 3
LO: 8-4
EOC: P8-45A
86
144) The internal financial statements of Vera Incorporated show that their beaded purses incurred an
operating loss in the most recent year. There were 25,000 purses sold in that year. Selected financial
information about the purse line follows.
Total sales revenue
Variable costs
Contribution margin
Fixed costs
Net operating loss
$ 190,000
$ 100,000
$ 90,000
$ 100,000
$ (10,000)
If the line of purses were to be discontinued, the company would avoid $16,000 in fixed costs per year.
If Vera Incorporated were to discontinue the line of purses, the change in annual operating income would
be a(n):
A) increase in total operating income of $74,000.
B) decrease in total operating income of $10,000.
C) increase in total operating income of $10,000.
D) decrease in total operating income of $74,000.
Answer: D
Explanation: D) Contribution Margin $ 90,000
Less Fixed exp. Avoided
16,000
Decrease in OI
$ 74,000
Diff: 2
LO: 8-4
EOC: P8-45A
87
145) Simpson Corporation operates two divisions with the following operating results from last year:
Sales
Variable costs
Contribution margin
Allocated common fixed costs
Western Division
$ 620,000
$ 310,000
$ 310,000
$ 110,000
$ 90,000
$ 100,000
Eastern Division
$ 290,000
$ 200,000
$ 90,000
$ 70,000
$ 45,000
$ (25,000)
Total
$ 900,000
$ 510,000
$ 390,000
$ 180,000
$ 135,000
$ 75,000
Management is considering whether the Eastern Division should be discontinued since it incurred an
operating loss last year. Allocated common fixed costs would continue for Simpson Corporation whether
the division is discontinued or not.
If the Eastern Division had been discontinued at the beginning of last year, what would the total
operating income for Simpson Corporation have been for the year?
A) $55,000
B) $20,000
C) $25,000
D) $110,000
Answer: A
Explanation: A)
SOLUTION
Eastern Division
Sales
290,000
Variable costs
Contribution margin
90,000
75,000
Less avoidable fixed costs

Segment margin for division
Original total operating income
Less segment margin for discontinued
division
Operating income if division discontinued
Diff: 2
LO: 8-4
EOC: P8-45A
88
146) Benace Parts and Supply makes a variety of car parts. The company produces 6,000 A90 parts each
year. Each A90 sells for $7 and has a contribution margin of $2. Currently, $16,000 of fixed manufacturing
overhead is allocated to the A90 product line. If Benace Parts and Supply discontinues the A90 product
line, $7,000 of fixed manufacturing overhead costs would be avoided. What would be the impact on total
operating income if the A90 product line were to be discontinued?
B) Decrease in total operating income of $5,000
Answer: B
Explanation: B)
Number of units produced
6,000
Unit contribution margin
Total contribution margin
12,000

Decrease (increase) in operating income if product discontinued
Diff: 2
LO: 8-4
EOC: P8-45A
147) Jerry Enterprises is considering whether to discontinue a division that generates a total contribution
margin of $65,000 per year. Fixed manufacturing overhead allocated to this division is $50,000, of which
18,000 is unavoidable. If Jerry Enterprises were to eliminate this division, the effect on the company's
operating income would be a(n):
A) increase in total operating income of $33,000.
B) decrease in total operating income of $33,000.
C) increase in total operating income of $47,000.
D) decrease in total operating income of $47,000.
Answer: B
Explanation: B) SOLUTION
Fixed manufacturing overhead of division
$
50,000
Portion of fixed MOH which is unavoidable
Avoidable fixed manufacturing overhead
32,000
Total contribution margin
65,000

Division segment margin income (loss)
Diff: 2
LO: 8-4
EOC: P8-45A
89
148) All About Animals has two product lines: Cat food and Dog food. Contribution margin income
statement data for the most recent year follow:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$385,000
$205,000
$180,000
$102,000
$78,000
Cat Food
$300,000
$165,000
$135,000
$50,000
$85,000
Dog Food
$85,000
$40,000
$45,000
$52,000
$(7,000)
Assuming total fixed costs remain unchanged, how would discontinuing the Dog food line affect
operating income?
Answer: C
Explanation: C) Sales revenue, Cat food
$
300,000
Variable expenses, Cat food
Contribution margin for Cat food
135,000
Total fixed expenses

Operating income (loss) from Cat food only
33,000
Operating income (loss) from Cat food only
33,000
Total operating income (loss)

Diff: 3
LO: 8-4
EOC: P8-45A
90
149) All About Animals has two product lines: Cat food and Dog food. Contribution margin income
statement data for the most recent year follow:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$385,000
$205,000
$180,000
$102,000
$78,000
Cat Food
$300,000
$165,000
$135,000
$50,000
$85,000
Dog Food
$85,000
$40,000
$45,000
$52,000
$(7,000)
If $12,000 of fixed costs will be eliminated by discontinuing the Dog food line, how will operating income
be affected?
B) Increase $45,000
C) Decrease $33,000
D) Decrease $57,000
Answer: C
Explanation: C) Sales revenue, Cat food
$
300,000
Fixed expenses
102,000

90,000
135,000

Operating income (loss) from Cat food
only
45,000

only
135,000
45,000

Diff: 3
LO: 8-4
EOC: P8-45A
91
150) Contribution margin income statement data for the most recent year follow:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$385,000
$205,000
$180,000
$102,000
$78,000
Cat Food
$300,000
$165,000
$135,000
$50,000
$85,000
Dog Food
$85,000
$40,000
$45,000
$52,000
$(7,000)
Assuming the Dog food is discontinued, total fixed costs remain unchanged, and the space formerly used
to produce the line is rented for $25,000 per year, how will operating income be affected?
A) Increase $58,000
C) Decrease $20,000
D) Increase $20,000
Answer: C
Explanation: C)
Sales revenue, Cat food
$
300,000
Additional revenue if Dog food
discontinued
Total sales revenue for Cat food only
325,000

160,000
Fixed expenses
only

only
58,000
58,000

Diff: 3
LO: 8-4
EOC: P8-45A
92
151) Contribution margin income statement data for the most recent year follow:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Total
$385,000
$205,000
$180,000
$102,000
$78,000
Cat Food
$300,000
$165,000
$135,000
$50,000
$85,000
Dog Food
$85,000
$40,000
$45,000
$52,000
$(7,000)
Assuming the Dog food line is discontinued, total fixed costs remain unchanged, and the space formerly
used to produce the Dog food line is used to double the production of Cat food, how will operating
income be affected?
A) Increase $90,000
D) Decrease $90,000
Answer: A
Diff: 3
LO: 8-4
EOC: P8-45A
93
152) Black Productions has three models: D, E, and F. The following information is available:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Model D
$65,000
$32,000
$33,000
$16,000
$17,000
Model E
$33,000
$13,000
$20,000
$16,000
$4,000
Model F
$24,000
$14,000
$10,000
$16,000
$(6,000)
Black Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed
expenses are unavoidable. Assuming Black Productions discontinues model F and does not replace it,
what effect will this have on operating income?
A) Decrease $10,000
B) Increase $10,000
C) Increase $6,000
D) Decrease $6,000
Answer: A
Explanation: A)
Contribution Margin 33,000 + 20,000
Fixed Exp 16,000 3
Operating Income
$53,000
48,000
5,000
Prior operating income
15,000
Decrease
10,000
Diff: 2
LO: 8-4
EOC: P8-45A
94
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Model D
$65,000
$32,000
$33,000
$16,000
$17,000
Model E
$33,000
$13,000
$20,000
$16,000
$4,000
Model F
$24,000
$14,000
$10,000
$16,000
$(6,000)
costs are unavoidable. Black Productions discontinues model F and rents the space formerly used to
produce product F for $15,000 per year, what effect will this have on operating income?
A) Increase $21,000
B) Increase $5,000
C) Decrease $21,000
D) Decrease $5,000
Answer: B
Explanation: B)
Contribution Margin 33,000 + 20,000 $53,000
Fixed Exp 16,000 3
48,000
Operating Income
5,000
Prior operating income
Rent income
Increase
-15,000
+15,000
5,000
Diff: 3
LO: 8-4
EOC: P8-45A
95
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Model D
$65,000
$32,000
$33,000
$16,000
$17,000
Model E
$33,000
$13,000
$20,000
$16,000
$4,000
Model F
$24,000
$14,000
$10,000
$16,000
$(6,000)
costs are unavoidable. Assuming Black Productions discontinues line F and is able to double the
production and sales of model E without increasing fixed costs. What effect will this have on operating
income?
A) Increase $10,000
B) Decrease $10,000
C) Increase $26,000
D) Decrease $26,000
Answer: A
96
Explanation: A)
Sales revenue, E
33,000
E
66,000
Sales revenue, D
131,000
13,000
E
26,000
Variable expenses for E

58,000
Fixed expenses, D
Fixed expenses, E
$
$
16,000
16,000
Fixed expenses, F
48,000
131,000

73,000

25,000

$
$
17,000
4,000

products
15,000

25,000
products
Diff: 3
LO: 8-4
EOC: P8-45A
97
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Model D
$65,000
$32,000
$33,000
$16,000
$17,000
Model E
$33,000
$13,000
$20,000
$16,000
$4,000
Model F
$24,000
$14,000
$10,000
$16,000
$(6,000)
costs are unavoidable. Assume Black Productions is able to increase the sale price of product F to $35,000
with no change in volume of units sold and no change in variable costs or fixed costs. What effect will
this have on operating income?
A) Increase $11,000
B) Increase $24,000
C) Decrease $11,000
D) Decrease $24,000
Answer: A
98
Explanation: A)
Sales revenue, D
Sales revenue, E
$
$
65,000
33,000
New revenue for F

133,000
$
$
32,000
13,000
Variable expenses, F
59,000
Fixed expenses, D
Fixed expenses, E
$
$
16,000
16,000
Fixed expenses, F
48,000
133,000

Contribution margin for all products
74,000

26,000

$
$
17,000
4,000

products
15,000
26,000

products

Diff: 3
LO: 8-4
EOC: P8-45A
99
156) Totally Technology manufactures Cameras and Video Recorders. The company's product line
income statement follows:
Sales revenue
Cost of goods sold
Variable
Fixed
Total cost of goods sold
Gross profit
Marketing and administrative expenses
Variable
Fixed
Total marketing and administrative expenses
Camera
Video Recorder
$300,000
$100,000
Total
$400,000
$75,000
$82,000
$157,000
$143,000
$49,000
$28,000
$77,000
$23,000
$124,000
$110,000
$234,000
$166,000
$25,000
$32,000
$57,000
$86,000
$28,000
$19,000
$47,000
$(24,000)
$53,000
$51,000
$104,000
$62,000
Management is considering discontinuing the Video Recorder product line. Accountants for the company
estimate that discontinuing the Video Recorder line will decrease fixed cost of goods sold by $10,000 and
fixed marketing and administrative expenses by $4,000.
Prepare an analysis supporting your opinion about whether or not the Video Recorder product line
should be discontinued.
100
Answer: Contribution margin income statement for DVDs:

If Video Recorders discontinued:
Sales revenue from Cameras
Variable cost of goods sold from Cameras
Variable marketing and administrative expenses from Cameras
Contribution margin from Cameras only
Total fixed costs of goods sold
Decrease in fixed costs of goods sold if Video Recorders
discontinued
Fixed costs of goods sold if Video Recorders discontinued
Total fixed marketing and administrative expenses
Decrease in fixed marketing and administrative if Video
Recorders discontinued
Fixed marketing and administrative expenses if Video Recorders
discontinued
Contribution margin from Cameras only
Fixed costs of goods sold if Video Recorders discontinued
Fixed marketing and administrative expenses if Video Recorders
discontinued
Operating income (loss) from Cameras only
Operating income (loss) with both products
Decrease in operating income if Video Recorders discontinued
$ 300,000
$ (75,000)
$ (25,000)
$ 200,000
$ 110,000
$ (10,000)
$ 100,000
$ 51,000
$ (4,000)
$ 47,000
$ 200,000
$(100,000)
$ (47,000)
$ 53,000
$ 53,000
$ 62,000
$ 9,000
The company should keep producing and selling Video Recorders since operating income will decrease
by $9,000 if the product line is discontinued.
Diff: 3
LO: 8-4
EOC: P8-45A
101
157) Cornell Enterprises currently produces several products. Model L78 is showing a net operating loss
as indicated by the following condensed income statement prepared for the year ended December 31.
You have been hired by Cornell Enterprises to help analyze the decision as to whether to eliminate Model
L78. Upon investigation, you discover that if Model L78 is eliminated, $20,000 of the fixed costs shown on
the above condensed income statement can be eliminated. The rest of the fixed costs allocated to Model
L78 are common fixed costs that will be allocated to the remaining two products produced by Cornell
Enterprises.
Determine if Cornell Enterprises should discontinue Model L78.
Answer:
If product discontinued:
Lost sales
$(480,000)
Savings in variable costs
$ 360,000
Savings in avoidable fixed costs $ 20,000
Operating loss
$ (100,000)
Cornell Enterprises should not discontinue L78, since discontinuing the product will result in a $100,000
loss.
Diff: 2
LO: 8-4
EOC: P8-45A
158) For some merchandisers, the primary constraint may be cubic feet of display space.
Answer: TRUE
Diff: 1
LO: 8-5
EOC: S8-8
102
159) A constraint is a factor that restricts production or sale of a product.

Answer: TRUE
Diff: 1
LO: 8-5
EOC: S8-8
160) Fixed costs affect product mix considerations.
Answer: TRUE
Diff: 1
LO: 8-5
EOC: S8-8
161) An example of an expansion constraint would be the size of the available labor pool.
Answer: TRUE
Diff: 1
LO: 8-5
EOC: S8-8
162) To maximize profits, produce the product with the lowest contribution margin per unit of the
constraint.
Answer: FALSE
Diff: 1
LO: 8-5
EOC: S8-8
163) When making product mix decisions, companies are most profitable when they maximize
production of the product with the greatest sales demand.
Answer: FALSE
Diff: 1
LO: 8-5
EOC: S8-8
103
164) When making product mix decisions, companies are most profitable when they maximize
production of the product with the greatest sales price.
Answer: FALSE
Diff: 1
LO: 8-5
EOC: S8-8
165) All of the following are product mix considerations except
A) What constraint(s) stops us from making (or displaying) all of the units we can sell?
B) Which products offer the highest contribution margin per unit of the constraint?
C) Would emphasizing one product over another affect fixed costs?
D) Which product has the most sunk costs?
Answer: D
Diff: 1
LO: 8-5
EOC: S8-8
166) The contribution margin per unit of constraint is calculated as
A) contribution margin per unit constraint per unit.
B) contribution margin per unit units per constraint.
C) contribution margin per unit units per constraint.
D) contribution margin per unit + constraint per unit.
Answer: B
Diff: 1
LO: 8-5
EOC: S8-8
167) Companies with production constraints and irrelevant fixed costs will be most profitable when they
maximize production of the product with the highest
A) sales price.
B) demand for the product.
C) contribution margin per unit of the constraint.
D) contribution margin per unit.
Answer: C
Diff: 1
LO: 8-5
EOC: S8-8
104
168) The factor that restricts production or sale of a product is which of the following?
A) Demanding factor
B) Constraint
C) Sunk factor
D) Relevant factor
Answer: B
Diff: 1
LO: 8-5
EOC: S8-8
169) A "constraint" is best described by which of the following?
A) The distribution of all products to be sold
C) Benefits foregone by choosing a particular alternative course of action
Answer: B
Diff: 1
LO: 8-5
EOC: S8-8
170) A "sales mix" is best described by which of the following?
A) A factor that restricts production or sales of a product
B) Costs that were incurred in the past and cannot be changed
C) Expected future costs that differ among alternatives
D) The relative number of all products to be sold
Answer: D
Diff: 1
LO: 8-5
EOC: S8-8
171) Which of the following could be a constraint for selling a product?
A) Store hours
B) Available labor hours for employees
C) Shelf space
D) All of the above could be constraints.
Answer: D
Diff: 1
LO: 8-5
EOC: S8-8
105
172) All of the following would be considered in evaluating product or sales mix allocations, except
A) deciding which product offers the lowest contribution margin per unit.
B) deciding whether fixed costs would change as a result of the product sales mix.
C) deciding upon any and all constraints associated with the product/sale mix.
D) deciding which products will contribute the highest contribution margin per unit.
Answer: A
Diff: 2
LO: 8-5
EOC: S8-8
173) Changing the product mix emphasis in the short run will usually not affect
A) total variable costs.
B) both total variable and total fixed costs.
C) total fixed costs.
D) total contribution margin.
Answer: C
Diff: 2
LO: 8-5
EOC: S8-8
106
174) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Makers. The
following data are available:
Food Processors
$125
$50
Sales price
Variable costs
Espresso Makers
$225
$150
The company can manufacture two food processors per machine hour and three espresso machines per
machine hour. The company's production capacity is 1,200 machine hours per month.
What is the contribution margin ratio for food processors?
A) 60.00%
B) 150.00%
C) 140.00%
D) 33.33%
Answer: A
Explanation: A)
Sales price, food processors
$
125.00
Variable costs, food processors
Contribution margin per food processor
Divide by
75.00
Divide by
Sales price, food processors

Contribution margin ratio for food
processors
Diff: 2
LO: 8-5
EOC: E8-22A
107
175) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Machines.
The following data are available:
Sales price
Variable costs
Food Processors
$125
$50
Espresso Machines
$225
$150
What is the contribution margin per machine hour for espresso machines?
A) $1,125
B) $225
C) $150
D) $75
Answer: B
Explanation: B) Sales price, espresso machines $
225.00
Variable costs, espresso machines
Contribution margin per espresso machine
75.00
Espresso machines per hour

Contribution margin per hour for espresso
machines
Diff: 3
LO: 8-5
EOC: E8-22A
108
Sales price
Variable costs
Food Processors
$125
$50
Espresso Machines
$225
$150
What is the contribution margin per machine hour for food processors?
A) $350
B) $225
C) $75
D) $150
Answer: D
Explanation: D) Sales price, food processors
$
125.00
75.00
Food processors per hour

Contribution margin per hour for food
processors
Diff: 3
LO: 8-5
EOC: E8-22A
109
Food Processors
$125
$50
Sales price
Variable costs
Espresso Machines
$225
$150
To maximize profits, what product and how many units should the company produce in a month?
A) 2,400 Food Processors and 0 Espresso Machines
B) 300 Food Processors and 675 Espresso Machines
C) 2,400 Food Processors and 3,600 Espresso Machines
D) 3,600 Espresso Machines and 0 Food Processors
Answer: D
Explanation: D) Sales price, food processors
125.00

75.00
Food processors per hour

Contribution margin per hour for food processors
Sales price, espresso machines
225.00
Variable costs, espresso machines

Contribution margin per espresso machine
75.00
Espresso machiness per hour

Contribution margin per hour for espresso
machines
225.00
Product to emphasize
150.00
Espresso Machines
Production capacity (hours)
1,200
Espresso machines per hour

Number to produce
Diff: 3
LO: 8-5
EOC: E8-22A
110
178) Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers. The
Waffle Makers
$120
$45
Sales price
Variable cost
Coffee Makers
$215
$150
The company can manufacture two waffle makers per machine hour and three coffee makers per
What is the contribution margin ratio for waffle makers?
A) 30.23%B) 62.50%
C) 166.67%
D) 137.50%
Answer: B
Explanation: B)
Sales price, waffle makers
$
120.00
Variable costs, waffle maker
Contribution margin per waffle maker
Divide by
75.00
Divide by

Contribution margin ratio for waffle
makers
Diff: 2
LO: 8-5
EOC: E8-22A
111
Waffle Makers
$120
$45
Sales price
Variable cost
Coffee Makers
$215
$150
What is the contribution margin per machine hour for coffee makers?
A) $195
B) $1,095
C) $130
D) $65
Answer: A
Explanation: A) Sales price, coffee makers
$
215.00
Variable costs, coffee makers
Contribution margin per coffee maker
65.00
Coffee makers per hour

Contribution margin per hour for coffee makers
Diff: 3
LO: 8-5
EOC: E8-22A
112
Waffle Makers
$120
$45
Sales price
Variable cost
Coffee Makers
$215
$150
What is the contribution margin per machine hour for waffle makers?
A) $75
B) $225
C) $150
D) $330
Answer: C
Explanation: C) Sales price, waffle makers
$
120.00
Variable costs, waffle makers
75.00
Waffle makers per hour

Contribution margin per hour for waffle
makers
Diff: 3
LO: 8-5
EOC: E8-22A
113
Waffle Makers
$120
$45
Sales price
Variable cost
Coffee Makers
$215
$150
A) 3,600 Coffee Makers and 0 Waffle Makers
B) 300 Waffle Makers and 675 Coffee Makers
C) 2,400 Waffle Makers and 3,600 Coffee Makers
D) 2,400 Waffle Makers and 0 Coffee Makers
Answer: A
Explanation: A)
120.00
Variable costs, waffle makers

75.00
Waffle makers per hour

Contribution margin per hour for waffle makers $
150.00
Sales price, coffee makers
215.00
Variable costs, coffee makers

Contribution margin per coffee maker
65.00

Contribution margin per hour for coffee makers $
195.00
Coffee Makers
1,200

Number to produce
Diff: 3
LO: 8-5
EOC: E8-22A
114
182) Silvio Enterprises produces three products, with costs and selling prices as follows:
Each product requires a certain number of minutes on the drill press. There is only one drill press
available so it is the constraint for this product. Model D7 requires 2 minutes of drill press time, Model B3
requires 1 minute of drill press time, and Model F5 requires 7 minutes of drill press time. In what order
should Silvio Enterprises emphasize its products to maximize its contribution margin? (Rank the
products in order from most profitable to least profitable.)
A) Model B3, Model D7, Model F5
B) Model B3, Model F5, Model D7
C) Model D7, Model B3, Model F5
D) Model F5, Model D7, Model B3
Answer: A
Explanation: A)
Selling Price
Variable Cost
Contribution Margin
Divided by Minutes to Produce
Contribution Margin per
minute
Product B3
$42
18
24
1
Product D7
$34
12
22
2
Product F5
$50
36
14
7
$24.00
$11.00
$2.00
Diff: 3
LO: 8-5
EOC: E8-22A
115
183) Alamo Corporation processes all of its products through a lathe machine. The lathe is only available
for 60 hours per week and is the constraint for all of the products. Data regarding Alamo Corporation's
three products follows:
Selling price per unit

Variable cost per unit
Minutes of lathe time required per unit
Product A
$75.00
$45.00
15
Product B
$60.00
$35.00
20
Product C
$90.00
$80.00
10
In what order should Alamo Corporation emphasize its products to maximize its contribution margin?
(Rank the products in order from most profitable to least profitable.)
A) Product B, Product A, Product C
B) Product A, Product C, Product B
C) Product A, Product B, Product C
D) Product B, Product C, Product A
Answer: C
Explanation: C)
Diff: 3
LO: 8-5
EOC: E8-22A
116
184) Brittany Furniture manufactures two products: Couches and Beds. The following data are available:
Couches
$500.00
$350.00
Sales price
Variable costs
Beds
$700.00
$375.00
The company can manufacture two couches per machine hour and one bed per machine hour. The
company's production capacity is 900 machine hours per month.
What is the contribution margin ratio for Couches?
A) 30.0%
B) 42.86%
C) 170.00%
D) 23.08%
Answer: A
Explanation: A) Sales price, Couches
$
Variable costs, Couches
Contribution margin per Couch
Divide by
500.00
150.00
Divide by
Sales price, Couches

Contribution margin ratio for Couches
Diff: 1
LO: 8-5
EOC: E8-22A
117
Couches
$500.00
$350.00
Sales price
Variable costs
Beds
$700.00
$375.00
What is the contribution margin per machine hour for beds?
A) $325
B) $1,075
C) $650
D) $975
Answer: A
Explanation: A) Sales price, Beds
$
700.00
Variable costs, Beds
Contribution margin per Bed
325.00
Beds per hour

Contribution margin per hour for Beds
Diff: 3
LO: 8-5
EOC: E8-22A
118
Couches
$500.00
$350.00
Sales price
Variable costs
Beds
$700.00
$375.00
What is the contribution margin per machine hour for couches?
A) $1,700
B) $300
C) $150
D) $250
Answer: B
Explanation: B) Sales price, Couches
$
500.00
Contribution margin per Couche
150.00
Couches per hour

Contribution margin per hour for Couches
Diff: 2
LO: 8-5
EOC: E8-22A
119
Couch
$500.00
$350.00
Sales price
Variable costs
Bed
$700.00
$375.00
A) 1,800 couches and 900 beds
B) 900 beds
C) 1,800 couches
D) 600 couches and 325 beds
Answer: B
Explanation: B)
Sales price, Couches
500.00

Contribution margin per Couch
150.00
Couches per hour

Contribution margin per hour for Couches
300.00
Sales price, Beds
Variable costs, Beds

Contribution margin per Bed
325.00
Beds per hour

Contribution margin per hour for Beds
325.00
700.00
Beds
$
900
Beds per hour

Number to produce
Diff: 3
LO: 8-5
EOC: E8-22A
120
188) Brittany Furniture manufactures two products: Futons and Recliners. The following data are
available:
Futons
$500.00
$325.00
Sales price
Variable costs
Recliners
$480.00
$120.00
The company can manufacture two futons per machine hour and one recliner per machine hour. The
What is the contribution margin ratio for futons?
A) 53.85%
B) 37.50%
C) 165.00%
D) 35.00%
Answer: D
Explanation: D)
Sales price, Futons
$
Variable costs, Futons
Contribution margin per Futons
Divide by
500.00
175.00
Divide by
Sales price, Futons

Contribution margin ratio for Futons
Diff: 1
LO: 8-5
EOC: E8-22A
121
available:
Futons
$500.00
$325.00
Sales price
Variable costs
Recliners
$480.00
$120.00
What is the contribution margin per machine hour for recliners?
A) $1,080
B) $720
C) $600
D) $360
Answer: D
Explanation: D)
Sales price, Recliners
$
480.00
Variable costs, Recliners
Contribution margin per Recliner
360.00
Recliners per hour

Contribution margin per hour for Recliners
Diff: 3
LO: 8-5
EOC: E8-22A
122
available:
Futons
$500.00
$325.00
Sales price
Variable costs
Recliners
$480.00
$120.00
What is the contribution margin per machine hour for futons?
A) $350
B) $1,650
C) $175
D) $180
Answer: A
Explanation: A)
Sales price, Futons
$
500.00
Contribution margin per Futon
175.00
Futons per hour

Contribution margin per hour for Futons
Diff: 2
LO: 8-5
EOC: E8-22A
123
available:
Futons
$500.00
$325.00
Sales price
Variable costs
Recliners
$480.00
$120.00
A) 900 recliners
B) 1,800 futons and 900 recliners
C) 1,800 futons
D) 700 futons and 360 recliners
Answer: A
Explanation: A)
Sales price, Futons
500.00

Contribution margin per Futon
175.00
Futons per hour

Contribution margin per hour for Futons
350.00
Sales price, Recliners
Variable costs, Recliners

Contribution margin per Recliner
360.00
Recliners per hour

Contribution margin per hour for Recliners
360.00
480.00
Beds
$
900
Recliners per hour

Number to produce
Diff: 3
LO: 8-5
EOC: E8-22A
124
192) Rose Incorporated manufactures two types of vases, small and large. The following per unit data are
available:
Sale price
Variable costs
Machine hours required for 1 vase
Small Vase
$60
$35
1
Large Vase
$100
$60
2
Total fixed costs are $600,000 and Rose Incorporated can sell a maximum of 25,000 units of each type of
vase annually. Machine hour capacity is 50,000 hours per year.
A. Determine the contribution margin per unit for each type of vase.
B. Determine the contribution margin per machine hour for each type of vase.
C. Determine the number of units of each style of vase that Rose Incorporated should produce to
maximize operating income.
D. What is the dollar amount of the maximum operating income as calculated in C above?
Answer:
A.
B.
C.
125
D.
Diff: 2
LO: 8-5
EOC: P8-46A
126
193) Becky's Bakery produces two products, cake and pie. Becky's Bakery sells each cake for $15.00 and
each pie for $10.00. Variable costs for cakes and pies are respectively, $7.00 and $6.00. There are 3,200
direct labor hours per month available for producing one of the two products. Fixed manufacturing
overhead cost is allocated at $1,000 per month. Each cake and pie require 2 direct labor hours.
Compute the following:
A. Contribution margin per unit for each product.
B. Contribution margin per direct labor hour for each product.
C. The total number of products produced if only that product is produced each month.
D. Income for a month if only one product is produced and total production is sold.
Answer:
A.
Cakes
Pies
Selling price each
$ 15.00
$ 10.00
Variable costs
$ (7.00)
$ (6.00)
Contribution margin per unit
$ 8.00
$ 4.00
B.
Cakes
Selling price each
Variable costs
Divide by
Hours taken for each
Contribution margin per hour
Pies
$ 15.00
$ (7.00)
$ 8.00
Divide by
2
$ 4.00
$ 10.00
$ (6.00)
$ 4.00
Divide by
2
$ 2.00
C.
Cakes
Divide by
Maximum to produce
Pies
3,200
Divide by
2
1,600
3,200
Divide by
5
1,600
D.
Cakes
Divide by
Maximum to produce
Maximum to produce
Total fixed costs
Income
Pies
3,200
Divide by
2
1,600
$
8.00
1,600
$ 12,800
$ (1,000)
$ 11,800
3,200
Divide by
2
1,600
$
4.00
1,600
$ 6,400
$ (1,000)
$ 5,400
127
Diff: 3
LO: 8-5
EOC: P8-46A
194) When making outsourcing (make-or-buy) decisions, the focus is on how best to use available
resources.
Answer: TRUE
Diff: 1
LO: 8-6
EOC: S8-10
195) Make or buy decisions are often referred to as outsourcing decisions.
Answer: TRUE
Diff: 1
LO: 8-6
EOC: S8-10
196) All other things being equal, if the incremental costs of outsourcing a product exceed the incremental
costs of making a product, it should be outsourced.
Answer: FALSE
Diff: 1
LO: 8-6
EOC: S8-10
197) In most circumstances, all fixed costs can be eliminated by outsourcing a product.
Answer: FALSE
Diff: 1
LO: 8-6
EOC: S8-10
198) An opportunity cost is a past cost.
Answer: FALSE
Diff: 1
LO: 8-6
EOC: S8-11
128
199) Qualitative factors play an important part in make or buy decisions.

Answer: TRUE
Diff: 1
LO: 8-6
EOC: S8-10
200) Outsourcing decisions are best made by comparing the total manufacturing costs, both fixed and
variable, allocated to the product versus the total unit cost charged by the outsourcing company.
Answer: FALSE
Diff: 1
LO: 8-6
EOC: S8-10
201) The maximum outsourcing price a company is willing to pay can be found by solving for the
company's indifference point.
Answer: TRUE
Diff: 1
LO: 8-6
EOC: S8-10
202) Opportunity costs should be factored into outsourcing decisions.
Answer: TRUE
Diff: 1
LO: 8-6
EOC: S8-10
203) Companies often consider outsourcing so they can focus on their core competencies.
Answer: TRUE
Diff: 1
LO: 8-6
EOC: S8-10
129
204) In deciding whether to outsource, managers must consider

A) relevant fixed and variable components.
B) sunk costs.
C) only variable costs.
Answer: A
Diff: 1
LO: 8-6
EOC: S8-10
205) Outsourcing decisions are sometimes referred to as
A) make-or-buy decisions.
B) make decisions.
C) buy decisions.
Answer: A
Diff: 1
LO: 8-6
EOC: S8-10
206) All of the following are outsourcing considerations, except
A) Are any fixed costs avoidable if we outsource?
B) How do our fixed costs compare to the outsourcing cost?
C) What could we do with the freed capacity?
D) How do our variable costs compare to the outsourcing cost?
Answer: B
Diff: 1
LO: 8-6
EOC: S8-10
130
207) If a company decides to outsource and then has freed capacity, the decision on what to do with that
freed capacity would be based upon
A) avoidable fixed costs.
B) opportunity costs.
C) unavoidable fixed costs.
Answer: B
Diff: 2
LO: 8-6
EOC: S8-10
208) Managers should consider which of the following when deciding whether to outsource a product or
service?
A) Quality of the product or service
B) Delivery schedule of the product or service
C) Cost charged for the product or service
D) All of the above
Answer: D
Diff: 2
LO: 8-6
EOC: S8-10
131
209) Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of
producing 40,000 parts is $120,000, which includes fixed costs of $60,000 and variable costs of $60,000.
The company can buy the part from an outside supplier for $3.00 per unit, and avoid 30% of the fixed
costs.
If Harvey Automobiles makes the part, how much will its operating income be?
A) $42,000 greater than if the company bought the part
B) $42,000 less than if the company bought the part
C) $78,000 greater than if the company bought the part
D) $78,000 less than if the company bought the part
Answer: A
Explanation: A)
Outside supplier price
$
3.00
Parts produced
Purchase price
120,000
Fixed costs
60,000
Avoidable percentage of fixed costs

18,000
Fixed costs
60,000

42,000
Purchase price
120,000

Cost if bought
162,000
Total cost to produce

Income difference if produced
Diff: 2
LO: 8-6
EOC: E8-25A
132
producing 40,000 parts is $120,000, which includes fixed costs of $60,000 and variable costs of $60,000. By
outsourcing the part, the company can avoid 30% of the fixed costs.
If Harvey Automobiles buys the part, what is the most Harvey Automobiles can spend per unit so that
operating income equals the operating income from making the part?
A) $1.30
B) $1.95
C) $4.05
D) $2.33
Answer: B
Explanation: B)
Cost to Build
Variable Costs
$60,000
Fixed Costs
60,000
Total
$ 120,000
Less Unavoidable Fixed Cost 42,000
Adjusted Cost of part
78,000 Divided by 40,000 = $ 1.95
Diff: 2
LO: 8-6
EOC: E8-25A
133
costs.
Assume that factory space freed up by purchasing the part from an outside source can be used to
manufacture another product that can be sold for $12,000 profit. If Harvey Automobiles makes the part,
what will its operating income be?
D) $150,000 greater than if the company bought the part
Answer: C
Explanation: C)
3.00
Parts produced
Purchase price
120,000
Fixed costs
60,000

18,000
Fixed costs
60,000

42,000
$
$
120,000
42,000
bought
Cost if bought
150,000
Cost if bought
150,000
Purchase price
Profit from free space if part is

Diff: 2
LO: 8-6
EOC: E8-25A
134
212) Cuyahoga Valley Bicycles uses a standard part in the manufacture of several of its bikes. The cost of
costs.
If Cuyahoga Valley Bicycles makes the part, how much will its operating income be?
A) $90,400 less than if the company bought the part
Answer: D
Explanation: D)
$
3.50
Parts produced
Purchase price
140,000
Fixed costs
68,000

20,400
Fixed costs
68,000

47,600
Purchase price
140,000

Cost if bought
187,600

Diff: 2
LO: 8-6
EOC: E8-25A
135
producing 40,000 parts is $138,000, which includes fixed costs of $68,000 and variable costs of $70,000. By
outsourcing the part, the company can avoid 30% of the fixed costs.
If Cuyahoga Valley Bicycles buys the part, what is the most Cuyahoga Valley Bicycles can spend per unit
so that operating income equals the operating income from making the part?
A) $1.33
B) $2.26
C) $4.64
D) $2.33
Answer: B
Explanation: B)
Cost to Build
Variable Costs
$70,000
Fixed Costs
68,000
Total
$ 138,000
Less Unavoidable Fixed Cost
47,600
Adjusted Cost of part
90,400 Divided by 40,000 = $ 2.26
Diff: 2
LO: 8-6
EOC: E8-25A
136
costs.
Assume that factory space freed up by purchasing the part from an outside source can be used to
manufacture another product that can be sold for $12,000 profit. If Cuyahoga Valley Bicycles makes the
part, what will its operating income be?
Answer: A
Explanation: A)
3.50
Parts produced
Purchase price
140,000
Fixed costs
68,000

20,400
Fixed costs
68,000

47,600
$
$
140,000
47,600
bought
Cost if bought
175,600
Cost if bought
175,600
Purchase price
Profit from free space if part is

Diff: 2
LO: 8-6
EOC: E8-25A
137
215) Cruise Company produces a part that is used in the manufacture of one of its products. The unit
manufacturing costs of this part, assuming a production level of 6,000 units, are as follows:
Direct materials
Direct labor
Total cost
The fixed overhead costs are unavoidable.
$4.00
$4.00
$3.00
$1.00
$12.00
Suri Company has offered to sell 6,000 units of the same part to Cruise Company for $14 per unit.
Assuming the company has no other use for its facilities, what should Cruise Company do?
A) Make the part and save $3 per unit.
B) Make the part and save $6 per unit.
C) Buy from Suri and save $2 per unit.
D) Make the part and save $10 per unit.
Answer: A
Explanation: A)
Cost to produce: Direct Materials $4.00
Direct Labor
4.00
Var. mfg
3.00
Total Cost to build
11.00
Cost to Purchase
14.00
Savings to build
$ 3.00
Diff: 2
LO: 8-6
EOC: E8-25A
138
Direct materials
Direct labor
Total cost
$4.00
$4.00
$3.00
$1.00
$12.00

Assuming no other use for its facilities, what is the highest price per unit that Cruise Company should be
willing to pay for the part?
A) $12
B) $11
C) $8
D) $5
Answer: B
Explanation: B)
Cost to produce: Direct Materials
$4.00
Direct Labor
4.00
Var. mfg
3.00
Total Cost to build
11.00
Diff: 2
LO: 8-6
EOC: E8-25A
139
Direct materials
Direct labor
Total cost
$4.00
$4.00
$3.00
$1.00
$12.00

Assuming Cruise Company can purchase 6,000 units of the part from Suri Company for $14 each, and the
facilities currently used to make the part could be rented out to another manufacturer for $24,000 a year,
what should Cruise Company do?
A) Make the part and save $6.00 per unit.
B) Make the part and save $2.00 per unit.
C) Buy the part and save $2.00 per unit.
D) Buy the part and save $1.00 per unit.
Answer: D
Explanation: D)
Direct materials
Direct labor
$
$
4.00
4.00

Cost to produce
11.00
24,000
Divide by
Production level
Additional rental revenue per unit
4.00
Price to buy from supplier
14.00
Additional rental revenue per unit

Cost per unit if bought
10.00
Cost to produce
11.00
Rental revenue from unused

space
Divide by
Cost per unit if bought

Savings if buy from supplier
Diff: 2
LO: 8-6
EOC: E8-26A
140
Direct materials
Direct labor
Total cost
$4.00
4.00
3.00
1.00
$12.00

Assume Cruise Company can purchase 6,000 units of the part from Suri Company for $14.00 each, and
the facilities currently used to make the part could be used to manufacture 6,000 units of another product
that would have an $8 per unit contribution margin. If no additional fixed costs would be incurred, what
should Cruise Company do?
A) Make the new product and buy the part to earn an extra $5.00 per unit contribution to profit.
B) Make the new product and buy the part to earn an extra $6.00 per unit contribution to profit.
C) Continue to make the part to earn an extra $2.00 per unit contribution to profit.
D) Continue to make the part to earn an extra $4.00 per unit contribution to profit.
Answer: A
Explanation: A)
Direct materials
Direct labor
$
$
4.00
4.00

Cost to produce
11.00
Price to buy from supplier
14.00
Contribution margin per unit of new product

Net cost to buy
6.00
Cost to produce
11.00
Net cost to buy

Savings if new product made and part
bought
Diff: 2
LO: 8-6
EOC: E8-26A
141
219) Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following
costs and data relate to the production of Part P40:
Number of parts produced annually
Fixed costs
Variable costs
22,000
$ 40,000
$ 66,000
$ 106,000
Jackson Corporation can purchase the part from an outside supplier for $4.25 per unit. If they purchase
from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation makes the
part, how much will its operating income be?
B) $20,000 greater than if the company bought the part
D) $32,500 less than if the company bought the part
Answer: C
Explanation: C)
Purchase cost 22,000 $ 4.25 =
$ 93,500
Plus unavoidable fixed cost 40,000 50%
20,000
Total Cost to purchase
113,500
Less Cost to build
106,000
Add'l cost to buy the part
7,500
Diff: 2
LO: 8-6
EOC: E8-26A
142
Fixed costs
Variable costs
22,000
$ 40,000
$ 66,000
$ 106,000
from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation buys the part,
what is the most Jackson Corporation can spend per unit so that operating income is equal to $97,000?
A) $5.32
B) $3.50
C) $1.93
D) $1.00
Answer: B
Explanation: B)
Desired Income
$ 97,000
Less Unavoidable Fixed Cost 50% $40,000
20,000
Equals Maximum cost of part
77,000 / 22,000 units = $ 3.50
Diff: 2
LO: 8-6
EOC: E8-25A
143
Fixed costs
Variable costs
22,000
$ 40,000
$ 66,000
$ 106,000
from the outside supplier, 50% of the fixed costs would be avoided. Assume that factory space freed up
by purchasing the part from an outside source can be used to manufacture another product that can be
sold for $2,000 profit. If Jackson Corporation makes the part, what will its operating income be?
A) $5,500 less than if the company bought the part
B) $5,500 greater than if the company bought the part
C) 9,500 greater than if the company bought the part
Answer: B
Explanation: B)
Purchase price $ 4.25 22,000 =
$ 93,500
Unavoidable Fixed Cost 50% $40,000
20,000
Less lost profit from new product
(2,000)
Cost to buy
$ 111,500
Current cost to produce
106,000
Difference
5,500
Diff: 2
LO: 8-6
EOC: E8-25A
144
222) Moon Appliance manufactures a variety of appliances which all use Part B89. Currently, Moon
Appliance manufactures Part B89 itself. It has been producing 9,000 units of Part B89 annually. The
annual costs of producing Part B89 at the level of 9,000 units include:
Direct materials
Direct labor
Total cost
$ 3.00
$ 8.00
$ 4.00
$ 3.00
$ 18.00
All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or
purchased from an outside supplier. Moon Appliance has no alternative use for the manufacturing
facilities. Nadal Parts Company has offered to sell 9,000 units of Part B89 to Moon Appliance for $20.00
per unit. What should Moon Appliance do?
A) Make the part and save $9 per unit.
B) Make the part and save $5 per unit.
C) Buy from Nadal Parts Company and lose $2 per unit.
D) Make the part and save $13 per unit.
Answer: B
Explanation: B)
Purchase part $ 20.00
Add fixed cost
3.00
Total cost
23.00
Less build cost 18.00
Savings
$ 5.00
Diff: 2
LO: 8-6
EOC: E8-25A
145
Direct materials
Direct labor
Total cost
$ 3.00
$ 8.00
$ 4.00
$ 3.00
$ 18.00
purchased from an outside supplier. Moon Appliance has no alternative use for the manufacturing
facilities. Nadal Parts Company has offered to sell 9,000 units of Part B89 to Moon Appliance for $20.00
per unit. What is the highest price per unit that Moon Appliance should be willing to pay for the part?
A) $7
B) $15
C) $11
D) $18
Answer: B
Explanation: B)
Direct Materials
$ 3.00
Direct Labor
8.00
Variable MOH
4.00
Total Variable Cost $15.00
Diff: 2
LO: 8-6
EOC: E8-25A
146
Direct materials
Direct labor
Total cost
$ 3.00
$ 8.00
$ 4.00
$ 3.00
$ 18.00
purchased from an outside supplier. Assuming Moon Appliance can purchase 9,000 units of the part
from the Nadal Parts Company for $20.00 each, and the facilities currently used to make the part could be
rented out to another manufacturer for $18,000 a year, what should Moon Appliance do?
A) Make the part and save $7.00 per unit.
B) Make the part and save $3.00 per unit.
C) Buy the part and save $7.00 per unit.
D) Buy the part and save $3.00 per unit.
Answer: B
Explanation: B)
Direct Materials
Direct Labor
Variable Expenses
Cost to Produce
3.00
8.00
4.00
15.00
Potential income $ 18,000 / 9,000 units = $ 2.00 additional revenue per unit
Price to buy from Supplier 20.00
Less Rental Revenue
(2.00)
Net Cost to Buy
18.00
Cost to Produce
15.00
Less Cost to Buy
(18.00)
Savings if Buy
(3.00)
Diff: 2
LO: 8-6
EOC: E8-25A
147
Direct materials
Direct labor
Total cost
$ 3.00
$ 8.00
$ 4.00
$ 3.00
$ 18.00
purchased from an outside supplier. Assume Moon Appliance can purchase 9,000 units of the part from
the Nadal Parts Company for $20.00 each, and the facilities currently used to make the part could be used
to manufacture 7,000 units of another product that would have a $6 per unit contribution margin. If no
additional fixed costs would be incurred, what should Moon Appliance do?
A) Make the new product and buy the part to earn an extra $1.00 per unit contribution to profit.
B) Make the new product and buy the part to earn an extra $4.00 per unit contribution to profit.
C) Continue to make the part to earn an extra $3.00 per unit contribution to profit.
D) Continue to make the part to earn an extra $8.00 per unit contribution to profit.
Answer: A
Explanation: A)
Direct Materials
$ 3.00
Direct Labor
8.00
Variable MOH
4.00
Total Variable Cost $15.00
Less cost to buy
20.00
Savings
(5.00)
Plus CM from new product 6.00
Total add'l contribution to profit $ 1.00
Diff: 3
LO: 8-6
EOC: E8-25A
148
226) Victoria Technologies makes a part used in the manufacture of digital cameras. Management is
considering whether to continue manufacturing the part, or to buy the part from an outside source at a
cost of $24.00 per part. Victoria Technologies needs 60,000 parts per year. The cost of manufacturing
60,000 parts is computed as follows:
Direct materials
Direct labor
Total manufacturing costs
$ 750,000
600,000
525,000
750,000
$2,525,0000
If Victoria Technologies buys the part, it would pay $.60 per unit to transport the parts to its
manufacturing plant. Purchasing the part from an outside source would enable the company to avoid
50% of fixed manufacturing overhead costs. Victoria Technologies' factory space freed up by purchasing
the part from an outside supplier could be used to manufacture another product with a contribution
margin of $70,000.
Prepare an analysis to show which alternative makes the best use of Victoria Technologies' factory space:
1) Make the part
2) Buy the part and leave facilities idle
3) Buy the part and use facilities to make another product
149
Answer:
Transport cost per unit (if bought)
0.60
Number of parts needed

Total variable transportation
36,000
750,000

375,000
750,000

Unavoidable fixed manufacturing overhead
375,000

$
$
36,000
375,000

$
$
Total purchase price
$
Contribution margin provided by alternate use
36,000
375,000
1,440,000
Total purchase price

Total cost to buy parts and leave facilities idle
of space
Total cost to buy parts and use facilities to make
another product
Total manufacturing costs to make parts
#3: Victoria Technologies should buy the part and use facilities to make another product since their total
costs will be $1,781,000 under this option versus total costs of $2,625,000 to make the part.
Diff: 3
LO: 8-6
EOC: P8-47A
150
227) Define the term constraints and give an example. What product should be made first when resource
constraints exist?
Answer: Constraints are the limited resources that restrict production or sale of a product, and they vary
from company to company. For a manufacturer, production may be constrained by labor hours, machine
hours, or available materials. For a merchandiser, the primary constraint is cubic feet of display space.
When resource constraints exist, the company should focus on selling the products with the highest
contribution margin per unit of the constraint.
Diff: 2
LO: 8-6
EOC: P8-47A
228) Patty's Mailbox Company produces a standard mailbox with variable manufacturing costs of $18 per
unit. The selling price of the standard mailbox is $25 per unit. The fixed manufacturing overhead cost is
$67,000. A normal production run includes 100,000 units. Patty's Mailbox Company has discovered an
additional process to change the standard mailbox into a deluxe mailbox. Additional costs are estimated
at $4 per unit. The deluxe mailbox would sell for $35. Additional fixed manufacturing overhead cost of
$23,000 would be incurred if the deluxe mailbox is produced. There would be no change in the number of
units produced.
Make an analysis to determine if Patty's Mailbox Company should continue producing and selling the
standard mailbox or change the standard mailbox into a deluxe mailbox.
151
Answer:
Standard mailbox:
Standard mailbox selling price
Production volume
Revenue
$ 25.00
100,000
$ 2,500,000
Standard mailbox variable costs

Production volume
Variable costs
$ 18.00
100,000
$ 1,800,000
Revenue
Variable costs
Operating income for Standard mailbox
$ 2,500,000
$(1,800,000)
$ (67,000)
$ 633,000
Deluxe mailbox:
Deluxe mailbox selling price
Production volume
Revenue
$ 35.00
100,000
$ 3,500,000
Standard mailbox variable costs

Deluxe mailbox additional costs
Total costs
Production volume
Variable costs
$ 18.00
$ 4.00
$ 22.00
100,000
$ 2,200,000

Fixed costs
$ 67,000
$ 23,000
$ 90,000
Revenue
Variable costs
Fixed costs
Operating income for Deluxe mailbox
$ 3,500,000
$(2,200,000)
$ (90,000)
$ 1,210,000
Operating income for Deluxe mailbox

Operating income for Standard mailbox
Increase in income
$ 1,210,000
$ (633,000)
$ 577,000
Change the standard mailbox into the deluxe mailbox for $577,000 increase in operating income.
Diff: 2
LO: 8-6
EOC: P8-47A
152
229) Sunk costs should be considered when deciding whether to sell a product as is or process it further.
Answer: FALSE
Diff: 2
LO: 8-7
EOC: S8-13
230) A decision must be made at the point in a process where a product can either be sold as is or
processed further.
Answer: TRUE
Diff: 2
LO: 8-7
EOC: S8-13
231) A sunk cost is a past cost that can be changed regardless of which future action is taken.
Answer: FALSE
Diff: 1
LO: 8-7
EOC: S8-13
232) When the extra revenue from processing further is less than the extra cost of processing further, the
best decision would be to
A) process further.
B) develop a new product.
C) not process further.
D) start over.
Answer: C
Diff: 1
LO: 8-7
EOC: E8-28A
153
233) The benefit foregone by choosing a particular alternative course of action is referred to as a(n)
A) sunk cost.
B) opportunity cost.
C) variable cost.
D) incremental cost.
Answer: B
Diff: 1
LO: 8-7
EOC: E8-28A
234) In making the decision whether to sell a product as is or process the product further, the expected
income from selling the product as is may be defined as which of the following?
A) The opportunity cost of processing the product further
B) A sunk cost of processing the product further
C) The opportunity cost of selling the product as is
D) A limiting factor in processing the product further
Answer: A
Diff: 2
LO: 8-7
EOC: E8-28A
235) In a sell or process further decision, the company should process further if
A) the extra cost of processing further is the same as the extra revenue.
B) the extra revenue from processing further is less than the extra cost.
C) the extra cost of processing further is greater than the extra revenue.
D) the extra cost of processing further is less than the extra revenue.
Answer: D
Diff: 2
LO: 8-7
EOC: E8-28A
154
236) Which of the following would be a consideration for "sell as is or process further" decisions?
A) Revenue generated if sold "as is"
B) Revenue generated if "further processed"
C) Costs involved in further processing
D) All of the above
Answer: D
Diff: 2
LO: 8-7
EOC: S8-13
237) Bear Country Granola is considering selling premium granola. It already sells regular for
$6.75/pound and would sell premium granola for $9.50/pound. The cost for organic grains for the
premium granola would be $1.15/pound. A cost that would not be considered in this decision would be
A) the extra revenue generated by selling premium.
B) the cost of refining the regular granola.
C) the cost of further processing the regular granola into premium granola.
D) any of the above would be considered.
Answer: B
Diff: 2
LO: 8-7
EOC: S8-13
238) Four Guys Company has in its inventory 5,000 damaged televisions that cost $50,000. The televisions
can be sold in their present condition for $32,000, or repaired at a cost of $43,000 and sold for $76,000.
What is the opportunity cost of selling the televisions in their present condition?
A) $82,000
B) $119,000
C) $33,000
D) $75,000
Answer: C
Explanation: C)
Selling price after repair
$
76,000
Cost to repair
Opportunity cost to sell in current condition
Diff: 2
LO: 8-7
EOC: P8-48A
155
239) Paula has the following information to evaluateher current salary of $55,000 versus total revenues
of $120,000 and expenses of $75,000 from starting a new business. How much is the opportunity cost
associated with starting the new business?
A) $55,000
B) $120,000
C) $45,000
D) $75,000
Answer: A
Diff: 2
LO: 8-7
EOC: P8-48A
240) Zach has the following information to evaluatehis current salary of $75,000 versus total revenues of
$100,000 and expenses of $67,000 from starting a new business. How much is the opportunity cost
associated with staying at his current job?
A) $75,000
B) $(8,000)
C) $33,000
D) $167,000
Answer: C
Explanation: C)
Revenues
$ 100,000
Expenses
67,000
Potential income
$ 33,000
Diff: 2
LO: 8-7
EOC: P8-48A
156
241) Brittany Furniture manufactures two products, pillows and cushions, from a joint process. Pillows
are allocated $7,000 of the total joint costs of $25,000. There are 2,500 pillows produced and 2,500 cushions
produced each year. Pillows can be sold at the split-off point for $12 per unit, or they can be processed
further into a deluxe pillow for additional processing costs of $8,000 and sold for $16 for each deluxe
pillow. If the pillows are processed further and made into deluxe pillows, the effect on operating income
would be:
A) $30,000 net increase in operating income.
B) $2,000 net decrease in operating income.
C) $2,000 net increase in operating income.
D) $30,000 net decrease in operating income.
Answer: C
Explanation: C)
Selling Price Units $ 16.00 2,500 =
$40,000
less Additional cost
8,000
Profit
32,000
Less split-off point sales $ 12 2,500 =
30,000
Net increase
$2,000
Diff: 3
LO: 8-7
EOC: P8-48A
242) Upscale Dishwear manufactures two products, salad plates and platters, from a joint process. Salad
plates are allocated $7,500 of the total joint costs of $25,000. There are 3,000 salad plates produced and
3,000 platters produced each year. Salad plates can be sold at the split-off point for $12 per unit, or they
can be hand painted for additional processing costs of $8,400 and sold for $16 for each deluxe salad plate.
If the salad plates are processed further and made into deluxe plates, the effect on operating income
would be:
A) $36,000 net increase in operating income.
B) $3,600 net decrease in operating income.
C) $36,000 net decrease in operating income.
D) $3,600 net increase in operating income.
Answer: D
Explanation: D)
Selling Price Units $ 16.00 3000 = $48,000
less Additional cost
8,400
Profit
39,600
Less split-off point sales $ 12 3,000 =
36,000
Net increase
$3,600
Diff: 3
LO: 8-7
EOC: P8-48A
157
243) A joint production process at Happy Days Farms results in two products, blackberry syrup and
blackberry jam. The following cost and activity data relate to these two products:
Blackberry syrup
Blackberry jam
$ 10,000
$ 12,000
Joint costs allocated

Number of units produced from joint process
1,500
1,500
Selling price at split-off point

Selling price after processing further
$ 2.50
$ 5.00
$ 1.75
$ 2.00
$ 2,000
$ 2,000
Cost of processing further
Blackberry syrup can be sold as-is (at the split-off point) for $2.50 per unit, or it can be processed further
into a specialty blackberry juice and then sold for $5.00 per unit. If blackberry syrup is processed further
into the specialty blackberry juice, what would be the overall effect on operating income?
A) $1,750 net increase in operating income
B) $1,750 net decrease in operating income
C) $3,750 net increase in operating income
D) $3,750 net decrease in operating income
Answer: A
Explanation: A)
Selling Price after further processing 1500 $ 5.00 = $ 7,500
Additional Processing cost
2,000
Net Income
5,500
Less Income if sold at split-off point 1,500 $ 2.50
3,750
Equals increase in Operating Income
$ 1,750
Diff: 3
LO: 8-7
EOC: P8-48A
158
244) A joint production process at Sunny Brooks Dairy results in two products, cherry jelly and cherry
jam. The following cost and activity data relate to these two products:
Cherry jelly
$ 10,000
Cherry jam
$ 12,000
Number of units produced from joint process
2,000
2,000
Selling price at split-off point

Selling price after processing further
$ 2.50
$ 5.00
$ 1.75
$ 2.00
$ 2,200
$ 2,000
Joint costs allocated
Cost of processing further
Cherry jelly can be sold as-is (at the split-off point) for $2.50 per unit, or it can be processed further into a
specialty cherry smoothie and then sold for $5.00 per unit. If cherry jelly is processed further into the
specialty cherry smoothie, what would be the overall effect on operating income?
A) $2,800 net decrease in operating income
B) $5,000 net decrease in operating income
C) $5,000 net increase in operating income
D) $2,800 net increase in operating income
Answer: D
Explanation: D)
Selling Price after further processing 2000 $ 5.00 = $ 10,000
Additional Processing cost
2,200
Net Income
7,800
Less Income if sold at split-off point 2,000 $ 2.50
5,000
Equals increase in Operating Income
$ 2,800
Diff: 3
LO: 8-7
EOC: P8-48A
159
245) Stoog Enterprises manufactures ceiling fans that normally sell for $90 each. There are 300 defective
fans in inventory, which cost $55 each to manufacture. These defective units can be sold as is for $20 each,
or they can be processed further for a cost of $40 each and then sold for the normal selling price. Stoog
Enterprises would be better off by a
A) $21,000 net increase in operating income if the ceiling fans are repaired.
B) $9,000 net increase in operating income if the ceiling fans are sold as is.
C) $9,000 net increase in operating income if the ceiling fans are repaired.
D) $21,000 net increase in operating income if the ceiling fans are sold as is.
Answer: C
Explanation: C)
Normal selling price
$
90.00
Sold "as is" price per unit
Incremental revenue per unit
Cost to repair each unit

Incremental income per unit from further processing
70.00
$
30.00
Number of defective units

Total incremental income from further processing
Diff: 3
LO: 8-7
EOC: P8-48A
246) Longview Baskets has in its inventory 2,000 damaged baskets that cost $20,000. The baskets can be
sold in their present condition for $12,000, or repaired at a cost of $13,000 and sold for $35,000. What is
the opportunity cost of selling the baskets in their present condition?
A) $32,000
B) $25,000
C) $48,000
D) $22,000
Answer: D
Explanation: D)
Selling price after repair
$
35,000
Cost to repair
Opportunity cost to sell in current
condition
Diff: 2
LO: 8-7
EOC: P8-48A
160
247) Molly has the following information to evaluateher current salary of $57,000 versus total revenues
associated with starting the new business?
A) $62,000
B) $15,000
C) $57,000
D) $47,000
Answer: C
Diff: 2
LO: 8-7
EOC: P8-48A
248) Jackie has the following information to evaluateher current salary of $74,000 versus total revenues
associated with staying at her current job?
A) $35,000
B) $165,000
C) $74,000
D) $(9,000)
Answer: A
Explanation: A)
Revenues from the new business
$
100,000
Costs to start a business
Opportunity cost of staying at current job
Diff: 2
LO: 8-7
EOC: P8-48A
161
249) On the line in front of each statement, enter the letter corresponding to the term that best fits that
statement. An item may be used more than once or not at all.
A.
B.
C.
D.
relevant costs
sunk costs
constraint
contribution margin
E.
F.
G.
H.
opportunity costs
full cost of product or service
sales mix
variable costing
____ Costs that were incurred in the past and cannot be changed
____ Benefits foregone by choosing a particular alternative course of action
____ Expected future costs that differs among alternatives
____ Costs of developing, producing and delivering a product or service
____ A factor that restricts production or sales of a product
Answer: B, E, A, F, C
Diff: 2
LO: 8-7
EOC: E8-28A
162

Managerial Accounting CH 8

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Managerial Accounting CH 8

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Managerial Accounting, 3e (Braun/Tietz)

Chapter 8 Relevant Costs for Short-Term Decisions

11) An "opportunity cost" is best described by which of the following?

15) Which of the following is irrelevant when making a decision?

19) A sunk cost is described as which of the following?

40) A company should ________ when making a short-term special decision.

Variable costs per unit:

Total fixed costs:

Times units sold

Variable costs per unit:

Total fixed costs:

Variable costs per unit:

Total fixed costs:

Special sales order volume

Total variable costs per unit

Additional revenue from order

Special order increase in fixed expense

Variable costs per unit:

Total fixed costs:

Variable costs per unit:

Total fixed costs:

Times units sold

Variable costs per unit:

Total fixed costs:

Variable costs per unit:

Total fixed costs:

Special sales order volume

Total variable costs per unit

Additional revenue from order

Special order increase in fixed expenses

Variable costs per unit:

Total fixed costs:

Times units sold

Assume no beginning inventory

Assume no beginning inventory

Assume no beginning inventory

Special sales order volume

Total variable costs per unit

Additional revenue from order

Additional expenses from order

Special sales order volume

Variable manufacturing costs per unit

Additional revenue from order

Additional expenses from order

Special sales order volume

Special order increase in fixed expenses

Special sales order volume

Total variable costs per unit

Additional revenue from order

Special order increase in fixed expenses

Units produced and sold

Units produced and sold

Units produced and sold

Direct materials cost per unit

Variable manufacturing overhead per unit

Special order volume

Special order sales price per unit

Special order volume

Special order sales price per unit

Additional revenue from order

Additional variable costs per unit

Investors' return (% of assets)

Total fixed costs