AIM 2302 SOLUTION TO PRACTICE EXAM III

Chapter 7: Pricing and Product Planning

1. Short-term pricing decisions depend on all of the following, EXCEPT:
a. Whether surplus capacity is available for the additional production.
b. Whether the available capacity limits production.
c. The time period of the contract over which capacity is committed.
d. The level of product-sustaining activities and costs.
____D____
2. A small firm on the fringe of an industry is probably
a. A price setter
b. A price taker
c. Both a price taker and a price setter
d. A price maker
_____B____
3. Ram Company produces two products, AR4 and AR8. AR4 has a
contribution per unit of $3.00 and requires 0.3 machine hours per unit, whereas
AR8 has a contribution of $2.50 per unit and requires 0.2 machine hours per
unit. The companys policy is to sell only products with a contribution per
machine, the constrained or scare resource, greater than $9.90. What should
they do?
a. Sell both AR4 and AR8.
b. Sell only AR4.
c. Sell only AR8.
d. Sell neither AR4 nor AR8.
_____A____
4. An opportunity cost is
a. Completely intangible and not measurable.
b. The sacrificed potential benefit of choosing one alternative over another.
c. The sacrificed past benefit of choosing one alternative over another.
d. Not relevant to any decision.
_____B____

5. Lido Company manufactures product MY40. Currently, the product sells

for $55, with total costs to manufacture of $30. In order to add a new feature
to the product, additional direct materials of $3.00, direct labor of $2.50, and
batch-related costs of $1.45 per unit would have to be incurred. What are the
incremental costs per unit of the decision to add the new feature?
a. $3.00
b. $2.50
c. $6.95
d. $5.50
_____C____
6. Full-cost pricing is LEAST likely to be economically justified under which
of the following?
a. When customized products are produced.
b. When contracts are developed with government agencies.
c. When a firm enters into a long-term contractual relationship with a
customer to supply a product.
d. When a firm enters into a short-term contractual relationship with a
customer to supply a product.
_____D____
7. Demand is elastic when
a. A small increase in price results in a small decrease in demand.
b. Price increases cause demand to fluctuate wildly.
c. A small increase in price results in a large decrease in demand
d. Price increases cause demand to increase.
_____C____
8. For long-term product mix decisions, comparison of the price of a product
with its ___________ costs provides a valuable evaluation of its long-term
profitability.
a. Variable
b. Opportunity
c. Incremental
d. Full
____D_____

9.
Plasticraft Company produces and sells a single product called a
DROID. Plasticraft has excess capacity to manufacture 5,000 additional
DROIDS. Variable costs are $35 per unit, and fixed costs total $300,000 per
month. Ajax Company has offered to pay Plasticraft $39 per unit for a onetime special order for 4,000 DROIDS. This special order requires some
additional selling expenses of $1.50 per unit. Should Plasticraft accept this
special order?
YES: PLASTICRAFT SHOULD ACCEPT AJAX COMPANYS OFFER
BECAUSE IT WILL INCREASE OPERATING INCOME BY
$10,000 = ($39 ($35 + $1.50) * 4,000 UNITS.
OR: BECAUSE INCREMENTAL REVENUE OF $39 > INCREMENTAL
COSTS OF $36.50.
10. Peanuts Company produces porcelain figurines of Lucy and Linus.
The selling prices and variable costs for each figurine are as follows:

Selling price
Variable costs
Direct materials
Direct labor
Indirect manufacturing

Linus
$25.00

Lucy
$20.00

$9.00
5.00
4.00

$6.00
2.00
2.00

The cost of direct labor is $10.00 per hour and only 500 hours of labor time
are available each week.
a.) Determine the contribution margin per direct labor hour for each product.
Selling Price
Less: Variable Costs
Direct materials
Direct labor
Support
Contribution Margin per figurine
Direct labor hours per figurine
Contribution Margin per direct labor hour
3

Linus
$25

Lucy
$20

9
5
4
$7
.5hrs
$14

6
2
2
$10
.2hrs
$50

b.) Which product should Peanuts sales force promote?

Peanuts sales force should promote the Lucy figurine, because it has the
higher contribution margin per unit of constrained resource (DL hours).
11.
Charlies Chairs manufactures 2 models of chairs, Standard and
Premium. Weekly demand is estimated to be 120 units of the Standard
Model and 70 units of the Premium Model. Only 420 machine hours are
available per week. The following per unit data apply:
Standard
$12
2

Contribution margin per unit

Number of machine hours

Premium
$15
3

a.) For each model, compute contribution margin per machine hour.
CM per unit
Machine Hours
CM per Machine Hour

$12
2
$ 6

$15
3
$ 5

b.) To maximize weekly production profits, how many units would you
recommend of each model?
Standard: 120 units * 2MH = 240 MH
Premium: 70 units * 3MH = 210 MH
450 MH
Available Capacity = 420MH vs. Required Hours = 450MH
To maximize profits, Charlies should maximize sales of standard
chairs. 240 machine hours should be used to manufacture 120 units of
the Standard Chair, and 180 machine hours should be used to
manufacture 60 units of the Premium Chair

c.) If there are 500 machine hours available per week (instead of only
420 MH), how many chairs of each model should Charlies produce to
maximize profits.?
500 Machine Hours results in excess capacity. Therefore, demand for
both types of chairs can be met:
120 units of Standard Chair
70 units of the Premium Chair
Chapter 6:Activity and Process Decisions
1. Each of the following should result in reduction in the level of work-inprocess inventory and cycle time, EXCEPT:
a. Quality improvement programs.
b. Corporate downsizing programs.
c. Just-in-time programs.
d. Cellular manufacturing.
____B____
2.

Which of the following is NOT one of the four cost of quality categories?
a. Appraisal costs
b. Internal failure costs
c. Prevention costs
d. Benchmarking costs
_____D____

3. Each of the following should be considered in the make-or-buy decision,

EXCEPT:
a. Unavoidable facility-sustaining costs
b. The costs to produce the product
c. The cost to purchase the product outside the firm
d. The general implications for the firm to buy the product from another
firm (e.g., sustainability of outside price, quality of outside product,
etc.)
_____A____

4. The cost of which of the following is an example of an appraisal cost in the

cost of quality framework?
a. Inspection of batches of products
b. Supplier certification
c. Product liability lawsuits
d. Warranty claims
_____A____
5. In ____________, equipment is organized to accommodate the production
of a specific product.
a. A process layout
b. A product layout
c. Cellular manufacturing
d. Just-in-Time Production
____B_____
6. Shields Company has the capacity to produce 5,000 units of product H199.
Currently it is producing 3,900 units. Foster Company asks Shield to produce
800 more units of H199 for a special order. Neither new machinery nor extra
plant space is needed for the special order. Which of the following statements
is true?
a. Only product-sustaining costs will increase.
b. Only facility-sustaining costs will increase.
c. Both product-sustaining and facility sustaining costs will increase.
d. Neither product-sustaining nor facility-sustaining costs will increase.
____D_____
7. The theory of constraints
a. Emphasizes long-term optimization
b. Maintains that maximizing volume through production bottlenecks will
increase operating income
c. Helps managers make special one-time decisions
d. Suggests that some component parts should be outsourced
____B_____
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8. All of the following statements about just-in-time (JIT) are true, EXCEPT:
a. Processing time decreases
b. It simplifies accounting
c. It reduces the amount of money invested in inventory
d. JIT processing systems must be reliable
____B_____
9.
Gumby Company is determining whether to outsource product Pokey.
An outside bidder has quoted a price of $52. The following costs of the
product when produced in-house are shown below on a per-unit basis:

Direct materials
Direct labor
Unit-related overhead
Batch-related overhead
Product-sustaining overhead
Facility-sustaining overhead
TOTAL
a.)

Pokey
$13.95
15.00
17.80
6.55
3.25
8.35
$64.90

Which support costs will not be incurred if Pokey is outsourced?

UNIT-RELATED COSTS ARE AVOIDABLE
BATCH-RELATED & PRODUCT-SUSTAINING ARE MOST
LIKELY AVOIDABLE
POSSIBLY FACILITY-SUSTAINING IF THE FACILITY CAN BE
CONVERTED TO ANOTHER USE WHEN PRODUCT POKEY IS
OUTSOURCED

b.) Suppose that unit-related, batch-related and product-sustaining costs

can be eliminated if Pokey is outsourced. However, the machinery, factory
space, and other facility-related costs will still be incurred if Pokey is
outsourced. Should Gumby outsource Pokey?
RELEVANT COSTS OF PRODUCING POKEY ARE AS FOLLOWS:
Direct materials
Direct labor
Unit-related overhead
Batch-related overhead
Product-sustaining overhead
TOTAL

$13.95
15.00
17.80
6.55
3.25
$56.55

VERSUS THE PURCHASE PRICE OF $52

GUMBY SHOULD OUTSOURCE
OR YOU COULD HAVE WORKED IT AS FOLLOWS:
TOTAL COST TO MAKE (INCLUDING FACILITY) = $64.90 VS.
COST TO PURCHASE INCLUDING FACILITY ($52 + $8.35) = $60.35
10. Eastco purchased a stamping machine four months ago and now
realizes that a much better machine is available on the market. The
following information pertains to both machines.
OLD
$150,000
3 years
$60,000
$6,000
$60,000

Acquisition cost
Remaining Life
Current disposal value
Salvage value at the end of 3 years
Annual operating costs

NEW
$200,000
3 years
$9,000
$12,000

The estimates above do not include rework costs. The new stamping
machine also will reduce the defect rate from 4% to 2%. All defective units
are reworked at a cost of $1.25 per unit. Eastco produces 150,000 units
annually.

a.

What costs are considered sunk?

ACQUISITION COST OF OLD MACHINE OF $150,000

b.

Should Eastco replace the old machine?

NET BENEFITS OVER 3 YEARS

NEW OLD

Salvage value increase (9,000 6,000)

Decrease in annual operating costs
(3 years * 48,000)
Reduction in rework costs
(150,000 * 2% * $1.25 * 3 years)
Acquisition of new machine
Current disposal value of old machine
Net cash inflow

$ 3,000
144,000
11,250
(200,000)
60,000
$18,250

Eastco should purchase the new machine.

11. Jerrys 5-year-old Chevy Geo Prism requires repairs estimated at $3,000
to make it roadworthy again. His friend, Elaine, suggested that he should
buy a 5-year-old Honda Civic instead for $3000 cash. Elaine estimated the
following costs for the two cars:
Chevy Geo Prism
$15,000
$ 3,000

Acquisition cost
Repairs
Annual operating costs
(Gas, maintenance, insurance)

$ 2,280

a. What costs are NOT relevant for this decision?

ACQUISITION COST OF GEO PRISM

Honda Civic
$3,000
--$2,100

b. What should Jerry do? What is his savings in the first year?
REPAIR THE PRISM:
REPAIR COSTS
ANNUAL OPERATING COSTS
TOTAL COSTS

$3,000
$2,280
$5,280

PURCHASE THE CIVIC:

PURCHASE PRICE
ANNUAL OPERATING COSTS
TOTAL COSTS

$3,000
$2,100
$5,100

JERRY SHOULD BUY THE CIVIC. HIS SAVINGS IN THE

FIRST YEAR ARE $180 ($5,280 - $5,100)
Chapter 11: Budgeting
1. _______________ bases a periods expenditure level for a discretionary
item on the amount spent on that item during the previous period
a. Zero-based budgeting
b. Periodic budgeting
c. Incremental budgeting
d. Continuous budgeting
____C___
2.

Operating budgets include all of the following, EXCEPT:

a. Sales plan
b. Purchasing plan
c. Production plan
d. Cash flow plan
_____D____

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3. A demand forecast is
a. An estimate of sales demand given a product price
b. Developed largely because of customer dissatisfaction
c. An estimate of market demand given the amount sold the previous year
d. An estimate for the demand for labor
____A_____
4. Financial budgets include all of the following except a:
a. Projected balance sheet
b. Production plan
c. Cash flow plan
d. Projected income statement
____B_____
5. When discussing the roles of budgets, a control role includes?
a. Identify organizational objectives and short-term goals
b. Developing long-term strategies and short-term plans
c. Measuring and assessing performance against budgeted amounts
d. Developing the master budget.
_____C____
6. Financial budgets are prepared
a. To specify expectation for selling, purchasing, and production
b. To evaluate financial results of the proposed decisions
c. So that financial statements can be prepared for shareholders
d. To plan for production capacity
_____B____
7. Although planners update or revise the budgets during the period,
____________ is typically performed once per year
a. Zero-based budgeting
b. Periodic budgeting
c. Incremental budgeting
d. Continuous budgeting
____B_____

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8. The finished goods production budget determines

a. The units to be produced during a period
b. Budgeted sales dollars
c. The predetermined factory overhead rate
d. The amount of labor hours worked
____A____
9. Direct material purchases equal
a. Usage plus production needs
b. Production needs plus target ending finished goods inventory
c. Beginning inventories plus production needs
d. Usage plus target ending inventories less beginning inventories
____D____
10. ______________ occur(s) when subordinates ask for excess resources
above and beyond what they need to accomplish budget objectives
a. Pseudo participation
b. Effective budgeting
c. Budget slack
d. Participative budgeting
____C____
11.

Amigo Corporation developed the following sales budget:

Month
July
August
September
October
November
December

Sales
$ 30,000
34,000
38,000
42,000
48,000
60,000

Cash is collected from customers in the following manner

Month of sale
30%
Month following sale
50%
Two months following sale
15%
Amount uncollectible
5%
12

Prepare a summary of cash collections for the 4th quarter. ($126,100)

Month
August
September
October
November
December

October
5,100
19,000
12,600
----36,700

November
--5,700
21,000
14,400
--41,100

December
----6,300
24,000
18,000
48,300

12. The Mahoney Company has prepared a sales budget of 24,000 units
for a 3-month period starting from January 1. The company has an inventory
of 11,000 units of finished goods on hand at December 31 and has a target
finished goods inventory of 13,000 units at the end of the succeeding
quarter.
It takes 5 gallons of direct materials to make 1 unit of finished product. The
company has an inventory of 110,000 gallons of direct materials at
December 31 and has a target ending inventory of 100,000 gallons.
How many gallons of direct materials should be purchased during the
3 months ending March 31?
Budgeted sales
Add target ending FG inventory
Total requirements
Deduct beginning FG inventory
Units to be produced

DM needed for production (26,000 x 5)

Add target ending DM inventory
Total requirements
Deduct beginning DM inventory
DM to be purchased

13

FG (Units)
24,000
13,000
37,000
11,000
26,000
DM (Gallons)
130,000
100,000
230,000
110,000
120,000

Chapter 12: Variance Analysis

1. Madzingas Draperies manufactures curtains. Each window requires the
following:
Direct materials, standards
Direct labor, standards

10 square yards at $5 per yard

5 hours at $10 per hour

During the second quarter, the company made 1,500 curtains and used
14,000 square yards of fabric costing $68,600. Direct labor totaled 7,600
hours for $79,800.
a.

b.

Compute the direct materials price and efficiency variances for the
quarter.
Actual Unit Costs:

= $68,600 / 14,000 square yards

= $4.90 per square yard

Price Variance

(AP SP) * AQ
= ($4.90 - $5.00) * 14,000
= $1,400 F

Usage Variance

(AQ SQ) * SP
= [14,000 (10 * 1,500)] * $5.00
= $5,000 F

Compute the direct labor price and efficiency variances for the
quarter.
Actual Labor Rate:

= $79,800 / 7,600 hours

= $10.50 per hour

Rate Variance

(AR SR) * AH
= ($10.50 - $10.00) * 7,600
= $3,800 U

Efficiency Variance

(AH SH) * SR
= [7,600 (5 * 1,500)] * $10.00
= $1,000 U

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2. Robb Industries Inc. (RII) developed standard costs for direct material
and direct labor. In 2004, RII estimated the following standard costs for one
of their major products, the 10-gallon plastic container.
Direct materials
Direct labor

Budgeted quantity
0.10 pounds
0.05 hours

Budgeted price
$30 per pound
$15 per hour

During June RII produced and sold 5,000 containers using 490 pounds of
direct materials at an average cost per pound of $32 and 250 direct
manufacturing labor-hours at an average wage of $15.25 per hour.
a. Calculate the direct materials price and usage variances for June.
Price Variance

(AP SP) * AQ
= ($32 - $30) * 490
= $980 U

Usage Variance

(AQ SQ) * SP
= [490 (.10 * 5,000)] * $30
= $300 F

b. Calculate the direct labor rate and efficiency variances for June.
Rate Variance

(AR SR) * AH
= ($15.25 - $15.00) * 250
= $62.50 U

Efficiency Variance

(AH SH) * SR
= [250 (.05 * 5,000)] * $15
= $0

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