TB Ch12

Chapter 12

Differential Analysis: The Key to Decision Making

True / False Questions
1. Future costs that do not differ among the alternatives are not relevant in a
decision.
True False
2. Fixed costs are irrelevant in a decision.
True False
3. Sunk costs are considered to be avoidable costs.
True False
4. Avoidable costs are also called relevant costs.
True False
5. An avoidable cost is a cost that can be eliminated (in whole or in part) as a result
of choosing one alternative over another.
True False
6. A sunk cost is a cost that has already been incurred and that cannot be avoided
regardless of what action is chosen.
True False
7. The book value of a machine, as shown on the balance sheet, is relevant in a
decision concerning the replacement of that machine by another machine.
True False
8. If by dropping a product a firm can avoid more in fixed costs than it loses in
contribution margin, then the firm is better off economically if the product is dropped.
True False
9. Generally, a product line should be dropped when the fixed costs that can be
avoided by dropping the product line are less than the contribution margin that will
be lost.
True False
10. The cost of a resource that has no alternative use in a make or buy decision
problem has an opportunity cost of zero.
True False
11. Vertical integration is the involvement by a company in more than one of the
steps from securing basic raw materials to the production and distribution of a
finished product.
True False
12. Depreciation expense on existing factory equipment is generally relevant to a
decision of whether to accept or reject a special offer for a company's product.
True False
13. When a company has a production constraint, the product with the highest
contribution margin per unit of the constrained resource should be given highest
priority.
True False
14. Managers should not authorize working overtime at a work station that contains a
bottleneck.
True False
15. Joint costs are not relevant to the decision to sell a product at the split-off point or
to process the product further.
True False
16. Joint production costs are relevant costs in decisions about what to do with a
product from the split-off point onward in the production process.
True False
Multiple Choice Questions
17. Costs which are always relevant in decision making are those costs which are:
A. variable.
B. avoidable.
C. sunk.
D. fixed.
18. A general rule in relevant cost analysis is:
A. variable costs are always relevant.
B. fixed costs are always irrelevant.
C. differential future costs and revenues are always relevant.
D. depreciation is always irrelevant.
19. The opportunity cost of making a component part in a factory with no excess
capacity is the:
A. variable manufacturing cost of the component.
B. fixed manufacturing cost of the component.
C. total manufacturing cost of the component.
D. net benefit foregone from the best alternative use of the capacity required.
20. Freestone Company is considering renting Machine Y to replace Machine X. It is
expected that Y will waste less direct materials than does X. If Y is rented, X will be
sold on the open market. For this decision, which of the following factors is (are)
relevant?
I. Cost of direct materials used
II. Resale value of Machine X
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II
21. Which of the following are valid reasons for eliminating a product line?
I. The product line's contribution margin is negative.
II. The product line's traceable fixed costs plus its allocated common corporate costs
are less than its contribution margin.
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II
22. When there is a production constraint, a company should emphasize the
products with:
A. the highest unit contribution margins.
B. the highest contribution margin ratios.
C. the highest contribution margin per unit of the constrained resource.
D. the highest contribution margins and contribution margin ratios.
23. In a sell or process further decision, which of the following costs are relevant?
I. A variable production cost incurred prior to the split-off point.
II. An avoidable fixed production cost incurred after the split-off point.
A. Only I.
B. Only II.
C. Both I and II.
D. Neither I nor II.
24. Scherer Corporation is preparing a bid for a special order that would require 720
liters of material U48N. The company already has 560 liters of this raw material in
stock that originally cost $6.30 per liter. Material U48N is used in the company's
main product and is replenished on a periodic basis. The resale value of the existing
stock of the material is $5.80 per liter.
New stocks of the material can be readily purchased for $6.65 per liter. What is the
relevant cost of the 720 liters of the raw material when deciding how much to bid on
the special order?
A. $4,592
B. $4,788
C. $4,456
D. $4,176
25. Cung Inc. has some material that originally cost $68,400. The material has a
scrap value of $30,100 as is, but if reworked at a cost of $1,400, it could be sold for
$30,800. What would be the incremental effect on the company's overall profit of
reworking and selling the material rather than selling it as is as scrap?
A. -$69,100
B. -$700
C. $29,400
D. -$39,000
26. Liffick Corporation is a specialty component manufacturer with idle capacity.
Management would like to use its extra capacity to generate additional profits. A
potential customer has offered to buy 6,200 units of component VFG. Each unit of
VFG requires 8 units of material C79 and 6 units of material X70. Data concerning
these two materials follow:
Material C79 is in use in many of the company's products and is routinely
replenished. Material X70 is no longer used by the company in any of its normal
products and existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining
a minimum acceptable price for the order for product VFG?
A. $528,551
B. $523,280
C. $476,350
D. $484,455
27. Schemm Inc. regularly uses material F04E and currently has in stock 460 liters of
the material for which it paid $2,622 several weeks ago. If this were to be sold as is
on the open market as surplus material, it would fetch $5.25 per liter. New stocks of
the material can be purchased on the open market for $5.85 per liter, but it must be
purchased in lots of 1,000 liters.
You have been asked to determine the relevant cost of 800 liters of the material to be
used in a job for a customer. The relevant cost of the 800 liters of material F04E is:
A. $5,850
B. $4,200
C. $4,404
D. $4,680
28. Stampka Corporation is a specialty component manufacturer with idle capacity.
Management would like to use its extra capacity to generate additional profits. A
potential customer has offered to buy 4,200 units of component JJF. Each unit of JJF
requires 6 units of material O38 and 9 units of material P56. Data concerning these
two materials follow:
Material O38 is in use in many of the company's products and is routinely
replenished. Material P56 is no longer used by the company in any of its normal
products and existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining
a minimum acceptable price for the order for product JJF?
A. $146,790
B. $199,080
C. $155,610
D. $212,340
29. Janus Corporation has in stock 43,700 kilograms of material L that it bought five
years ago for $6.10 per kilogram. This raw material was purchased to use in a
product line that has been discontinued. Material L can be sold as is for scrap for
$3.23 per kilogram. An alternative would be to use material L in one of the
company's current products, E99D, which currently requires 2 kilograms of a raw
material that is available for $9.45 per kilogram. Material L can be modified at a cost
of $0.62 per kilogram so that it can be used as a substitute for this material in the
production of product E99D. However, after modification, 3 kilograms of material L
is required for every unit of product E99D that is produced. Janus Corporation has
now received a request from a company that could use material L in its production
process. Assuming that Janus Corporation could use all of its stock of material L to
make product E99D or the company could sell all of its stock of the material at the
current scrap price of $3.23 per kilogram, what is the minimum acceptable selling
price of material L to the company that could use material L in its own production
process?
A. $3.23
B. $5.68
C. $6.92
D. $2.45
30. Lampshire Inc. is considering using stocks of an old raw material in a special
project. The special project would require all
160 kilograms of the raw material that are in stock and that originally cost the
company $1,136 in total. If the company were to buy new supplies of this raw
material on the open market, it would cost $7.25 per kilogram. However, the
company has no other use for this raw material and would sell it at the discounted
price of $6.50 per kilogram if it were not used in the special project.
The sale of the raw material would involve delivery to the purchaser at a total cost of
$75 for all 160 kilograms. What is the relevant cost of the 160 kilograms of the raw
material when deciding whether to proceed with the special project?
A. $1,040
B. $965
C. $1,136
D. $1,160
31. A study has been conducted to determine if Product A should be dropped. Sales
of the product total $200,000 per year; variable expenses total $140,000 per year.
Fixed expenses charged to the product total $90,000 per year. The company
estimates that $40,000 of these fixed expenses will continue even if the product is
dropped. These data indicate that if Product A is dropped, the company's overall net
operating income would:
A. decrease by $20,000 per year
B. increase by $20,000 per year
C. decrease by $10,000 per year
D. increase by $30,000 per year
32. The Kelsh Company has two divisions--North and South. The divisions have the
following revenues and expenses:
Management at Kelsh is pondering the elimination of North Division. If North Division
were eliminated, its traceable fixed expenses could be avoided. The total common
corporate expenses would be unaffected. Given these data, the elimination of North
Division would result in an overall company net operating income of:
A. $100,000
B. $150,000
C. $(140,000)
D. $50,000
33. Power Systems Inc. manufactures jet engines for the United States armed forces
on a cost-plus basis. The production cost of a particular jet engine is shown
below:
If production of this engine was discontinued, the production capacity would be idle,
and the supervisor would be laid off. The depreciation referred to above is for
special equipment that would have no resale value and that does not wear out
through use.
When asked to bid on the next contract for this engine, the minimum unit price that
Power Systems should bid is:
A. $408,000
B. $365,000
C. $397,000
D. $385,000
34. The management of Heider Corporation is considering dropping product J14V.
Data from the company's accounting system appear below:
In the company's accounting system all fixed expenses of the company are fully
allocated to products. Further investigation has revealed that $211,000 of the fixed
manufacturing expenses and $172,000 of the fixed selling and administrative
expenses are avoidable if product J14V is discontinued. What would be the effect
on the company's overall net operating income if product J14V were dropped?
A. Overall net operating income would decrease by $55,000.
B. Overall net operating income would increase by $160,000.
C. Overall net operating income would increase by $55,000.
D. Overall net operating income would decrease by $160,000.
35. Product R19N has been considered a drag on profits at Buzzeo Corporation for
some time and management is considering discontinuing the product altogether.
Data from the company's accounting system appear below:
In the company's accounting system all fixed expenses of the company are fully
allocated to products. Further investigation has revealed that $49,000 of the fixed
manufacturing expenses and $30,000 of the fixed selling and administrative
expenses are avoidable if product R19N is discontinued. What would be the effect
on the company's overall net operating income if product R19N were dropped?
A. Overall net operating income would decrease by $59,000.
B. Overall net operating income would decrease by $22,000.
C. Overall net operating income would increase by $59,000.
D. Overall net operating income would increase by $22,000.
36. Lusk Company produces and sells 15,000 units of Product A each month. The
selling price of Product A is $20 per unit, and variable expenses are $14 per unit. A
study has been made concerning whether Product A should be discontinued. The
study shows that $70,000 of the $100,000 in fixed expenses charged to Product A
would continue even if the product was discontinued. These data indicate that if
Product A is discontinued, the company's overall net operating income would:
A. decrease by $60,000 per month
B. increase by $10,000 per month
C. increase by $20,000 per month
D. decrease by $20,000 per month
37. Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant
capacity. Peluso's plant manager is considering making the headlights now being
purchased from an outside supplier for $11 each. The Peluso plant has idle
equipment that could be used to manufacture the headlights. The design engineer
estimates that each headlight requires $4 of direct materials, $3 of direct labor, and
$6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a
fixed cost that would be unaffected by this decision. A decision by Peluso Company
to manufacture the headlights should result in a net gain (loss) for each headlight of:
A. $(2.00)
B. $1.60
C. $0.40
D. $2.80
38. Part I51 is used in one of Pries Corporation's products. The company makes
18,000 units of this part each year. The company's
Accounting Department reports the following costs of producing the part at this level
of activity:
An outside supplier has offered to produce this part and sell it to the company for
$15.80 each. If this offer is accepted, the supervisor's salary and all of the variable
costs, including direct labor, can be avoided. The special equipment used to make
the part was purchased many years ago and has no salvage value or other use.
The allocated general overhead represents fixed costs of the entire company. If the
outside supplier's offer were accepted, only $26,000 of these allocated general
overhead costs would be avoided.
If management decides to buy part I51 from the outside supplier rather than to
continue making the part, what would be the annual impact on the company's
overall net operating income?
A. Net operating income would decline by $81,800 per year.
B. Net operating income would decline by $55,800 per year.
C. Net operating income would decline by $119,800 per year.
D. Net operating income would decline by $29,800 per year.
39. Iwasaki Inc. is considering whether to continue to make a component or to buy it
from an outside supplier. The company uses
13,000 of the components each year. The unit product cost of the component
according to the company's cost accounting system is given as follows:
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead,
30% is avoidable if the component were bought from the outside supplier. In
addition, making the component uses 1 minute on the machine that is the company's
current constraint. If the component were bought, this machine time would be freed
up for use on another product that requires 2 minutes on this machine and that has
a contribution margin of $5.20 per unit.
When deciding whether to make or buy the component, what cost of making the
component should be compared to the price of buying the component?
A. $22.40
B. $19.80
C. $17.28
D. $19.88
40. Part N29 is used by Farman Corporation to make one of its products. A total of
11,000 units of this part are produced and used every year. The company's
Accounting Department reports the following costs of producing the part at this level
of activity:
An outside supplier has offered to make the part and sell it to the company for $21.20
each. If this offer is accepted, the supervisor's salary and all of the variable costs,
including the direct labor, can be avoided. The special equipment used to make the
part was purchased many years ago and has no salvage value or other use. The
allocated general overhead represents fixed costs of the entire company, none of
which would be avoided if the part were purchased instead of produced internally. In
addition, the space used to make part N29 could be used to make more of one of the
company's other products, generating an additional segment margin of $29,000 per
year for that product. What would be the impact on the company's overall net
operating income of buying part N29 from the outside supplier?
A. Net operating income would decline by $38,900 per year.
B. Net operating income would increase by $29,000 per year.
C. Net operating income would decline by $32,600 per year.
D. Net operating income would increase by $19,100 per year.
41. Fillip Corporation makes 4,000 units of part U13 each year. This part is used in
one of the company's products. The company's
Accounting Department reports the following costs of producing the part at this level
of activity:
An outside supplier has offered to make and sell the part to the company for $21.60
each. If this offer is accepted, the supervisor's salary and all of the variable costs,
including direct labor, can be avoided. The special equipment used to make the part
was purchased many years ago and has no salvage value or other use. The
allocated general overhead represents fixed costs of the entire company. If the
outside supplier's offer were accepted, only $3,000 of these allocated general
overhead costs would be avoided. In addition, the space used to produce part U13
would be used to make more of one of the company's other products, generating an
additional segment margin of $13,000 per year for that product.
What would be the impact on the company's overall net operating income of buying
part U13 from the outside supplier?
A. Net operating income would increase by $13,000 per year.
B. Net operating income would decline by $42,600 per year.
C. Net operating income would decline by $68,600 per year.
D. Net operating income would increase by $9,200 per year.
42. Ethridge Corporation is presently making part H25 that is used in one of its
products. A total of 9,000 units of this part are produced and used every year. The
company's Accounting Department reports the following costs of producing the part
at this level of activity:
An outside supplier has offered to make and sell the part to the company for $15.40
each. If this offer is accepted, the supervisor's salary and all of the variable costs
can be avoided. The special equipment used to make the part was purchased many
years ago and has no salvage value or other use. The allocated general overhead
represents fixed costs of the entire company, none of which would be avoided if the
part were purchased instead of produced internally. If management decides to buy
part H25 from the outside supplier rather than to continue making the part, what
would be the annual impact on the company's overall net operating income?
A. Net operating income would increase by $24,300 per year.
B. Net operating income would decline by $24,300 per year.
C. Net operating income would increase by $58,500 per year.
D. Net operating income would decline by $58,500 per year.
43. Pitkin Company produces a part used in the manufacture of one of its products.
The unit product cost of the part is $33, computed as follows:
An outside supplier has offered to provide the annual requirement of 10,000 of the
parts for only $27 each. The company estimates that 30% of the fixed
manufacturing overhead costs above will continue if the parts are purchased from the
outside supplier.
Assume that direct labor is an avoidable cost in this decision. Based on these data,
the per unit dollar advantage or disadvantage of purchasing the parts from the
outside supplier would be:
A. $3 advantage
B. $1 advantage
C. $1 disadvantage
D. $4 disadvantage
44. A customer has requested that Inga Corporation fill a special order for 2,000 units
of product K81 for $25.00 a unit. While the product would be modified slightly for the
special order, product K81's normal unit product cost is $19.90:
Direct labor is a variable cost. The special order would have no effect on the
company's total fixed manufacturing overhead costs. The customer would like
modifications made to product K81 that would increase the variable costs by $1.20
per unit and that would require an investment of $10,000 in special molds that
would have no salvage value.
This special order would have no effect on the company's other sales. The company
has ample spare capacity for producing the special order. If the special order is
accepted, the company's overall net operating income would increase (decrease) by:
A. $13,000
B. $(9,700)
C. $10,200
D. $(2,200)
45. Rojo Corporation has received a request for a special order of 8,000 units of
product W68 for $27.20 each. Product W68's unit product cost is $18.50,
determined as follows:
Direct labor is a variable cost. The special order would have no effect on the
company's total fixed manufacturing overhead costs. The customer would like
modifications made to product W68 that would increase the variable costs by $7.90
per unit and that would require an investment of $31,000 in special molds that
would have no salvage value.
This special order would have no effect on the company's other sales. The company
has ample spare capacity for producing the special order. If the special order is
accepted, the company's overall net operating income would increase (decrease) by:
A. $(4,400)
B. $69,600
C. $30,600
D. $(24,600)
46. Ellis Television makes and sells portable televisions. Each television regularly
sells for $210. The following cost data per television is based on a full capacity of
10,000 televisions produced each period.
A special order has been received by Ellis for a sale of 2,000 televisions to an
overseas customer. The only selling costs that would be incurred on this order
would be $6 per television for shipping. Ellis is now selling 6,000 televisions through
regular channels each period. What should be the minimum selling price per
television in negotiating a price for this special order?
A. $174
B. $168
C. $210
D. $180
47. An automated turning machine is the current constraint at Naik Corporation.
Three products use this constrained resource.
Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be
emphasized.
A. OP, KU, YY
B. YY, OP, KU
C. KU, YY, OP
D. YY, KU, OP
48. Pappan Corporation makes three products that use compound W, the current
constrained resource. Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be
emphasized.
A. RH, GY, QF
B. GY, RH, QF
C. QF, GY, RH
D. RH, QF, GY
49. Consider the following production and cost data for two products, X and Y:
The company has 15,000 machine hours available each period, and there is
unlimited demand for each product. What is the largest possible total contribution
margin that can be realized each period?
A. $120,000
B. $125,000
C. $135,000
D. $150,000
50. The constraint at Mcglathery Corporation is time on a particular machine. The
company makes three products that use this machine. Data concerning those
products appear below:
Assume that sufficient time is available on the constrained machine to satisfy
demand for all but the least profitable product.
Up to how much should the company be willing to pay to acquire more of the
constrained resource?
A. $75.26 per unit
B. $38.94 per unit
C. $11.80 per minute
D. $15.20 per minute
51. Wright Company produces products I, J, and K from a single raw material input.
Budgeted data for the next month follows:
If the cost of the raw material input is $78,000, which of the products should be
processed beyond the split-off point?
A. Option A
B. Option B
C. Option C
D. Option D
52. Two products, IF and RI, emerge from a joint process. Product IF has been
allocated $25,300 of the total joint costs of $46,000. A total of 2,000 units of product
IF are produced from the joint process. Product IF can be sold at the split-off point
for $11 per unit, or it can be processed further for an additional total cost of $10,000
and then sold for $13 per unit. If product IF is processed further and sold, what
would be the effect on the overall profit of the company compared with sale in its
unprocessed form directly after the split-off point?
A. $31,300 less profit
B. $6,000 less profit
C. $16,000 more profit
D. $19,300 more profit
53. Coakley Beet Processors, Inc., processes sugar beets in batches. A batch of
sugar beets costs $48 to buy from farmers and $10 to crush in the company's plant.
Two intermediate products, beet fiber and beet juice, emerge from the crushing
process. The beet fiber can be sold as is for $24 or processed further for $16 to
make the end product industrial fiber that is sold for $36. The beet juice can be sold
as is for $44 or processed further for $28 to make the end product refined sugar that
is sold for $70. How much profit (loss) does the company make by processing the
intermediate product beet juice into refined sugar rather than selling it as is?
A. $(31)
B. $(60)
C. $(2)
D. $(12)
54. Galluzzo Corporation processes sugar beets in batches. A batch of sugar beets
costs $51 to buy from farmers and $14 to crush in the company's plant. Two
intermediate products, beet fiber and beet juice, emerge from the crushing process.
The beet fiber can be sold as is for $20 or processed further for $18 to make the
end product industrial fiber that is sold for $45. The beet juice can be sold as is for
$41 or processed further for $21 to make the end product refined sugar that is sold
for $62. How much profit (loss) does the company make by processing one batch of
sugar beets into the end products industrial fiber and refined sugar?
A. $(104)
B. $(4)
C. $7
D. $3
55. Beilke Corporation processes sugar beets in batches that it purchases from
farmers for $53 a batch. A batch of sugar beets costs $12 to crush in the company's
plant. Two intermediate products, beet fiber and beet juice, emerge from the
crushing process. The beet fiber can be sold as is for $20 or processed further for
$10 to make the end product industrial fiber that is sold for $26. The beet juice can
be sold as is for $30 or processed further for $29 to make the end product refined
sugar that is sold for $79. Which of the intermediate products should be processed
further?
A. beet fiber should be processed into industrial fiber; beet juice should be processed
into refined sugar
B. beet fiber should NOT be processed into industrial fiber; beet juice should be
processed into refined sugar
C. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be
processed into refined sugar
D. beet fiber should be processed into industrial fiber; beet juice should NOT be
processed into refined sugar
56. Zollars Cane Products, Inc., processes sugar cane in batches. The company
buys a batch of sugar cane from farmers for $70 which is then crushed in the
company's plant at a cost of $19. Two intermediate products, cane fiber and cane
juice, emerge from the crushing process. The cane fiber can be sold as is for $21 or
processed further for $13 to make the end product industrial fiber that is sold for
$42. The cane juice can be sold as is for $44 or processed further for $26 to make
the end product molasses that is sold for $88. How much profit (loss) does the
company make by processing one batch of sugar cane into the end products
industrial fiber and molasses?
A. $26
B. $2
C. $(24)
D. $(128)
57. Kempler Corporation processes sugar cane in batches. The company purchases
a batch of sugar cane for $34 from farmers and then crushes the cane in the
company's plant at the cost of $15. Two intermediate products, cane fiber and cane
juice, emerge from the crushing process. The cane fiber can be sold as is for $26 or
processed further for $17 to make the end product industrial fiber that is sold for
$41. The cane juice can be sold as is for $32 or processed further for $22 to make
the end product molasses that is sold for $51. Which of the intermediate products
should be processed further?
A. Cane fiber should be processed into industrial fiber; Cane juice should be
processed into molasses
B. Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT
be processed into molasses
C. Cane fiber should be processed into industrial fiber; Cane juice should NOT be
processed into molasses
D. Cane fiber should NOT be processed into industrial fiber; Cane juice should be
processed into molasses Two alternatives, code-named X and Y, are under
consideration at Afalava Corporation. Costs associated with the alternatives are
listed below.
58. Are the materials costs and processing costs relevant in the choice between
alternatives X and Y/ (Ignore the equipment rental and occupancy costs in this
question.)
A. Only materials costs are relevant
B. Only processing costs are relevant
C. Both materials costs and processing costs are relevant
D. Neither materials costs nor processing costs are relevant
59. What is the differential cost of Alternative Y over Alternative X, including all of the
relevant costs?
A. $103,000
B. $39,000
C. $142,000
D. $122,500 Zurasky Corporation is considering two alternatives: A and B. Costs
associated with the alternatives are listed below:
60. Are the materials costs and processing costs relevant in the choice between
alternatives A and B/ (Ignore the equipment rental and occupancy costs in this
question.)
A. Neither materials costs nor processing costs are relevant
B. Only processing costs are relevant
C. Only materials costs are relevant
D. Both materials costs and processing costs are relevant
61. What is the differential cost of Alternative B over Alternative A, including all of the
relevant costs?
A. $44,000
B. $149,000
C. $105,000
D. $127,000 Austin Wool Products purchases raw wool and processes it into yarn.
The spindles of yarn can then be sold directly to stores or they can be used by
Austin Wool Products to make afghans. Each afghan requires one spindle of yarn.
Current cost and revenue data for the spindles of yarn and for the afghans are as
follows:
Each month 4,000 spindles of yarn are produced that can either be sold outright or
processed into afghans.
62. If Austin chooses to produce 4,000 afghans each month, the change in the
monthly net operating income as compared to selling
4,000 spindles of yarn is:
A. $24,000 decrease
B. $24,000 increase
C. $16,000 decrease
D. $16,000 increase
63. What is the lowest price Austin should be willing to accept for one afghan as long
as it can sell spindles of yarn to the outside market for $12 each?
A. $32
B. $30
C. $28
D. $26 The Tingey Company has 500 obsolete microcomputers that are carried in
inventory at a total cost of $720,000. If these microcomputers are upgraded at a
total cost of $100,000, they can be sold for a total of $160,000. As an alternative,
the microcomputers can be sold in their present condition for $50,000.
64. The sunk cost in this situation is:
A. $720,000
B. $160,000
C. $50,000
D. $100,000
65. What is the net advantage or disadvantage to the company from upgrading the
computers rather than selling them in their present condition?
A. $110,000 advantage
B. $660,000 disadvantage
C. $10,000 advantage
D. $60,000 advantage
66. Suppose the selling price of the upgraded computers has not been set. At what
selling price per unit would the company be as well off upgrading the computers as
if it just sold the computers in their present condition?
A. $100
B. $770
C. $300
D. $210 The management of Fries Corporation has been concerned for some time
with the financial performance of its product R89H and has considered
discontinuing it on several occasions. Data from the company's accounting system
appear below:
In the company's accounting system all fixed expenses of the company are fully
allocated to products. Further investigation has revealed that $31,000 of the fixed
manufacturing expenses and $46,000 of the fixed selling and administrative
expenses are avoidable if product R89H is discontinued.
67. According to the company's accounting system, what is the net operating income
earned by product R89H?
A. $143,000
B. $8,000
C. $(8,000)
D. $(143,000)
68. What would be the effect on the company's overall net operating income if
product R89H were dropped?
A. Overall net operating income would decrease by $66,000.
B. Overall net operating income would decrease by $8,000.
C. Overall net operating income would increase by $66,000.
D. Overall net operating income would increase by $8,000. The management of
Freshwater Corporation is considering dropping product C11B. Data from the
company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's
accounting system. Further investigation has revealed that $211,000 of the fixed
manufacturing expenses and $122,000 of the fixed selling and administrative
expenses are avoidable if product C11B is discontinued.
69. According to the company's accounting system, what is the net operating income
earned by product C11B?
A. $74,000
B. $(521,000)
C. $(74,000)
D. $521,000
70. What would be the effect on the company's overall net operating income if
product C11B were dropped?
A. Overall net operating income would decrease by $188,000.
B. Overall net operating income would increase by $74,000.
C. Overall net operating income would decrease by $74,000.
D. Overall net operating income would increase by $188,000. The Western
Company is considering the addition of a new product to its current product lines.
The expected cost and revenue data for the new product are as follows:
If the new product is added to the existing product line, then sales of existing
products will decline. As a consequence, the contribution margin of the other
existing product lines is expected to drop $78,000 per year.
71. If the new product is added next year, the increase in net operating income
resulting from this decision would be:
A. $387,000
B. $261,000
C. $183,000
D. $207,000
72. What is the lowest selling price per unit among those listed below that could be
charged for the new product and still make it economically desirable to add the new
product?
A. $240
B. $222
C. $291
D. $249 Condensed monthly operating income data for Cosmo Inc. for November
is presented below. Additional information regarding Cosmo's operations follows the
statement.
Three-quarters of each store's traceable fixed expenses are avoidable if the store
were to be closed.
Cosmo allocates common fixed expenses to each store on the basis of sales dollars.
Management estimates that closing the Town Store would result in a ten percent
decrease in Mall Store sales, while closing the
Mall Store would not affect Town Store sales.
The operating results for November are representative of all months.
73. A decision by Cosmo Inc. to close the Town Store would result in a monthly
increase (decrease) in Cosmo's operating income of:
A. $4,000
B. $(10,800)
C. $(800)
D. $(6,000)
74. Cosmo is considering a promotional campaign at the Town Store that would not
affect the Mall Store. Increasing annual promotional expenses at the Town Store by
$60,000 in order to increase Town Store sales by ten percent would result in a
monthly increase (decrease) in Cosmo's operating income of:
A. $(16,800)
B. $3,400
C. $7,000
D. $(1,400) The Cabinet Shoppe is considering the addition of a new line of
kitchen cabinets to its current product lines. Expected cost and revenue data for the
new cabinets are as follows:
If the new cabinets are added, it is expected that the contribution margin of other
product lines at the cabinet shop will drop by $20,000 per year.
75. If the new cabinet product line is added next year, the increase in net operating
income resulting from this decision would be:
A. $80,000
B. $225,000
C. $125,000
D. $105,000
76. What is the lowest selling price per unit that could be charged for the new
cabinets from the following list and still make it economically desirable to add the
new product line?
A. $160
B. $164
C. $171
D. $151 Knaack Corporation is presently making part R20 that is used in one of its
products. A total of 18,000 units of this part are produced and used every year. The
company's Accounting Department reports the following costs of producing the part
at this level of activity:
An outside supplier has offered to produce and sell the part to the company for
$27.70 each. If this offer is accepted, the supervisor's salary and all of the variable
costs, including direct labor, can be avoided. The special equipment used to make
the part was purchased many years ago and has no salvage value or other use.
The allocated general overhead represents fixed costs of the entire company, none
of which would be avoided if the part were purchased instead of produced internally.
77. If management decides to buy part R20 from the outside supplier rather than to
continue making the part, what would be the annual impact on the company's
overall net operating income?
A. Net operating income would increase by $162,000 per year.
B. Net operating income would increase by $50,400 per year.
C. Net operating income would decline by $50,400 per year.
D. Net operating income would decline by $162,000 per year.
78. In addition to the facts given above, assume that the space used to produce part
R20 could be used to make more of one of the company's other products,
generating an additional segment margin of $27,000 per year for that product. What
would be the impact on the company's overall net operating income of buying part
R20 from the outside supplier and using the freed space to make more of the other
product?
A. Net operating income would increase by $27,000 per year.
B. Net operating income would decline by $135,000 per year.
C. Net operating income would decline by $23,400 per year.
D. Net operating income would decline by $189,000 per year. Meltzer Corporation
is presently making part O13 that is used in one of its products. A total of 3,000 units
of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of
activity:
An outside supplier has offered to produce and sell the part to the company for
$27.00 each. If this offer is accepted, the supervisor's salary and all of the variable
costs, including direct labor, can be avoided. The special equipment used to make
the part was purchased many years ago and has no salvage value or other use.
The allocated general overhead represents fixed costs of the entire company. If the
outside supplier's offer were accepted, only $3,000 of these allocated general
overhead costs would be avoided.
79. If management decides to buy part O13 from the outside supplier rather than to
continue making the part, what would be the annual impact on the company's
overall net operating income?
A. Net operating income would decline by $23,100 per year.
B. Net operating income would decline by $26,100 per year.
C. Net operating income would decline by $20,100 per year.
D. Net operating income would decline by $8,700 per year.
80. In addition to the facts given above, assume that the space used to produce part
O13 could be used to make more of one of the company's other products,
generating an additional segment margin of $26,000 per year for that product. What
would be the impact on the company's overall net operating income of buying part
O13 from the outside supplier and using the freed space to make more of the other
product?
A. Net operating income would decline by $49,100 per year.
B. Net operating income would increase by $26,000 per year.
C. Net operating income would increase by $2,900 per year.
D. Net operating income would increase by $17,300 per year. Ahsan Company
makes 60,000 units per year of a part it uses in the products it manufactures. The
unit product cost of this part is computed as follows:
An outside supplier has offered to sell the company all of these parts it needs for
$45.70 a unit. If the company accepts this offer, the facilities now being used to
make the part could be used to make more units of a product that is in high demand.
The additional contribution margin on this other product would be $318,000 per
year.
If the part were purchased from the outside supplier, all of the direct labor cost of the
part would be avoided. However, $3.50 of the fixed manufacturing overhead cost
being applied to the part would continue even if the part were purchased from the
outside supplier. This fixed manufacturing overhead cost would be applied to the
company's remaining products.
81. How much of the unit product cost of $40.50 is relevant in the decision of whether
to make or buy the part?
A. $40.50
B. $15.20
C. $27.90
D. $37.00
82. What is the net total dollar advantage (disadvantage) of purchasing the part
rather than making it?
A. $318,000
B. $(522,000)
C. $(312,000)
D. $(204,000)
83. What is the maximum amount the company should be willing to pay an outside
supplier per unit for the part if the supplier commits to supplying all 60,000 units
required each year?
A. $40.50
B. $42.30
C. $45.80
D. $5.30 Talboe Company makes wheels which it uses in the production of
children's wagons. Talboe's costs to produce 200,000 wheels annually are as
follows:
An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If
the wheels are purchased from the outside supplier, $25,000 of annual fixed
manufacturing overhead would be avoided and the facilities now being used to make
the wheels would be rented to another company for $55,000 per year.
84. If Talboe chooses to buy the wheel from the outside supplier, then the change in
annual net operating income is a:
A. $5,000 decrease
B. $50,000 increase
C. $70,000 increase
D. $40,000 increase
85. What is the highest price that Talboe could pay the outside supplier for each
wheel and still be economically indifferent between making or buying the wheels?
A. $0.95
B. $1.15
C. $1.00
D. $1.05 The Rodgers Company makes 27,000 units of a certain component each
year for use in one of its products. The cost per unit for the component at this level
of activity is as follows:
Rodgers has received an offer from an outside supplier who is willing to provide
27,000 units of this component each year at a price of $25 per component. Assume
that direct labor is a variable cost. None of the fixed manufacturing overhead would
be avoidable if this component were purchased from the outside supplier.
86. Assume that there is no other use for the capacity now being used to produce the
component and the total fixed manufacturing overhead of the company would be
unaffected by this decision. If Rodgers Company purchases the components rather
than making them internally, what would be the impact on the company's annual net
operating income?
A. $94,500 increase
B. $81,000 decrease
C. $237,600 decrease
D. $124,000 increase
87. Assume that if the component is purchased from the outside supplier, $35,100 of
annual fixed manufacturing overhead would be avoided and the facilities now being
used to make the component would be rented to another company for $64,800 per
year. If
Rodgers chooses to buy the component from the outside supplier under these
circumstances, then the impact on annual net operating income due to accepting
the offer would be:
A. $18,900 decrease
B. $18,900 increase
C. $21,400 decrease
D. $21,400 increase Meacham Company has traditionally made a subcomponent
of its major product. Annual production of 20,000 subcomponents results in the
following costs:
Meacham has received an offer from an outside supplier who is willing to provide
20,000 units of this subcomponent each year at a price of $28 per subcomponent.
Meacham knows that the facilities now being used to make the subcomponent would
be rented to another company for $75,000 per year if the subcomponent were
purchased from the outside supplier. Otherwise, the fixed overhead would be
unaffected.
88. If Meacham decides to purchase the subcomponent from the outside supplier,
how much higher or lower will net operating income be than if Meacham continued
to make the subcomponent?
A. $45,000 higher
B. $70,000 higher
C. $30,000 lower
D. $70,000 lower
89. Suppose the price for the subcomponent has not been set. At what price per unit
charged by the outside supplier would Meacham be economically indifferent
between making the subcomponent or buying it from the outside?
A. $30.25
B. $29.25
C. $26.50
D. $31.50 Elhard Company produces a single product. The cost of producing and
selling a single unit of this product at the company's normal activity level of 40,000
units per month is as follows:
The normal selling price of the product is $51.10 per unit.
An order has been received from an overseas customer for 2,000 units to be
delivered this month at a special discounted price.
This order would have no effect on the company's normal sales and would not
change the total amount of the company's fixed costs.
The variable selling and administrative expense would be $0.10 less per unit on this
order than on normal sales.
Direct labor is a variable cost in this company.
90. Suppose there is ample idle capacity to produce the units required by the
overseas customer and the special discounted price on the special order is $41.60
per unit. By how much would this special order increase (decrease) the company's
net operating income for the month?
A. $2,000
B. $25,200
C. $(8,400)
D. $(18,800)
91. Suppose the company is already operating at capacity when the special order is
received from the overseas customer. What would be the opportunity cost of each
unit delivered to the overseas customer?
A. $5.40
B. $5.30
C. $9.50
D. $22.00
92. Suppose there is not enough idle capacity to produce all of the units for the
overseas customer and accepting the special order would require cutting back on
production of 200 units for regular customers. The minimum acceptable price per unit
for the special order is closest to:
A. $38.80
B. $31.20
C. $51.10
D. $45.80 The Varone Company makes a single product called a Hom. The
company has the capacity to produce 40,000 Homs per year. Per unit costs to
produce and sell one Hom at that activity level are:
The regular selling price for one Hom is $60. A special order has been received at
Varone from the Fairview Company to purchase
8,000 Homs next year at 15% off the regular selling price. If this special order were
accepted, the variable selling expense would be reduced by 25%. However, Varone
would have to purchase a specialized machine to engrave the Fairview name on
each Hom in the special order. This machine would cost $12,000 and it would have
no use after the special order was filled. The total fixed costs, both manufacturing
and selling, are constant within the relevant range of 30,000 to 40,000 Homs per
year. Assume direct labor is a variable cost.
93. If Varone can expect to sell 32,000 Homs next year through regular channels and
the special order is accepted at 15% off the regular selling price, the effect on net
operating income next year due to accepting this order would be a:
A. $52,000 increase
B. $80,000 increase
C. $24,000 decrease
D. $68,000 increase
94. If Varone can expect to sell 32,000 Homs next year through regular channels, at
what special order price from Fairview should
Varone be economically indifferent between either accepting or not accepting this
special order?
A. $51.00
B. $48.20
C. $42.50
D. $39.60
95. If Varone has an opportunity to sell 37,960 Homs next year through regular
channels and the special order is accepted for 15% off the regular selling price, the
effect on net operating income next year due to accepting this order would be a:
A. $33,320 decrease
B. $33,320 increase
C. $35,480 decrease
D. $35,480 increase The Immanuel Company has just obtained a request for a
special order of 6,000 jigs to be shipped at the end of the month at a selling price of
$7 each. The company has a production capacity of 90,000 jigs per month with total
fixed production costs of $144,000. At present, the company is selling 80,000 jigs
per month through regular channels at a selling price of $11 each. For these regular
sales, the cost for one jig is:
If the special order is accepted, Immanuel will not incur any selling expense;
however, it will incur shipping costs of $0.30 per unit. Total fixed production cost
would not be affected by this order.
96. If Immanuel accepts this special order, the change in monthly net operating
income will be a:
A. $12,600 increase
B. $14,400 increase
C. $3,600 increase
D. $1,800 increase
97. At what selling price per unit should Immanuel be indifferent between accepting
or rejecting the special offer?
A. $7.40
B. $7.70
C. $6.40
D. $4.90
98. Suppose that regular sales of jigs total 85,000 units per month. All other
conditions remain the same. If Immanuel accepts the special order, the change in
monthly net operating income will be:
A. $14,400 increase
B. $7,200 increase
C. $3,600 decrease
D. $5,400 decrease Mckerchie Inc. manufactures industrial components. One of its
products, which is used in the construction of industrial air conditioners, is known as
G62. Data concerning this product are given below:
The above per unit data are based on annual production of 9,000 units of the
component. Direct labor can be considered to be a variable cost.
99. The company has received a special, one-time-only order for 300 units of
component G62. There would be no variable selling expense on this special order
and the total fixed manufacturing overhead and fixed selling and administrative
expenses of the company would not be affected by the order. Assuming that
Mckerchie has excess capacity and can fill the order without cutting back on the
production of any product, what is the minimum price per unit on the special order
below which the company should not go?
A. $26
B. $67
C. $55
D. $160
100. The company has received a special, one-time-only order for 300 units of
component G62. There would be no variable selling expense on this special order
and the total fixed manufacturing overhead and fixed selling and administrative
expenses of the company would not be affected by the order. However, assume
that Mckerchie has no excess capacity and this special order would require 50
minutes of the constraining resource, which could be used instead to produce
products with a total contribution margin of $6,900. What is the minimum price per
unit on the special order below which the company should not go?
A. $90
B. $23
C. $49
D. $78
101. Refer to the original data in the problem. What is the current contribution margin
per unit for component G62 based on its selling price of $160 and its annual
production of 9,000 units?
A. $28
B. $134
C. $93
D. $132 The constraint at Dalbey Corporation is time on a particular machine. The
company makes three products that use this machine.
Data concerning those products appear below:
102. Rank the products in order of their current profitability from most profitable to
least profitable. In other words, rank the products in the order in which they should
be emphasized.
A. WP, FE, MB
B. FE, WP, MB
C. FE, MB, WP
D. MB, FE, WP
103. Assume that sufficient time is available on the constrained machine to satisfy
demand for all but the least profitable product. Up to how much should the company
be willing to pay to acquire more of this constrained resource?
A. $12.50 per minute
B. $29.96 per unit
C. $10.70 per minute
D. $71.92 per unit
104. Rank the products in order of their current profitability from most profitable to
least profitable. In other words, rank the products in the order in which they should
be emphasized.
A. KZ, XB, ZP
B. ZP, KZ, XB
C. XB, ZP, KZ
D. KZ, ZP, XB
105. Assume that sufficient constraint time is available to satisfy demand for all but
the least profitable product. Up to how much should the company be willing to pay
to acquire more of the constrained resource?
A. $14.30 per minute
B. $14.80 per minute
C. $33.81 per unit
D. $118.69 per unit Cress Company makes four products in a single facility. Data
concerning these products appear below:
The milling machines are potentially the constraint in the production facility. A total of
11,500 minutes are available per month on these machines.
106. How many minutes of milling machine time would be required to satisfy demand
for all four products?
A. 12,000
B. 10,800
C. 9,000
D. 11,500
107. Which product makes the LEAST profitable use of the milling machines?
A. Product A
B. Product B
C. Product C
D. Product D
108. Which product makes the MOST profitable use of the milling machines?
A. Product A
B. Product B
C. Product C
D. Product D
109. Up to how much should the company be willing to pay for one additional minute
of milling machine time if the company has made the best use of the existing milling
machine capacity/ (Round off to the nearest whole cent.)
A. $7.46
B. $15.20
C. $19.40
D. $0.00 Broze Company makes four products in a single facility. These products
have the following unit product costs:
Additional data concerning these products are listed below.
The grinding machines are potentially the constraint in the production facility. A total
of 53,600 minutes are available per month on these machines.
Direct labor is a variable cost in this company.
110. How many minutes of grinding machine time would be required to satisfy
demand for all four products?
A. 56,100
B. 40,900
C. 53,600
D. 13,000
111. Which product makes the LEAST profitable use of the grinding machines?
A. Product A
B. Product B
C. Product C
D. Product D
112. Which product makes the MOST profitable use of the grinding machines?
A. Product A
B. Product B
C. Product C
D. Product D
113. Up to how much should the company be willing to pay for one additional minute
of grinding machine time if the company has made the best use of the existing
grinding machine capacity/ (Round off to the nearest whole cent.)
A. $35.90
B. $0.00
C. $8.58
D. $11.60 Dunford Company produces three products with the following costs and
selling prices:
114. If Dunford has a limit of 20,000 direct labor hours but no limit on units sold or
machine hours, then the ranking of the products from the most profitable to the least
profitable use of the constrained resource is:
A. X, Y, Z
B. Y, Z, X
C. X, Z, Y
D. Z, Y, X
115. If Dunford has a limit of 30,000 machine hours but no limit on units sold or direct
labor hours, then the ranking of the products from the most profitable to the least
profitable use of the constrained resource is:
A. Y, Z, X
B. X, Y, Z
C. X, Z, Y
D. Z, X, Y Sohr Corporation processes sugar beets that it purchases from farmers.
Sugar beets are processed in batches. A batch of sugar beets costs $50 to buy
from farmers and $15 to crush in the company's plant. Two intermediate products,
beet fiber and beet juice, emerge from the crushing process. The beet fiber can be
sold as is for $20 or processed further for $19 to make the end product industrial
fiber that is sold for $58. The beet juice can be sold as is for $41 or processed further
for $23 to make the end product refined sugar that is sold for $58.
116. How much profit (loss) does the company make by processing one batch of
sugar beets into the end products industrial fiber and refined sugar?
A. $(107)
B. $(4)
C. $9
D. $13
117. How much profit (loss) does the company make by processing the intermediate
product beet juice into refined sugar rather than selling it as is?
A. $(71)
B. $(6)
C. $(39)
D. $(21)
118. Which of the intermediate products should be processed further?
A. beet fiber should NOT be processed into industrial fiber; beet juice should be
processed into refined sugar
B. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be
processed into refined sugar
C. beet fiber should be processed into industrial fiber; beet juice should be processed
into refined sugar
D. beet fiber should be processed into industrial fiber; beet juice should NOT be
processed into refined sugar Resendes Refiners, Inc., processes sugar cane that it
purchases from farmers. Sugar cane is processed in batches. A batch of sugar
cane costs $48 to buy from farmers and $16 to crush in the company's plant. Two
intermediate products, cane fiber and cane juice, emerge from the crushing
process. The cane fiber can be sold as is for $24 or processed further for $17 to
make the end product industrial fiber that is sold for $38. The cane juice can be sold
as is for $34 or processed further for $23 to make the end product molasses that is
sold for $76.
119. How much profit (loss) does the company make by processing one batch of
sugar cane into the end products industrial fiber and molasses?
A. $16
B. $(104)
C. $(6)
D. $10
120. How much profit (loss) does the company make by processing the intermediate
product cane juice into molasses rather than selling it as is?
A. $3
B. $19
C. $(45)
D. $(13)
121. Which of the intermediate products should be processed further?
A. Cane fiber should NOT be processed into industrial fiber; Cane juice should be
processed into molasses
B. Cane fiber should be processed into industrial fiber; Cane juice should be
processed into molasses
C. Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT
be processed into molasses
D. Cane fiber should be processed into industrial fiber; Cane juice should NOT be
processed into molasses Dodrill Company makes two products from a common
input. Joint processing costs up to the split-off point total $43,200 a year.
The company allocates these costs to the joint products on the basis of their total
sales values at the split-off point. Each product may be sold at the split-off point or
processed further. Data concerning these products appear below:
122. What is the net monetary advantage (disadvantage) of processing Product X
beyond the split-off point?
A. $26,800
B. $7,000
C. $4,800
D. $29,000
123. What is the net monetary advantage (disadvantage) of processing Product Y
beyond the split-off point?
A. $(4,200)
B. $21,800
C. $24,400
D. $(1,600)
124. What is the minimum amount the company should accept for Product X if it is to
be sold at the split-off point?
A. $26,800
B. $19,800
C. $52,200
D. $45,200 Payne Company makes two products, M and N, in a joint process. At
the split-off point, 40,000 units of M and 50,000 units of N are available each month.
Monthly joint production costs are $270,000.
Product M can be sold at the split-off point for $4.20 per unit. Product N can either be
sold at the split-off point for $3.20 per unit or it can be processed further and sold for
$6.30 per unit. If N is processed further, additional processing costs of $2.50 per
unit will be incurred.
125. If N is processed further and then sold, rather than being sold at the split-off
point, the change in monthly operating income would be a:
A. $30,000 increase
B. $315,000 increase
C. $155,000 increase
D. $125,000 decrease
126. What would the selling price per unit of product N need to be after further
processing in order for Payne Company to be economically indifferent between
selling N at the split-off point or processing N further?
A. $8.70
B. $6.70
C. $7.20
D. $5.70
Essay Questions
127. Marcell Corporation is considering two alternatives that are code-named M and
N. Costs associated with the alternatives are listed below:
Required:
a. Which costs are relevant and which are not relevant in the choice between these
two alternatives?
b. What is the differential cost between the two alternatives?
128. Costs associated with two alternatives, code-named Q and R, being considered
by Corniel Corporation are listed below:
Required:
a. Which costs are relevant and which are not relevant in the choice between these
two alternatives?
b. What is the differential cost between the two alternatives?
129. The management of Therriault Corporation is considering dropping product
U51Y. Data from the company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's
accounting system. Further investigation has revealed that $280,000 of the fixed
manufacturing expenses and $140,000 of the fixed selling and administrative
expenses are avoidable if product U51Y is discontinued.
Required:
What would be the effect on the company's overall net operating income if product
U51Y were dropped? Should the product be dropped? Show your work!
130. Nutall Corporation is considering dropping product N28X. Data from the
company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's
accounting system. Further investigation has revealed that $199,000 of the fixed
manufacturing expenses and $114,000 of the fixed selling and administrative
expenses are avoidable if product N28X is discontinued.
Required:
a. According to the company's accounting system, what is the net operating income
earned by product N28X? Show your work!
b. What would be the effect on the company's overall net operating income of
dropping product N28X? Should the product be dropped? Show your work!
131. The management of Rodarmel Corporation is considering dropping product
G91Q. Data from the company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's
accounting system. Further investigation has revealed that $57,000 of the fixed
manufacturing expenses and $40,000 of the fixed selling and administrative
expenses are avoidable if product G91Q is discontinued.
Required:
a. What is the net operating income earned by product G91Q according to the
company's accounting system? Show your work!
b. What would be the effect on the company's overall net operating income of
dropping product G91Q? Should the product be dropped? Show your work!
132. Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following
product-line income data:
The following additional information is available: * The factory rent of $1,500
assigned to Product C is avoidable if the product were dropped. * The company's
total depreciation would not be affected by dropping C. * Eliminating Product C will
reduce the monthly utility bill from $1,500 to $800. * All supervisors' salaries are
avoidable. * If Product C is discontinued, the maintenance department will be able to
reduce monthly expenses from $3,000 to $2,000. * Elimination of Product C will
make it possible to cut two persons from the administrative staff; their combined
salaries total $3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.
133. The Hayes Company manufactures and sells several products, one of which is
called a slip differential. The company normally sells 30,000 units of the slip
differential each month. At this activity level, unit costs are:
An outside supplier has offered to produce the slip differentials for the Hayes
Company, and to ship them directly to the Hayes
Company's customers. This arrangement would permit the Hayes Company to
reduce its variable selling expenses by one third (due to elimination of freight costs).
The facilities now being used to produce the slip differentials would be idle and fixed
manufacturing overhead would continue at 60 percent of its present level. The total
fixed selling expenses of the company would be unaffected by this decision.
Required:
What is the maximum acceptable price quotation for the slip differentials from the
outside supplier?
134. Bady Inc. makes a range of products. The company's predetermined overhead
rate is $14 per direct labor-hour, which was calculated using the following budgeted
data:
Component M3 is used in one of the company's products. The unit cost of the
component according to the company's cost accounting system is determined as
follows:
An outside supplier has offered to supply component M3 for $108 each. The outside
supplier is known for quality and reliability.
Assume that direct labor is a variable cost, variable manufacturing overhead is really
driven by direct labor-hours, and total fixed manufacturing overhead would not be
affected by this decision. Bady chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?
135. Kramer Company makes 4,000 units per year of a part called an axial tap for
use in one of its products. Data concerning the unit production costs of the axial tap
follow:
An outside supplier has offered to sell Kramer Company all of the axial taps it
requires. If Kramer Company decided to discontinue making the axial taps, 40% of
the above fixed manufacturing overhead costs could be avoided. Assume that direct
labor is a variable cost.
Required:
a. Assume Kramer Company has no alternative use for the facilities presently
devoted to production of the axial taps. If the outside supplier offers to sell the axial
taps for $65 each, should Kramer Company accept the offer? Fully support your
answer with appropriate calculations.
b. Assume that Kramer Company could use the facilities presently devoted to
production of the axial taps to expand production of another product that would yield
an additional contribution margin of $80,000 annually. What is the maximum price
Kramer Company should be willing to pay the outside supplier for axial
taps?
136. Masse Corporation uses part G18 in one of its products. The company's
Accounting Department reports the following costs of producing the 16,000 units of
the part that are needed every year.
An outside supplier has offered to make the part and sell it to the company for $28.00
each. If this offer is accepted, the supervisor's salary and all of the variable costs,
including direct labor, can be avoided. The special equipment used to make the part
was purchased many years ago and has no salvage value or other use. The
allocated general overhead represents fixed costs of the entire company. If the
outside supplier's offer were accepted, only $22,000 of these allocated general
overhead costs would be avoided. In addition, the space used to produce part G18
could be used to make more of one of the company's other products, generating an
additional segment margin of $22,000 per year for that product.
Required:
a. Prepare a report that shows the effect on the company's total net operating income
of buying part G18 from the supplier rather than continuing to make it inside the
company.
b. Which alternative should the company choose?
137. Part E43 is used in one of Ran Corporation's products. The company's
Accounting Department reports the following costs of producing the 12,000 units of
the part that are needed every year.
An outside supplier has offered to make the part and sell it to the company for $14.70
each. If this offer is accepted, the supervisor's salary and all of the variable costs,
including direct labor, can be avoided. The special equipment used to make the part
was purchased many years ago and has no salvage value or other use. The
allocated general overhead represents fixed costs of the entire company. If the
outside supplier's offer were accepted, only $5,000 of these allocated general
overhead costs would be avoided.
Required:
a. Prepare a report that shows the effect on the company's total net operating income
of buying part E43 from the supplier rather than continuing to make it inside the
company.
b. Which alternative should the company choose?
138. Foulds Company makes 10,000 units per year of a part it uses in the products it
manufactures. The unit product cost of this part is computed as follows:
An outside supplier has offered to sell the company all of these parts it needs for
$42.30 a unit. If the company accepts this offer, the facilities now being used to
make the part could be used to make more units of a product that is in high demand.
The additional contribution margin on this other product would be $39,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the
part would be avoided. However, $6.40 of the fixed manufacturing overhead cost
being applied to the part would continue even if the part were purchased from the
outside supplier. This fixed manufacturing overhead cost would be applied to the
company's remaining products.
Required:
a. How much of the unit product cost of $47.90 is relevant in the decision of whether
to make or buy the part?
b. What is the net total dollar advantage (disadvantage) of purchasing the part rather
than making it?
c. What is the maximum amount the company should be willing to pay an outside
supplier per unit for the part if the supplier commits to supplying all 10,000 units
required each year?
139. Jerston Company has an annual plant capacity of 3,000 units. Data concerning
this product are given below:
The company has received a special order for 500 units at a selling price of $45
each. Regular sales would not be affected, and sales commissions on the 500 units
would be reduced by one-third. This special order would have no impact on total
fixed costs.
Required:
140. Nowlan Co. manufactures and sells trophies for winners of athletic and other
events. Its manufacturing plant has the capacity to produce 11,000 trophies each
month; current monthly production is 8,800 trophies. The company normally charges
$87 per trophy. Cost data for the current level of production are shown below:
The company has just received a special one-time order for 500 trophies at $50
each. For this particular order, no variable selling and administrative costs would be
incurred. This order would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?
141. Holtrop Corporation has received a request for a special order of 9,000 units of
product Z74 for $46.50 each. The normal selling price of this product is $51.60
each, but the units would need to be modified slightly for the customer. The normal
unit product cost of product Z74 is computed as follows:
Direct labor is a variable cost. The special order would have no effect on the
company's total fixed manufacturing overhead costs. The customer would like some
modifications made to product Z74 that would increase the variable costs by $6.20
per unit and that would require a one-time investment of $46,000 in special molds
that would have no salvage value. This special order would have no effect on the
company's other sales. The company has ample spare capacity for producing the
special order.
Required:
Determine the effect on the company's total net operating income of accepting the
special order. Show your work!
142. Rothery Co. manufactures and sells medals for winners of athletic and other
events. Its manufacturing plant has the capacity to produce 18,000 medals each
month; current monthly production is 17,100 medals. The company normally charges
$88 per medal.
Cost data for the current level of production are shown below:
The company has just received a special one-time order for 600 medals at $73 each.
For this particular order, no variable selling and administrative costs would be
incurred. This order would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?
143. Humes Corporation makes a range of products. The company's predetermined
overhead rate is $16 per direct labor-hour, which was calculated using the following
budgeted data:
Management is considering a special order for 700 units of product J45K at $64
each. The normal selling price of product J45K is $75 and the unit product cost is
determined as follows:
If the special order were accepted, normal sales of this and other products would not
be affected. The company has ample excess capacity to produce the additional
units. Assume that direct labor is a variable cost, variable manufacturing overhead is
really driven by direct labor-hours, and total fixed manufacturing overhead would not
be affected by the special order.
Required:
If the special order were accepted, what would be the impact on the company's
overall profit?
144. A customer has asked Twiner Corporation to supply 5,000 units of product D05,
with some modifications, for $40.20 each. The normal selling price of this product is
$52.80 each. The normal unit product cost of product D05 is computed as follows:
Direct labor is a variable cost. The special order would have no effect on the
company's total fixed manufacturing overhead costs. The customer would like some
modifications made to product D05 that would increase the variable costs by $3.50
per unit and that would require a one-time investment of $23,000 in special molds
that would have no salvage value. This special order would have no effect on the
company's other sales. The company has ample spare capacity for producing the
special order.
Required:
Determine the effect on the company's total net operating income of accepting the
special order. Show your work!
145. Jumonville Company produces a single product. The cost of producing and
selling a single unit of this product at the company's normal activity level of 70,000
units per month is as follows:
The normal selling price of the product is $56.70 per unit.
An order has been received from an overseas customer for 2,000 units to be
delivered this month at a special discounted price.
This order would have no effect on the company's normal sales and would not
change the total amount of the company's fixed costs.
The variable selling and administrative expense would be $0.70 less per unit on this
order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas
customer and the special discounted price on the special order is $51.20 per unit.
By how much would this special order increase (decrease) the company's net
operating income for the month?
b. Suppose the company is already operating at capacity when the special order is
received from the overseas customer. What would be the opportunity cost of each
unit delivered to the overseas customer?
c. Suppose there is not enough idle capacity to produce all of the units for the
overseas customer and accepting the special order would require cutting back on
production of 700 units for regular customers. What would be the minimum
acceptable price per unit for the special order?
146. Block Corporation makes three products that use the current constraint, which is
a particular type of machine. Data concerning those products appear below:
Required:
a. Rank the products in order of their current profitability from the most profitable to
the least profitable. In other words, rank the products in the order in which they
should be emphasized. Show your work!
b. Assume that sufficient constraint time is available to satisfy demand for all but the
least profitable product. Up to how much should the company be willing to pay to
acquire more of the constrained resource?
147. Redner, Inc. produces three products. Data concerning the selling prices and
unit costs of the three products appear below:
Fixed costs are applied to the products on the basis of direct labor hours.
Demand for the three products exceeds the company's productive capacity. The
grinding machine is the constraint, with only 2,400 minutes of grinding machine time
available this week.
Required:
a. Given the grinding machine constraint, which product should be emphasized?
Support your answer with appropriate calculations.
b. Assuming that there is still unfilled demand for the product that the company
should emphasize in part (a) above, up to how much should the company be willing
to pay for an additional hour of grinding machine time?
148. Glunn Company makes three products in a single facility. These products have
the following unit product costs:
Additional data concerning these products are listed below.
The mixing machines are potentially the constraint in the production facility. A total of
24,200 minutes are available per month on these machines.
Direct labor is a variable cost in this company.
Required:
a. How many minutes of mixing machine time would be required to satisfy demand
for all three products?
b. How much of each product should be produced to maximize net operating income/
(Round off to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one additional hour of
mixing machine time if the company has made the best use of the existing mixing
machine capacity/ (Round off to the nearest whole cent.)
149. Holvey Company makes three products in a single facility. Data concerning
these products follow:
The mixing machines are potentially the constraint in the production facility. A total of
6,300 minutes are available per month on these machines. Direct labor is a variable
cost in this company.
Required:
a. How many minutes of mixing machine time would be required to satisfy demand
for all three products?
b. How much of each product should be produced to maximize net operating income/
(Round off to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one additional hour of
mixing machine time if the company has made the best use of the existing mixing
machine capacity/ (Round off to the nearest whole cent.)
150. The constraint at Vrana Inc. is an expensive milling machine. The three
products listed below use this constrained resource.
Required:
a. Rank the products in order of their current profitability from the most profitable to
the least profitable. In other words, rank the products in the order in which they
should be emphasized. Show your work!
b. Assume that sufficient constraint time is available to satisfy demand for all but the
least profitable product. Up to how much should the company be willing to pay to
acquire more of the constrained resource?
151. Prevatte Corporation purchases potatoes from farmers. The potatoes are then
peeled, producing two intermediate products- peels and depeeled spuds. The peels
can then be processed further to make a cocktail of organic nutrients. And the
depeeled spuds can be processed further to make frozen french fries. A batch of
potatoes costs $45 to buy from farmers and $11 to peel in the company's plant. The
peels produced from a batch can be sold as is for animal feed for $27 or processed
further for $16 to make the cocktail of nutrients that are sold for $47. The depeeled
spuds can be sold as is for $38 or processed further for $27 to make frozen french
fries that are sold for $59.
Required:
a. Assuming that no other costs are involved in processing potatoes or in selling
products, how much money does the company make from processing one batch of
potatoes into the cocktail of organic nutrients and frozen french fries? Show your
work!
b. Should each of the intermediate products, peels and depeeled spuds, be sold as is
or processed further into an end product?
Explain.
152. Spurrier Corporation produces two intermediate products, A and B, from a
common input. Intermediate product A can be further processed into end product X.
Intermediate product B can be further processed into end product Y. The common
input is purchased in batches that cost $50 each and the cost of processing a batch
to produce intermediate products A and B is $15. Intermediate product A can be
sold as is for $28 or processed further for $18 to make end product X that is sold for
$43. Intermediate product
B can be sold as is for $31 or processed further for $24 to make end product Y that is
sold for $68.
Required:
a. Assuming that no other costs are involved in processing potatoes or in selling
products, how much money does the company make from processing one batch of
the common input into the end products X and Y? Show your work!
b. Should each of the intermediate products, A and B, be sold as is or processed
further into an end product? Explain.
153. Harris Corp. manufactures three products from a common input in a joint
processing operation. Joint processing costs up to the split-off point total $200,000
per year. The company allocates these costs to the joint products on the basis of
their total sales value at the split-off point.
Each product may be sold at the split-off point or processed further. The additional
processing costs and sales value after further processing for each product (on an
annual basis) are:
The "Further Processing Costs" consist of variable and avoidable fixed costs.
Required:
Which product or products should be sold at the split-off point, and which product or
products should be processed further? Show computations.
154. Iaukea Company makes two products from a common input. Joint processing
costs up to the split-off point total $49,600 a year. The company allocates these
costs to the joint products on the basis of their total sales values at the split-off point.
Each product may be sold at the split-off point or processed further. Data concerning
these products appear below:
Required:
a. What is the net monetary advantage (disadvantage) of processing Product X
beyond the split-off point?
b. What is the net monetary advantage (disadvantage) of processing Product Y
beyond the split-off point?
c. What is the minimum amount the company should accept for Product X if it is to be
sold at the split-off point?
d. What is the minimum amount the company should accept for Product Y if it is to be
sold at the split-off point?