Consider the following statements about relevant costing and activity-based costing:

I. The concept of relevant costs and benefits cannot be used in conjunction with an activity-based
costing system.
II. The concept of relevant costs and benefits must be modified for use with an activity-based
costing system.
III. Generally speaking, the decision maker can better associate relevant costs with the activities
that drive them under an activity-based costing system than under a conventional
product-costing system.

Which of the above statements is (are) true?

II and III.
I only.
I and II.
III only.
II only.

Ortega Interiors provides design services to residential and commercial clients. The residential
services produce a contribution margin of $480,000 and have traceable fixed operating costs of
$520,000. Management is studying whether to drop the residential operation. If closed, the fixed
operating costs will fall by $430,000 and Ortega's income will:
decrease by $50,000.
increase by $50,000.
increase by $390,000.
increase by $40,000.
decrease by $390,000.

An architecture firm currently offers services that appeal to both individuals and commercial
clients. If the firm decides to discontinue services to individuals because of ongoing losses, which
of the following costs could the company likely avoid?
Monthly installment payments on general-purpose, computer drafting equipment.
General corporate overhead that was allocated to individual clients.
Building depreciation.
Variable operating costs.
Insurance.

Maddox, a division of Stanley Enterprises, currently performs computer services for various
departments of the firm. One of the services has created a number of operating problems, and
management is exploring whether to outsource the service to a consultant. Traceable variable
and fixed operating costs total $80,000 and $25,000, respectively, in addition to $18,000 of
corporate administrative overhead allocated from Stanley. If Maddox were to use the outside
consultant, fixed operating costs would be reduced by 70%. The irrelevant costs in Maddox's
outsourcing decision total:
$25,500.
$25,000.
$18,000.
$17,500.
None of the other answers are correct.

Indiana Corporation has $200,000 of joint processing costs and is studying whether to process J
and K beyond the split-off point. Information about J and K follows.
 

If Indiana desires to maximize total company income, what should the firm do with regard to
Products J and K?

   
Choice C
Choice A
Choice E
Choice B
Choice D

The Shoe Department at the El Paso Department Store is being considered for closure. The
following information relates to shoe activity:
 
  Sales revenue $ 370,000  
  Variable costs:  
        Cost of goods sold 293,000  
        Sales commissions 34,000  
  Fixed operating costs 92,000  
  
If 90% of the fixed operating costs are avoidable, should the Shoe Department be closed?
No, El Paso would be worse off by $33,800.
No, El Paso would be worse off by $43,000.
None of these.
Yes, El Paso would be better off by $49,000.
Yes, El Paso would be better off by $39,800.

Snyder, Inc., which has excess capacity, received a special order for 4,500 units at a price of $16
per unit. Currently, production and sales are anticipated to be 15,000 units without considering
the special order. Budget information for the current year follows.
 
  Sales $ 270,000  
  Less: Cost of goods sold 219,000  
 
  Gross margin $ 51,000  
 
  
Cost of goods sold includes $39,000 of fixed manufacturing cost. If the special order is accepted,
the company's income will:
decrease by $6,300.
increase by $18,000.
None of these.
decrease by $18,000.
increase by $6,300.

Gorski Corporation manufactures parts that are used in the production of washers and dryers.
The following costs are associated with part no. 65:

   

The company received a special-order inquiry from an appliance manufacturer in Spain for
15,000 units of part no. 65. Only $3 of fixed manufacturing will be incurred on the order, and the
variable selling costs per unit will amount to only $5. Since Gorski has excess capacity, the
minimum price that Gorski should charge the Spanish manufacturer is:
None of the other answers are correct.
$99.
$96.
$105.
$108.

CompuTronics, a manufacturer of computer peripherals, has excess capacity. The company's

Utah plant has the following per-unit cost structure for item no. 89:

   

The traceable fixed administrative cost was incurred at the Utah plant; in contrast, the allocated
administrative cost represents a "fair share" of CompuTronics' corporate overhead. Utah has
been presented with a special order of 5,000 units of item no. 89 on which no selling cost will be
incurred. The proper relevant cost in deciding whether to accept this special order would be:
$40.
$80.
$61.
$59.
None of the other answers are correct.

Two months ago, Victory Corporation purchased 4,500 pounds of Hydrol, paying $15,300. The
demand for this product has been very strong since the acquisition, with the market price jumping
to $4.05 per pound. (Victory can buy or sell Hydrol at this price.) The company recently received
a special-order inquiry, one that would require the use of 4,200 pounds of Hydrol. Which of the
following is (are) relevant in deciding whether to accept the special order?
The $4.05 market price.
The 300-pound remaining inventory of Hydrol.
4,500 pounds of Hydrol.
The $3.40 purchase price.
Two or more of the other factors are relevant.

Song, a division of Carolina Enterprises, currently makes 120,000 units of a product that has
created a number of manufacturing problems. Song's costs follow.
 
  Manufacturing costs:  
        Variable $ 530,000  
        Fixed 185,000  
  Allocated corporate administrative cost 69,000  
  
If Song were to discontinue production, fixed manufacturing costs would be reduced by 70%. The
relevant cost of deciding whether the division should purchase the product from an outside
supplier is:
$659,500.
$728,500.
$585,500.
$530,000.
$715,000.

Summers Corporation is composed of five divisions. Each division is allocated a share of

Summers's overhead to make divisional managers aware of the cost of running the corporate
headquarters. The following information relates to the Metro Division:

   

If the Metro Division is closed, 100% of the traceable fixed operating costs can be eliminated.
What will be the impact on Summers's overall profitability if the Metro Division is closed?
Decrease by $500,000.
Decrease by $200,000.
Decrease by $2,400,000.
Decrease by $2,100,000.
None of the answers are correct.
Wright Enterprises, which produces various goods, has limited processing hours at its
manufacturing plant. The following data apply to product no. 607:
 
Sales price per unit: $11.60
Variable cost per unit: $6.50
Process time per unit:6.00 hours
 
Management is now studying whether to devote the firm's limited hours to product no. 607 or to
other products. What key dollar amount should management focus on when determining no.
607's "value" to the firm and deciding the best course of action to follow considering the limited
processing hours at its manufacturing plant?
$6.50.
$0.85.
$11.60.
$5.10.
$1.90.

A firm that decides to emphasize those goods with the highest contribution margin per unit may
have made an incorrect decision when the company:
has excess capacity.
has a high fixed-cost structure.
is highly automated.
has a high level of sunk costs.
has capacity constraints in the form of limited resources.

Buchnell Manufacturing has 64,600 labor hours available for producing M and N. Consider the
following information:
 
  Product M Product N
  Required labor time per unit (hours) 4  5 
  Maximum demand (units) 6,400   8,200  
  Contribution margin per unit $ 6.00   $ 6.50  
  Contribution margin per labor hour $1.50   $ 1.30  
  
If Buchnell follows proper managerial accounting practices in terms of setting a production
schedule, how much contribution margin would the company expect to generate?
$91,700.
$89,100.
$37,500.
None of these.
$88,700.

Laredo manufactures Nuts and Bolts from a joint process (cost = $80,000). Five thousand
pounds of Nuts can be sold at split-off for $20 per pound; ten thousand pounds of Bolts can be
sold at split-off for $15 per pound. For product costing purposes Laredo allocates joint costs
using the relative sales value method.

The amount of joint cost allocated to Bolts would be:

$60,000.
$40,000.
$80,000.
$32,000.
$48,000.

Mueller has been approached about providing a new service to its clients. The company will bill
clients $140 per hour; the related hourly variable and fixed operating costs will be $75 and $18,
respectively. If all employees are currently working at full capacity on other client matters, the
per-hour opportunity cost of being unable to provide this new service is:
$93.
$0.
$65.
$47.
$140.

Johnstone Company makes two products: Carpet Kleen and Floor Deodorizer. Operating
information from the previous year follows.

Fixed costs of $20,000 per year are presently allocated equally between both products. If the
product mix were to change, total fixed costs would remain the same.

The contribution margin per machine hour for Floor Deodorizer is:
$4.00.
$20.00.
$2.00.
$0.25.
$5.00.

Allegiance, Inc. has $141,000 of inventory that suffered minor smoke damage from a fire in the
warehouse. The company can sell the goods "as is" for $52,000; alternatively, the goods can be cleaned
and shipped to the firm's outlet center at a cost of $25,000. There the goods could be sold for $96,000.
What alternative is more desirable and what is the relevant cost for that alternative?
Clean and ship to outlet center, $166,000.
Neither alternative is desirable, as both produce a loss for the firm.
Sell "as is," $141,000.
Clean and ship to outlet center, $25,000.
Clean and ship to outlet center, $121,000.

Snyder, Inc., which has excess capacity, received a special order for 4,000 units at a price of $15
per unit. Currently, production and sales are anticipated to be 10,000 units without considering
the special order. Budget information for the current year follows.
   

Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted,
the company's income will:
decrease by $2,000.
decrease by $14,000.
None of the other answers are correct.
increase by $2,000.
increase by $14,000.

Prudence Corporation manufactures two products: X and Y. The company has 4,000 hours of
machine time available and can sell no more than 800 units of product X. Other pertinent data
follow.

   

Which of the following is a constraint function of Prudence?

2X + 3Y ≤ 4,000.
Minimize Z = 6.50X + 11.25Y.
X ≥ 800.
Maximize Z = 5X + 14Y.
2X ≤ 4,000; 3Y ≤ 4,000.

Snyder, Inc., which has excess capacity, received a special order for 4,200 units at a price of $17
per unit. Currently, production and sales are anticipated to be 13,000 units without considering
the special order. Budget information for the current year follows.
 
  Sales $ 260,000  
  Less: Cost of goods sold 195,000  
 
  Gross margin $ 65,000  
 
  
Cost of goods sold includes $52,000 of fixed manufacturing cost. If the special order is accepted,
the company's income will:
increase by $8,400.
None of these.
decrease by $8,400.
increase by $25,200.
decrease by $25,200.

Torrey Pines is studying whether to outsource its Human Resources (H/R) activities. Salaried
professionals who earn $410,000 would be terminated; in contrast, administrative assistants who
earn $145,000 would be transferred elsewhere in the organization. Miscellaneous departmental
overhead (e.g., supplies, copy charges, overnight delivery) is expected to decrease by $31,000,
and $24,000 of corporate overhead, previously allocated to Human Resources, would be picked
up by other departments. If Torrey Pines can secure needed H/R services locally for $430,000,
how much would the company benefit by outsourcing?
$11,000.
$156,000.
$38,000.
$183,000.
Nothing, as it would be cheaper to keep the department open.

Johnstone Company makes two products: Carpet Kleen and Floor Deodorizer. Operating
information from the previous year follows.

Fixed costs of $20,000 per year are presently allocated equally between both products. If the
product mix were to change, total fixed costs would remain the same.

Assuming there is unlimited demand for both products and Johnson has 10,000 machine hours
available, how many units of each product should be produced and sold?

   
Choice D
Choice E
Choice B
Choice C
Choice A
S'Round Sound, Inc. reported the following results from the sale of 29,000 units of IT-54:
 
  Sales $530,000  
  Variable manufacturing costs 319,000  
  Fixed manufacturing costs 174,000  
  Variable selling costs 54,500  
  Fixed administrative costs 36,200  
  
Rhythm Company has offered to purchase 3,200 IT-54s at $16 each. Sound has available
capacity, and the president is in favor of accepting the order. She feels it would be profitable
because no variable selling costs will be incurred. The plant manager is opposed because the
"full cost" of production is $17. Which of the following correctly notes the change in income if the
special order is accepted?
$3,200 decrease.
$16,000 increase.
None of these.
$16,000 decrease.
$3,200 increase.

HiTech manufactures two products: Regular and Super. The results of operations for 20x1 follow.

Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and
$20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for
Super; remaining selling amounts are fixed.

Disregard the information in the previous question. If HiTech eliminates Regular and uses the
available capacity to produce and sell an additional 1,500 units of Super, what would be the
impact on operating income?
$28,000 increase
$45,000 increase
$85,000 increase
$55,000 increase
None of the other answers are correct.

S'Round Sound, Inc. reported the following results from the sale of 24,000 units of IT-54:
 
  Sales $542,000  
  Variable manufacturing costs 240,000  
  Fixed manufacturing costs 144,000  
  Variable selling costs 53,800  
  Fixed administrative costs 35,700  
  
Rhythm Company has offered to purchase 3,400 IT-54s at $15 each. Sound has available
capacity, and the president is in favor of accepting the order. She feels it would be profitable
because no variable selling costs will be incurred. The plant manager is opposed because the
"full cost" of production is $16. Which of the following correctly notes the change in income if the
special order is accepted?
$3,400 increase.
$3,400 decrease.
None of these.
$17,000 increase.
$17,000 decrease.

Buchnell Manufacturing has 31,000 labor hours available for producing M and N. Consider the
following information:

If Buchnell follows proper managerial accounting practices in terms of setting a production

schedule, how much contribution margin would the company expect to generate?
$31,450.
$63,100.
None of the other answers are correct.
$78,100.
$66,700.

Snyder, Inc., which has excess capacity, received a special order for 4,800 units at a price of $15
per unit. Currently, production and sales are anticipated to be 12,000 units without considering
the special order. Budget information for the current year follows.
 
  Sales $ 252,000  
  Less: Cost of goods sold 174,000  
 
  Gross margin $ 78,000  
 
  
Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted,
the company's income will:
increase by $14,400.
increase by $2,400.
decrease by $14,400.
decrease by $2,400.
None of these.

In early July, Mike Gottfried purchased a $70 ticket to the December 15 game of the Chicago
Titans. (The Titans belong to the Midwest Football League and play their games outdoors on the
shore of Lake Michigan.) Parking for the game was expected to cost approximately $22, and
Gottfried would probably spend another $15 for a souvenir program and food. It is now
December 14. The Titans were having a miserable season and the temperature was expected to
peak at 5 degrees on game day. Mike therefore decided to skip the game and took his wife to the
movies, with tickets and dinner costing $50. The sunk cost associated with this decision situation
is:
None of the other answers are correct.
$107.
$20.
$50.
$70.

Susan is contemplating a job offer with an advertising agency where she will make $54,000 in
her first year of employment. Alternatively, Susan can begin to work in her father's business
where she will earn an annual salary of $38,000. If Susan decides to work with her father, the
opportunity cost would be:
$54,000.
$92,000.
$0.
$38,000.
irrelevant in deciding which job offer to accept.

The City of Miami is about to replace an old fire truck with a new vehicle in an effort to save
maintenance and other operating costs. Which of the following items, all related to the
transaction, would not be considered in the decision?
Savings in operating costs as a result of the new vehicle.
Proceeds from disposal of the old vehicle.
Purchase price of the old vehicle.
Future depreciation on the new vehicle.
Purchase price of the new vehicle

When deciding whether to sell a product at the split-off point or process it further, joint costs
are not usually relevant because:
such amounts only slightly increase a company's sales margin.
such amounts do not help to increase sales revenue.
the sales revenue does not decrease to the extent that it should, if compared with separable
processing.
such amounts are sunk and do not change with the decision.
such amounts reflect opportunity costs.

Allegiance, Inc. has $128,000 of inventory that suffered minor smoke damage from a fire in the
warehouse. The company can sell the goods "as is" for $47,000; alternatively, the goods can be cleaned
and shipped to the firm's outlet center at a cost of $26,000. There the goods could be sold for $83,000.
What alternative is more desirable and what is the relevant cost for that alternative?
Clean and ship to outlet center, $26,000.
Sell "as is," $128,000.
Clean and ship to outlet center, $109,000.
Neither alternative is desirable, as both produce a loss for the firm.
Clean and ship to outlet center, $154,000

Wright Enterprises, which produces various goods, has limited processing hours at its
manufacturing plant. The following data apply to product no. 607:

Sales price per unit: $9.60

Variable cost per unit: $6.20
Process time per unit: 4 hours

Management is now studying whether to devote the firm's limited hours to product no. 607 or to
other products. What key dollar amount should management focus on when determining no.
607's "value" to the firm and deciding the best course of action to follow?
$3.40.
$6.20.
$2.40.
$0.85.
$9.60.

Song, a division of Carolina Enterprises, currently makes 100,000 units of a product that has
created a number of manufacturing problems. Song's costs follow.

   

If Song were to discontinue production, fixed manufacturing costs would be reduced by 70%. The
relevant cost of deciding whether the division should purchase the product from an outside
supplier is:
$666,000.
$540,000.
$720,000.
$726,000.
$594,000.

HiTech manufactures two products: Regular and Super. The results of operations for 20x1 follow.
 
  Regular Super Total
Units  11,000 4,300 15,300
Sales $297,000 $946,000 $1,243,000
Less: Cost of
220,000 559,000 779,000
goods sold 
 
Gross margin $77,000 $387,000 $464,000
Less: Selling
77,000 239,000 316,000
expenses
 
Operating
$0 $148,000 $148,000
income
 

Fixed manufacturing costs included in cost of goods sold amount to $2 per unit for Regular and
$20 per unit for Super. Variable selling expenses are $3 per unit for Regular and $20 per unit for
Super; remaining selling amounts are fixed.

HiTech wants to drop the Regular product line. If the line is dropped, company-wide fixed
manufacturing costs would fall by 20% because there is no alternative use of the facilities. What
would be the impact on operating income if Regular is discontinued?
$0.
None of these.
$44,000 increase.
$21,600 increase.
$44,400 decrease.

Song, a division of Carolina Enterprises, currently makes 100,000 units of a product that has
created a number of manufacturing problems. Song's costs follow.
 
  Manufacturing costs:  
        Variable $ 540,000  
        Fixed 180,000  
  Allocated corporate administrative cost 60,000  
  
If Song were to discontinue production, fixed manufacturing costs would be reduced by 70%. The
relevant cost of deciding whether the division should purchase the product from an outside
supplier is:
$720,000.
$594,000.
$666,000.
$540,000.
$726,000.

ido manufactures A and B from a joint process (cost = $80,000). Five thousand pounds of A can
be sold at split-off for $20 per pound or processed further at an additional cost of $20,000 and
then sold for $25 per pound. If Lido decides to process A beyond the split-off point, operating
income will:
decrease by $10,000.
increase by $5,000.
increase by $10,000.
increase by $20,000.
decrease by $20,000.

Johnstone Company makes two products: Carpet Kleen and Floor Deodorizer. Operating
information from the previous year follows.

 
 

Fixed costs of $20,000 per year are presently allocated equally between both products. If the
product mix were to change, total fixed costs would remain the same.

Assuming there is unlimited demand for both products and Johnson has 10,000 machine hours
available, how many units of each product should be produced and sold?

   
Choice D
Choice A
Choice E
Choice C
Choice B

Smythe Manufacturing has 27,000 labor hours available for producing X and Y. Consider the
following information:

If Smythe follows proper managerial accounting practices, how many units of Product X should it
produce?
4,500.
6,000.
8,000.
5,000.
1,500.
The Shoe Department at the El Paso Department Store is being considered for closure. The
following information relates to shoe activity:

   

If 70% of the fixed operating costs are avoidable, should the Shoe Department be closed?
Yes, El Paso would be better off by $23,000.
No, El Paso would be worse off by $13,000.
None of the answers are correct.
Yes, El Paso would be better off by $50,000.
No, El Paso would be worse off by $40,000.

Laredo manufactures Nuts and Bolts from a joint process (cost = $80,000). Five thousand
pounds of Nuts can be sold at split-off for $20 per pound; ten thousand pounds of Bolts can be
sold at split-off for $15 per pound. For product costing purposes Laredo allocates joint costs
using the relative sales value method.

The amount of joint cost allocated to Nuts would be:

$48,000.
$32,000.
$60,000.
$80,000.
$40,000.

Johnstone Company makes two products: Carpet Kleen and Floor Deodorizer. Operating
information from the previous year follows.

Fixed costs of $20,000 per year are presently allocated equally between both products. If the
product mix were to change, total fixed costs would remain the same.

The contribution margin per machine hour for Floor Deodorizer is:
$5.00.
$0.25.
$4.00.
$20.00.
$2.00.
The Shoe Department at the El Paso Department Store is being considered for closure. The
following information relates to shoe activity:
 
  Sales revenue $ 370,000  
  Variable costs:  
        Cost of goods sold 292,000  
        Sales commissions 35,000  
  Fixed operating costs 95,000  
  
If 80% of the fixed operating costs are avoidable, should the Shoe Department be closed?
No, El Paso would be worse off by $24,000.
Yes, El Paso would be better off by $52,000.
Yes, El Paso would be better off by $33,000.
No, El Paso would be worse off by $43,000.
None of these.

CompuTronics, a manufacturer of computer peripherals, has excess capacity. The company's

Utah plant has the following per-unit cost structure for item no. 89:

   

The traceable fixed administrative cost was incurred at the Utah plant; in contrast, the allocated
administrative cost represents a "fair share" of CompuTronics' corporate overhead. Utah has
been presented with a special order of 5,000 units of item no. 89 on which no selling cost will be
incurred. The proper relevant cost in deciding whether to accept this special order would be:
$59.
$40.
$61.
None of the other answers are correct.
$80.

Mueller has been approached about providing a new service to its clients. The company will bill
clients $180 per hour; the related hourly variable and fixed operating costs will be $85 and $14,
respectively. If all employees are currently working at full capacity on other client matters, the
per-hour opportunity cost of being unable to provide this new service is:
$95.
$81.
$180.
$0.
$99.
Fester Company is considering whether to sell Retox at the split-off point or subject it to further
processing and produce a more refined product known as Retox-F. Consider the following items:

I. The selling price of Retox-F.

II. The joint processing cost of Retox.
III. The separable cost of producing Retox-F.

Which of the above items is (are) relevant to Foster's decision to process Retox into Retox-F?
I and III
I and II
I only
III only
II only

Flowers Company is operating at capacity and desires to add a new service to its rapidly
expanding business. The service should be added as long as service revenues exceed:
variable costs.
the sum of variable costs and fixed costs.
the sum of variable costs and any related opportunity costs.
the sum of variable costs, fixed costs, and any related opportunity costs.
fixed costs.

Prudence Corporation manufactures two products: X and Y. The company has 4,000 hours of
machine time available and can sell no more than 800 units of product X. Other pertinent data
follow.

   

Which of the following is Prudence's objective function?

Maximize Z = 1.50X + 7.75Y.
Maximize Z = 2X + 3Y.
Maximize Z = 5X + 14Y.
Maximize Z = 8X + 19Y.
Minimize Z = 6.50X + 11.25Y.

CompuTronics, a manufacturer of computer peripherals, has excess capacity. The company's

Utah plant has the following per-unit cost structure for item no. 89:
 
  Variable manufacturing $ 60  
  Fixed manufacturing 25  
  Variable selling 8 
  Fixed selling 11  
  Traceable fixed administrative 4 
  Allocated administrative 2 
  
The traceable fixed administrative cost was incurred at the Utah plant; in contrast, the allocated
administrative cost represents a "fair share" of CompuTronics' corporate overhead. Utah has
been presented with a special order of 5,600 units of item no. 89 on which no selling cost will be
incurred. The proper relevant cost in deciding whether to accept this special order would be:
$91.
None of these.
$89.
$110.
$60.

Ortega Interiors provides design services to residential and commercial clients. The residential
services produce a contribution margin of $510,000 and have traceable fixed operating costs of
$570,000. Management is studying whether to drop the residential operation. If closed, the fixed
operating costs will fall by $430,000 and Ortega's income will:
increase by $60,000.
decrease by $80,000.
increase by $370,000.
decrease by $370,000.
increase by $80,00

Allegiance, Inc. has $125,000 of inventory that suffered minor smoke damage from a fire in the
warehouse. The company can sell the goods "as is" for $45,000; alternatively, the goods can be
cleaned and shipped to the firm's outlet center at a cost of $23,000. There the goods could be
sold for $80,000. What alternative is more desirable and what is the relevant cost for that
alternative?
Neither alternative is desirable, as both produce a loss for the firm.
Clean and ship to outlet center, $23,000.
Clean and ship to outlet center, $148,000.
Clean and ship to outlet center, $103,000.
Sell "as is," $125,000.

Klein Enterprises, which has three departments, recently reported the following results:

The company incurred variable operating costs as well as $25,000 of fixed operating costs. The
$25,000 amount was allocated to A, B, and C on the basis of sales revenue and is included in
the cost figures noted above. Which department(s), if any, should be closed if none of the fixed
operating costs can be avoided?
Department B.
Department A.
Department C.
None of the departments should be closed.
HiTech manufactures two products: Regular and Super. The results of operations for 20x1 follow.

 
 

Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and
$20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for
Super; remaining selling amounts are fixed.

HiTech wants to drop the Regular product line. If the line is dropped, company-wide fixed
manufacturing costs would fall by 10% because there is no alternative use of the facilities. What
would be the impact on operating income if Regular is discontinued?
None of the other answers are correct.
$39,600 decrease.
$20,000 increase.
$0.
$10,400 increase.

Consider the following costs and decision-making situations:

I. The cost of existing inventory, in a keep vs. disposal decision.

II. The cost of special electrical wiring, in an equipment acquisition decision.
III. The salary of a supervisor who will be transferred elsewhere in the organization, in a
department-closure decision.

Which of the above costs is (are) relevant to the decision situation noted?
II and III.
III only.
II only.
I only.
I and II.

Torrey Pines is studying whether to outsource its Human Resources (H/R) activities. Salaried
professionals who earn $390,000 would be terminated; in contrast, administrative assistants who
earn $120,000 would be transferred elsewhere in the organization. Miscellaneous departmental
overhead (e.g., supplies, copy charges, overnight delivery) is expected to decrease by $30,000,
and $25,000 of corporate overhead, previously allocated to Human Resources, would be picked
up by other departments. If Torrey Pines can secure needed H/R services locally for $410,000,
how much would the company benefit by outsourcing?
Nothing, as it would be cheaper to keep the department open.
$10,000.
$155,000.
$35,000.
$130,000