Deck 19: Short-Term Business Decisions

Question 1

Financial data is relevant to a decision if it involves a cash flow in the future and the cash flow differs among alternatives.

Answer 1

True

Question 2

Unavoidable fixed costs are irrelevant to the decision-making process.

Answer 2

True

Question 3

Fixed costs, while generally irrelevant to the decision-making process, may change and become relevant.

Answer 3

True

Question 4

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
$$\begin{array} { | l | l | l | } \hline & \text { Old Machine } & \begin{array} { l } \text { Replacement } \\\text { Machine }\end{array} \\\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 & 0 \\\hline \text { Book value } & \$ 25,000 & \\\hline \text { Current disposal value in cash } & \$ 8,000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \\\hline \text { Annual cash operating costs } & \$ 7,000 & \$ 4,000 \\\hline\end{array}$$ Which of the information provided in the table is irrelevant to the replacement decision?

A) The annual operating cost of the old machine
B) The original cost of the old machine
C) The current disposal value of the old machine
D) Both A and C are correct

Question 5

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
$$\begin{array} { | l | l | l | } \hline & \text { Old Machine } & \begin{array} { l } \text { Replacement } \\\text { Machine }\end{array} \\\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 & 0 \\\hline \text { Book value } & \$ 25,000 & \\\hline \text { Current disposal value in cash } & \$ 8,000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \\\hline \text { Annual cash operating costs } & \$ 7,000 & \$ 4,000 \\\hline\end{array}$$ For a machine replacement decision which of the information provided in the table is a sunk cost?

A) The original cost of the old machine
B) The current disposal value of the old machine
C) The current annual operating cost of the old machine
D) Both A and B are correct

Question 6

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
$$\begin{array} { | l | l | l | } \hline & \text { Old Machine } & \begin{array} { l } \text { Replacement } \\\text { Machine }\end{array} \\\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 & 0 \\\hline \text { Book value } & \$ 25,000 & \\\hline \text { Current disposal value in cash } & \$ 8,000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \\\hline \text { Annual cash operating costs } & \$ 7,000 & \$ 4,000 \\\hline\end{array}$$ How much are the total relevant costs associated with keeping the old machine?

A) $35,000
B) $40,000
C) $47,000
D) $60,000

Question 7

In deciding whether to accept a special sales order, management should consider the quantitative data as well as the qualitative factors.

Question 8

A company viewing itself as a price-taker generally utilizes a target pricing approach.

Question 9

Revenue at market price plus desired operating profit equals a product's target full cost.

Question 10

An opportunity cost must be taken into consideration for a special sales order decision.

Question 11

When making a pricing decision, it is not necessary to separate costs into fixed and variable since only total costs matter.

Question 12

Which of the following costs is irrelevant with respect to a special sales order decision?

A) Additional fixed costs that will be incurred to complete the order.
B) Fixed costs that are determined to be unavoidable.
C) Special packaging costs associated with the order.
D) Variable manufacturing costs incurred to complete the order.

Question 13

Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails per year, and is currently producing and selling 20,000 sails per year. The following information relates to current production:
$$\begin{array} { | l | r | } \hline \text { Sale price per unit } & \$ 150 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 55 \\\hline \text { Marketing and administrative } & \$ 25 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 640,000 \\\hline \text { Marketing and administrative } & \$ 280,000 \\\hline\end{array}$$ If a special sales order is accepted for 5,000 sails at a price of $125 per unit, and fixed costs remain unchanged, what is the change in operating income?

A) Operating income decreases $5,000.
B) Operating income increases $190,000.
C) Operating income decreases $125,000.
D) Operating income increases $225,000.

Question 14

Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails per year, and is currently producing and selling 20,000 sails per year. The following information relates to current production:
$$\begin{array} { | l | r | } \hline \text { Sale price per unit } & \$ 150 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 55 \\\hline \text { Marketing and administrative } & \$ 25 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 640,000 \\\hline \text { Marketing and administrative } & \$ 280,000 \\\hline\end{array}$$ If a special sales order is accepted for 2,000 sails at a price of $95 per unit, and fixed costs increase by $10,000, what is the change in operating income affected?

A) Operating income decreases $34,000.
B) Operating income decreases $44,000.
C) Operating income increases $20,000.
D) Operating income increases $25,000.

Question 15

Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails per year, and is currently producing and selling 20,000 sails per year. The following information relates to current production:
$$\begin{array} { | l | r | } \hline \text { Sale price per unit } & \$ 150 \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 55 \\\hline \text { Marketing and administrative } & \$ 25 \\\hline \text { Total fixed costs: } & \\\hline \text { Manufacturing } & \$ 640,000 \\\hline \text { Marketing and administrative } & \$ 280,000 \\\hline\end{array}$$ If a special sales order is accepted for 2,500 sails at a price of $70 per unit, fixed costs increase by $10,000, and variable marketing and administrative costs for that order decrease by $5 per unit, how what is the change in operating income?

A) Operating income decreases $22,500.
B) Operating income decreases $82,500.
C) Operating income decreases $10,000.
D) Operating income increases $22,500.

Question 16

Dakoka Corporation provided the following information regarding its only product:
$$\begin{array} { | l | r | } \hline \text { Sales price per unit } & \$ 60 \\\hline \text { Direct materials used } & \$ 160,000 \\\hline \text { Direct labor costs incurred } & \$ 230,000 \\\hline \text { Variable manufacturing overhead costs incurred } & \$ 150,000 \\\hline \text { Variable selling and administrative costs incurred } & \$ 60,000 \\\hline \text { Fixed manufacturing overhead costs incurred } & \$ 80,000 \\\hline \text { Fixed selling and administrative costs incurred } & \$ 10,000 \\\hline \text { Units produced and sold } & 12,000 \\\hline \text { Assume no beginning inventory } & \\\hline\end{array}$$ Assuming there is excess capacity, what would be the change in operating income as a result of accepting a special order for 1,000 units at a sales price of $40 per unit?

A) Operating income decreases $10,000.
B) Operating income decreases $15,000.
C) Operating income increases $10,000.
D) Operating income increases $80,000.

Question 17

Dakoka Corporation provided the following information regarding its only product:
$$\begin{array} { | l | r | } \hline \text { Sales price per unit } & \$ 60 \\\hline \text { Direct materials used } & \$ 160,000 \\\hline \text { Direct labor costs incurred } & \$ 230,000 \\\hline \text { Variable manufacturing overhead costs incurred } & \$ 150,000 \\\hline \text { Variable selling and administrative costs incurred } & \$ 60,000 \\\hline \text { Fixed manufacturing overhead costs incurred } & \$ 80,000 \\\hline \text { Fixed selling and administrative costs incurred } & \$ 10,000 \\\hline \text { Units produced and sold } & 12,000 \\\hline \text { Assume no beginning inventory } & \\\hline\end{array}$$ Assuming there is excess capacity, what would be the change in operating income as a result of accepting a special order for 1,000 units at a sales price of $55 per unit assuming additional fixed manufacturing overhead costs of $7,000 would be incurred?

A) Operating income decreases $2,000.
B) Operating income decreases $5,000.
C) Operating income decreases $87,000.
D) Operating income increases $2,000.

Question 18

Dakoka Corporation provided the following information regarding its only product:
$$\begin{array} { | l | r | } \hline \text { Sales price per unit } & \$ 60 \\\hline \text { Direct materials used } & \$ 160,000 \\\hline \text { Direct labor costs incurred } & \$ 230,000 \\\hline \text { Variable manufacturing overhead costs incurred } & \$ 150,000 \\\hline \text { Variable selling and administrative costs incurred } & \$ 60,000 \\\hline \text { Fixed manufacturing overhead costs incurred } & \$ 80,000 \\\hline \text { Fixed selling and administrative costs incurred } & \$ 10,000 \\\hline \text { Units produced and sold } & 12,000 \\\hline \text { Assume no beginning inventory } & \\\hline\end{array}$$ Assuming there is excess capacity, what would be the change in operating income as a result of accepting a special order for 800 units at a sales price of $46 per product? The 800 units would not require any variable selling and administrative expenses.

A) Operating income decreases $800.
B) Operating income decreases $3,200.
C) Operating income increases $800.
D) Operating income increases $3,200.

Question 19

Perfect Time Company manufactures and sells watches. Great Products Company has offered Perfect Time $21 per watch for 5,000 watches. Perfect Time's normal selling price is $36 per watch. The total manufacturing cost per watch is $24 and consists of variable costs of $18 per watch and fixed overhead costs of $6 per watch. What is the change in operating income resulting from the special sales order?

A) $15,000
B) ($15,000)
C) $105,000
D) ($60,000)

Question 20

Perfect Time Company manufactures and sells watches. Great Products Company has offered Perfect Time $21 per watch for 5,000 watches. Perfect Time's normal selling price is $36 per watch. The total manufacturing cost per watch is $24 and consists of variable costs of $18 per watch and fixed overhead costs of $6 per watch. What is the change in operating income assuming that 2,000 units of sales to regular customers will have to be given up?

A) ($21,000)
B) $15,000
C) $33,000
D) (9,000)

Question 21

Burr Hill golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $10 per golfer. The Burr Hill golf course is a price-taker and won't be able to charge more than its competitors who charge $65 per round of golf. What profit will it earn as a percent of assets?

A) 2.5%
B) 5.0%
C) 10.0%
D) 12.5%

Question 22

Which of the following statements is not accurate?

A) A milk producing company does not control the market price and as a result is a price-taker.
B) A custom-made furniture manufacturer has some control over the market price and as a
Result is a price-setter.
C) A company with a unique product tends to be a price-setter rather than a price-taker.
D) Most business managers would prefer to be a price-taker rather than a price-setter.

Question 23

Which of the following correctly describes a company's approach to pricing its products?

A) When a company is a price-setter, it will utilize a target costing approach to pricing.
B) When a company is a price taker, it will utilize a cost-plus approach to pricing.
C) When a company is a price-setter, it will use a cost-plus approach to pricing.
D) When a company is a price-setter, it doesn't have to categorize its costs as fixed and variable.

Question 24

The management of Garland Inc. is considering whether or not to accept a special sales order for 500
Units of a product that it manufactures. Management has been provided the following data regarding
The manufacturing and selling costs per unit:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 225 \\\hline \text { Direct labor } & \$ 195 \\\hline \text { Variable manufacturing overhead } & \$ 105 \\\hline \text { Fixed manufacturing overhead } & \$ 119 \\\hline \text { Variable selling costs } & \$ 75 \\\hline \text { Fixed selling costs } & \$ 25 \\\hline\end{array}$$ Management has been informed that variable selling costs pertaining to the special order will be
Reduced by 20%. Management has also been informed that 250 units of sales to regular customers will
Be lost; the sales to regular customers create a contribution margin of $500 per unit. What is the
Lowest selling price that Garland's management would be willing to accept?

A) $585
B) $600
C) $835
D) $715

Question 25

The management of Garland Inc. is considering whether or not to accept a special sales order for 500
Units of a product at a sales price of $900 per unit. Management has been provided the following data
Regarding the manufacturing and selling costs per unit:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 225 \\\hline \text { Direct labor } & \$ 195 \\\hline \text { Variable manufacturing overhead } & \$ 105 \\\hline \text { Fixed manufacturing overhead } & \$ 119 \\\hline \text { Variable selling costs } & \$ 75 \\\hline \text { Fixed selling costs } & \$ 25 \\\hline\end{array}$$ Management has been informed that variable selling costs pertaining to the special sales order will be
Reduced by 20%. Management has also been informed that 250 units of sales to regular customers will
Be lost; the sales to regular customers create a contribution margin of $500 per unit. Should Garland's
Management accept the special sales order?

A) Yes, because operating income will increase $157,500.
B) No, because operating income will decrease $92,500.
C) Yes, because operating income will increase $32,500.
D) No, because operating income will decrease $47,000.

Question 26

Gen Company has provided the following per unit information pertaining to the production and sale
Of 2,000 units of generators:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 250 \\\hline \text { Direct Labor } & \$ 50 \\\hline \text { Variable manufacturing overhead } & \$ 75 \\\hline \text { Packaging and shipping } & \$ 49 \\\hline \text { Fixed manufacturing overhead } & \$ 45 \\\hline \text { Variable selling } & \$ 18 \\\hline \text { Fixed selling } & \$ 30 \\\hline\end{array}$$ Gen has received a special sales order for 1,000 units of this generator. Given that Gen is currently
Operating at capacity, Gen will have to increase its fixed costs by 40% in order to accommodate the
Special sales order. The variable selling expenses associated with this special sales order will be
Reduced by $8 per unit. What is the minimum per unit selling price that Gen is willing to accept?

A) $442
B) $434
C) $464
D) $494

Question 27

Gen Company has provided the following per unit information pertaining to the production and sale
For one of its generators:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 250 \\\hline \text { Direct Labor } & \$ 50 \\\hline \text { Variable manufacturing overhead } & \$ 75 \\\hline \text { Packaging and shipping } & \$ 49 \\\hline \text { Fixed manufacturing overhead } & \$ 45 \\\hline \text { Variable selling } & \$ 18 \\\hline \text { Fixed selling } & \$ 30 \\\hline\end{array}$$ Gen has received a special sales order for 1,000 units of this generator. If Jen accepts the special sales
Order, 300 units of sales to regular customers will have to be given up. The variable selling expenses
Associated with this special sales order will be reduced by $8 per unit. What is the minimum per unit
Selling price that Gen is willing to accept?

A) $434
B) $650
C) $497
D) $580

Question 28

Russ Company is trying to determine whether to accept a 1,000 unit special sales order. Russ doesn'thave the capacity to accept the special sales order without losing 250 units of sales to regularcustomers. What is the least that Russ would be willing to accept for the 1,000 units?

A) The variable costs of producing and selling the 1,000 units.
B) The variable and fixed costs of producing and selling the 1,000 units.
C) The incremental cost of producing and selling the 1,000 units plus the opportunity cost
Associated with the loss of sales to regular customers.
D) The per unit sales price paid by the regular customers.

Question 29

JC Company operates in a very competitive market and as a result it is forced to use the target pricingapproach to price its various products. The cost of making and selling one of its products exceeds thetarget full cost of that product. Which of the following options would not be a logical choice for JC'smanagement to utilize in order to achieve the product's targeted full cost?

A) Attempt to reduce fixed costs.
B) Attempt to reduce variable costs.
C) Attempt to increase the selling price.
D) The willingness to accept a lower return on the company's assets.

Question 30

Which of the following considerations is irrelevant with respect to consideration of a special sales order?

A) The consideration of manufacturing capacity constraints.
B) The impact of the order on regular sales in the future.
C) The variable manufacturing costs associated with the order.
D) The decline in the fixed manufacturing cost per unit as a result of producing additional units.

Question 31

If the decrease in contribution margin from eliminating a product line exceeds the avoidable fixed costs associated with eliminating the product line, the product line should not be eliminated.

Question 32

If a product line has a negative contribution margin, the product line should probably be dropped.

Question 33

To maximize profits when there is a production constraint, a company will produce the product with the highest contribution margin per unit.

Question 34

Pirate Company's management is considering dropping its small television product line due to continued operating losses. Pirate has forecasted an operating loss of $25,000 for the upcoming year. Fixed expenses for the upcoming year are forecasted at $45,000, of which $30,000 are considered to be avoidable. Should Pirate Company drop the small television product line?

A) Yes, because of the forecasted operating loss of $25,000.
B) Yes, because the avoidable fixed costs exceed the contribution margin that would be lost.
C) No, because the contribution margin that would be lost exceeds the $45,000 of fixed costs.
D) No, because the unavoidable fixed costs are less than the forecasted operating loss.

Question 35

DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs. If DC Electronics buys the part, what is the most DC Electronics can spend per unit so that operating income equals the operating income from making the part?

A) $2.23
B) $2.34
C) $2.67
D) $3.00

Question 36

Sports Hats, Etc. has two product lines: baseball helmets and football helmets. Income statement data for the most recent year follow:
$$\begin{array} { | l | r | r | r | } \hline & \text { Total } & \begin{array} { r } \text { Baseball } \\\text { Helmets }\end{array} & \begin{array} { r } \text { Football } \\\text { Helmets }\end{array} \\\hline \text { Sales revenue } & \$ 460,000 & \$ 310,000 & \$ 150,000 \\\hline \text { Variable expenses } & 355,000 & 235,000 & 120,000 \\\hline \text { Contribution margin } & 105,000 & 75,000 & 30,000 \\\hline \text { Fixed expenses } & 76,000 & { 38,000 } & { 38,000 } \\\hline \text { Operating income (loss) } & \$ 29,000 & \$ 37,000 & \$ ( 8,000 ) \\\hline\end{array}$$ Assuming fixed costs remain unchanged how would dropping the Football Helmets line affect operating income?

A) Operating income will increase $8,000.
B) Operating income will increase $38,000.
C) Operating income will decrease $30,000.
D) Operating income will decrease $150,000.

Question 37

Sports Hats, Etc. has two product lines: baseball helmets and football helmets. Income statement data for the most recent year follow:
$$\begin{array} { | l | r | r | r | } \hline & \text { Total } & \begin{array} { r } \text { Baseball } \\\text { Helmets }\end{array} & \begin{array} { r } \text { Football } \\\text { Helmets }\end{array} \\\hline \text { Sales revenue } & \$ 460,000 & \$ 310,000 & \$ 150,000 \\\hline \text { Variable expenses } & 355,000 & 235,000 & 120,000 \\\hline \text { Contribution margin } & 105,000 & 75,000 & 30,000 \\\hline \text { Fixed expenses } & 76,000 & { 38,000 } & { 38,000 } \\\hline \text { Operating income (loss) } & \$ 29,000 & \$ 37,000 & \$ ( 8,000 ) \\\hline\end{array}$$ Assuming the Football Helmets line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $45,000 per year, how will operating income be affected?

A) Operating income will increase $15,000.
B) Operating income will increase $37,000.
C) Operating income will decrease $7,000.
D) Operating income will decrease $37,000.

Question 38

Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are available:
$$\begin{array} { | l | r | r | } \hline & \text { Toaster Ovens } & \text { Bread Machines } \\\hline \text { Sale price } & \$ 60 & \$ 135 \\\hline \text { Variable costs } & \$ 38 & \$ 62 \\\hline\end{array}$$ What is the contribution margin ratio for toaster ovens?

A) 36.7%
B) 45.9%
C) 54.1%
D) 63.3%

Question 39

Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are available:
$$\begin{array} { | l | r | r | } \hline & \text { Toaster Ovens } & \text { Bread Machines } \\\hline \text { Sale price } & \$ 60 & \$ 135 \\\hline \text { Variable costs } & \$ 38 & \$ 62 \\\hline\end{array}$$ Easy Cook can manufacture five toaster ovens per machine hour and three bread machines per machine
Hour. Easy Cook's production capacity is 1,500 machine hours per month.
To maximize profits, what product and how many units should the company produce in a month?

A) 4,500 bread machines
B) 2,250 toaster ovens and 3,750 bread machines
C) 3,750 toaster ovens and 2,250 bread machines
D) 7,500 toaster ovens

Question 40

Shine Bright Company has three product lines: D, E, and F. The following information is available:
$$\begin{array} { | l | r | r | r | } \hline & \mathbf { D } & \mathbf { E } & \mathbf { F } \\\hline \text { Sales } & \$ 60,000 & \$ 38,000 & \$ 26,000 \\\hline \text { Variable costs } & 36,000 & 18,000 & 12,000 \\\hline \text { Contribution margin } & 24,000 & 20,000 & 14,000 \\\hline \text { Fixed expenses } & \underline { 12,000 } & \underline { 15,000 } & 16,000 \\\hline \text { Operating income (loss) } & \$ 12,000 & \$ 5,000 & \$ ( 2,000 ) \\\hline\end{array}$$ Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assuming Shine Bright Company drops line F and is able to double the production and sales of product line E without increasing fixed costs. What effect will this have on operating income?

A) Operating income will increase $6,000.
B) Operating income will increase $20,000.
C) Operating income will decrease $6,000.
D) Operating income will decrease $14,000.

Question 41

Shine Bright Company has three product lines: D, E, and F. The following information is available:
$$\begin{array} { | l | r | r | r | } \hline & \mathbf { D } & \mathbf { E } & \mathbf { F } \\\hline \text { Sales } & \$ 60,000 & \$ 38,000 & \$ 26,000 \\\hline \text { Variable costs } & 36,000 & 18,000 & 12,000 \\\hline \text { Contribution margin } & 24,000 & 20,000 & 14,000 \\\hline \text { Fixed expenses } & \underline { 12,000 } & \underline { 15,000 } & 16,000 \\\hline \text { Operating income (loss) } & \$ 12,000 & \$ 5,000 & \$ ( 2,000 ) \\\hline\end{array}$$ Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assume Shine Bright Company is able to increase the sales of product F to $30,000 with no change in volume of units sold and no change in variable costs or fixed costs. What effect will this have on operating income?

A) Increase $2,000
B) Increase $4,000
C) Decrease $2,000
D) Decrease $4,000

Question 42

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows:
$$\begin{array} { | l | r | r | r | } \hline & \text { Blankets } & \text { Pillows } & \text { Total } \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & 465,000 & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { Fixed expenses } & 76,000 & 76,000 & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$ ( 16,000 ) & \$ 63,000 \\\hline\end{array}$$ If fixed costs remain unchanged and Sweet Dreams drops the pillow line, which of the following statements is correct?
1) Total operating income will decrease $60,000.
2) Total contribution margin will increase $60,000.
3) Total operating income will increase $16,000.

A) 1 only
B) both 2 and 3
C) 3 only
D) 2 only

Question 43

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows:
$$\begin{array} { | l | r | r | r | } \hline & \text { Blankets } & \text { Pillows } & \text { Total } \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & 465,000 & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { Fixed expenses } & 76,000 & 76,000 & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$ ( 16,000 ) & \$ 63,000 \\\hline\end{array}$$ If Sweet Dreams can eliminate fixed costs of $50,000 by dropping the pillow line, then dropping it should result in which of the following?

A) An increase in total operating income of $16,000.
B) A decrease in total operating income of $10,000.
C) A decrease in total operating income of $34,000.
D) An increase in total operating income of $26,000.

Question 44

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows:
$$\begin{array} { | l | r | r | r | } \hline & \text { Blankets } & \text { Pillows } & \text { Total } \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & 465,000 & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { Fixed expenses } & 76,000 & 76,000 & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$ ( 16,000 ) & \$ 63,000 \\\hline\end{array}$$ If Sweet Dreams can eliminate fixed costs of $50,000 and increase the sale of blankets by 3,000 units at a selling price of $20 per unit and a contribution margin of $5 per unit, then dropping the pillows should result in which of the following?

A) An increase in operating income of $25,000.
B) A decrease in operating income of $5,000.
C) No change in total operating income
D) An increase in total operating income of $5,000.

Question 45

DJ Corporation has a limited number of labor hours available for monthly production purposes.
What should DJ's strategy be in order to maximize its monthly operating income?

A) DJ should produce the products with the highest gross margin per unit.
B) DJ should produce the products with the highest contribution margin per unit.
C) DJ should hire additional laborers as long as the hourly labor cost is less than the
Sales revenue generated as a result of working an additional hour.
D) DJ should produce the products with the highest contribution margin per labor hour.

Question 46

Prince Company's racquet division has projected a net operating loss of $190,000 for the upcomingyear; fixed costs for the racquet division total $325,000, of which $115,000 are considered to beavoidable. As a result of the forecasted loss, Prince is considering dropping the racquet division.If the racquet division is dropped, Prince estimates that the clothing division's sales will decrease 5%next year. The clothing division's projected operating income next year is $195,000 while theprojected contribution margin is $525,000. Should Prince Company drop the racquet division?

A) Yes, because operating income will increase $115,000.
B) Yes, because operating income will increase $180,250.
C) No, because operating income will decrease $46,250.
D) No, because operating income will decrease $29,750.

Question 47

Which of the following is (are) relevant with respect to the decision as to whether a product line
Should be dropped?
I. The product line's contribution margin.
II. The product line's avoidable fixed expenses.
III. The product line's unavoidable fixed expenses.
IV. The impact of the decision to drop the product on the sales of the company's other products.
V. The potential use of the freed capacity resulting from dropping the product line.

A) I, II, and IV
B) I, II, IV, and V
C) I, III, and IV
D) They are all relevant.

Question 48

Which of the following statements is not correct?

A) Depreciation expense is irrelevant with respect to an outsourcing decision.
B) Unavoidable fixed costs are irrelevant with respect to a decision to drop a product line.
C) Variable production costs are relevant with respect to a special sales order decision.
D) Avoidable fixed costs are irrelevant with respect to a make or buy decision.

Question 49

If the incremental costs of manufacturing a product exceed the incremental costs of outsourcing the product, it should be outsourced.

Question 50

The sell as is or process further decision considers the joint manufacturing costs to be irrelevant to the decision.

Question 51

If the marginal (extra) revenue associated with a sell as is or process further decision exceeds the
marginal (extra) cost associated with the decision, the company should make the decision to process
further.

Question 52

DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs.
If DC Electronics makes the part, how much will its operating income be?

A) $6,500 greater than if the company bought the part
B) $8,100 greater than if the company bought the part
C) $5,100 less than if the company bought the part
D) $15,000 less than if the company bought the part

Question 53

DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $11,600 profit. If DC Electronics makes the part, what will its operating income be?

A) It will be $3,400 less than if the company bought the part.
B) It will be $3,500 less than if the company bought the part.
C) It will be $1,700 greater than if the company bought the part.
D) It will be $19,700 greater than if the company bought the part.

Question 54

Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:
$$\begin{array} { | l | r | r | } \hline \text { Direct materials } & \$ 3 & \\\hline \text { Direct labor } & 5 & \\\hline \text { Variable manufacturing overhead } & 4 & \\\hline \text { Fixed manufacturing overhead } & 2 & \\\hline \text { Total cost } & \$ 14 & \\\hline\end{array}$$ Erickson Company has offered to sell 5,000 units of the same part to Lincoln Company for $13 per unit. Assuming the company has no other use for its facilities and that the fixed manufacturing costs are
Unavoidable, what should Lincoln Company do?

A) Make the part and save $1 per unit.
B) Make the part and save $3 per unit.
C) Buy from Erickson and save $1 per unit.
D) Buy from Erickson and save $3 per unit.

Question 55

Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:
$$\begin{array} { | l | r | r | } \hline \text { Direct materials } & \$ 3 & \\\hline \text { Direct labor } & 5 & \\\hline \text { Variable manufacturing overhead } & 4 & \\\hline \text { Fixed manufacturing overhead } & 2 & \\\hline \text { Total cost } & \$ 14 & \\\hline\end{array}$$ The fixed overhead costs are unavoidable.
Assuming no other use for its facilities, what is the highest price per unit that Lincoln Company should be willing to pay for the part?

A) $10
B) $11
C) $12
D) $14

Question 56

Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:
$$\begin{array} { | l | r | r | } \hline \text { Direct materials } & \$ 3 & \\\hline \text { Direct labor } & 5 & \\\hline \text { Variable manufacturing overhead } & 4 & \\\hline \text { Fixed manufacturing overhead } & 2 & \\\hline \text { Total cost } & \$ 14 & \\\hline\end{array}$$ The fixed overhead costs are unavoidable.
Assuming Lincoln Company can purchase 5,000 units of the part from Sexton Company for $15 each, and the facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year, what should Lincoln Company do?

A) Make the part and save $1 per unit.
B) Make the part and save $3 per unit.
C) Buy the part and save $1 per unit.
D) Buy the part and save $3 per unit.

Question 57

Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:
$$\begin{array} { | l | r | r | } \hline \text { Direct materials } & \$ 3 & \\\hline \text { Direct labor } & 5 & \\\hline \text { Variable manufacturing overhead } & 4 & \\\hline \text { Fixed manufacturing overhead } & 2 & \\\hline \text { Total cost } & \$ 14 & \\\hline\end{array}$$ The fixed overhead costs are unavoidable.
Assume Lincoln Company can purchase 5,000 units of the part from Allgood Company for $14 each, and the facilities currently used to make the part could be used to manufacture 5,000 units of another product that would contribute $5 per unit to fixed costs. If no additional fixed costs would be incurred, what should Lincoln Company do?

A) Make the new product and buy the part to earn an extra $1 per unit contribution to profit.
B) Make the new product and buy the part to earn an extra $3 per unit contribution to profit.
C) Continue to make the part to earn an extra $1 per unit contribution to profit.
D) Continue to make the part to earn an extra $3 per unit contribution to profit.

Question 58

The Ascott Company has in its inventory 3,000 damaged radios that cost $45,000. The radios can be sold in their present condition for $30,000, or repaired at a cost of $41,000 and sold for $75,000. What is the opportunity cost of selling the radios in their present condition?

A) $30,000
B) $34,000
C) $41,000
D) $75,000

Question 59

Billings Corporation has 100 defective chairs in stock which can be sold in their present condition for$50 each. The defective chairs cost Billings $60 to manufacture. Billings is considering repairing thechairs at a cost of $30 per chair; Billings will be able to sell the repaired chairs for $90 per unit. ShouldBillings repair the defective chairs?

A) No, because Billings will not make any profit on the sale of the repaired chairs.
B) Yes, because Billings can sell the repaired chairs at a price greater than what they can be sold
For as defective chairs.
C) No, because the cost of repairing the defective chairs increases the total manufacturing costs
To $90, which is the selling price of the repaired chairs.
D) Yes, because Billings can increase its overall operating income by $1,000.

Question 60

BWM Motors currently purchases batteries from an outside supplier, which are used in the motorcycles that they manufacture. BWM pays $78 for each battery and uses 1,000 batteries per year.
BWM's management team is considering manufacturing the batteries internally and has estimated
The per unit battery cost to be as follows:
$$\begin{array} { | l | l | } \hline \text { Direct materials } & \$ 37 \\\hline \text { Direct labor } & \$ 19 \\\hline \text { Variable manufacturing overhead } & \$ 13 \\\hline \text { Fixed manufacturing overhead } & \$ 22 \\\hline\end{array}$$ BWM has idle capacity and can manufacture the batteries without affecting the manufacture of their
Motorcycles. Should BWM manufacture the batteries?

A) Yes, because the annual increase in operating income will be $9,000.
B) No, because the annual decrease in operating income will be $13,000.
C) No, because the annual decrease in operating income will be $9,000.
D) Yes, because the annual increase in operating income will be $13,000.

Question 61

Which of the following costs is (are) relevant with respect to the decision to sell a product at the split-
Off point or to process if further?
I. The variable costs of further processing the product.
II. The joint processing costs associated with the manufacture of the product.
III. The increase in the sales price of the product if it is further processed.

A) I and III
B) I and II
C) I, II, and III
D) II and III

Question 62

Saber Sawmill produces rough-cut lumber from a joint process which begins with logs that they
Purchase from a logging company. Saber's management is trying to determine whether the rough-cut
Lumber should be planed and then sold as finished lumber. Which of the following is (are) relevant to
The decision faced by Saber's management?
I. The amount that Saber paid to acquire the logs.
II. The selling price of the rough-cut lumber.
III. The selling price of the planed lumber.
IV. The variable cost of planing the lumber.
V. The cost of buying a new planer.

A) I and V
B) II, III, IV, and V
C) II, III, and IV
D) They are all relevant.

Question 63

Mastic Company recently manufactured 100 defective products. Mastic's management can sell the defective products as is at a reduced price or they can repair them and sell them at the regular sales price. Which of the following is irrelevant to Mastic's decision to sell them as is or to repair them?

A) The manufacturing costs incurred to produce the defective units.
B) The difference in revenue when comparing the regular sales price to the reduced sales price.
C) The labor costs associated with repairing the defective units.
D) The opportunity costs associated with the time commitment to repair the defective units.

Question 64

The Bike Manufacturing Company has idle manufacturing capacity and is considering themanufacture of a new line of bikes. Which of the following costs is irrelevant with respect to thedecision to manufacture the new line of bikes?

A) The salary of the new production manager who would have to be hired.
B) The cost of the new manufacturing equipment which would have to be purchased.
C) The monthly rental on the manufacturing facility used to produce bikes.
D) The costs associated with marketing and selling the new line of bikes.