Deck 10: Relevant Costing for Managerial Decisions

Question 1

An opportunity cost is the potential benefit lost by taking a specific action when two or more alternative choices are available.

Answer 1

True

Question 2

Most financial measures of revenues and costs from accounting systems are based on historical costs.

Answer 2

True

Question 3

In a make or buy decision, management should focus on costs that are the same under the two alternatives.

Answer 3

False

Question 4

Part of the decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

Question 5

Wages from a job a student gives up to attend summer school would be a sunk cost.

Question 6

Incremental costs should be considered in a make or buy decision.

Question 7

A sunk cost will change with a future course of action.

Question 8

Additional business in the form of a special order of goods or services should be accepted when the incremental revenue equals the incremental costs.

Question 9

If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B; assuming fixed costs are the same, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin per unit of operating capacity.

Question 10

Sunk costs are irrelevant to future decisions.

Question 11

An out-of-pocket cost requires a future outlay of cash and is relevant for current and future decision making.

Question 12

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

Question 13

A sunk cost arises from a past decision and cannot be avoided or changed.

Question 14

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

Question 15

The cost of equipment purchased by a company last year would be an avoidable cost.

Question 16

Significant sunk costs are relevant to decisions about the future.

Question 17

Opportunity costs are the additional or incremental revenues generated by selecting a certain course of action.

Question 18

The concept of incremental cost is the same as the concept of differential cost.

Question 19

Another name for relevant cost is unavoidable cost.

Question 20

Incremental costs are the additional costs incurred if a company pursues a certain course of action.

Question 21

If the cost to buy a part is less than the direct material, direct labor, and incremental overhead cost of making the part, the company should buy the part.

Question 22

If accepting additional business would cause existing sales to decline, the offer should always be declined.

Question 23

Employee morale, timeliness of delivery, and the reactions of customers are examples of nonfinancial factors that should be considered when making a managerial decision.

Question 24

Contribution margin lost from a decline in sales is an opportunity cost.

Question 25

A special order of goods or services should always be accepted when the incremental revenue exceeds the normal revenue.

Question 26

Additional costs incurred if a company pursues a certain course of action are sunk costs.

Question 27

Sales mix refers to the combination of products sold by a company.

Question 28

Incremental costs are also called out-of-pocket costs.

Question 29

The total cost method determines a selling price equal to a product's total costs plus a desired profit on the product.

Question 30

The potential benefits lost by taking a specific action when two or more alternative choices are available is known as a(n):

A) Alternative cost.
B) Sunk cost.
C) Out-of-pocket cost.
D) Differential cost.
E) Opportunity cost.

Question 31

The decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

Question 32

A cost that requires a future outlay of cash, and is relevant for current and future decision making, is a(n):

A) Out-of-pocket cost.
B) Sunk cost.
C) Opportunity cost.
D) Operating cost.
E) Uncontrollable cost.

Question 33

A company's best sales mix is determined using contribution margin per unit of scarce resource.

Question 34

Costs already incurred in manufacturing the units of a product that do not meet quality standards are relevant costs in a scrap or rework decision.

Question 35

A markup percentage equals total costs divided by desired profit.

Question 36

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

Question 37

Assuming a company has excess operating capacity, a special order should be accepted if its incremental revenues exceed the incremental costs, and the special order does not negatively impact existing business.

Question 38

Additional power for operating machines, extra supplies, and added cleanup costs are examples of incremental overhead costs.

Question 39

An opportunity cost:

A) Is an unavoidable cost because it remains the same regardless of the alternative chosen.
B) Requires a current outlay of cash.
C) Results from past managerial decisions.
D) Is the potential benefit lost by choosing a specific alternative course of action among two or more.
E) Is irrelevant in decision making because it occurred in the past.

Question 40

To maximize profit when a constrained resource exists, management should produce the sales mix that has the highest contribution margin per unit of scarce resource.

Question 41

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?

A) No, because net income would decrease by $1,500.
B) No, because net income would decrease by $2,000.
C) Yes, because net income would increase by $7,500.
D) Yes, because net income would increase by $2,000.
E) No, because net income would decrease by $5,500.

Question 42

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. Assuming Maxim further processes Green Health further into Premium Green and Green Deluxe, revenue from the two products would be:

A) $98,000.
B) $96,000.
C) $ 8,000.
D) $ 6,000.
E) $ 2,000.

Question 43

Factor Co. can produce a unit of product for the following costs: $\begin{array}{llcc} \text { Direct material } &\$8\\ \text { Direct labor } &24\\ \text { Overhead } &\underline{40}\\ \text {Total costs per unit } &\$72\\\end{array}$

An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to:

A) Buy since the relevant cost to make it is $56.
B) Make since the relevant cost to make it is $48.
C) Buy since the relevant cost to make it is $48.
D) Make since the relevant cost to make it is $32.
E) Buy since the relevant cost to make it is $32.

Question 44

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. Chang should:

A) Throw the units away.
B) Sell the units to the salvage company for $5 per unit.
C) Sell the units as they are because repairing them will cause their total cost to exceed their selling price.
D) Sell 1,000 units to the salvage company and repair the remainder.
E) Correct the defects and sell the units at the regular price.

Question 45

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be:

A) $98,000.
B) $96,000.
C) $8,000.
D) $6,000.
E) $2,000.

Question 46

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Minor wishes to earn $1,250 on the special order, the size of the order would need to be:

A) 4,500 units.
B) 2,250 units.
C) 1,125 units.
D) 625 units.
E) 300 units.

Question 47

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the incremental revenue will be:

A) $45,000.
B) $11,250.
C) $33,750.
D) $7,500.
E) $52,500.

Question 48

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. The incremental income or loss on reworking the units is:

A) $20,000 loss.
B) $20,000 income.
C) $12,000 loss.
D) $32,000 income.
E) $30,000 income.

Question 49

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?

A) No, because additional production would exceed capacity.
B) No, because incremental costs exceed incremental revenue.
C) Yes, because incremental revenue exceeds incremental costs.
D) Yes, because incremental costs exceed incremental revenues.
E) No, because the incremental revenue is too low.

Question 50

A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n):

A) Uncontrollable cost.
B) Incremental cost.
C) Opportunity cost.
D) Out-of-pocket cost.
E) Sunk cost.

Question 51

Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should:

A) Produce only Product A.
B) Produce only Product B.
C) Produce equal amounts of A and B.
D) Produce A and B in the ratio of 62.5% A to 37.5% B.
E) Produce A and B in the ratio of 40% A and 60% B.

Question 52

Listmann Corp. processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data:
$$\begin{array} { | l | r | r | r | } \hline \text { Product } & \begin{array} { c } \text { Sales Value } \\\text { with no further } \\\text { Processing }\end{array} & \begin{array} { c } \text { Additional } \\\text { Processing } \\\text { Costs }\end{array} & { \begin{array} { c } \text { Sales } \\\text { Value after } \\\text { further } \\\text { processing }\end{array} } \\\hline \text { Premier } & \$ 1,350 & \$ 900 & \$ 2,700 \\\hline \text { Deluxe } & 450 & 225 & 630 \\\hline \text { Super } & 900 & 450 & 1,800 \\\hline \text { Basic } & 90 & 45 & 180 \\\hline\end{array}$$ Which product(s) should not be processed further?

A) Premier.
B) Deluxe.
C) Super.
D) Basic.
E) Premier and Basic.

Question 53

Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Gordon's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Gordon should:

A) Sell the watches for $3 per unit.
B) Correct the defects and sell the watches at the regular price.
C) Sell the watches as they are because repairing them will cause their total cost to exceed their selling price.
D) Sell 5,000 watches to the salvage company and repair the remainder.
E) Throw the watches away.

Question 54

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the incremental cost will be:

A) $45,000.
B) $11,250.
C) $38,750.
D) $7,500.
E) $33,750.

Question 55

A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $200,000 original cost of the machine is an example of a(n):

A) Incremental cost.
B) Opportunity cost.
C) Variable cost.
D) Sunk cost.
E) Out-of-pocket cost.

Question 56

A company is considering a new project that will cost $19,000. This project would result in additional annual revenues of $6,000 for the next 5 years. The $19,000 cost is an example of a(n):

A) Sunk cost.
B) Fixed cost.
C) Incremental cost.
D) Uncontrollable cost.
E) Opportunity cost.

Question 57

Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be:

A) $68,000.
B) $78,000.
C) $96,000.
D) $98,000.
E) $100,000.

Question 58

An additional cost incurred only if a company pursues a particular course of action is a(n):

A) Period cost.
B) Pocket cost.
C) Discount cost.
D) Incremental cost.
E) Sunk cost.

Question 59

Epsilon Co. can produce a unit of product for the following costs: $\begin{array}{llcc} \text { Direct material } &\$8\\ \text { Direct labor } &24\\ \text { Overhead } &\underline{40}\\ \text {Total costs per unit } &\$72\\\end{array}$
An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to:

A) Buy since the relevant cost to make it is $72.
B) Make since the relevant cost to make it is $56.
C) Buy since the relevant cost to make it is $48.
D) Make since the relevant cost to make it is $48.
E) Buy since the relevant cost to make it is $56.

Question 60

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The incremental revenue of processing Green Health further into Premium Green and Green Deluxe would be:

A) $98,000.
B) $96,000.
C) $ 8,000.
D) $ 6,000.
E) $ 2,000.

Question 61

Ahngram Corp. has 1,000 defective units of a product that cost $3 per unit in direct costs and $6.50 per unit in indirect cost when produced last year. The units can be sold as scrap for $4 per unit or reworked at an additional cost of $2.50 and sold at full price of $12. The incremental net income (loss) from the choice of reworking the units would be:

A) $5,500.
B) $0.
C) ($2,500).
D) $9,500.
E) $2,500.

Question 62

Elliot Company can sell all of its products A and Z that it can produce, but it has limited production capacity. It can produce 8 units of A per hour or 10 units of Z per hour, and it has 20,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for Elliot Company?

A) 84,000 units of A and 60,000 units of Z.
B) 48,000 units of A and 80,000 units of Z.
C) 60,000 units of A and 100,000 units of Z.
D) 120,000 units of A and 0 units of Z.
E) 0 units of A and 200,000 units of Z.

Question 63

Frederick Co. is thinking about having one of its products manufactured by an outside supplier. Currently, the cost of manufacturing 5,000 units follows:
$$\begin{array} { | l | r | } \hline \text { Direct material } & \$ 62,000 \\\hline \text { Direct labor } & 47,000 \\\hline \text { Variable factory overhead } \ldots \ldots \ldots \ldots \ldots \ldots . & 38,000 \\\hline \text { Factory overhead } & 52,000 \\\hline\end{array}$$ If Frederick can buy 5,000 units from an outside supplier for $130,000, it should:

A) Make the product because current factory overhead is less than $130,000.
B) Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000.
C) Make the product because factory overhead is a sunk cost.
D) Buy the product because total fixed and variable manufacturing costs are greater than $130,000.
E) Buy the product because the total incremental costs of manufacturing are greater than $130,000.

Question 64

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What is the amount of incremental revenue from rebuilding?

A) $3.00 per unit.
B) $5.00 per unit.
C) $7.00 per unit.
D) $2.40 per unit.
E) $0.60 per unit.

Question 65

Bannister Co. is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows:
$$\begin{array} { | l | r | } \hline \text { Direct material } & \$ 45,000 \\\hline \text { Direct labor } & 30,000 \\\hline \text { Factory overhead ( } 30 \% \text { is variable) } & 98,000 \\\hline\end{array}$$ If Bannister can buy 1,000 units from an outside supplier for $100,000, it should:

A) Make the product because current factory overhead is less than $100,000.
B) Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000.
C) Buy the product because the total incremental costs of manufacturing are greater than $100,000.
D) Buy the product because total fixed and variable manufacturing costs are greater than $100,000.
E) Make the product because factory overhead is a sunk cost.

Question 66

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What is the amount of incremental income (loss) from rebuilding?

A) $3.00 per unit.
B) $(3.00) per unit.
C) $7.00 per unit.
D) $(0.60) per unit.
E) $0.60 per unit.

Question 67

Benjamin Company had the following results of operations for the past year: $$\begin{array} { | l | r | r | } \hline \text { Sales } ( 16,000 \text { units at } \$ 10 ) & & \$ 160,000 \\\hline \text { Direct materials and direct labor } & \$ 96,000 & \\\hline \text { Overhead ( } 20 \% \text { variable) } & 16,000 & \\\hline \text { Selling and administrative expenses (all fixed) } & \underline { 32,000 } & \underline { ( 144,000 )} \\\hline \text { Operating income } & & \underline { \$ 16,000 }\\\hline\end{array}$$ A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. Assuming Benjamin's productive capacity is 16,000 units per year and accepts the offer, its profits will:

A) Decrease by $10,000.
B) Decrease by $10,900.
C) Decrease by $ 6,000.
D) Increase by $ 9,100.
E) Increase by $ 4,300.

Question 68

Walters manufactures a specialty food product that can currently be sold for $22 per unit and has 20,000 units on hand. Alternatively, it can be further processed at a cost of $12,000 and converted into 12,000 units of Deluxe and 6,000 units of Super. The selling price of Deluxe and Super are $30 and $20, respectively. The incremental net income of processing further would be:

A) $40,000.
B) $28,000.
C) $18,000.
D) $44,000.
E) $12,000.

Question 69

Benjamin Company had the following results of operations for the past year: $$\begin{array} { | l | r | r | } \hline \text { Sales } ( 16,000 \text { units at } \$ 10 ) & & \$ 160,000 \\\hline \text { Direct materials and direct labor } & \$ 96,000 & \\\hline \text { Overhead ( } 20 \% \text { variable) } & 16,000 & \\\hline \text { Selling and administrative expenses (all fixed) } & \underline { 32,000 } & \underline { ( 144,000 )} \\\hline \text { Operating income } & & \underline { \$ 16,000 }\\\hline\end{array}$$ A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. Assuming Benjamin has excess capacity and accepts the offer, its profits will:

A) Increase by $30,000.
B) Increase by $6,000.
C) Decrease by $6,000.
D) Increase by $5,200.
E) Increase by $4,300.

Question 70

A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. If the company rebuilds the units, what is the impact on income?

A) Income will increase by $4,000.
B) Income will increase by $500.
C) Income will decrease by $4,500.
D) Income will decrease by $500.
E) Income will increase by $8,000.

Question 71

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What should the company do?

A) Sell the units as scrap.
B) Rebuild the units.
C) It does not matter because both alternatives have the same result.
D) Since both alternatives produce a loss, store the units in hopes of a better price later.
E) Throw the units away.

Question 72

Lattimer Company had the following results of operations for the past year: $$\begin{array} { | l | r | r | } \hline \text { Sales } ( 15,000 \text { units at } \$ 12 ) & & \$ 180,000 \\\hline \text { Variable manufacturing costs } & \$ 97,500 & \\\hline \text { Fixed manufacturing costs } & 21,000 & \\\hline \text { Selling and administrative expenses (all fixed) } & \underline { 36,000 } & \underline { ( 154,500 ) }\\\hline \text { Operating income } & & \underline { \$ 25,500} \\\hline\end{array}$$ A foreign company whose sales will not affect Lattimer's market offers to buy 5,000 units at $7.50 per unit. In addition to existing costs, selling these units would add a $0.25 selling cost for export fees. Lattimer's annual production capacity is 25,000 units. If Lattimer accepts this additional business, the special order will yield a:

A) $2,000 loss.
B) $8,250 loss.
C) $3,750 profit.
D) $3,250 loss.
E) $5,000 profit.

Question 73

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What is the amount of incremental cost from rebuilding?

A) $3.00 per unit.
B) $5.00 per unit.
C) $7.00 per unit.
D) $2.40 per unit.
E) $0.60 per unit.

Question 74

Cornish Company had the following results of operations for the past year: $\begin{array}{|l|r|r|}\hline \text { Sales }(20,000 \text { units at } \$ 22) & & \$ 440,000 \\\hline \text { Direct materials and direct labor } & \$ 200,000 & \\\hline \text { Overhead (40\% variable) } & 100,000 & \\\hline \text { Selling and administrative expenses (all fixed) } & 92,000 & (392,000) \\\hline \text { Operating income } & & \$ 48,000 \\\hline\end{array}$
A foreign company (whose sales will not affect Cornish's market) offers to buy 3,000 units at $17.00 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. If Cornish accepts the offer, its profits will:

A) Decrease by $4,500.
B) Increase by $4,500.
C) Decrease by $300.
D) Increase by $13,500.
E) Increase by $15,000.

Question 75

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:

A) $45,000 increase.
B) $11,250 increase.
C) $33,750 increase.
D) $7,500 decrease.
E) $33,750 decrease.

Question 76

Markson Company had the following results of operations for the past year: $\begin{array}{|l|l|cc|} \hline \text { Sales \( (8,000 \) units at \( \$ 20) \).................................... } & & \$160,000\\\hline \text {Variable manufacturing costs.............................. } &\$86,000\\\hline \text { Fixed manufacturing costs................................. } &15,000&\\ \hline\text { Variable selling and administrative expenses....... } &12,000\\\hline \text {Fixed selling and administrative expenses............ } & 20,000&(133,000)\\\hline \text { Operating income................................................ } & & \$27,000\\\hline\end{array}$
A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $14 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $1,600 for the purchase of special tools. Markson's annual productive capacity is 12,000 units. If Markson accepts this additional business, its profits will:

A) Increase by $3,500.
B) Decrease by $5,650.
C) Decrease by $1,600.
D) Increase by $1,900.
E) Decrease by $5,100.

Question 77

Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the product to Wheeler for $45. If Wheeler buys from the supplier, it will still incur 45% of its overhead cost. Compute the net incremental cost or savings of buying.

A) $4.00 savings per unit.
B) $4.00 cost per unit.
C) $2.20 cost per unit.
D) $3.80 cost per unit.
E) $2.20 savings per unit.

Question 78

Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $10; direct labor, $14, variable overhead $3 and fixed overhead, $8. An outside supplier has offered to sell the product to Paxton for $32. Compute the net incremental cost or savings of buying the component.

A) $5.00 savings per unit.
B) $3.00 cost per unit.
C) $0 cost or savings per unit.
D) $5.00 cost per unit.
E) $3.00 savings per unit.

Question 79

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $3,000. The division sales for the year were $1,050,000 and the variable costs were $860,000. The fixed costs of the division were $193,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

A) $57,900 decrease
B) $132,100 decrease
C) $54,900 decrease
D) $190,000 increase
E) $190,000 decrease

Question 80

A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. What should the company do?

A) Sell the units as scrap.
B) Rebuild the units.
C) It does not matter because both alternatives have the same result.
D) Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently.
E) Throw the units away.