Deck 12: Decision Making: Relevant Costs and Benefits

Question 1

The City of Newmarket 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?

A)Purchase price of the new vehicle.
B)Purchase price of the old vehicle.
C)Savings in operating costs as a result of the new vehicle.
D)Proceeds from disposal of the old vehicle.
E)Future depreciation on the new vehicle.

Answer 1

B

Question 2

Which of the following best defines the concept of a relevant cost?

A)A past cost that is the same among alternatives.
B)A past cost that differs among alternatives.
C)A future cost that is the same among alternatives.
D)A future cost that differs among alternatives.
E)A cost that is based on past experience.

Answer 2

D

Question 3

A trade-off in a decision situation sometimes occurs between information:

A)accuracy and relevance.
B)relevance and uniqueness.
C)accuracy and timeliness.
D)sensitivity and accuracy.
E)sensitivity and relevance.

Answer 3

C

Question 4

Carol-Lynn is contemplating a job offer with an advertising agency where she will make $64,000 in her first year of employment. Alternatively, Carol-Lynn can begin to work in her uncle's business where she will earn an annual salary of $48,000. If Carol-Lynn decides to work with her uncle, the opportunity cost would be:

A)$0.
B)$16,000.
C)$38,000.
D)$64,000.
E)$92,000.

Question 5

Managerial accountants:

A)rarely become involved in an organization's decision-making activities.
B)make decisions that focus solely on an organization's accounting matters.
C)collect data and provide information so that decisions can be made.
D)never serve as cross-functional team member, making a wide range of decisions.
E)collect data and provide information so that decisions can be made but do not serve as a cross-function team member in making a wide range of decisions.

Question 6

In early July, Jim Smith purchased a $70 ticket to the December 15 game of the Toronto Raptors. Parking for the game was expected to cost approximately $22, and Smith would probably spend another $15 for a souvenir program and food. It is now December 14. The Raptors were having a miserable season and the temperature was expected to peak at 5 degrees Celsius on game day. Jim is thinking about skipping the game and taking his wife to the movies and dinner, at a cost of $50. The amount of sunk cost that should influence Jim's decision to spend some time with his wife is:

A)$20.
B)$50.
C)$70.
D)$80
E)$107.

Question 7

Factors in a decision problem that cannot be expressed in numerical terms are:

A)qualitative in nature.
B)quantitative in nature.
C)predictive in nature.
D)sensitive in nature.
E)uncertain in nature.

Question 8

A factory that makes a part has significant idle capacity. The factory's opportunity cost of making this part is equal to:

A)the variable manufacturing cost per unit.
B)the fixed manufacturing cost per unit.
C)the semi-variable cost per unit.
D)the total manufacturing cost per unit.
E)zero.

Question 9

A special order generally should be accepted if:

A)its revenue exceeds allocated fixed costs, regardless of the variable costs associated with the order.
B)excess capacity exists and revenue exceeds variable costs associated with the order.
C)excess capacity exists and the revenue exceeds allocated fixed costs.
D)the revenue exceeds total costs, regardless of available capacity.
E)the revenue exceeds variable costs, regardless of available capacity.

Question 10

At which step or steps in the decision-making process do qualitative considerations generally have the greatest impact?

A)Specifying the criterion and identifying the alternatives.
B)Developing a decision model.
C)Collecting the data.
D)Select an alternative.
E)Identifying the alternatives.

Question 11

In early September, Merina Holden purchased an $800 ticket to the December 31 game of the Toronto Maple Leafs. Parking for the game was expected to cost approximately $30, and Holden would probably spend another $25 for a souvenir program and food. It is now December 14. The Maple Leafs were having a miserable season and the temperature was expected to peak at 5 degrees Celsius on game day. Merina therefore decided to skip the game and instead, took her sister to a Lady Gaga concert, with tickets and dinner costing $150. The sunk cost associated with this decision situation is:

A)$3.
B)$55.
C)$150.
D)$800.
E)$855.

Question 12

An accounting information system should be designed to provide information that is useful. To be useful the information must be:

A)qualitative rather than quantitative.
B)unique and unavailable through other sources.
C)historical in nature and not purport to predict the future.
D)marginal between two alternatives.
E)relevant, accurate, and timely.

Question 13

The following costs are relevant to the decision situation cited except:

A)the cost of hiring a full-time staff attorney, in a decision to establish an in-house legal department or retain the services of a prominent law firm.
B)the remodeling cost of existing office space, in a firm's decision to stay at its current location or move to a new building.
C)the long-term salary costs demanded by Dany Heatley (a superstar) and Brendan Bell (an average player) in hockey contract negotiations, in a decision that determines the amounts by which ticket prices must be raised.
D)the cost to enhance West Jet's Web site, in a decision to expand existing service to either Moosonee or Fort Albany
E)the commissions that could be earned by a salesperson, in a decision that involves salesperson compensation methods (i.e., commissions or flat monthly salaries).

Question 14

Which of the following costs can be ignored when making a decision?

A)Opportunity costs.
B)Differential costs.
C)Sunk costs.
D)Relevant costs.
E)All future costs.

Question 15

Two months ago, Tippett Inc. purchased 5,500 litres of Drysol at $2.40 per litre, paying $13,200. The demand for this product has been very strong since the acquisition, with the current market price at $5.05 per litre. The company recently received a special-order inquiry, one that would require the use of 4,000 litres of Drysol. Which of the following is (are) relevant in deciding whether to accept the special order?

A)The 1,500 litres remaining inventory of Drysol.
B)The $5.05 market price.
C)The $2.40 purchase price.
D)5,500 litres of Drysol.
E)The market price less the price paid.

Question 16

An opportunity cost may be described as a(n):

A)forgone benefit.
B)historical cost.
C)specialized type of variable cost.
D)specialized type of fixed cost.
E)specialized type of semi-variable cost.

Question 17

Triumph Incorporated is studying whether to expand operations by adding a new product line. Which of the following costs should be considered in this decision? $\begin{array}{|l|l|c|}\hline &\text { Opportunity Cost } & \text { Sunk Cost } \\\hline 1& \text { Yes } & \text { Yes } \\\hline 2& \text { Yes } & \text { Sometimes } \\\hline3 & \text { Yes } & \text { No } \\\hline4 & \text { No } & \text { Yes } \\\hline 5& \text { No } & \text { No }\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 18

Whispers Inc. has $150,000 of inventory that suffered minor smoke damage from a fire in the warehouse. The company can sell the goods "as is" for $70,000; alternatively, the goods can be cleaned and shipped to the firm's outlet centre at a cost of $48,000. There the goods could be sold for $90,000. What alternative is more desirable and what is the relevant cost for that alternative?

A)Sell "as is," for $80,000.
B)Sell "as is," for $150,000.
C)Clean and ship to outlet centre, $48,000.
D)Clean and ship to outlet centre, $138,000.
E)Clean and ship to outlet centre, $198,000.

Question 19

The book value of equipment currently owned by a company is an example of a(n):

A)future cost.
B)differential cost.
C)comparative cost.
D)opportunity cost.
E)sunk cost.

Question 20

Flower Company, which is operating at capacity, desires to add a new service to its rapidly expanding business. The service should be added as long as service revenues exceed:

A)variable costs.
B)fixed costs.
C)the sum of variable costs and fixed costs.
D)the sum of variable costs and any related opportunity costs.
E)the sum of variable costs, fixed costs, and any related opportunity costs.

Question 21

Quantum manufactures parts that are used in the production of washers and dryers. The following costs are associated with Part No. 41: $\begin{array} { | l | l | } \hline \text { Direct materials } & \$ 60 \\\hline \text { Direct labour } & 29 \\\hline \text { Variable manufacturing overhead } & 32 \\\hline \text { Fixed manufacturing overhead } & 10 \\\hline \text { Variable selling costs } & 9 \\\hline\end{array}$ The company has received a special-order inquiry from an appliance manufacturer in Portugal for 16,000 units of Part No.41. A total of 30% of Quantum's fixed manufacturing overhead can be avoided on the order, and the variable selling costs per unit will amount to only $6. The minimum price that Quantum should charge the Portuguese manufacturer is:

A)$127.
B)$130.
C)$134.
D)$137.
E)$140.

Question 22

Worldwide Enterprises has been approached about providing a new service to its clients. The company will bill clients at the rate of $150 per hour; the related hourly variable and fixed operating costs will be $65 and $28, 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:

A)$0.
B)$57.
C)$85.
D)$93.
E)$150.

Question 23

Heritage Homemakers Corp. (HHC) is composed of eight divisions across Canada, and each division is allocated a share of HHC overhead to make divisional managers aware of the cost of running the corporate headquarters. The following information relates to the Ontario Division: $\begin{array} { | l | l | } \hline \text { Sales revenue } & \$ 8,500,000 \\\hline \text { Variable operating costs } & 6,000,000 \\\hline \text { Traceable fixed operating costs } & 2,000,000 \\\hline \text { Allocated corporate overhead } & 200,000 \\\hline\end{array}$ If the Ontario Division is closed, 100% of the traceable fixed operating costs can be eliminated. The impact on HHC's profitability if the Ontario Division is closed is a:

A)decrease by $300,000.
B)decrease by $500,000.
C)decrease by $2,300,000.
D)decrease by $2,500,000.
E)decrease by $6,500,000.

Question 24

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:

A)$17,500.
B)$18,000.
C)$25,000.
D)$25,500.
E)$105,500.

Question 25

Which of the following statements regarding costs and decision-making is correct?

A)Fixed costs must be considered only on a per-unit basis.
B)Per-unit fixed cost amounts are valid only for make-or-buy decisions.
C)Per-unit fixed costs can be misleading because such amounts appear to behave as variable costs when, in actuality, the amounts are related to fixed expenditures.
D)Sunk costs can be misleading in make-or-buy decisions because these amounts appear to be relevant differential costs.
E)Opportunity costs should be ignored when evaluating decision alternatives.

Question 26

Occidental Company is studying whether to drop a product because of ongoing losses. Costs that would be relevant in this situation would include variable manufacturing costs as well as:

A)factory depreciation.
B)avoidable fixed costs.
C)unavoidable fixed costs.
D)allocated corporate administrative costs.
E)general corporate advertising.

Question 27

The Cosmetics Department at the Webb's Department Store is being considered for closure. The following information relates to cosmetics activity: $\begin{array} { l r } \text { Sales revenue } & \$ 300,000 \\\text { Variable costs: } & \\\text { Cost of goods sold } &200,000 \\\text { Sales commissions } & 20,000\\\text { Fixed operating costs }& 100,000\end{array}$ If all of the fixed operating costs are avoidable, should the Cosmetics Department be closed?

A)Yes, Webb's Department Store would be better off by $20,000.
B)Yes, Webb's Department Store would be better off by $100,000.
C)No, Webb's Department Store would be worse off by $80,000.
D)No, Webb's Department Store would be worse off by $100,000.
E)No, Webb's Department Store would be worse off by $200,000.

Question 28

Kline Enterprises, which has three departments, recently reported the following results: $\begin{array}{|l|c|c|c|c|}\hline & A&B&C\\\hline \text { Sales revenue } & \$ 12,000 & \mid \$ 48.000 & \mid \$ 40,000 \\\hline \text { Less: Operating costs } & \underline {11.400}& \mid\underline{59.800} &\mid\underline {50.500}\\\hline \text { Operating income (loss) } & \underline{\$ 600} &\mid\underline {\$(11.800)} &\mid \underline{\$(10,500)} \\\hline\end{array}$ 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. If none of the fixed operating costs can be avoided, which operating loss should be considered first in choosing which department to close?

A)$600.
B)$11,800.
C)$10,500.
D)$50,500.
E)$59,800.

Question 29

When deciding whether to sell a product at the split-off point or process it further, joint costs are not usually relevant because:

A)such amounts do not help to increase sales revenue.
B)such amounts only slightly increase a company's sales margin.
C)such amounts are sunk and do not change with the decision.
D)the sales revenue does not decrease to the extent that it should, if compared with separable processing.
E)such amounts reflect opportunity costs.

Question 30

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 Product No. 607's "value" to the firm and deciding the best course of action to follow?

A)$0.85.
B)$2.40.
C)$3.40.
D)$6.20.
E)$9.60.

Question 31

Sampsonnites, a manufacturer of travel accessories, has excess capacity. The company's Kingston, Ontario plant has the following per-unit cost structure for Note No.12: $\begin{array} { | l | l | } \hline \text { Variable manufacturing } & \$ 50 \\\hline \text { Fixed manufacturing } & 25 \\\hline \text { Variable selling } & 6 \\\hline \text { Fixed selling } & 10 \\\hline \text { Traceable fixed administrative } & 5 \\\hline \text { Allocated administrative } & 2 \\\hline\end{array}$ The traceable fixed administrative cost was incurred at the Kingston plant; in contrast, the allocated administrative cost represents a "fair share" of Sampsonnites' corporate overhead. The Kingston plant has been presented with a special order of 6,000 units of Note No.12 on which no selling cost will be incurred. The proper relevant cost in deciding whether to accept this special order would be:

A)$50.
B)$80.
C)$85.
D)$91.
E)$96.

Question 32

Chocolate Company currently has excess capacity. A special order for 5,000 units is received at a price of $13 per unit. Currently, production and sales are anticipated to be 20,000 units without considering the special order. Budget information for the current year follows. $\begin{array}{lccc} \text { Sales } & \$ 300,000 \\ \text { Less: Cost of goods sold } & \underline{ 160,000 } \\\text { Gross margin } & \underline{\$140,000 }\end{array}$
Cost of goods sold includes $20,000 of fixed manufacturing cost. If the special order is accepted, the company's income will:

A)Increase by $30,000.
B)Decrease by $30,000.
C)Increase by $35,000.
D)Decrease by $35,000.
E)Increase by $65,000.

Question 33

Beatbox Company reported the following results from the sale of 24,250 units of Product 123: $\begin{array} { l r } \text { Sales } & \$ 608,000 \\\text { Variable manufacturing costs } & 388,000 \\\text { Fixed manufacturing costs } & 120,000 \\\text { Variable selling costs } & 60,000 \\\text { Fixed administrative costs } & 30,000\end{array}$ Bongo Inc. has offered to purchase 2,000 of Product 123 at $20 each. Beatbox 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 $20.95. Which of the following correctly notes the change in income if the special order is accepted?

A)$8,000 decrease.
B)$8,000 increase.
C)$32,000 decrease.
D)$40,000 decrease.
E)$40,000 increase.

Question 34

The term "outsourcing" is most closely associated with:

A)special-order decisions.
B)make-or-buy decisions.
C)equipment replacement decisions.
D)decisions to process joint products beyond the split-off point.
E)decisions that involve limited resources.

Question 35

Fifth Avenue designs is studying whether to outsource its Public Relations (P/R) activities. Salaried professionals who earn $200,000 would be terminated; in contrast, administrative assistants who earn $50,000 would be transferred elsewhere in the organization. Miscellaneous departmental overhead (e.g., supplies, copy charges, overnight delivery) is expected to decrease by $20,000, and $35,000 of corporate overhead, previously allocated to Public Relations, would be picked up by other departments. If Fifth Avenue can secure needed P/R services locally for $230,000, how much would the company benefit by outsourcing?

A)$0.
B)($5,000).
C)($10,000).
D)$10,000.
E)$25,000.

Question 36

Outdoors Inc. manufactures two products: Canoes and Kayaks. The results of operations for 2012 follow. $\begin{array}{l}\begin{array}{lll}\\\text { Units}\\\text { Sales}\\\text { Less: Cost of Goods Sold}\\\text { Gross Margin}\\\text { Less: Selling Expenses}\\\text { Operating Income}\\\end{array}\begin{array}{lll}\text { Canoes }\\12.000 \\\$ 288,000 \\\underline{216,000}\\72,000 \\\underline{72000}\\\underline{\$ 0} \end{array}\begin{array}{lll}\text { Kayaks}\\4,000 \\\$ 800,000 \\\underline{516,000} \\ 284,000 \\\underline{159,000} \\\underline{\$ 125,000} \\\end{array}\begin{array}{lll}\text { Total }\\16,000\\\$ 1,080,000\\\underline{732,000}\\{348,000}\\\underline{231,000}\\\underline{\$ 125.000}\end{array}\end{array}$ Fixed manufacturing costs included in cost of goods sold amount to $2 per unit for Canoes and $19 per unit for Kayaks. Variable selling expenses are $5 per unit for Canoes and $21 per unit for Kayaks; remaining selling amounts are fixed. Assume Outdoors Inc. eliminates Canoes but there is no reduction in company-wide fixed manufacturing overhead costs. Instead, Outdoors Inc. uses the available capacity to produce and sell an additional 2,000 units of Kayaks. Under this scenario, the impact on operating income would be:

A)$0.
B)$36,000 decrease.
C)$102,000 increase.
D)$138,000 increase.
E)$180,000 increase.

Question 37

Lido Company 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. Ten thousand pounds of B can be sold at split-off for $15 per pound or processed further at an additional cost of $20,000 and later sold for $16. If Lido decides to process B beyond the split-off point, operating income will:

A)increase by $10,000.
B)increase by $20,000.
C)decrease by $10,000.
D)decrease by $20,000.
E)decrease by $58,000.

Question 38

Outdoors Inc. manufactures two products: Canoes and Kayaks. The results of operations for 2012 follow. $\begin{array}{l}\begin{array}{lll}\\\text { Units}\\\text { Sales}\\\text { Less: Cost of Goods Sold}\\\text { Gross Margin}\\\text { Less: Selling Expenses}\\\text { Operating Income}\\\end{array}\begin{array}{lll}\text { Canoes }\\12.000 \\\$ 288,000 \\\underline{216,000}\\72,000 \\\underline{72000}\\\underline{\$ 0} \end{array}\begin{array}{lll}\text { Kayaks}\\4,000 \\\$ 800,000 \\\underline{516,000} \\ 284,000 \\\underline{159,000} \\\underline{\$ 125,000} \\\end{array}\begin{array}{lll}\text { Total }\\16,000\\\$ 1,080,000\\\underline{732,000}\\{348,000}\\\underline{231,000}\\\underline{\$ 125.000}\end{array}\end{array}$ Fixed manufacturing costs included in cost of goods sold amount to $2 per unit for Canoes and $19 per unit for Kayaks. Variable selling expenses are $5 per unit for Canoes and $21 per unit for Kayaks; remaining selling amounts are fixed. Outdoors Inc. wants to drop the Canoes 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 Canoes is discontinued?

A)$0.
B)$8,700 increase.
C)$26,000 decrease.
D)$36,000 decrease.
E)$96,000 decrease.

Question 39

A company that is operating at full capacity should emphasize those products and services that have the:

A)lowest total per-unit costs.
B)highest contribution margin per unit.
C)highest contribution margin per unit of scarce resource.
D)highest operating income.
E)highest sales volume.

Question 40

India 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. $\begin{array} { | l | r | r | } \hline & \text { Product J } & \text { Product K } \\\hline \text { Tons produced } & 25,000 & 15,000 \\\hline \text { Scparable variable processing eosts bcyond split-olI } & \$ 64,000 & \$ 100.000 \\\hline \text { Selling price per ton at split-off } & 15 & 52 \\\hline \text { Selling price per ton after additional processing } & 21 & 58 \\\hline\end{array}$ If India desires to maximize total company income, what should the firm do with regard to Products J and K? $\begin{array} { | l | l | l | } \hline & \text { Product J } & \underline { \text { Product K } } \\\hline 1 & \text { Sell at split-off } & \text { Sell at split-off } \\\hline 2 & \text { Sell at split-off } & \text { Process beyond split-off } \\\hline 3 & \text { Process beyond split-off } & \text { Sell at split-off } \\\hline 4 & \text { Process beyond split-off } & \text { Process beyond split-off } \\\hline 5 & \text { There is not enough information to judge. } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 41

Cornell Corporation manufactures faucets. Several weeks ago, the company received a special-order inquiry from Yale Incorporated. Yale desires to market a faucet similar to Cornell's Model No. 55 and has offered to purchase 3,000 units. The following data are available:
▪ Cost data for Cornell's Model No. 55 faucet: direct materials, $45; direct labour, $30 (2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35 per hour).
▪ The normal selling price of Model No. 55 is $180; however, Yale has offered Cornell only $115 because of the large quantity it is willing to purchase.
▪ Yale requires a design modification that will allow a $4 reduction in direct-material cost.
▪ Cornell's production supervisor notes that the company will incur $8,700 in additional set-up costs and will have to purchase a $3,300 special device to manufacture these units. The device will be discarded once the special order is completed.
▪ Total manufacturing overhead costs are applied to production at the rate of $35 per labour hour. This figure is based, in part, on budgeted yearly fixed overhead of $624,000 and planned production activity of 24,000 labour hours.
▪ Cornell will allocate $5,000 of existing fixed administrative costs to the order as "…part of the cost of doing business."
Required:
A. One of Cornell's staff accountants wants to reject the special order because "financially, it's a loser." Do you agree with this conclusion if Cornell currently has excess capacity? Show calculations to support your answer.
B. If Cornell currently has no excess capacity, should the order be rejected from a financial perspective? Briefly explain.
C. Assume that Cornell currently has no excess capacity. Would outsourcing be an option that Cornell could consider if management truly wanted to do business with Yale? Briefly discuss, citing several key considerations for Cornell in your answer.

Question 42

Fowler Industries produces two bearings: C15 and C19. Data regarding these two bearings follow. The company requires 8,000 units of C15 and 11,000 units of C19. Recently, management decided to devote additional machine time to other product lines, resulting in only 31,000 machine hours per year that can be dedicated to production of the bearings. An outside company has offered to sell Fowler the bearings at prices of $13.50 for C15 and $13.50 for C19.
Required:
A. Assume that Fowler decided to produce all C15s and purchase C19s only as needed. Determine the number of C19s to be purchased.
B. Compute the net benefit to the company of manufacturing (rather than purchasing) a unit of C15. Repeat the calculation for a unit of C19.
C. Fowler lacks sufficient machine time to produce all of the C15s and C19s needed. Which component (C15 or C19) should Fowler manufacture first with the limited machine hours available? Why? Be sure to show all supporting computations.

Question 43

Kinsey Company recently discontinued the manufacture of Product #627. The standard costs for this product were: There are 900 units of this product in finished-goods inventory. The units are technologically obsolete, and the following alternatives are being considered.
1. Dispose of as scrap. The proceeds from the sale will equal the cost of transportation to the disposal site.
2. Sell to an exporter for sale in a developing country. The sales price to the exporter
would be $13 per unit.
3. Remanufacture the products to convert them into Model M55, a model that normally sells for $300. The additional cost to convert the Product #627 units would be $55; the standard cost to manufacture M55 is $135. Presently, there is sufficient capacity to manufacture M55 directly or to do the necessary conversion work on Product #627.
Required:
A. Determine the current carrying value of the Product #627 inventory.
B. Evaluate each alternative and determine the financial benefit to Kinsey if the alternative is pursued.

Question 44

"It's close to a $40,000 loser and we ought to devote our efforts elsewhere," noted Kara Whitmore, after reviewing financial reports of her company's attempt to offer a reduced-price daycare service to employees. The daycare's financial figures for the year just ended follow. If the daycare service/centre is closed, 70% of the traceable fixed cost will be avoided. In addition, the company will incur one-time closure costs of $6,800.
Required:
A. Show calculations that support Kara Whitmore's belief that the daycare centre lost almost $40,000.
B. Should the centre be closed? Show calculations to support your answer.
C. What problem might the company experience if the centre is closed?

Question 45

Stowers Corporation manufactures products J, K, and L in a joint process. The company incurred $480,000 of joint processing costs during the period just ended and had the following data that related to production:
An analysis revealed that all costs incurred after the split-off point are variable and directly traceable to the individual product line.
Required:
A. If Stowers allocates joint costs on the basis of the products' sales values at the split-off point, what amount of joint cost would be allocated to product J?
B. If production of J totalled 50,000 gallons for the period, determine the relevant cost per gallon that should be used in decisions that explore whether to sell at the split-off point or process further? Briefly explain your answer.
C. At the beginning of the current year, Stowers decided to process all three products beyond the split-off point. If the company desired to maximize income, did it err in regards to its decision with product J? Product K? Product L? By how much?

Question 46

Pillsbury Corporation makes two types of ice cream: Chocolate and Peanut Butter. Operating information from the previous year follows: $\begin{array} { l r r } & \text { Chocolate } & \text { Peanut Butter } \\\text { Units produced and sold } & 6,000 & 5,000 \\\text { Machine hours used } & 6,000 & 2,500 \\\text { Sales price per unit } & \$ 8 & \$ 11 \\\text { Variable cost per unit } & \$ 5 & \$ 9\end{array}$ Fixed costs of $30,000 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 Pillsbury has 20,000 machine hours available, how many units of each product should be produced and sold respectively?

A)0, 0.
B)0, 40,000.
C)6,000, 20,000.
D)6,000, 40,000.
E)20,000, 0.

Question 47

Mystic Incorporated produces a variety of products that carry the logos of teams in the Canadian Football League (CFL). The company recently paid the league $85,000 for the rights to market a popular player jersey and immediately began production. The following information is available:
The CFL is about to file a lawsuit to stop jersey sales and is demanding another $50,000 from Mystic for the manufacturing rights. Conversations with Mystic's attorneys indicate that the league has a strong case and is likely to win the suit. If this situation arises, Mystic will be unable to recover any amounts paid to the CFL.
Required:
Mystic's sales department anticipates very strong demand and a sellout of all jerseys manufactured.
A. Determine the overall profitability of the jersey product line if Mystic settles the disagreement with the CFL and the anticipated sellout occurs.
B. Should the company pay the additional $50,000 demanded by the league or should the jersey program be dropped? Show computations to support your answer.

Question 48

Don Olsen builds custom homes in Ottawa, Ontario. Olsen was approached not too long ago by a client about a potential project, and he submitted a bid of $557,000, derived as follows: Olsen adds a 35% profit margin to all jobs, computed on the basis of total cost. In this client's case the profit margin amounted to $194,950 ($557,000 x 35%), producing a bid price of $751,950. Assume that 50% of construction overhead is fixed.
Required:
A. Suppose that business is presently very slow, and the client countered with an offer on this home of $550,000. Should Olsen accept the client's offer? Briefly explain your response.
B. If Olsen has more business than he can handle, how much should he be willing to accept for the home? Briefly explain your response.

Question 49

Riverside Company manufactures G and H in a joint process. The joint costs amount to $80,000 per batch of finished goods. Each batch yields 20,000 litres, of which 40% are G and 60% are H. The selling price of G is $8.75 per litre, and the selling price of H is $15.00 per litre.
Required:
A. If the joint costs are allocated on the basis of the products' sales value at the split-off point, what amount of joint cost will be charged to each product?
B. Riverside has discovered a new process by which G can be refined into Product GG, which has a sales price of $12 per litre. This additional processing would increase costs by $2.10 per litre. Assuming there are no other changes in costs, should the company use the new process? Show calculations.

Question 50

Smith Manufacturing has 27,000 labour hours available for producing X and Y. Consider the following information: $\begin{array} { | l | c | c | c | } \hline & \text { Product X } & & \text { Product Y } \\\hline \text { Required labour time per unit (hours) } & 2 && 3 \\\hline \text { Maximum demand (units) } & 6,000 && 8.000 \\\hline \text { Contribution margin per unit } & \$ 5.00& & \$ 6.00 \\\hline \text { Contribution margin per labour hour } & \$ 2.50 && \$ 2.00 \\\hline\end{array}$ If Smith follows proper managerial accounting practices, which of the following production schedules should the company set? $\begin{array} { | l | r | r | r | } \hline & \text { Product X } & & \text { Product Y } \\\hline 1 & 0 \text { units } && 8,000 \text { units } \\\hline 2 & 1,500 \text { units } & & 8,000 \text { units } \\\hline 3 & 6,000 \text { units } & &0 \text { units } \\\hline 4 & 6.000 \text { units } && 5.000 \text { units } \\\hline 5 & 6.000 \text { units } && 8.000 \text { units } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 51

Clancy Van Lines is considering the acquisition of two new trucks. Because of improved mileage, these vehicles are expected to have a lower operating cost per mile than the trucks the company plans to replace. Management is studying whether the firm would be better-off keeping the older vehicles or going ahead with the replacement, and has identified the following decision factors to evaluate.
1. Cost and book value of the old trucks
2. Moving revenues, which are not expected to change with the acquisition
3. Operating costs of the new and old vehicles
4. New truck purchase price and related depreciation charges
5. Proceeds from sale of the old vehicles
6. The 8% return on alternative investments that Clancy will forego by tying up cash in the new trucks
7. Drivers' wages and fringe benefits
Required:
Classify the seven decision factors listed into the following categories (note: factors may be used more than once).
A. Relevant costs.
B. Opportunity costs.
C. Sunk costs.
D. Factors to be considered in the decision.

Question 52

Golden Company makes 3,000 units per year of a part called a "glup" for use in one of its products. Data concerning the unit production costs of glup follow:
An outside supplier has offered to sell Golden Company all the glups it requires. If Golden decided to discontinue making the glups, 40% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labour is a variable cost.
Required:
A. Assume Golden Company has no alternative use for the facilities presently devoted to production of the glups. If the outside supplier offers to sell glups for $65 each, should Golden Company accept the offer? Should the centre be closed? Show calculations to support your answer.
B. Assume that Golden Company could use the facilities presently devoted to production of glups to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Golden Company should be willing to pay the outside supplier for glups?

Question 53

St. Joseph Hospital has been hit with a number of complaints about its food service from patients, employees, and cafeteria customers. These complaints, coupled with a very tight local labour market, have prompted the organization to contact Nationwide
Institutional Food Service (NIFS) about the possibility of an outsourcing arrangement.
The hospital's business office has provided the following information for food service for the year just ended: food costs, $890,000; labour, $85,000; variable overhead, $35,000; allocated fixed overhead, $60,000; and cafeteria sales revenue, $80,000.
Conversations with NIFS personnel revealed the following information.
▪ NIFS will charge St. Joseph Hospital $14 per day for each patient served. Note: This figure has been "marked up" by NIFS to reflect the firm's cost of operating the hospital cafeteria.
▪ St. Joseph's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%.
▪ Labour is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labour costs will drop by 90%. NIFS plans to use St. Joseph facilities for meal preparation.
▪ Cafeteria sales revenue is expected to increase by 15% because NIFS will offer an improved menu selection.
Required:
A. What is meant by the term "outsourcing"?
B. Should St. Joseph outsource its food-service operation to NIFS?
C. Factors to consider would include improvement in food quality, reliability of NIFS, elimination of labor problems, and data validity in future years.

Question 54

Which of the following statements is true with respect to activity-based costing?

A)The concept of relevant costs and benefits cannot be used in conjunction with an activity-based costing system.
B)The concept of relevant costs and benefits must be modified for use with an activity-based costing system.
C)The concept of relevant costs and benefits can only be used with an activity-based costing system for short-run decisions.
D)The concept of relevant costs and benefits can only be used with an activity-based costing system for outsourcing decisions
E)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.

Question 55

A technique that is useful in exploring what would happen if a key decision prediction or assumption proved wrong is termed:

A)sensitivity analysis.
B)uncertainty analysis.
C)project analysis.
D)linear programming.
E)the theory of constraints.

Question 56

Pillsbury Corporation makes two types of ice cream: Chocolate and Peanut Butter. Operating information from the previous year follows: $\begin{array} { l r r } & \text { Chocolate } & \text { Peanut Butter } \\\text { Units produced and sold } & 6,000 & 5,000 \\\text { Machine hours used } & 6,000 & 2,500 \\\text { Sales price per unit } & \$ 8 & \$ 11 \\\text { Variable cost per unit } & \$ 5 & \$ 9\end{array}$ Fixed costs of $30,000 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 Peanut Butter is:

A)$0.25.
B)$2.00.
C)$4.00.
D)$5.00.
E)$20.00.

Question 57

Millennium 21 sells clothing, shoes, and accessories at a downtown location in Montreal, Quebec. Information for the year ended December 31, 2012 follows: Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $40,000 will be terminated; however, all other departmental fixed costs will continue to be incurred.
Millennium 21 will spend $20,000 on remodeling costs and anticipates that accessories sales will increase by $80,000. This additional sales revenue is expected to generate a 25% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 10% if the shoe department is closed.
Required:
Determine whether the shoe department should be closed.
The company is currently earning $45,000 ($60,000 - $30,000 + $15,000). If the shoe department is closed, total income amounts to only $10,500 as shown below, meaning the department should remain in operation.

Question 58

Garner Corporation has met all production requirements for the current month and has an opportunity to manufacture additional units with its excess capacity. Unit selling prices and unit costs for three product lines follow. Variable overhead is applied on the basis of direct labour dollars, whereas fixed overhead is applied on the basis of machine hours. There is sufficient demand for the additional manufacture of all products.
Required:
A. If Garner Corporation has excess machine capacity and can add more labour as needed with no constraints, which product is the most attractive to produce?
B. If Garner Corporation has excess machine capacity but a limited amount of labour time available, which product or products should be manufactured in the excess capacity?

Question 59

The following costs relate to a variety of decision settings:
Required:
Consider each of the nine costs listed and determine whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain why.

Question 60

Mamma Lucy's Pizza is a franchise operation with 47 stores across Canada. Store No. 10 has fallen on hard times and is about to be closed. The following figures are available for the period just ended: All employees except the store manager would be discharged. The manager, who earns $37,000 annually, would be transferred to Store No. 12 in a neighboring suburb. Also, no. 10's furnishings and equipment are fully depreciated and would be removed and transported to Mamma Lucy's warehouse at a cost of $3,200.
Required:
A. What is Store No. 10's reported loss for the period just ended?
B. Should the store be closed? Briefly explain your response.
C. Would Mamma Lucy's likely lose all $305,000 of sales revenue if Store No. 10 were closed? Briefly explain your response.

Question 61

Capacity restrictions often change the way that managers make decisions. For example, consider a retailer that has limited square footage in its store. What guideline should be used in deciding which new products to carry? How would this differ, say, from a concert promoter that desires to bring a rock group to an arena-type facility?

Question 62

Information is said to be useful in decision making if it possesses three characteristics.
Required:
A. List the three characteristics of useful information.
B. Frequently, there is a conflict between two of the characteristics requested in part "A." Briefly explain what this conflict is.
C. What distinguishes relevant from irrelevant information?

Question 63

Sunk costs and opportunity costs are inherent in decision making.
Required:
A. Define the terms "sunk cost" and "opportunity cost."
B. How are sunk costs treated when making decisions?
C. "Information about sunk costs can be found in the financial statements and accounting records; however, information about opportunity costs is omitted." Do you agree with this statement? Explain.