Deck 10: Relevant Costs and Product Planning Decisions

Question 1

Speed Quest Inc.manufactures speed boats.Currently,the company manufactures its own engine for the boats at the following unit costs:
$\begin{array}{lr} \text { Direct materials } &\$25.00\\ \text {Direct labour } &\$40.00\\ \text { Variable overhead } &\$15.00\\ \text { Fixed overhead } &\$20.00\\\end{array}$

Another manufacturer has offered to supply Speed Quest with the engine at a cost of $85 each.Speed Quest currently makes 1000 boats annually.If Speed Quest accepts the offer,what will be the short-term impact on net income?

A) Decrease of $5000
B) Increase of $15 000
C) Decrease of $85 000
D) Increase of $20 000

Answer 1

Decrease of $5000

Question 2

Which of the following would not be a factor in the consideration of whether or not a special order is accepted or not?

A) Variable costs
B) Avoidable fixed costs
C) Sales price of the special order
D) Unavoidable fixed costs

Answer 2

D

Question 3

Which of the following is not a consideration associated with outsourcing?

A) The effect on employees
B) The effect on vertical integration
C) The effect on unavoidable fixed costs
D) The effect on variable costs

Answer 3

C

Question 4

A local science museum normally sells entry tickets for $6 each.The daily maximum capacity of the museum is 500 visitors.At the maximum capacity,fixed costs are $3 per visitor and variable costs are $.50 per visitor.A local school group has approached the museum wishing to purchase 25 special passes at a cost of $2.00 each.Assuming the museum has excess capacity,if the special order were accepted,net income would:

A) increase by $37.50.
B) decrease by $87.50.
C) increase by $50.00.
D) decrease by $37.50.

Question 5

When are fixed costs relevant in a make or buy decision?

A) Fixed costs are never relevant to the decision.
B) Fixed costs are relevant when they differ among alternatives.
C) Fixed costs are always relevant to the decision.
D) Fixed costs are relevant when they exceed variable costs.

Question 6

Which of the following statements is true when a company is considering whether or not to make or buy (outsource)a component of a product that it currently manufactures?

A) If none of the current fixed overhead is avoidable when outsourcing,the product should be made internally.
B) If the current fixed overhead is avoidable when outsourcing,the product should be outsourced.
C) If the relevant costs to make internally are greater than the relevant costs of outsourcing,the product should be outsourced.
D) If the cost of outsourcing is greater than the direct materials cost of making internally,the product should continue to be made internally.

Question 7

Which of the following costs is least likely to be relevant in deciding whether to accept a special order?

A) Variable direct labour costs
B) Variable selling costs
C) Fixed manufacturing overhead
D) Variable packaging and shipping costs

Question 8

JNR Products produces and sells plastic soft drink cups with specialised logos on the front.They sell the cups in batches of 500 for $125 per batch.The company has the capacity to produce 100 batches per month but averages much less.When 75 batches are sold a month,each batch has $40 worth of variable costs and $5 worth of fixed overhead costs allocated to it.The company has been approached by a local fireman's association who wishes to purchase three batches of cups for $50 per batch.If the special order were accepted,net income would:

A) increase by $10.
B) decrease by $225.
C) increase by $15.
D) increase by $30.

Question 9

Which of the following types of costs should always be considered in special order decisions?

A) Unavoidable costs
B) Relevant costs
C) Sunk costs
D) Fixed costs

Question 10

Collegiate Products produces and sells padded stadium seats emblazoned with a university logo.The company has the capacity to produce as many as 6000 seats per month but consistently averages much less.When 4500 seats are produced,each seat has $5 of variable costs and $2 of fixed overhead costs allocated to it.The seats typically sell for $25 each.The company has been approached by a small college who wishes to purchase 500 seats for special alumni at a price of $5 per seat.If the special order were accepted,net income would:

A) decrease by $1000.
B) increase by $2500.
C) decrease by $12 500.
D) not change.

Question 11

Preston Wade
Preston Wade, a local craftsman, normally sells his handcrafted wooden birdhouses for $88 each. Preston has the capacity to produce as many as 50 birdhouses a week. In a normal week, Preston makes 20 birdhouses with the following costs per unit:
$\begin{array}{lc}\text { Direct materials } & \$ 5.00 \\\text { Direct labour } & \$ 20.00 \\\text { Variable overhead } & \$ 4.00 \\\text { Fixed overhead } & \$ 2.00\end{array}$


-Refer to the Preston Wade information below.
Preston has received a special order from a local plant nursery to purchase 25 birdhouses for a price of $90 each.The nursery wishes to have the birdhouses engraved with their own logo,therefore,the order would require the rental of a special engraving tool at a cost of $200.If Preston accepts the special order,net income will increase by:

A) $1525
B) $1325
C) $1275
D) $1475

Question 12

A local vendor at the county fair sells snow cones for $3 each.When 250 snow cones are sold,each snow cone is estimated to have $.10 in variable costs and $.15 in fixed costs.A local school group plans on attending the fair next week and wishes to purchase 50 snow cones for $.25 each.The vendor can sell as many as 400 snow cones per day.What is the minimum price the vendor should charge for the snow cones?

A) $3.00
B) $ .25
C) $ .10
D) $2.75

Question 13

Vertical integration:

A) is achieved when a company acquires many of its competitors.
B) is accomplished when a company is involved in multiple steps in the value chain.
C) is rarely attempted due to the risks involved.
D) ensures that the highest quality products are produced at the lowest possible price.

Question 14

What are Averette & Averette's total relevant costs to make the dentures themselves?

A) $150
B) $250
C) $260
D) $100

Question 15

Preston Wade
Preston Wade, a local craftsman, normally sells his handcrafted wooden birdhouses for $88 each. Preston has the capacity to produce as many as 50 birdhouses a week. In a normal week, Preston makes 20 birdhouses with the following costs per unit:
$\begin{array}{lc}\text { Direct materials } & \$ 5.00 \\\text { Direct labour } & \$ 20.00 \\\text { Variable overhead } & \$ 4.00 \\\text { Fixed overhead } & \$ 2.00\end{array}$


-Refer to the Preston Wade information below.
Preston has received a special order from a local plant nursery for 25 birdhouses.The nursery wishes to have the birdhouses engraved with their own logo,therefore,the order would require the rental of a special engraving tool at a cost of $200.Preston requires a minimum $2000 profit on any special order.The minimum price per birdhouse that Preston should charge the nursery is:

A) $ 80
B) $117
C) $ 89
D) $119

Question 16

Which of the following would not be a factor in the consideration of whether or not a special order should be accepted?

A) Excess capacity
B) Variable costs
C) Sunk costs
D) Qualitative factors

Question 17

Which of the following will never be considered in special order decisions?

A) Variable costs
B) Fixed costs
C) Sunk costs
D) Opportunity costs

Question 18

Which of the following statements is true regarding special order decisions?

A) Special order decisions are long-run decisions.
B) Whether or not the company has excess capacity is seldom a consideration.
C) Both quantitative and qualitative impacts should be considered.
D) The sales price of a special order should never be below the price offered to regular customers.

Question 19

Quinton Products manufactures digital cameras.Currently,the company manufactures its own carrying case for the cameras at the following unit costs:
$\begin{array}{lr} \text { Direct materials } &\$2.00\\ \text {Direct labour } &\$2.00\\ \text { Variable overhead } &\$1.00\\ \text { Fixed overhead } &\$1.00\\\end{array}$

Another manufacturer has offered to supply Quinton with the case at a cost of $6 each.Quinton currently makes 9000 cases annually.If Quinton accepts the offer,what will be the short-term impact on net income?

A) No impact on net income.
B) Decrease by $9000.
C) Increase by $9000.
D) Decrease by $18 000.

Question 20

A local vendor at the county fair sells snow cones for $3 each.When 250 snow cones are sold,each snow cone is estimated to have $.10 in variable costs and $.15 in fixed costs.A local school group plans on attending the fair next week and wishes to purchase 50 snow cones for $.25 each.The vendor can sell as many as 400 snow cones per day.If the special order were accepted,net income would:

A) not change.
B) decrease by $137.50.
C) increase by $12.50.
D) increase by $7.50.

Question 21

Which of the following is the least likely to be a consideration in a resource utilisation decision?

A) Shelf space
B) Direct labour hours
C) Machine time
D) Fixed costs

Question 22

Carlton Products has three product lines: A,B,and C.
$\begin{array}{lr}&\underline{\text { A }} &\underline{\text { B }} &\underline{ \text { C }} &\underline{ \text { Total }}\\ \text { Sales } &\$50000&\$550200&\$700000&\$1750000\\ \text { Variable costs } &\underline{280000}&\underline{420000}&\underline{300000}&\underline{1000000}\\ \text {Contribution margin } &220000&130000&400000&750000\\ \text { Fixed costs} &\underline{100000}&\underline{140000}&\underline{150000}&\underline{390000}\\ \text { Net income} &\underline{\$120000}&\underline{\$10000}&\underline{\$(250000)}&\underline{\$360000}\\ \text { } &\\\end{array}$




Management is considering dropping product line B.If it is discontinued,all of its fixed costs can be avoided.The discontinuation of product line B would:

A) decrease net income $10 000.
B) increase net income $140 000.
C) decrease net income $130 000.
D) increase net income $10 000.

Question 23

Refer to the Kellerman Detailing Service information below.
Kellerman Detailing Service
Kellerman Detailing Service provides two types of car detailing packages: the standard and the deluxe. Selected data related to each package is as follows:
$\begin{array}{lrr}&\text { Standard}&\text { Deluxe }\\\text { Sales price } & \$ 85 & \$ 200 \\\text { Direct materials } & 5 & 10 \\\text { Direct labour } & 15 & 40 \\\text { Variable overhead } & 5 & 15 \\\text { Direct labour hours } & 2 & 3\end{array}$

Most of the car detailing is done by hand.

-For the upcoming year,there is a maximum of 4050 direct labour hours available.Management believes that the demand for both the standard and deluxe detailing is limited to 900 each per year.How many standard and deluxe detailing jobs should be sold in the upcoming year in order to maximise profits?

A) Standard: 900 Deluxe: 750
B) Standard: 675 Deluxe: 900
C) Standard: 900 Deluxe: 900
D) Standard: 450 Deluxe: 900

Question 24

A particular product line is most likely to be dropped when:

A) its total fixed costs are more than its contribution margin.
B) its avoidable fixed costs are more than its contribution margin.
C) its unavoidable fixed costs are more than its contribution margin.
D) its variable costs are more than its fixed costs.

Question 25

Compton Products Inc.
Compton Products Inc. manufactures humidifiers. The company currently makes all of the electronic components for the humidifier itself. When 10 000 units are manufactured each year, the motor costs per unit are as follows:
$\begin{array}{lr}\text { Direct materials } & \$ 6 \\\text { Direct labour } & 8 \\\text { Variable overhead } & 7 \\\text { Fixed overhead } & 9\end{array}$

McClintock Inc. has offered to sell Compton 10 000 motors for $25 per unit. If Compton accepts the offer, 75% of the fixed overhead currently allocated to the motors could be avoided.

-If Compton accepts the offer to purchase 10 000 motors from McClintock,net income will:

A) increase by $27 500.
B) decrease by $17 500.
C) increase by $50 000.
D) decrease by $40 000.

Question 26

Refer to the Kellerman Detailing Service information below.
Kellerman Detailing Service
Kellerman Detailing Service provides two types of car detailing packages: the standard and the deluxe. Selected data related to each package is as follows:
$\begin{array}{lrr}&\text { Standard}&\text { Deluxe }\\\text { Sales price } & \$ 85 & \$ 200 \\\text { Direct materials } & 5 & 10 \\\text { Direct labour } & 15 & 40 \\\text { Variable overhead } & 5 & 15 \\\text { Direct labour hours } & 2 & 3\end{array}$

Most of the car detailing is done by hand.

-There is a maximum of 4050 direct labour hours available each year.If demand were equally strong for both packages and the company could sell an unlimited number of either package,how many of which kind(s)of package(s)should be sold in order to maximise profits?

A) 2025 standard
B) 1350 deluxe
C) 1620 standard and 2430 deluxe
D) 810 standard and 810 deluxe

Question 27

In resource utilisation decisions,managers should:

A) minimise the contribution margin per unit.
B) minimise the use of the scarce resource.
C) maximise the contribution margin per unit of scarce resource.
D) maximise the contribution margin per unit.

Question 28

Decker Products
Decker Products manufactures standard and deluxe wooden swing sets. Selected data related to each product is as follows:
$\begin{array}{lrr}&\text { Standard}& \text { Deluxe }\\\text { Sales price per unit } & \$ 900 & \$ 2000 \\\text { Direct materials per unit } & 100 & 500 \\\text { Direct labour per unit } & 300 & 700 \\\text { Variable overhead per unit } & 50 & 100 \\\text { Machine hours per unit } & 4 & 8\end{array}$
Most of the manufacturing process for the sets is done on machines. There is a maximum of 10 000 machine hours available each year.

-If demand were strong for both sets and the company could sell an unlimited number of either style,how many of which kind(s)of wooden swing set(s)should be produced in order to maximise profits?

A) 2500 standard sets
B) 1250 deluxe sets
C) 833 standard sets and 833 deluxe sets
D) 2500 standard sets and 1250 deluxe sets

Question 29

Decker Products
Decker Products manufactures standard and deluxe wooden swing sets. Selected data related to each product is as follows:
$\begin{array}{lrr}&\text { Standard}& \text { Deluxe }\\\text { Sales price per unit } & \$ 900 & \$ 2000 \\\text { Direct materials per unit } & 100 & 500 \\\text { Direct labour per unit } & 300 & 700 \\\text { Variable overhead per unit } & 50 & 100 \\\text { Machine hours per unit } & 4 & 8\end{array}$
Most of the manufacturing process for the sets is done on machines. There is a maximum of 10 000 machine hours available each year.

-If demand were strong for both sets and the company could sell an unlimited number of either style,what is the maximum total contribution margin the company could have?

A) $ 875 000
B) $ 281 250
C) $1 125 000
D) $1 750 000

Question 30

In the decision on whether or not to drop an unprofitable product line,the product line will most likely be dropped if:

A) all of the product line's fixed costs are unavoidable.
B) the product line's total fixed costs are less than the contribution margin lost from dropping the product line.
C) the contribution margin lost from dropping the product line is less than the fixed costs avoided from dropping the product line.
D) the contribution margin lost from dropping the product line is more than the fixed costs avoided from dropping the product line.

Question 31

For the upcoming year,there is a maximum of 4050 direct labour hours available.Management believes that the demand for both the standard and deluxe detailing is limited to 900 each per year.If the company maximises profits,what is the maximum contribution margin the company could have in the upcoming year?

A) $ 67 500
B) $175 500
C) $162 000
D) $ 60 750

Question 32

Henderson Manufacturing Inc.
Henderson Manufacturing Inc. manufactures electric scooters. The company currently makes all of the electronic components for the scooter itself. When 6000 motors are manufactured each year, the motor costs per unit are as follows:
$\begin{array}{lr} \text { Direct materials } &\$3\\ \text {Direct labour } &4\\ \text { Variable overhead } &5\\ \text { Fixed overhead } &8\\\end{array}$


Plymouth Inc. has offered to sell Henderson 6000 motors for $15 per unit. If Henderson accepts the offer, 60% of the fixed overhead currently allocated to the motors could be avoided.


-What are the relevant costs per unit of Henderson manufacturing the motors themselves?

A) $16.80
B) $15.20
C) $20.00
D) $12.00

Question 33

Compton Products Inc.
Compton Products Inc. manufactures humidifiers. The company currently makes all of the electronic components for the humidifier itself. When 10 000 units are manufactured each year, the motor costs per unit are as follows:
$\begin{array}{lr}\text { Direct materials } & \$ 6 \\\text { Direct labour } & 8 \\\text { Variable overhead } & 7 \\\text { Fixed overhead } & 9\end{array}$

McClintock Inc. has offered to sell Compton 10 000 motors for $25 per unit. If Compton accepts the offer, 75% of the fixed overhead currently allocated to the motors could be avoided.

-What are the relevant costs per unit of Compton making the motors themselves?

A) $21.00
B) $23.25
C) $27.75
D) $30.00

Question 34

Paxton Products has three product lines: A,B,and C.
$\begin{array}{lr}&\underline{\text { A }} &\underline{\text { B }} &\underline{ \text { C }} &\underline{ \text { Total }}\\ \text { Sales } &\$90000&\$150000&\$200000&\$440000\\ \text { Variable costs } &\underline{50000}&\underline{120000}&\underline{100000}&\underline{270000}\\ \text {Contribution margin } &40000&30000&100000&170000\\ \text { Fixed costs} &\underline{15000}&\underline{40000}&\underline{50000}&\underline{105000}\\ \text { Net income} &\underline{\$25000}&\underline{\$10000}&\underline{\$(50000)}&\underline{\$65000}\\ \text { } &\\\end{array}$




Management is considering dropping product line B.In order for the dropping of product line B to not cause an overall decrease in profits,product line B's avoidable fixed costs should be at least:

A) $40 000
B) $30 000
C) $10 000
D) $70 000

Question 35

Laurel Inc.has three product lines: A,B,and C.
$\begin{array}{lr}&\underline{\text { A }} &\underline{\text { B }} &\underline{ \text { C }} &\underline{ \text { Total }}\\ \text { Sales } &\$20000&\$35000&\$22000&\$77000\\ \text { Variable costs } &\underline{8000}&\underline{10000}&\underline{14000}&\underline{32000}\\ \text {Contribution margin } &12000&25000&8000&45000\\ \text { Fixed costs} &\underline{4000}&\underline{11000}&\underline{9000}&\underline{24000}\\ \text { Net income} &\underline{\$8000}&\underline{\$14000}&\underline{\$(1000)}&\underline{\$21000}\\ \text { } &\\\end{array}$


Management is considering dropping product line C.If it is discontinued,one-half of its fixed costs can be avoided.The discontinuation of product line C would:

A) decrease net income by $3500.
B) increase net income by $1000.
C) decrease net income by $12 500.
D) increase net income by $4500.

Question 36

Tremaine Inc.has three product lines: A,B,and C.
$\begin{array}{lr}&\underline{\text { A }} &\underline{\text { B }} &\underline{ \text { C }} &\underline{ \text { Total }}\\ \text { Sales } &\$50000&\$85000&\$90000&\$225000\\ \text { Variable costs } &\underline{30000}&\underline{30000}&\underline{44000}&\underline{104000}\\ \text {Contribution margin } &2000&55000&46000&121000\\ \text { Fixed costs} &\underline{23000}&\underline{25000}&\underline{18000}&\underline{66000}\\ \text { Net income} &\underline{\$3000}&\underline{\$30000}&\underline{\$(28000)}&\underline{\$55000}\\ \text { } &\\\end{array}$



Management is considering dropping product line A.If it is discontinued,$18 000 of its fixed costs can be avoided.The discontinuation of product line A would:

A) decrease net income by $15 000.
B) increase net income by $21 000.
C) decrease net income by $2000.
D) increase net income by $3000.

Question 37

Which of the following statements regarding resource utilisation is not true?

A) Resource utilisation decisions are usually short-term in nature.
B) Resource utilisation decisions require the identification of a constraint.
C) Resource utilisation decisions require an analysis of which fixed costs are unavoidable.
D) Resource utilisation decisions require managers to compute a product's contribution margin.

Question 38

Decker Products
Decker Products manufactures standard and deluxe wooden swing sets. Selected data related to each product is as follows:
$\begin{array}{lrr}&\text { Standard}& \text { Deluxe }\\\text { Sales price per unit } & \$ 900 & \$ 2000 \\\text { Direct materials per unit } & 100 & 500 \\\text { Direct labour per unit } & 300 & 700 \\\text { Variable overhead per unit } & 50 & 100 \\\text { Machine hours per unit } & 4 & 8\end{array}$
Most of the manufacturing process for the sets is done on machines. There is a maximum of 10 000 machine hours available each year.

-What is the contribution margin per unit of limited resource for each type of set?

A) Standard: $125.00 Deluxe: $100.00
B) Standard: $225.00 Deluxe: $250.00
C) Standard: $450.00 Deluxe: $700.00
D) Standard: $112.50 Deluxe: $ 87.50

Question 39

Henderson Manufacturing Inc.
Henderson Manufacturing Inc. manufactures electric scooters. The company currently makes all of the electronic components for the scooter itself. When 6000 motors are manufactured each year, the motor costs per unit are as follows:
$\begin{array}{lr} \text { Direct materials } &\$3\\ \text {Direct labour } &4\\ \text { Variable overhead } &5\\ \text { Fixed overhead } &8\\\end{array}$


Plymouth Inc. has offered to sell Henderson 6000 motors for $15 per unit. If Henderson accepts the offer, 60% of the fixed overhead currently allocated to the motors could be avoided.

-If Henderson accepts the offer to purchase 6000 motors from Plymouth,net income will:

A) decrease by $1200.
B) increase by $30 000.
C) decrease by $18 000.
D) increase by $10 800.

Question 40

If Averette & Averette outsources the making of dentures,net income will:

A) decrease by $15 000.
B) increase by $5000.
C) increase by $15 000.
D) decrease by $5000.

Question 41

Serenity Garden Inc.
Serenity Garden Inc. produces and sells a variety of garden accessories. One of the product lines the company makes is unpainted gnome statues that come in three sizes: small, medium, and large. The company is considering painting the gnomes. The following information is available regarding unpainted and painted gnomes:
$\begin{array}{lrrr}&\text { Small}&\text { Medium } & \text { Large }\\\text { Initial sales price } & \$ 40 & \$ 60 & \$ 80 \\\text { Initial cost } & 15 & 20 & 23 \\\text { Sales price after painting } & 47 & 70 & 95 \\\text { Cost of painting } & 8 & 9 & 11 \\& & & \\\text { Number sold per year } & 500 & 1000 & 400\end{array}$

-What is the maximum amount that net income could increase each year with further processing?

A) $2100
B) $2600
C) $7600
D) $1600

Question 42

Which of the following is most likely to represent a bottleneck?

A) A production machine that is underutilised
B) A workstation that requires significant supervision
C) A production machine that has limited capacity
D) An employee who has one hour of idle time each day

Question 43

Joyner Products
Joyner Products makes cedar garden benches in three sizes: small, medium, and large. Joyner sells the benches to local retailers. The benches can be sold with or without assembly. The following information is available for each table:
$\begin{array}{lrrr}.&\text { Small }& \text { Medium } & \text { Large }\\\text { Initial sales price } & \$ 90 & \$ 150 & \$ 250 \\\text { Initial cost } & 30 & 45 & 70 \\\text { Sales price after assembly } & 110 & 180 & 260 \\\text { Cost of assembly } & 15 & 20 & 25 \\& & & \\\text { Number sold per month } & 120 & 350 & 150\end{array}$

-Which bench(es)should be assembled before they are sold to retailers?

A) Small and medium
B) Medium and large
C) Small and large
D) Small,medium,and large

Question 44

What is a special order? What factors does a company consider when examining a special order?

Question 45

Mountaineer Products
Mountaineer Products manufactures two types of tents: single-wall and double-wall. Selected data related to each type of tent is as follows:
$\begin{array}{lrr}&\text { Single-wall}&\text { Double-wall }\\\text { Sales price } & \$ 250 & \$ 375 \\\text { Direct materials } & 25 & 50 \\\text { Direct labour } & 20 & 40 \\\text { Variable overhead } & 10 & 15 \\\text { Machine hours } & 2 & 3\end{array}$
Total fixed overhead is $150 000. Most of the manufacturing process is done on specialised machines. For the upcoming year, there is a maximum of 9000 machine hours available. Management believes there is sufficient demand for 3000 single-wall and 4000 double-wall tents each year.

-If the company maximises profits,what is the maximum contribution margin for the upcoming year?

A) $232 500
B) $382 500
C) $705 000
D) $855 000

Question 46

In the production process,bottlenecks:

A) maximise profits.
B) maximise the use of scarce resources.
C) limit throughput.
D) minimise the total cost of a product.

Question 47

If a company is faced with a limited resource,which of the following is not a feasible option for alleviating the constraint?

A) Focusing on products that require less use of the resource
B) Increasing the capacity of the limited resource
C) Reducing the use of the resource in production
D) Ignoring the constraint

Question 48

Joyner Products
Joyner Products makes cedar garden benches in three sizes: small, medium, and large. Joyner sells the benches to local retailers. The benches can be sold with or without assembly. The following information is available for each table:
$\begin{array}{lrrr}.&\text { Small }& \text { Medium } & \text { Large }\\\text { Initial sales price } & \$ 90 & \$ 150 & \$ 250 \\\text { Initial cost } & 30 & 45 & 70 \\\text { Sales price after assembly } & 110 & 180 & 260 \\\text { Cost of assembly } & 15 & 20 & 25 \\& & & \\\text { Number sold per month } & 120 & 350 & 150\end{array}$

-What is the maximum amount that net income could increase each month with further processing?

A) $14 400
B) $ 1850
C) $ 4100
D) $ 6350

Question 49

You overhear the manager of a sign shop say,'I'd never accept a special order! How could you ever make money selling products below full cost?' Do you agree? Why or why not?

Question 50

Mountaineer Products
Mountaineer Products manufactures two types of tents: single-wall and double-wall. Selected data related to each type of tent is as follows:
$\begin{array}{lrr}&\text { Single-wall}&\text { Double-wall }\\\text { Sales price } & \$ 250 & \$ 375 \\\text { Direct materials } & 25 & 50 \\\text { Direct labour } & 20 & 40 \\\text { Variable overhead } & 10 & 15 \\\text { Machine hours } & 2 & 3\end{array}$
Total fixed overhead is $150 000. Most of the manufacturing process is done on specialised machines. For the upcoming year, there is a maximum of 9000 machine hours available. Management believes there is sufficient demand for 3000 single-wall and 4000 double-wall tents each year.

-In order to maximise profits,how many of each type of tent should be produced?

A) Single-wall: 3000 Double-wall: 1000
B) Single-wall: 0 Double-wall: 3000
C) Single-wall: 1800 Double-wall: 1800
D) Single-wall: 1500 Double-wall: 4000

Question 51

In a sell 'as is' or process further decision,if the incremental revenue of additional processing is greater than the incremental cost of additional processing,then:

A) it is less profitable to process further.
B) it is more profitable to process further.
C) total fixed costs have increased.
D) total product costs have decreased.

Question 52

Wright Manufacturing
Wright Manufacturing makes picnic tables in three sizes: small, medium, and large. The picnic tables can be sold with or without a finishing stain. The following information is available for each table:
$\begin{array}{lrrr}&\text { Small }& \text { Medium } & \text { Large }\\\text { Initial sales price } & \$ 60 & \$ 100 & \$ 1 / 5 \\\text { Initial cost } & 20 & 40 & 55 \\\text { Sales price after staining } & 70 & 125 & 210 \\\text { Cost of staining } & 11 & 15 & 20 \\& & & \\\text { Number sold per month } & 100 & 300 & 175\end{array}$

-Which table(s)should be processed further?

A) Small and medium tables
B) Medium and large tables
C) Large tables
D) Small,medium,and large tables

Question 53

Carolina Potato Inc.currently sells cut sweet potatoes for $.85 per can.The cost of producing the sweet potatoes is $.18 per can.Carolina Potato is considering starting a line of mashed sweet potatoes.The additional processing costs would be $.06 per can and each can would sell for $.95.Which of the following pieces of information is not relevant to the decision to sell 'as is' or process further?

A) $.06 additional processing cost
B) $.18 production cost
C) $.95 sales price
D) demand for pureed sweet potatoes

Question 54

Serenity Garden Inc.
Serenity Garden Inc. produces and sells a variety of garden accessories. One of the product lines the company makes is unpainted gnome statues that come in three sizes: small, medium, and large. The company is considering painting the gnomes. The following information is available regarding unpainted and painted gnomes:
$\begin{array}{lrrr}&\text { Small}&\text { Medium } & \text { Large }\\\text { Initial sales price } & \$ 40 & \$ 60 & \$ 80 \\\text { Initial cost } & 15 & 20 & 23 \\\text { Sales price after painting } & 47 & 70 & 95 \\\text { Cost of painting } & 8 & 9 & 11 \\& & & \\\text { Number sold per year } & 500 & 1000 & 400\end{array}$


-Which gnomes,if any,should be painted?

A) Small,medium,and large
B) Medium and large
C) Small and medium
D) None should be painted.

Question 55

In deciding whether to sell a product 'as is' or process it further,which of the following pieces of information would not be relevant to the decision?

A) Costs of further processing.
B) Costs incurred up to the decision point.
C) Sales price if processed further.
D) Customer demand with further processing.

Question 56

In deciding whether to sell a product 'as is' or process it further,which of the following costs are relevant to the decision?

A) Costs incurred up to the decision point
B) Costs incurred to process further
C) Only overhead costs
D) Direct materials and direct labour costs only

Question 57

Tilton Food Warehouse Club sells food and other items in bulk to its members.Tilton is very selective in the products it sells because of limited shelf space.It has been asked by a canned vegetables manufacturer to consider adding three of its canned food items.The following information is available regarding each of the possible canned food items:
$\begin{array}{lrrr}&\underline{\text { Item \#1} }&\underline{\text { Item \#2 }}&\underline{\text { Item \#3 }}\\\text { Sales price per unit } & \$ 3.50 & \$ 4.50 & \$ 7.00 \\\text { Cost to purchase } & 1.25 & 2.00 & 3.00 \\\text { Units per foot of shelf space }&3&2&1\end{array}$
Assuming that there is unlimited demand for all items,if Tilton has 15 feet of shelf space available,which of the following statements is true if they wish to maximise profits?

A) Tilton should sell only item #1.
B) Tilton should sell only item #2.
C) Tilton should sell only item #3.
D) Tilton should sell an equal amount of each item.

Question 58

Hannah's Homemade Cookies produces and sells delicious shortbread cookies.The cost of producing a bag of cookies is $.65 and the bag sells for $3.75.Hannah is considering processing all the cookies further by dipping them in chocolate.The additional processing costs would be $.50 per bag and the sales price of the chocolate-dipped cookies would be $4.20 per bag.If Hannah can sell 5000 bags of either type of cookie per year,which of the following statements is true if she chooses to process the cookies further?

A) Net income would increase by $2250 per year.
B) Net income would decrease by $2500 per year.
C) Net income would decrease by $250 per year.
D) Net income would increase by $15 250 per year.

Question 59

Wright Manufacturing
Wright Manufacturing makes picnic tables in three sizes: small, medium, and large. The picnic tables can be sold with or without a finishing stain. The following information is available for each table:
$\begin{array}{lrrr}&\text { Small }& \text { Medium } & \text { Large }\\\text { Initial sales price } & \$ 60 & \$ 100 & \$ 1 / 5 \\\text { Initial cost } & 20 & 40 & 55 \\\text { Sales price after staining } & 70 & 125 & 210 \\\text { Cost of staining } & 11 & 15 & 20 \\& & & \\\text { Number sold per month } & 100 & 300 & 175\end{array}$

-What is the maximum amount that net income could increase each month with further processing?

A) $81 125
B) $ 5525
C) $82 125
D) $ 5625

Question 60

The theory of constraints:

A) is a management tool used to determine whether or not a company should accept a special order.
B) identifies bottlenecks in the production process.
C) identifies fixed overhead costs in the production process.
D) is a management tool used for deciding whether a product should be sold 'as is' or processed further.

Question 61

Castleberry Products manufactures three product lines: A,B,and C.The following information is available for each product line:
$\begin{array}{lr}&\underline{\text { A }} &\underline{\text { B }} &\underline{ \text { C }} &\underline{ \text { Total }}\\ \text { Sales } &\$50000&\$35000&\$400000&\$1250000\\ \text { Variable costs } &\underline{175000}&\underline{240000}&\underline{200000}&\underline{615000}\\ \text {Contribution margin } &325000&110000&200000&635000\\ \text { Fixed costs} &\underline{120000}&\underline{120000}&\underline{100000}&\underline{340000}\\ \text { Net income} &\underline{\$250000}&\underline{\$10000}&\underline{\$(100000)}&\underline{\$295000}\\\end{array}$




Management is considering dropping product line B.
Required:
A. What is one qualitative factor that Castleberry should consider before dropping product line $B$ ?

B. If it is determined that all of product line B's fixed costs are avoidable, what would be the effect on the company's overall net income if it were dropped?

C. If it is determined that none of product line B's fixed costs are avoidable, what would be the effect on the company's overall net income if it were dropped?

D. If it is determined that $\$ 80000$ of product line B's fixed costs are avoidable, what would be the effect on the company's overall net income if it were dropped?

Question 62

List at least two factors that should be considered in a make or buy decision.

Question 63

Morris Inc.manufactures two products: Widgets and Gizmos.Widgets have a contribution margin per unit of $30 and require 2 hours of direct labour while Gizmos have a contribution margin per unit of $39 and require 3 hours of direct labour.
A. In the short-run, how should the company choose which product to produce or sell first if direct labour hours are a constraint?
B. Assuming there is sufficient demand for each of these products, which of the above products should the company maximise production of first? Show calculations to support your answer.

Question 64

Zing Inc.produces both soft and firm twin-size mattresses.Selected data related to each product is as follows:
$\begin{array}{lcc} &\underline{ \text { Soft }} &\underline{ \text { Firm }} \\ \text { Sales price per unit } & \$ 300 & \$ 400 \\\text { Direct materials per unit } & 50 & 70 \\\text { Direct labour per unit } & 40 & 60 \\\text { Variable overhead per unit } & 20 &30 \\\text { Direct labour hours per unit } & 40 \text { minutes } & 60 \text { minutes }\end{array}$
Most of the stuffing process is done by hand.There are a maximum of 2 000 000 direct labour minutes available each year.
Required:
A. If there is unlimited demand for both products, how many of each type of mattress should be produced in order to maximise profits?

B. If the company believes that there is sufficient demand for up to 30000 soft and 20000 firm mattresses each year, how many of each type should be installed in order to maximise profits?

Question 65

Kane Manufacturing has three product lines: A,B,and C.The following information is available for each product line:
$\begin{array}{lr}&\underline{\text { A }} &\underline{\text { B }} &\underline{ \text { C }} &\underline{ \text { Total }}\\ \text { Sales } &\$30000&\$350000&\$155000&\$805000\\ \text { Variable costs } &\underline{100000}&\underline{110000}&\underline{105000}&\underline{315000}\\ \text {Contribution margin } &2000&240000&50000&490000\\ \text { Fixed costs} &\underline{40000}&\underline{55000}&\underline{52000}&\underline{147000}\\ \text { Net income} &\underline{\$160000}&\underline{\$185000}&\underline{\$(2000)}&\underline{\$343000}\\ \text { } &\\\end{array}$




Management is considering dropping product line C.
Required:
A. What is one qualitative factor that Kane should consider before dropping product line $\mathrm{C}$ ?
B. If it is determined that all of product line C's fixed costs are avoidable, what would be the effect on the company's overall net income if it were dropped?

C. If it is determined that none of product line C's fixed costs are avoidable, what would be the effect on the company's overall net income if it were dropped?

D. If it is determined that half of product line C's fixed costs are avoidable, what would be the effect on the company's overall net income if it were dropped?

Question 66

Ergo Products manufactures a variety of ergonomic household tools including a cordless drill.The cordless drill comes with a battery recharger.Currently,the company manufactures its own recharger for the drill with the following unit costs:
$\begin{array}{ll}\text { Direct materials } & \$ 3.00 \\\text { Direct labour } & \$ 3.00 \\\text { Variable overhead } & \$ 1.00\end{array}$

In addition,when 5000 rechargers are produced each year,Ergo applies $2 of fixed overhead costs to each recharger.Another manufacturer has offered to supply Ergo with a recharger at a cost of $8 each.If Ergo accepts the offer,80% of the fixed overhead allocated to the rechargers will be avoidable.
Required:
A. List at least two qualitative factors that Ergo Products should consider in this make or buy decision.
B. What is the relevant cost of each recharger if they make it themselves?
C. What is the relevant cost of each recharger if they outsource?
D. From a quantitative basis, should they make or buy the rechargers? By what amount will the company's net income increase or decrease if they outsource?

Question 67

American Motors manufactures automobiles.Currently,the company manufactures its own carpet mats with the following unit cost per set when 20 000 sets are manufactured:
$\begin{array}{lr}\text { Direct materials } & \$ 15.00 \\\text { Direct labour } & 20.00 \\\text { Variable overhead } & 8.00 \\\text { Fixed overhead } &\underline{4.00} \\\text { Total } & \$ 47.00\end{array}$

Another manufacturer has offered to supply American Motors with the mats at a cost of $45.00 per set.If American outsources the making of the carpet mats,fixed overhead costs are expected to decrease by 60%.
Required:
A. List at least two qualitative factors that American Motors should consider in this make or buy decision.
B. What are the relevant costs per set of making the carpet mats themselves?
C. What are the relevant costs per set of outsourcing the carpet mats?
D. From a quantitative basis, should they make or buy the carpet mats? By what amount will the company's net income increase or decrease if they outsource? Show calculations.

Question 68

A local skating rink charges each person $5 to skate and another $3 for each skate rental.The rink has determined that on a daily basis,when 100 tickets are sold,the costs per skater are $.50 for variable costs and $1 for fixed overhead costs.The rink has the capacity for up to 175 skaters per day.A local kid's day camp has asked the rink to allow up to 35 children to skate for $2.50 each on 15 July.This price would include the cost of a skate rental.During July,the rink averages 100 skaters per day.
Required:
A. List two qualitative factors that should be considered by the rinls before accepting the special order.
B. What are the total relevant costs of accepting the special order?
C. From a quantitative basis, should they accept the special order? By what amount will the rink's net income increase or decrease if they accept the special order?

Question 69

Assuming there is sufficient customer demand either way,how does a company decide whether to sell a product 'as is' or to process it further? When should it be processed further?

Question 70

Describe the theory of constraints.In doing so,define bottlenecks and throughput.

Question 71

Sugarhill Products makes a wood product in three sizes: small,medium,and large.Currently,the company does not stain any of the products,but market research has indicated that they can be sold with or without a finishing stain.The following information is available:
$\begin{array}{lrrr}&\underline{\text { Small }} &\underline{ \text { Medium }} &\underline{ \text { Large} }\\\text { Initial sales price } & \$ 1500 & \$ 2300 & \$ 4000 \\\text { Initial cost } & 500 & 800 & 1300 \\\text { Sales price after staining } & 1650 & 2400 & 4400 \\\text { Cost of staining } & 100 & 190 & 300 \\& & & \\\text { Number sold per vear } & 300 & 300 & 150\end{array}$
Required:
A. Which products should be staned? Support your answer with calculations.

B. If all the products are stained, what is the overall effect on net income? Support your answer with calculations

Question 72

Grissom Products installs standard and deluxe storage sheds.Selected data related to each product is as follows:
$\begin{array}{lrr}&\underline{\text {Standard}}&\underline{\text {Deluxe}}\\\text { Sales price per unit } & \$ 2000 & \$ 4000 \\\text { Direct materials per unit } & 350 & 600 \\\text { Direct labour per unit } & 250 & 350 \\\text { Variable overhead per unit } & 100 & 200 \\\text { Direct labour hours per unit } & 4 & 6\end{array}$
Most of the installation process of the sheds is done using direct labour.There are a maximum of 24 000 direct labour hours available each year.
Required:
A. If there is unlimited demand for both products, how many of each type of shed should be installed in order to maximise profits?

B. If the company believes that there is sufficient demand for up to 4000 standard and 2500 deluxe sheds each year, how many of each type should be installed in order to maximise profits?

Question 73

Quality Products produces and sells screen-printed t-shirts to local organisations.The normal sales price per shirt is $12.Due to setup costs,they only accept orders of at least 100 shirts.The setup cost per order is $40 and the variable costs per shirt are $3.Fixed overhead costs per month total $2000.Quality Products has the capacity to screen-print as many as 5000 shirts per month,but is currently producing around 3000.On 1 May,the company was approached by a local non-profit group who wishes to place a single order for 100 shirts.The non-profit group has indicated that they can only pay $5 per shirt.
Required:
A. List two qualitative factors that should be considered by Quality Products before accepting the special order.
B. What are the total relevant costs of accepting the special order?
C. From a quantitative basis, should they accept the special order? By what amount will Quality Product's net income increase or decrease if they accept the special order?

Question 74

Berringer Enterprises manufactures 10 product lines.The following information is available for one of these product lines:
$\begin{array}{lr}\text { Sales revenue } & \$ 50000 \\\text { Variable costs } &\underline{ 35000} \\\text { Contribution margin } & 15000 \\\text { Fixed costs } &\underline{ 18000} \\\text { Net income } &\underline{ \$(3000)}\end{array}$

The company's controller is considering dropping the line because it is unprofitable.The controller believes that if the line is dropped,overall company profits are guaranteed to increase.However,the managerial accountant says,'That is not necessarily always the case'.Do you agree or disagree with the accountant? Why or why not?

Question 75

When are fixed costs relevant in a make or buy decision? Give one example of a relevant fixed cost.