Deck 12: Relevant Costs for Decision Making

Question 1

A study has been conducted to determine if Product A should be dropped.Total sales of the product are $200,000 per year; total variable expenses are $140,000 per year.Total fixed expenses charged to the product are $90,000 per year.The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped.These data indicate that if Product A is dropped,the company's overall operating income per year would change by how much?

A) A decrease of $10,000.
B) An increase of $20,000.
C) A decrease of $20,000.
D) An increase of $30,000.

Answer 1

A

Question 2

Lusk Company produces and sells 15,000 units of Product A each month.The selling price of Product A is $20 per unit,and variable expenses are $14 per unit.A study has been conducted concerning whether Product A should be discontinued.The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product were discontinued.These data indicate that if Product A were discontinued,the company's overall monthly operating income would change by how much?

A) An increase of $10,000.
B) An increase of $20,000.
C) A decrease of $20,000.
D) A decrease of $60,000.

Answer 2

D

Question 3

Consider the following statements:
I)A vertically integrated firm is more dependent on its suppliers than a firm that is NOT vertically integrated.
II)Many firms feel they can control quality better by making their own parts.
III)A vertically integrated firm realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations.
Which of the above statements represent advantages to a firm that is vertically integrated?

A) I only.
B) III only.
C) I and II only.
D) II and III only.

Answer 3

D

Question 4

Wagner Company sells Product A for $21 per unit.Wagner's unit product cost based on the full capacity of 200,000 units is as follows:
$$\begin{array} { | l | r | } \hline \text { Direct Materials } & \$ 4 \\\hline \text { Direct Labour } & \$ 5 \\\hline \text { Marufacturing Overhead } & \$ 6 \\\hline \text { Unit Product Cost } & \$ 15 \\\hline\end{array}$$
A special order offering to buy 20,000 units has been received from a foreign distributor.The only selling costs that would be incurred on this order would be $3 per unit for shipping.Wagner has sufficient idle capacity to manufacture the additional units.Two-thirds of the manufacturing overhead is fixed and would not be affected by this order.Assume that direct labour is an avoidable cost in this decision.In negotiating a price for the special order,what should be the minimum acceptable selling price per unit?

A) $14.
B) $15.
C) $16.
D) $18.

Question 5

Relay Corporation manufactures batons.Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000.Based on Relay's predictions for next year,240,000 batons will be sold at the regular price of $5.00 each.In addition,a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price.Total fixed costs would be unaffected by this order.By what amount would the company's operating income be increased or decreased as a result of the special order?

A) $30,000 increase.
B) $36,000 increase.
C) $60,000 decrease.
D) $180,000 increase.

Question 6

Gata Co.plans to discontinue a department that has a $48,000 contribution margin and $96,000 of fixed costs.Of these fixed costs,$42,000 cannot be avoided.What would be the effect of discontinuing the department on Gata's overall operating income?

A) An increase of $6,000.
B) A decrease of $6,000.
C) An increase of $48,000.
D) A decrease of $48,000.

Question 7

What is a joint product?

A) Any product that consists of several parts.
B) Any product produced by a firm with more than one product line.
C) Any product involved in a make or buy decision.
D) One of several products produced from a common input.

Question 8

The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of $20,000.If the lanterns are re-machined for $5,000,they could be sold for $9,000.Alternatively,the lanterns could be sold for scrap for $1,000.Which alternative is more desirable,and what are the total relevant costs for that alternative?

A) Re-machine and $5,000.
B) Re-machine and $25,000.
C) Scrap and $20,000.
D) Scrap and $19,000.

Question 9

Consider a decision facing a firm of either accepting or rejecting a special offer for one of its products.Which of the following costs is NOT relevant?

A) Direct materials.
B) Variable overhead.
C) Fixed overhead that will be avoided if the special offer is accepted.
D) Common fixed overhead that will continue if the special offer is NOT accepted.

Question 10

A study has been conducted to determine if one of the departments in Parry Company should be discontinued.The contribution margin in the department is $50,000 per year.Fixed expenses charged to the department are $65,000 per year.It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued.These data indicate that if the department were discontinued,the company's overall operating income per year would change by how much?

A) An increase of $10,000.
B) A decrease of $10,000.
C) An increase of $25,000.
D) A decrease of $25,000.

Question 11

The Cook Company has two divisions: Eastern and Western.The divisions have the following revenues and expenses:
$\begin{array}{|l|r|r|}\hline & \text { Eastern } & \text { Western } \\\hline \text { Sales } & \$ 550,000 & \$ 500,000 \\\hline \text { Variable Costs } & \$ 275,000 & \$ 200,000 \\\hline \text { Direct Fixed Costs } & \$ 180,000 & \$ 150,000 \\\hline \text { Allocated Corporate Costs } & \$ 170,000 & \$ 135,000 \\\hline \text { Operating Income (Loss) } & (\$ 75,000) & \$ 15,000 \\\hline\end{array}$
The management of Cook is considering the elimination of the Eastern Division.If the Eastern Division were eliminated,the direct fixed costs associated with this division could be avoided.However,corporate costs would still be $305,000 in total.Given these data,what would be the overall company's operating income (loss)if the Eastern Division were eliminated?

A) ($155,000).
B) ($75,000).
C) ($60,000).
D) $15,000.

Question 12

What is the opportunity cost of making a component part in a factory with no excess capacity?

A) Variable manufacturing cost of the component.
B) Fixed manufacturing cost of the component.
C) Cost of the production given up in order to manufacture the component.
D) Net benefit foregone from the alternative use of the capacity required.

Question 13

Which of the following costs are always relevant in decision making?

A) Variable costs.
B) Avoidable costs.
C) Sunk costs.
D) Fixed costs.

Question 14

Manor Company plans to discontinue a department that has a contribution margin of $25,000 and $50,000 in fixed costs.Of the fixed costs,$21,000 cannot be eliminated.What would be the effect on the operating income of Manor Company of discontinuing this department?

A) An increase of $4,000.
B) A decrease of $4,000.
C) An increase of $25,000.
D) A decrease of $25,000.

Question 15

Which of the following is NOT an effective way of dealing with a production constraint (i.e.,bottleneck)?

A) Reduce the number of defective units produced at the bottleneck.
B) Pay overtime to workers assigned to the bottleneck.
C) Pay overtime to workers assigned to workstations located after the bottleneck in the production process.
D) Subcontract work that would otherwise require use of the bottleneck.

Question 16

Which of the following best describes a plant operating at capacity?

A) Every machine and person in the plant is working at the maximum possible rate.
B) Only some specific machines or processes are operating at the maximum rate possible.
C) Fixed costs will need to change to accommodate increased demand.
D) Managers should produce those products with the highest contribution margin in order to deal with the constrained resource.

Question 17

Green Company produces 1,000 parts per year,which are used in the assembly of one of its products.The unit product cost of these parts is:
$\begin{array}{|l|r|}\hline \text { Variable Manufacturing Cost } & \$ 12 \\\hline \text { Fixed Manufacturing Cost } & \$ 9 \\\hline \text { Unit Product Cost } & \$ 21 \\\hline\end{array}$
The part can be purchased from an outside supplier for $20 per unit.If the part is purchased from the outside supplier,two-thirds of the fixed manufacturing costs can be eliminated.What will be the annual impact on the company's operating income of buying the part from the outside supplier? (Do not round intermediate calculations.)

A) $1,000 increase.
B) $1,000 decrease.
C) $2,000 decrease.
D) $5,000 increase.

Question 18

The manufacturing capacity of Jordan Company's facilities is 30,000 units a year.A summary of operating results for last year follows:
$\begin{array}{|l|r|}\hline \text { Sales }(18,000 \text { units @ } \$ 100) & \$ 1,800,000 \\\hline \text { Variable Costs } & \$ 990,000 \\\hline \text { Contribution Margin } & \$ 810,000 \\\hline \text { Fixed Costs } & \$ 495,000 \\\hline \text { Operating Income } & \$ 315,000 \\\hline\end{array}$
A foreign distributor has offered to buy 15,000 units at $90 per unit next year.Jordan expects its regular sales next year to be 18,000 units.If Jordan accepts this offer and rejects some business from regular customers so as not to exceed capacity,what would be the total operating income next year? (Assume that the total fixed costs would be the same no matter how many units are produced and sold.)

A) $390,000.
B) $705,000.
C) $840,000.
D) $855,000.

Question 19

Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs.Of the fixed costs,$21,000 cannot be avoided.What would be the effect of discontinuing the department on Manor's overall operating income?

A) An increase of $3,000.
B) A decrease of $3,000.
C) An increase of $24,000.
D) A decrease of $24,000.

Question 20

What should a firm faced with a production constraint do to maximize total contribution margin?

A) Promote those products having the highest unit contribution margins.
B) Promote those products having the highest contribution margin ratios.
C) Promote those products having the highest contribution margin per unit of constrained resource.
D) Promote those products having the highest contribution margins and contribution margin ratios.

Question 21

The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per-unit costs to produce and sell one Hom at that activity level follow:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 20 \\\hline \text { Direct Labour } & \$ 10 \\\hline \text { Variable Manufacturing Overhead } & \$ 5 \\\hline \text { Fixed Manufacturing Overhead } & \$ 7 \\\hline \text { Variable Selling Expense } & \$ 8 \\\hline \text { Fixed Selling Expense } & \$ 2 \\\hline\end{array}$ The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order is accepted, the variable selling expense will be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000, and Varone would have no use for it after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labour is a variable cost.

-If Varone can expect to sell 32,000 Homs next year through regular channels,at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order?

A) $39.60.
B) $42.50.
C) $48.20.
D) $51.00.

Question 22

Products A,B,and C are produced from a single raw material input.The raw material costs are $90,000,from which 5,000 units of A,10,000 units of B,and 15,000 units of C can be produced each period.Product A can be sold at the split-off point for $2 per unit,or it can be processed further at a cost of $12,500 and then sold for $5 per unit.What is the correct course of action regarding Product A?

A) It should be sold at the split-off point, since further processing would result in a loss of $0.50 per unit.
B) It should be processed further, since this will increase profits by $2,500 each period.
C) It should be sold at the split-off point, since further processing will result in a loss of $2,500 each period.
D) It should be processed further, since this will increase profits by $12,500 each period.

Question 23

The following are the Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month, which represents the company's capacity: $\begin{array} { | l | r | } \hline \text { Manufacturing: } & \\\hline \text { Direct Materials } & \$ 1.00 \\\hline \text { Direct Labour } & \$ 2.00 \\\hline \text { Variable Overhead } & \$ 0.50 \\\hline \text { Fixed Overhead } & \$ 0.90 \\\hline \text { Selling and Administrative: } & \\\hline \text { Variable } & \$ 1.50 \\\hline \text { Fixed } & \$ 0.60 \\\hline\end{array}$
Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labour is a variable cost.



-Assume the company has 50 units left over from last year that have small defects and which will have to be sold at a reduced price as scrap.This would have no effect on the company's other sales.What cost is relevant as a guide for setting a minimum price on these defective units?

A) $1.50.
B) $3.50.
C) $5.00.
D) $6.50.

Question 24

WP Company produces products X,Y,and Z from a single raw material input in a joint production process.Budgeted data for the next month is as follows:
$\begin{array}{|l|r|r|r|}\hline&X&Y&Z\\\hline \text { Units Produced } & 1,500 & 2,000 & 3,000 \\\hline \text { Per Unit Sales Value at Split-Off } & \$ 19 & \$ 21 & \$ 24 \\\hline \text { Added Processing Costs per Unit } & \$ 7 & \$ 7.50 & \$ 7 \\\hline \text { Per Unit Sales Value if Processed Further } & \$ 29 & \$ 29 & \$ 30\\\hline\end{array}$
The cost of the joint raw material input is $149,000.Which of the products should be processed beyond the split-off point?
$$\begin{array} { | l | l | l | l | } \hline & \mathbf { X } & \mathbf { Y } & \mathbf { Z } \\\hline \text { A) } & \text { Yes } & \text { Yes } & \text { No } \\\hline \text { B) } & \text { No } & \text { Yes } & \text { No } \\\hline \text { C) } & \text { Yes } & \text { No } & \text { Yes } \\\hline \text { D) } & \text { No } & \text { Yes } & \text { Yes } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 25

Cardinal Company needs 20,000 units of a certain part to use in one of its products.The following information is available:
Cost to Cardinal to make the part:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 4 \\\hline \text { Direct Labour } & \$ 16 \\\hline \text { Variable Manufacturing Overhead } & \$ 8 \\\hline \text { Fixed Manufacturing Overhead } & \$ 10 \\\hline & \$ 38 \\\hline \text { Cost to buy the part from the Oriole Company: } & \$ 36 \\\hline\end{array}$
Oriole Company has offered to sell this part to Cardinal Company for $36 each.If Cardinal were to buy the part from Oriole instead of making it,Cardinal would not have any use for the released capacity.In addition,60% of the fixed manufacturing overhead costs would continue regardless of what decision is made.Assume that direct labour is an avoidable cost in this decision.In deciding whether to make or buy the part,what would be the total relevant costs to make the part?

A) $560,000.
B) $640,000.
C) $720,000.
D) $760,000.

Question 26

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: $\begin{array}{|l|r|}\hline \text { Variable Production Cost } & \$ 4.60 \\\hline \text { Fixed Production Cost } & \$ 1.80 \\\hline \text { Variable Selling Expense } & \$ 1.00 \\\hline\end{array}$
If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $\$ 0.30$ per unit.

-Suppose that total regular sales of jigs are 85,000 units per month,and all other conditions remain the same.If Immanuel accepts the special order,what will be the change in monthly operating income?

A) $3,600 decrease.
B) $5,400 decrease.
C) $7,200 increase.
D) $14,000 increase.

Question 27

The SP Company makes 40,000 motors to be used in the production of its sewing machines.The average cost per motor at this level of activity consists of:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 5.50 \\\hline \text { Direct Labour } & \$ 5.60 \\\hline \text { Variable Manufacturing Overhead } & \$ 4.75 \\\hline \text { Fixed Manufacturing Overhead } & \$ 4.45 \\\hline\end{array}$
An outside supplier recently began producing a comparable motor that could be used in the sewing machine.The price offered to SP Company for this motor is $18.If SP Company decides not to make the motors,there would be no other use for the production facilities,and total fixed factory overhead costs would not change.If SP Company decides to continue making the motor,how much higher or lower would net income be than if the motors are purchased from the outside suppler? Assume that direct labour is a variable cost in this company.

A) $86,000 higher.
B) $92,000 lower.
C) $178,000 higher.
D) $276,000 higher.

Question 28

Golden,Inc.has been manufacturing 5,000 units of Part 10541,which is used in one of its products.At this level of production,the unit product cost of Part 10541 is as follows:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 2 \\\hline \text { Direct Labour } & \$ 8 \\\hline \text { Variable Manufacturing Overhead } & \$ 4 \\\hline \text { Fixed Manufacturing Overhead } & \$ 6 \\\hline \text { Unit Product Cost } & \$ 20 \\\hline\end{array}$
Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit.Golden has determined that two-thirds of the fixed manufacturing overhead will continue even if Part 10541 is purchased from Brown.Assume that direct labour is an avoidable cost in this decision.To determine whether to accept Brown's offer,what are the relevant costs to Golden of manufacturing the parts internally? (Do not round intermediate calculations.)

A) $70,000.
B) $80,000.
C) $90,000.
D) $95,000.

Question 29

Pitkin Company produces a part used in the manufacture of one of its products.The unit product cost of the part is $33,computed as follows:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 12 \\\hline \text { Direct Labour } & \$ 8 \\\hline \text { Variable Manufacturing Overhead } & \$ 3 \\\hline \text { Fixed Manufacturing Overhead } & \$ 10 \\\hline \text { Unit Product Cost } & \$ 33 \\\hline\end{array}$
An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each.The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier.Assume that direct labour is an avoidable cost in this decision.Based on these data,what will be the per-unit dollar advantage or disadvantage of purchasing the parts from the outside supplier?

A) $1 advantage.
B) $1 disadvantage.
C) $3 advantage.
D) $4 disadvantage.

Question 30

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: $\begin{array}{|l|r|}\hline \text { Variable Production Cost } & \$ 4.60 \\\hline \text { Fixed Production Cost } & \$ 1.80 \\\hline \text { Variable Selling Expense } & \$ 1.00 \\\hline\end{array}$
If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $\$ 0.30$ per unit.

-At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer?

A) $4.90.
B) $6.40.
C) $7.40.
D) $7.70.

Question 31

Manico Company produces three products-X,Y,& Z-with the following characteristics:
$\begin{array}{|l|r|r|r|}\hline & \mathbf{X} & \mathbf{Y} & \mathbf{Z} \\\hline \text { Selling price per unit } & \$ 20100 \% & \$ 16100 \% & \$ 15100 \% \\\hline \text { Variable cost per unit } & \underline{1260} & \underline{1275} & \underline{640} \\\hline \text { Contribution margin per unit } & \$ 840 \% & \$ 425 \% & \$ 960 \% \\\hline&=&=&=\\\hline \text { Machine hours per unit }&5&3&6\\\hline\end{array}$
The company has only 2,000 machine hours available each month.If demand exceeds the company's capacity,in what sequence should orders be filled if the company wants to maximize its total contribution margin?

A) Orders for Z first, X second, and Y third.
B) Orders for X first, Z second, and Y third.
C) Orders for Y first, X second, and Z third.
D) Orders for Z first and no orders for X or Y.

Question 32

The following are the Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month, which represents the company's capacity: $\begin{array} { | l | r | } \hline \text { Manufacturing: } & \\\hline \text { Direct Materials } & \$ 1.00 \\\hline \text { Direct Labour } & \$ 2.00 \\\hline \text { Variable Overhead } & \$ 0.50 \\\hline \text { Fixed Overhead } & \$ 0.90 \\\hline \text { Selling and Administrative: } & \\\hline \text { Variable } & \$ 1.50 \\\hline \text { Fixed } & \$ 0.60 \\\hline\end{array}$
Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labour is a variable cost.



-How much will the company's operating income be increased or (decreased)if it prices the 1,000 units in the special order at $6 each?

A) ($500).
B) $400.
C) $1,000.
D) $2,500.

Question 33

The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per-unit costs to produce and sell one Hom at that activity level follow:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 20 \\\hline \text { Direct Labour } & \$ 10 \\\hline \text { Variable Manufacturing Overhead } & \$ 5 \\\hline \text { Fixed Manufacturing Overhead } & \$ 7 \\\hline \text { Variable Selling Expense } & \$ 8 \\\hline \text { Fixed Selling Expense } & \$ 2 \\\hline\end{array}$ The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order is accepted, the variable selling expense will be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000, and Varone would have no use for it after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labour is a variable cost.

-If Varone can expect to sell 32,000 Homs next year through regular channels and the special order is accepted at 15% off the regular selling price,what would be the effect on operating income next year due to accepting this order?

A) $24,000 decrease.
B) $52,000 increase.
C) $68,000 increase.
D) $80,000 increase.

Question 34

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200.

-Assume that Tolar decides to upgrade the calculators.At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition?

A) $8.
B) $30.
C) $53.
D) $67.

Question 35

The following standard costs pertain to a component part manufactured by Ashby Company:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 2 \\\hline \text { Direct Labour } & \$ 5 \\\hline \text { Manufacturing Overhead } & \$ 20 \\\hline \text { Standard Cost per Unit } & \$ 27 \\\hline\end{array}$
The company can purchase the part from an outside supplier for $25 per unit.The manufacturing overhead is 60% fixed,and this fixed portion would not be affected by this decision.Assume that direct labour is an avoidable cost in this decision.What would be the relevant amount of the standard cost per unit in a decision of whether to make the part internally or buy it from the external supplier?

A) $2.
B) $15.
C) $19.
D) $27.

Question 36

The Wyeth Company produces three products-A,B,and C-from a single raw material input.Product A can be sold at the split-off point for $40,000,or it can be processed further at a total cost of $15,000 and then sold for $58,000.Joint product costs total $60,000 annually.What is the correct course of action regarding Product A?

A) It should be discontinued since revenues after further processing are less than total joint product costs.
B) It should be sold at the split-off point.
C) It should be processed further and then sold.
D) It should be processed further only if its share of the total joint product costs is less than the incremental revenues from further processing.

Question 37

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200.

-What is the net advantage or disadvantage to the company from upgrading the calculators?

A) $8,000 disadvantage.
B) $8,800 advantage.
C) $18,000 disadvantage.
D) $20,000 advantage.

Question 38

Consider the following production and cost data for two products,L and C:
$\begin{array}{|l|r|r|}\hline & \text { Product L } & \text { Product C } \\\hline \text { Contribution Margin per Unit } & \$ 130 & \$ 120 \\\hline \text { Machine Setups Needed per Unit } & 10 \text { setups } & 8 \text { setups } \\\hline\end{array}$
The company can only perform 65,000 machine setups each period due to limited skilled labour,and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?

A) $845,000.
B) $910,000.
C) $975,000.
D) $1,820,000.

Question 39

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: $\begin{array}{|l|r|}\hline \text { Variable Production Cost } & \$ 4.60 \\\hline \text { Fixed Production Cost } & \$ 1.80 \\\hline \text { Variable Selling Expense } & \$ 1.00 \\\hline\end{array}$
If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $\$ 0.30$ per unit.

-If Immanuel accepts this special order,what will be the increase in the monthly operating income?

A) $1,800.
B) $3,600.
C) $12,600.
D) $14,400.

Question 40

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200.

-What is the sunk cost in this situation?

A) $0.
B) $10,000.
C) $11,200.
D) $26,800.

Question 41

Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 42.60 \\\hline \text { Direct Labour } & \$ 8.10 \\\hline \text { Variable Manufacturing Overhead } & \$ 1.10 \\\hline \text { Fixed Manufacturing Overhead } & \$ 17.30 \\\hline \text { Variable Selling \& Administrative Expense } & \$ 1.8 \\\hline \text { Fixed Selling \& Administrative Expense } & \$ 8.00 \\\hline\end{array}$
The normal selling price of the product is $\$ 86.10$ per unit.An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales.

Direct labour is a variable cost in this company.


-Suppose the company is already operating at capacity when the special order is received from the overseas customer.What would be the opportunity cost of each unit delivered to the overseas customer?

A) $7.20.
B) $8.40.
C) $9.70.
D) $32.50.

Question 42

Condensed monthly operating income data for Cosmo Inc.for November is presented below.Additional information regarding Cosmo's operations follows the statement:
$\begin{array}{|l|r|r|r|}\hline & &{\text { Mall }} &{\text { Town }} \\\hline & \text { Total } & \text { Store } & \text { Store } \\\hline \text { Sales } & \$ 200,000 & \$ 80,000 & \$ 120,000 \\\hline \text { Less: Variable Costs } & \$ 116,000 & \$ 32,000 & \$ 84,000 \\\hline \text { Contribution Margin } & \$ 84,000 & \$ 38,000 & \$ 36,000 \\\hline \text { Less: } \text { Traceable Fixed } & \$ 60,000 & \$ 20,000 & \$ 40,000 \\\text { Expenses }\\\hline \text { Store Segment Margin } & \$ 24,000 & \$ 28,000 & (\$ 4,000) \\\hline \text { Less: Common Fixed } & \$ 10,000 & \$ 4,000 & \$ 6,000 \\\text { Expenses }\\\hline \text { Operating Income (Loss) } & \$ 14,000 & \$ 24,000 & (\$ 10,000)\\\hline\end{array}$
Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be closed.
Cosmo allocates common fixed expenses to each store on the basis of sales dollars.
Management estimates that closing the Town Store would result in a 10% decrease in Mall Store sales,while closing the Mall Store would not affect Town Store sales.
The operating results for November are representative of all months.
A decision by Cosmo Inc.to close the Town Store would result in what monthly increase (decrease)in Cosmo's operating income?

A) ($800).
B) $4,000.
C) ($6,000).
D) ($10,800).

Question 43

Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs, which would be allocated to this part, amount to $300,000 per year.

-What would be the change in the company's overall annual operating income that would result from making the component,rather than buying it?

A) $1,000 decrease.
B) $5,000 increase.
C) $14,000 decrease.
D) $17,000 increase.

Question 44

The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per-unit costs to produce and sell one Hom at that activity level follow:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 20 \\\hline \text { Direct Labour } & \$ 10 \\\hline \text { Variable Manufacturing Overhead } & \$ 5 \\\hline \text { Fixed Manufacturing Overhead } & \$ 7 \\\hline \text { Variable Selling Expense } & \$ 8 \\\hline \text { Fixed Selling Expense } & \$ 2 \\\hline\end{array}$ The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order is accepted, the variable selling expense will be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000, and Varone would have no use for it after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labour is a variable cost.

-If Varone has an opportunity to sell 37,960 Homs next year through regular channels and the special order is accepted for 15% off the regular selling price,what would be the effect on operating income next year due to accepting this order?

A) $33,320 increase.
B) $33,320 decrease.
C) $35,480 increase.
D) $35,480 decrease.

Question 45

Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs, which would be allocated to this part, amount to $300,000 per year.

-What would the annual cost of additional supervision have to be in order for Hadley to be economically indifferent to making or buying the component? (Assume all other conditions stay the same.)

A) $17,000.
B) $18,000.
C) $19,000.
D) $20,000.

Question 46

Brown Company makes four products in a single facility. These products have the following unit product costs:

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Product }$
$\begin{array}{|l|r|r|r|r|r} \hline& \text { A } & \text { B } & \text { C } & \text { D } \\\hline \text { Direct Materials } & \$ 15.60 & \$ 19.50 & \$ 12.50 & \$ 15.20 \\\hline \text { Direct Labour } & \$ 17.60 & \$ 21.00 & \$ 15.40 & \$ 9.40 \\\hline \text { Variable Manufacturing Overhead } & \$ 4.40 & \$ 5.60 & \$ 8.10 & \$ 5.10 \\\hline \text { Fixed Manufacturing Overhead } & \$ 27.50 & \$ 14.40 & \underline{\$ 14.50} & \underline{\$ 16.50} \\\hline \text { Unit Product Cost } & \$ 65.10 & \$ 60.50 & \$ 50.50 & \underline{\$ 46.20} \\\hline\end{array}$

Additional data concerning these products are listed below.

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Product }$
$\begin{array}{l|r|r|r|r|}\hline \text { Grinding Minutes per Unit } & \text { A } & \text { B } & \text { C } & \text { D } \\\hline \text { Selling Price per Unit } & 2.00 & 1.10 & 0.70 & 0.30 \\\hline \text { Variable Selling Cost per Unit } & \$ 2.60 & 7 \$ 1.10 & \$ 67.90 & \$ 62.60 \\\hline \text { Monthly Demand in Units } & 3,000 & \$ 3.10 & \$ 2.80 & \$ 3.50 \\\hline\end{array}$


The grinding machines are potentially a constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company.

-How many minutes of grinding machine time would be required to satisfy demand for all four products?

A) 10,500 minutes.
B) 10,700 minutes.
C) 10,800 minutes.
D) 11,000 minutes.

Question 47

The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: $\begin{array}{|r|r|}\hline \text { Annual Sales } & 3,000 \text { Units } \\\hline \text { Selling Price per Unit } & \$ 309 \\\hline \text { Variable Costs (Per Unit) } & \$ 130 \\\hline \text { Production } & \$ 50 \\\hline \text { Selling } & \\\hline \text { Avoidable Fixed Costs per Year: } & \$ 51,000 \\\hline \text { Production } & \$ 75,000 \\\hline \text { Selling } & \\\hline \text { Unavoidable Allocated Fixed Corporate } & \$ 54,000 \\\hline \text { Costs per Year } & \\\hline\end{array}$ If the new product is added to the existing product line, then sales of existing products will decline. Therefore, the contribution margin of the other existing product lines is expected to drop $78,000 per year.





-Which lowest selling price per unit could be charged for the new product that would still make it economically desirable to add the new product?

A) $222.
B) $240.
C) $248.
D) $291.

Question 48

The Clemson Company reported the following results last year for the manufacture and sale of one of its products, known as a Tam:
$\begin{array}{|l|r|}\hline \text { Sales (6.500 Tams at } \$ 130 \text { each) } & \$ 845,000 \\\hline \text { Variable Cost of Sales } & \$ 390,000 \\\hline \text { Variable Distribution Costs } & \$ 65,000 \\\hline \text { Fixed Adertising Expense } & \$ 275,000 \\\hline \text { Salary of Product Line Manager } & \$ 25,000 \\\hline \text { Fixed Manufacturing Overhead } & \$ 145,000 \\\hline \text { Operating Income (Loss) } & \$ \$ 55,000) \\\hline\end{array}$ Clemson Company is trying to determine whether to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were discontinued, there would be no change in the fixed manufacturing costs of the company.

-Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines.If the company discontinues the Tam product line,what will be the change in the annual operating income (loss)?

A) $55,000 decrease.
B) $65,000 decrease.
C) $70,000 increase.
D) $90,000 decrease.

Question 49

Aholt Company makes 40,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows:

$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 11.30 \\\hline \text { Direct Labour } & \$ 22.70 \\\hline \text { Variable Manufacturing Overhead } & \$ 1.20 \\\hline \text { Fixed Manufactiong Overhead } & \$ 24.70 \\\hline \text { Unit Product Cost } & \$ 59.90\\\hline \end{array}$ An outside supplier has offered to sell the company all the parts that Aholt needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.

If the part were purchased from the outside supplier, all direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.


-What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?

A) $6.60.
B) $44.60.
C) $59.90.
D) $66.50.

Question 50

Aholt Company makes 40,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows:

$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 11.30 \\\hline \text { Direct Labour } & \$ 22.70 \\\hline \text { Variable Manufacturing Overhead } & \$ 1.20 \\\hline \text { Fixed Manufactiong Overhead } & \$ 24.70 \\\hline \text { Unit Product Cost } & \$ 59.90\\\hline \end{array}$ An outside supplier has offered to sell the company all the parts that Aholt needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.

If the part were purchased from the outside supplier, all direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.


-How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?

A) $22.70.
B) $35.20.
C) $38.00.
D) $59.90.

Question 51

Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 42.60 \\\hline \text { Direct Labour } & \$ 8.10 \\\hline \text { Variable Manufacturing Overhead } & \$ 1.10 \\\hline \text { Fixed Manufacturing Overhead } & \$ 17.30 \\\hline \text { Variable Selling \& Administrative Expense } & \$ 1.8 \\\hline \text { Fixed Selling \& Administrative Expense } & \$ 8.00 \\\hline\end{array}$
The normal selling price of the product is $\$ 86.10$ per unit.An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales.

Direct labour is a variable cost in this company.


-Suppose there is ample idle capacity to produce the units required by the overseas customer,and the special discounted price on the special order is $76.40 per unit.By how much would this special order increase (decrease)the company's operating income for the month?

A) ($5,000).
B) $13,400.
C) ($17,000).
D) $48,000.

Question 52

Bingham Company manufactures and sells Product J. Results for last year for the manufacture and sale of Product J are as follows:

$\begin{array}{|l|r|}\hline \text { Sales }(10,000 \text { units at } \$ 160 \text { each) } & \$ 1,600,000 \\\hline \text { Less: Costs; } & \$ 960,000 \\\hline \text { Variable Production Costs } & \$ 240,000 \\\hline \text { Sales Commisions }-15 \% \text { of Sales } & \$ 195,000 \\\hline \text { Salaries of Line Supervisors } & \$ 180,000 \\\hline \text { Traceable Fixed Factory Overhead (Allocated to } & \$ 170,000 \\\text { product on the Basis of Square Meters Occupied) } & \\\hline \text { Total Cost } & \$ 1,745,000 \\\hline \text { Operating Income (Loss) } & \$ 145,000 \\\hline\end{array}$

Bingham Company anticipates no change in the operating result for Product $\mathrm{J}$ in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether or not to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision.

-Assume that discontinuing the manufacture and sale of Product J will not affect the sale of other products.If the company discontinues Product J,what will be the change in annual operating income due to this decision?

A) $25,000 decrease.
B) $145,000 increase.
C) $170,000 decrease.
D) $315,000 decrease.

Question 53

The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows:

$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 4.20 \\\hline \text { Direct Labour } & \$ 120 \\\hline \text { Variable Manufacturing Overhead } & \$ 5.80 \\\hline \text { Fixed Manufactiong Overhead } & \$ 6.50\\\hline\end{array}$

Rodgers has received an offer from an outside supplier that is willing to provide 27,000 units of this component each year at a price of $\$ 25$ per component. Assume that direct labour is a variable cost.

-Assume that if the components were to be purchased from the outside supplier,$35,100 of annual fixed manufacturing overhead would be avoided,and the facilities now being used to make the component would be rented to another company for $64,800 per year.If Rodgers chooses to buy the component from the outside supplier under these circumstances,what would be the impact on annual operating income due to accepting the offer?

A) $18,900 increase.
B) $18,900 decrease.
C) $21,400 increase.
D) $21,400 decrease.

Question 54

Aholt Company makes 40,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows:

$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 11.30 \\\hline \text { Direct Labour } & \$ 22.70 \\\hline \text { Variable Manufacturing Overhead } & \$ 1.20 \\\hline \text { Fixed Manufactiong Overhead } & \$ 24.70 \\\hline \text { Unit Product Cost } & \$ 59.90\\\hline \end{array}$ An outside supplier has offered to sell the company all the parts that Aholt needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.

If the part were purchased from the outside supplier, all direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.


-What is the net total dollar advantage (disadvantage)of purchasing the part rather than making it?

A) ($64,000).
B) $264,000.
C) ($328,000).
D) ($548,000).

Question 55

Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 42.60 \\\hline \text { Direct Labour } & \$ 8.10 \\\hline \text { Variable Manufacturing Overhead } & \$ 1.10 \\\hline \text { Fixed Manufacturing Overhead } & \$ 17.30 \\\hline \text { Variable Selling \& Administrative Expense } & \$ 1.8 \\\hline \text { Fixed Selling \& Administrative Expense } & \$ 8.00 \\\hline\end{array}$
The normal selling price of the product is $\$ 86.10$ per unit.An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales.

Direct labour is a variable cost in this company.


-Suppose there is not enough idle capacity to produce all of the units for the overseas customer,and accepting the special order would require cutting back on production of 700 units for regular customers.The minimum acceptable price per unit for the special order is closest to which of the following?

A) $63.78.
B) $69.10.
C) $78.90.
D) $86.10.

Question 56

Bingham Company manufactures and sells Product J. Results for last year for the manufacture and sale of Product J are as follows:

$\begin{array}{|l|r|}\hline \text { Sales }(10,000 \text { units at } \$ 160 \text { each) } & \$ 1,600,000 \\\hline \text { Less: Costs; } & \$ 960,000 \\\hline \text { Variable Production Costs } & \$ 240,000 \\\hline \text { Sales Commisions }-15 \% \text { of Sales } & \$ 195,000 \\\hline \text { Salaries of Line Supervisors } & \$ 180,000 \\\hline \text { Traceable Fixed Factory Overhead (Allocated to } & \$ 170,000 \\\text { product on the Basis of Square Meters Occupied) } & \\\hline \text { Total Cost } & \$ 1,745,000 \\\hline \text { Operating Income (Loss) } & \$ 145,000 \\\hline\end{array}$

Bingham Company anticipates no change in the operating result for Product $\mathrm{J}$ in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether or not to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision.

-Assume that discontinuing Product J would result in a $100,000 increase in the contribution margin of other product lines.How many units of Product J would have to be sold next year for the company to be as well off as if it just dropped Product J and enjoyed the increase in contribution margin from other products?

A) 2,500 units.
B) 11,875 units.
C) 15,500 units.
D) 16,125 units.

Question 57

The Clemson Company reported the following results last year for the manufacture and sale of one of its products, known as a Tam:
$\begin{array}{|l|r|}\hline \text { Sales (6.500 Tams at } \$ 130 \text { each) } & \$ 845,000 \\\hline \text { Variable Cost of Sales } & \$ 390,000 \\\hline \text { Variable Distribution Costs } & \$ 65,000 \\\hline \text { Fixed Adertising Expense } & \$ 275,000 \\\hline \text { Salary of Product Line Manager } & \$ 25,000 \\\hline \text { Fixed Manufacturing Overhead } & \$ 145,000 \\\hline \text { Operating Income (Loss) } & \$ \$ 55,000) \\\hline\end{array}$ Clemson Company is trying to determine whether to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were discontinued, there would be no change in the fixed manufacturing costs of the company.

-Assume that discontinuing the Tam product would result in a $120,000 increase in the contribution margin of other product lines.How many Tams would have to be sold next year for the company to be as well off as if it just dropped the line and enjoyed the increase in contribution margin from other products?

A) 5,000 units.
B) 6,000 units.
C) 6,500 units.
D) 7,000 units.

Question 58

Bingham Company manufactures and sells Product J. Results for last year for the manufacture and sale of Product J are as follows:

$\begin{array}{|l|r|}\hline \text { Sales }(10,000 \text { units at } \$ 160 \text { each) } & \$ 1,600,000 \\\hline \text { Less: Costs; } & \$ 960,000 \\\hline \text { Variable Production Costs } & \$ 240,000 \\\hline \text { Sales Commisions }-15 \% \text { of Sales } & \$ 195,000 \\\hline \text { Salaries of Line Supervisors } & \$ 180,000 \\\hline \text { Traceable Fixed Factory Overhead (Allocated to } & \$ 170,000 \\\text { product on the Basis of Square Meters Occupied) } & \\\hline \text { Total Cost } & \$ 1,745,000 \\\hline \text { Operating Income (Loss) } & \$ 145,000 \\\hline\end{array}$

Bingham Company anticipates no change in the operating result for Product $\mathrm{J}$ in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether or not to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision.

-Assume that discontinuing Product J would result in a $30,000 increase in the contribution margin of other product lines.If Bingham chooses to discontinue Product J,what will be the change in operating income next year due to this action?

A) $5,000 increase.
B) $120,000 increase.
C) $145,000 increase.
D) $145,000 decrease.

Question 59

The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows:

$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 4.20 \\\hline \text { Direct Labour } & \$ 120 \\\hline \text { Variable Manufacturing Overhead } & \$ 5.80 \\\hline \text { Fixed Manufactiong Overhead } & \$ 6.50\\\hline\end{array}$

Rodgers has received an offer from an outside supplier that is willing to provide 27,000 units of this component each year at a price of $\$ 25$ per component. Assume that direct labour is a variable cost.

-Assume that there is no other use for the capacity now being used to produce the component,and the total fixed manufacturing overhead of the company would not be affected by this decision.If Rodgers Company were to purchase the components rather than making them internally,what would be the impact on the company's annual operating income?

A) $81,000 decrease.
B) $94,500 increase.
C) $124,000 increase.
D) $237,600 decrease.

Question 60

The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: $\begin{array}{|r|r|}\hline \text { Annual Sales } & 3,000 \text { Units } \\\hline \text { Selling Price per Unit } & \$ 309 \\\hline \text { Variable Costs (Per Unit) } & \$ 130 \\\hline \text { Production } & \$ 50 \\\hline \text { Selling } & \\\hline \text { Avoidable Fixed Costs per Year: } & \$ 51,000 \\\hline \text { Production } & \$ 75,000 \\\hline \text { Selling } & \\\hline \text { Unavoidable Allocated Fixed Corporate } & \$ 54,000 \\\hline \text { Costs per Year } & \\\hline\end{array}$ If the new product is added to the existing product line, then sales of existing products will decline. Therefore, the contribution margin of the other existing product lines is expected to drop $78,000 per year.





-If the new product is added next year,what will be the increase in operating income resulting from this decision?

A) $183,000.
B) $207,000.
C) $261,000.
D) $387,000.

Question 61

Which of the following items are included in the cost base under the absorption costing approach to cost-plus pricing?
$\begin{array}{|l|l|l|l|l|}\hline & {\text { Variable Cost }} &&{\text { Fixed Cost }} \\\hline & \text { Production } & \text { Selling } & \text { Production } & \text { Selling } \\\hline \text { A) } & \text { Yes } & \text { Yes } & \text { Yes } & \text { No } \\\hline \text { B) } & \text { No } & \text { Yes } & \text { No } & \text { Yes } \\\hline \text { C) } & \text { Yes } & \text { Yes } & \text { No } & \text { No } \\\hline \text { D) } & \text { Yes } & \text { No } & \text { Yes } & \text { No } \\\hline\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 62

Brown Company makes four products in a single facility. These products have the following unit product costs:

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Product }$
$\begin{array}{|l|r|r|r|r|r} \hline& \text { A } & \text { B } & \text { C } & \text { D } \\\hline \text { Direct Materials } & \$ 15.60 & \$ 19.50 & \$ 12.50 & \$ 15.20 \\\hline \text { Direct Labour } & \$ 17.60 & \$ 21.00 & \$ 15.40 & \$ 9.40 \\\hline \text { Variable Manufacturing Overhead } & \$ 4.40 & \$ 5.60 & \$ 8.10 & \$ 5.10 \\\hline \text { Fixed Manufacturing Overhead } & \$ 27.50 & \$ 14.40 & \underline{\$ 14.50} & \underline{\$ 16.50} \\\hline \text { Unit Product Cost } & \$ 65.10 & \$ 60.50 & \$ 50.50 & \underline{\$ 46.20} \\\hline\end{array}$

Additional data concerning these products are listed below.

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Product }$
$\begin{array}{l|r|r|r|r|}\hline \text { Grinding Minutes per Unit } & \text { A } & \text { B } & \text { C } & \text { D } \\\hline \text { Selling Price per Unit } & 2.00 & 1.10 & 0.70 & 0.30 \\\hline \text { Variable Selling Cost per Unit } & \$ 2.60 & 7 \$ 1.10 & \$ 67.90 & \$ 62.60 \\\hline \text { Monthly Demand in Units } & 3,000 & \$ 3.10 & \$ 2.80 & \$ 3.50 \\\hline\end{array}$


The grinding machines are potentially a constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company.

-What maximum amount (rounded to the nearest whole cent)should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity?

A) $0.
B) $10.60.
C) $19.25.
D) $21.90.

Question 63

Magner,Inc.uses the absorption costing approach to cost-plus pricing to set prices for its products.Based on budgeted sales of 34,000 units next year,the unit product cost of a particular product is $61.80.The company's selling,general,and administrative expenses for this product are budgeted to be $809,200 in total for the year.The company has invested $400,000 in this product and expects a return on investment of 9%.The target selling price for this product based on the absorption costing approach would be closest to which of the following?

A) $67.36.
B) $85.60.
C) $86.66.
D) $120.03.

Question 64

Dowchow Company makes two products from a common input. Joint processing costs up to the split-off point total $\$ 38,400$ a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

$\begin{array}{|l|r|r|r|}\hline & \text { Product X } & \text { Product Y } & \text { Total } \\\hline \text { Allocated Joint Processing Costs } & 20,800 & 17,600 & 38,400 \\\hline \text { Sales Value at Split-Off Point } & 26,000 & 22,000 & 48,000 \\\hline \text { Costs of Further Processing } & 22,600 & 20,400 & 43,000 \\\hline \text { Sales Value after Further Processing } & 45,000 & 45,900 & 90,900 \\\hline\end{array}$

-What is the net monetary advantage (disadvantage)of processing Product X beyond the split-off point?

A) $1,600.
B) ($3,600).
C) $22,400.
D) $27,600.

Question 65

Kircher,Inc.manufactures a product with the following costs:
$\begin{array}{|l|r|r|}\hline & \text { Per unit } & \text { Per year } \\\hline \text { Direct materials } & \$ 24.90 & \\\hline \text { Direct labour } & 13.90 \\\hline \text { Variable Manufacturing overhead } & 2.10 & \$ 1,182,600 \\\hline \text { Fixed manufacturing overhead } & & \\\hline \text { Variable SG\&A expenses } & 2.00 & 1,166,400 \\\hline \text { Fixed SG\&A expenses } & & \\\hline\end{array}$
The company uses the absorption costing approach to cost-plus pricing.The pricing calculations are based on budgeted production and sales of 81,000 units per year.The company has invested $220,000 in this product and expects a return on investment of 15%.The target selling price based on the absorption costing approach would be closest to which of the following?

A) $53.29.
B) $71.90.
C) $72.31.
D) $93.67.

Question 66

Crane Company makes four products in a single facility. Data concerning these products appear below:

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Product }$
$\begin{array}{|l|r|r|r|r|}\hline & \text { A } & \text { B } & \text { C } & \text { D } \\\hline \text { Selling Price per Unit } & \$ 35.30 & \$ 30.20 & \$ 20.80 & \$ 26.00 \\\hline \text { Variable Manufacturing Cost per Unit } & \$ 16.50 & \$ 15.80 & \$ 7.90 & \$ 8.50 \\\hline \text { Variable Selling Cost per Unit } & \$ 3.80 & \$ 1.60 & \$ 1.90 & \$ 3.30 \\\hline \text { Milling Machine Minutes per Unit } & 3.30 & 1.70 & 2.10 & 2.50 \\\hline \text { Monthly Deman in Units } & 4,000 & 1,000 & 3,000 & 1,000 \\\hline\end{array}$


The milling machines are potentially a constraint in the production facility. A total of 22,600 minutes are available per month on these machines.

-How many minutes of milling machine time would be required to satisfy demand for all four products?

A) 9,000 minutes.
B) 18,400 minutes.
C) 22,600 minutes.
D) 23,700 minutes.

Question 67

Cost data relating to the single product produced by the Jones Company are given below:
$\begin{array}{|l|r|r|}\hline & \text { Per unit } & \text { Total per year } \\\hline \text { Direct materials } & \$ 10 & \\\hline \text { Direct labour } & 6 & \\\hline \text { Variable Manufacturing overhead } & 3 & \\\hline \text { Fixed manufacturing overhead } & & \$140,000\\\hline \begin{array}{l}\text { Variable selling, general, and administrative } \\\text { expense }\end{array} &1 & \\\hline \text { Fixed selling,general, and administrative expese } & & 180,000 \\\hline\end{array}$
The Jones Company uses the absorption costing approach with a desired markup of 60%.If the company plans to produce and sell 20,000 units each year,what would be the target selling price per unit?

A) $32.00.
B) $36.00.
C) $41.60.
D) $43.20.

Question 68

Under time and material pricing,what is(are)included in the time component?

A) Only the direct costs of the employee, including salary and fringe benefits.
B) A profit element.
C) A loading charge.
D) A charge for ordering and handling inventory items.

Question 69

Which of the following statements is NOT consistent with target costing?

A) The target cost is the anticipated selling price less the desired profit.
B) The technique is most useful in the manufacturing stage of a product.
C) Effective target costing is an integral part of continuous improvement (Kaizen costing) as a management philosophy.
D) In target costing, the anticipated selling price of a product determines the maximum allowable cost for the product.

Question 70

The Sloan Company must invest $120,000 to produce and market 16,000 units of Product X each year.Other cost information regarding Product X is as follows:
$\begin{array}{|l|r|r|}\hline & \text { Per unit } & \text { Total } \\\hline \text { Direct materials } & \$ 7 & \\\hline \text { Direct labour } & 5 & \\\hline \text { Variable Manufacturing overhead } &4 & \\\hline \text { Fixed manufacturing overhead } & \\\hline \begin{array}{l}\text { Variable selling, general, and administrative } \\\text { expense }\end{array} &3 & \$ 80,000\\\hline \text { Fixed selling,general, and administrative expese } & & \$ 72,000 \\\hline\end{array}$
If Sloan Company requires a 15% return on investment,what would be the markup percentage on absorption cost for Product X,rounded to the nearest percent?

A) 16%.
B) 22%.
C) 29%.
D) 41%.

Question 71

Holding all other things constant,if the unit sales increase,what will happen to the markup under absorption costing?

A) It will increase.
B) It will decrease.
C) It will remain the same.
D) The effect cannot be determined.

Question 72

Under time and material pricing,the materials loading charge includes which of the following items?
$\begin{array}{|l|l|l|l|}\hline &&{\text { Cost of Ordering, }} \\\hline & \begin{array}{l}\text { Invoice Cost } \\\text { of Materials }\end{array} & \begin{array}{l}\text { Handling, and Strong } \\\text { Materials }\end{array} & \begin{array}{l}\text { Desired Profit on } \\\text { Materials }\end{array} \\\hline \text { A) } & \text { Yes } & \text { Yes } & \text { Yes } \\\hline \text { B) } & \text { No } & \text { Yes } & \text { Yes } \\\hline \text { C) } & \text { No } & \text { No } & \text { Yes } \\\hline \text { D) } & \text { Yes } & \text { Yes } & \text { No } \\\hline\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 73

Dowchow Company makes two products from a common input. Joint processing costs up to the split-off point total $\$ 38,400$ a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

$\begin{array}{|l|r|r|r|}\hline & \text { Product X } & \text { Product Y } & \text { Total } \\\hline \text { Allocated Joint Processing Costs } & 20,800 & 17,600 & 38,400 \\\hline \text { Sales Value at Split-Off Point } & 26,000 & 22,000 & 48,000 \\\hline \text { Costs of Further Processing } & 22,600 & 20,400 & 43,000 \\\hline \text { Sales Value after Further Processing } & 45,000 & 45,900 & 90,900 \\\hline\end{array}$

-What is the net monetary advantage of processing Product Y beyond the split-off point?

A) $3,500.
B) $7,900.
C) $25,500.
D) $29,900.

Question 74

The following information is available on Bruder Inc.'s Product A:
$\begin{array}{|l|r|}\hline \text { Number of Units Sold Each Year } & 10,000 \\\hline \text { Selling Price per Unit } & \$ 80 \\\hline \text { Unit Product Cost } & \$ 50 \\\hline \text { Investment in Product A } & \$ 400,000 \\\hline \text { Required Return on Investment } & 15 \% \\\hline\end{array}$
The company uses the absorption costing approach to cost-plus pricing.Based on these data,what are the total selling,general,and administrative expenses each year?

A) $140,000.
B) $200,000.
C) $240,000.
D) $300,000.

Question 75

Dowchow Company makes two products from a common input. Joint processing costs up to the split-off point total $\$ 38,400$ a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

$\begin{array}{|l|r|r|r|}\hline & \text { Product X } & \text { Product Y } & \text { Total } \\\hline \text { Allocated Joint Processing Costs } & 20,800 & 17,600 & 38,400 \\\hline \text { Sales Value at Split-Off Point } & 26,000 & 22,000 & 48,000 \\\hline \text { Costs of Further Processing } & 22,600 & 20,400 & 43,000 \\\hline \text { Sales Value after Further Processing } & 45,000 & 45,900 & 90,900 \\\hline\end{array}$

-What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

A) $20,800.
B) $22,400.
C) $43,400.
D) $45,000.

Question 76

Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores, or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows: $\begin{array}{l}\begin{array} { | l | r | } \hline \text { Data for one spindle of yarn: } & \\\hline \text { Selling price } & \$ 12 \\\hline \text { Variable Production Cost } & \$ 8 \\\hline \text { Fixed Production Cost (based on 4,000 spindles of yarn produced) } & \$ 2 \\\hline\end{array}\\\\\\\begin{array} { | l | r | } \hline \text { Data for one afghan: } & \\\hline \text { Selling Price } & \$ 32 \\\hline \text { Production Cost per Spindle of Yarn } & \$ 10 \\\hline \text { Variable Production cost to process the yarn into an Afghan } & \$ 9 \\\hline \begin{array} { l } \text { Avoidable Fixed Production Cost to Process the Yarn into an Afghan (based } \\\text { on } 4,000 \text { afghans produced) }\end{array} & \$ 5 \\\hline\end{array}\end{array}$ Each month 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans.

-If Austin produced and sold 4,000 afghans and zero spindles of yarn the total contribution margin would be closest to:

A) $24,000.
B) $40,000.
C) $60,000.
D) $8,000.

Question 77

Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores, or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows: $\begin{array}{l}\begin{array} { | l | r | } \hline \text { Data for one spindle of yarn: } & \\\hline \text { Selling price } & \$ 12 \\\hline \text { Variable Production Cost } & \$ 8 \\\hline \text { Fixed Production Cost (based on 4,000 spindles of yarn produced) } & \$ 2 \\\hline\end{array}\\\\\\\begin{array} { | l | r | } \hline \text { Data for one afghan: } & \\\hline \text { Selling Price } & \$ 32 \\\hline \text { Production Cost per Spindle of Yarn } & \$ 10 \\\hline \text { Variable Production cost to process the yarn into an Afghan } & \$ 9 \\\hline \begin{array} { l } \text { Avoidable Fixed Production Cost to Process the Yarn into an Afghan (based } \\\text { on } 4,000 \text { afghans produced) }\end{array} & \$ 5 \\\hline\end{array}\end{array}$ Each month 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans.

-If Austin chooses to produce 4,000 afghans each month,what will be the change in the monthly net operating income as compared to selling 4,000 spindles of yarn?

A) $16,000 increase.
B) $16,000 decrease.
C) $24,000 increase.
D) $24,000 decrease.

Question 78

Brown Company makes four products in a single facility. These products have the following unit product costs:

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Product }$
$\begin{array}{|l|r|r|r|r|r} \hline& \text { A } & \text { B } & \text { C } & \text { D } \\\hline \text { Direct Materials } & \$ 15.60 & \$ 19.50 & \$ 12.50 & \$ 15.20 \\\hline \text { Direct Labour } & \$ 17.60 & \$ 21.00 & \$ 15.40 & \$ 9.40 \\\hline \text { Variable Manufacturing Overhead } & \$ 4.40 & \$ 5.60 & \$ 8.10 & \$ 5.10 \\\hline \text { Fixed Manufacturing Overhead } & \$ 27.50 & \$ 14.40 & \underline{\$ 14.50} & \underline{\$ 16.50} \\\hline \text { Unit Product Cost } & \$ 65.10 & \$ 60.50 & \$ 50.50 & \underline{\$ 46.20} \\\hline\end{array}$

Additional data concerning these products are listed below.

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Product }$
$\begin{array}{l|r|r|r|r|}\hline \text { Grinding Minutes per Unit } & \text { A } & \text { B } & \text { C } & \text { D } \\\hline \text { Selling Price per Unit } & 2.00 & 1.10 & 0.70 & 0.30 \\\hline \text { Variable Selling Cost per Unit } & \$ 2.60 & 7 \$ 1.10 & \$ 67.90 & \$ 62.60 \\\hline \text { Monthly Demand in Units } & 3,000 & \$ 3.10 & \$ 2.80 & \$ 3.50 \\\hline\end{array}$


The grinding machines are potentially a constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company.

-Given the current capacity what is the greatest total contribution margin Brown Company can earn?

A) $124,500.
B) $329,325.
C) $336,300.
D) $570,903.

Question 79

Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of one unit of product Y:
$\begin{array}{|l|r|}\hline \text { Number of Units Sold Annually } & 20,000 \\\hline \text { Required Investment } & \$ 400,000 \\\hline \text { Unit Product Cost } & \$ 25 \\\hline \text { Selling, General, and Administrative } & \$ 130,000 \\ \text { Expenses } & \\\hline\end{array}$
If the company uses the absorption costing approach to cost-plus pricing and desires a 15% rate of return on investment (ROI),what would be the required markup on absorption cost for product Y?

A) 12%.
B) 15%.
C) 26%.
D) 38%.

Question 80

The following information is available on Browning Inc.'s Product A:
$\begin{array}{|l|r|}\hline \text { Number of Units Sold Each Year } & 20,000 \\\hline \text { Selling Price per Unit } & \$ 96 \\\hline \text { Unit Product Cost } & \$ 60 \\\hline \text { Investment in Product A } & \$ 500,000 \\\hline \text { Required Return on Investment } & 16 \% \\\hline\end{array}$
The company uses the absorption costing approach to cost-plus pricing.Based on these data,what are the total selling,general,and administrative expenses each year?

A) $400,000.
B) $480,000.
C) $640,000.
D) $720,000.