Deck 10: Relevant Costing for Managerial Decisions

Question 1

Significant sunk costs are relevant to decisions about the future.

Answer 1

False

Question 2

A markup percentage equals total costs divided by desired profit.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

Another name for relevant cost is unavoidable cost.

Question 5

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

Question 6

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

Question 7

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

Question 8

An out-of-pocket cost benefits a business, but is paid by an outside party.

Question 9

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

Question 10

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

Question 11

An out-of-pocket cost requires a current and/or future outlay of cash.

Question 12

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

Question 13

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

Question 14

If a company has the capacity to produce either 10,000 units of Product X or 10,000 units of Product Y, and the markets for both products are unlimited, the company should commit 100% of its capacity to the product that has the higher contribution margin.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

A company paid $400,000 five years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $40,000 per year.The company is considering using the machine in a new project that will have incremental revenues of $48,000 per year and annual cash expenses of $30,000.In analyzing the new project, the $40,000 depreciation on the machine is an example of a(n):

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

Question 22

When considering whether a business segment should be eliminated, unavoidable expenses are amounts that will continue even if a given segment is eliminated.

Question 23

An opportunity cost:

A)Is an unavoidable cost.
B)Requires a current outlay of cash.
C)Results from past managerial decisions.
D)Is the lost benefit of choosing an alternative course of action.
E)Is irrelevant in decision making.

Question 24

An additional cost that is incurred only if a particular action is taken is a(n):

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

Question 25

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

Question 26

A company has already incurred a $100 cost in partially producing its two products.Their selling prices when partially and fully processed are shown in the table below with the additional costs necessary to finish their processing.Based on this information, the company should process only product A further.
$$\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing Costs }\end{array} \\\hline \text { A } & \$ 200 & \$ 300 & \$ 120 \\\hline \text { B } & 75 & 130 & 45 \\\hline\end{array}$$

Question 27

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

Question 28

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

Question 29

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

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

Question 30

The potential benefit of one alternative that is lost by choosing another is known as a(n):

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

Question 31

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

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

Question 32

A cost that requires a current and/or future outlay of cash, and is usually an incremental cost, is a(n):

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

Question 33

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

Question 34

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

Question 35

A company has already incurred a $600 cost in partially producing its two products.Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing.Based on this information, the company should process both products further.
$$\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 425 & \$ 500 & \$ 70 \\\hline \text { B } & 375 & 400 & 20 \\\hline\end{array}$$

Question 36

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

Question 37

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

Question 38

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

Question 39

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

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

Question 40

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

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

Question 41

Assume markup percentage equals desired profit divided by total costs.What is the correct calculation to determine the dollar amount of the markup per unit?

A)Total cost times markup percentage.
B)Total cost per unit times markup percentage per unit.
C)Total cost per unit divided by markup percentage per unit.
D)Markup percentage per unit divided by total cost per unit.
E)Markup percentage divided by total cost.

Question 42

If Special Export is processed further into Prime Cat Food and Feline Surprise, the total gross profit would be:
A.$68,000
B.$78,000
C.$96,000
D.$98,000
E.$100,000

Question 43

Should the company accept the special order?
A.No, because additional production would exceed capacity.
B.No, because incremental costs exceed incremental revenue.
C.Yes, because incremental revenue exceeds incremental costs
D.Yes, because incremental costs exceed incremental revenues
E.No, because the incremental revenue is too low.

Question 44

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

An outside supplier offers to provide Alpha with all the Beta units it needs at $60 per unit.If Alpha buys from the supplier, Alpha will still incur 40% of its overhead.Alpha should:

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

Question 45

If Parker wishes to earn $1,250 on the special order, the size of the order would need to be:
A.4,500 units.
B.2,250 units
C.1,125 units
D.625 units
E.300 units

Question 46

Marcus processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data:
$\begin{array}{lrrr}&\text { Sales Value } & & \text { Sales } \\&\text { with No } & \text { Additional } & \text { Value after } \\&\text { Further } & \text { Processing } & \text { Further } \\\underline { \text { Product } }&\underline { \text { Processing }} & \underline { \text { Costs }} & \underline { \text { Processing }}\\\text { Acta } & \$ 1,350 & \$ 900 & \$ 2,700 \\\text { Corda } & 450 & 225 & 630 \\\text { Fando } & 900 & 450 & 1,800\\\text { Limo } & 90 & 45 & 180\end{array}$ Which product(s)should not be processed further?

A)Acta.
B)Corda.
C)Fando.
D)Limo.
E)None of the products should be processed further.

Question 47

Should the company accept the special order?
A.No, because additional production would exceed capacity.
B.No, because incremental costs exceed incremental revenue.
C.Yes, because incremental revenue exceeds incremental costs.
D.Yes, because incremental costs exceed incremental revenues.
E.No, because the incremental revenue is too low.

Question 48

A company expects to produce and sell 7,000 units of a single product.The following additional company information is available: $\begin{array}{lr} \text { Variable costs (per unit) } \\ \text {Production costs } &\$ 20 \\ \text { Nonproduction costs } &\$ 3 \\ \text { Fixed costs (in total) } \\ \text {Overhead } &\$ 175,000 \\ \text { Nonproduction } &\$ 14,000\end{array}$ Compute this company's total cost per unit.

A)$23
B)$45
C)$27
D)$50
E)$5

Question 49

Product X requires 10 machine hours per unit to be produced, Product Y requires only 6 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours.Product A sells for $32 per unit and has variable costs of $12 per unit.Product B sells for $24 per unit and has variable costs of $7 per unit.Assuming the company can sell as many units of either product as it produces, the company should:

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

Question 50

If Teague wishes to earn $1,250 on the special order, the size of the order would need to be:
A.4,500 units
B.2,250 units
C.1,125 units
D.625 units
E.300 units

Question 51

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

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

Question 52

Assume that Charlie's Brownies expects to produce and sell 5,000 units of a single product, a gift box containing an assortment of brownies that showcases the company's many flavors.The following additional company information is available: $\begin{array}{lr} \text { Variable costs (per unit) } \\ \text {Production costs } &\$ 30 \\ \text { Nonproduction costs } &\$ 2 \\ \text { Fixed costs (in total) } \\ \text {Overhead } &\$ 100,000 \\ \text { Nonproduction } &\$ 5,000\end{array}$ Compute Charlie's Brownies total cost per unit.

A)$32
B)$50
C)$53
D)$3
E)$21

Question 53

Beta Inc.can produce a unit of Zed for the following costs:
$\begin{array}{l}\text { Direct material } & \$10 \\\text { Direct labor } & 20 \\\text { Overhead } &\underline { 50} \\\text { Total costs per unit } & \underline { \$80}\end{array}$
An outside supplier offers to provide Beta with all the Zed units it needs at $58 per unit.If Beta buys from the supplier, it will still incur 40% of its overhead.Beta should:

A)Buy Zed since the relevant cost to make it is $60.
B)Make Zed since the relevant cost to make it is $60.
C)Buy Zed since the relevant cost to make it is $80.
D)Make Zed since the relevant cost to make it is $30.
E)Buy Zed since the relevant cost to make it is $30.

Question 54

Thompson Company had the following results of operations for the past year: $$\begin{array} { l r r } \text { Sales } ( 16,000 \text { units at } \$ 10 ) && \$ 160,000 \\\text { Direct materials and direct labor } & \$ 96,000 & \\\text { Overhead (20\% variable) } & 16,000 \\\text { Selling and administrative expenses (all fixed) } &\underline { 3 2 , 0 0 0 } & \underline { ( 144,000 ) }\\\text { Operating income } && \underline { \$ 16,000}\end{array}$$ A foreign company (whose sales will not affect Thompson's market)offers to buy 4,000 units at $7.50 per unit.In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300.If Thompson accepts the offer, its profits will:

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

Question 55

A company has the choice of either selling 500 defective units as scrap or rebuilding them.The company could sell the defective units as they are for $7.00 per unit.Alternatively, it could rebuild them with incremental costs of $2.00 per unit for materials, $3per unit for labor, and $1 per unit for overhead, and then sell the rebuilt units for $15 each.What should the company do?

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

Question 56

To determine a product selling price based on the total cost method, management should include:

A)Total production and nonproduction costs plus a markup.
B)Total production and nonproduction costs only.
C)Total production costs plus a markup.
D)Total nonproduction costs plus a markup.
E)Only a markup.

Question 57

The net advantage (incremental income)of processing Special Export further into Prime and Feline Surprise would be:
A.$98,000
B.$96,000
C.$8,000
D.$6,000
E.$2,000

Question 58

A company has the choice of either selling 750 defective units as scrap or rebuilding them.They have already spent $14 per unit making these items.The company could sell the defective units as they are for $8 per unit.Alternatively, it could rebuild them with incremental costs of $3 per unit for materials, $3per unit for labor, and $1per unit for overhead, and then sell the rebuilt units for $15.00 each.What should the company do?

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

Question 59

Textel is thinking about having one of its products manufactured by a subcontractor.Currently, the cost of manufacturing 1,000 units follows: $\begin{array}{lr}\text { Direct material } & \$ 45,000 \\\text { Direct labor } & 30,000 \\\text { Factory overhead (1/3 is variable) } & 98,000\end{array}$ If Textel can buy 1,000 units from a subcontractor for $100,000, it should:

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

Question 60

Which of the following should be classified as production costs?

A)Direct materials and selling costs.
B)Direct labor and administrative costs.
C)Manufacturing overhead and selling and administrative costs.
D)Direct materials, direct labor, and selling and administrative costs.
E)Direct materials, direct labor, and manufacturing overhead.

Question 61

Derby Inc.manufactures a product which contains a small part.The company has always purchased this motor from a supplier for $125 each.Derby recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers)to begin manufacturing the motor instead of buying it.The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost. $$\begin{array} { l r } \text { Direct materials } & \$ 38 \\\text { Direct labor } & 50 \\\text { Overhead (fixed and } & \underline { 75} \\\text { variable) } & \\\text { Total } & \underline { \$ 163}\end{array}$$ The required volume of output to produce the motors will not require any incremental fixed overhead.Incremental variable overhead cost is $21 per motor.What is the effect on income if Derby decides to make the motors?

A)Income will decrease by $16 per unit.
B)Income will increase by $16 per unit.
C)Income will increase by $23 per unit.
D)Income will decrease by $23 per unit.
E)Income will increase by $39 per unit.

Question 62

Sandlewood Company has 15,000 units of its sole product that it produced last year at a cost of $43 each.This year's model is superior to last year's and the 15,000 units cannot be sold for their regular selling price of $80 each.Sandlewood has two alternatives for these items: (1)they can be sold to a wholesaler for $30 each, or (2)they can be reworked at a total cost of $400,000 and then sold for $60 each.The company has enough idle capacity to rework these items without affecting any new production.Which choice would increase the company's profits the most?

A)Reworking, because profit will increase by $500,000 more than scrapping.
B)Scrapping, because profit will increase by $450,000 more than reworking.
C)Reworking, because profit will increase by $50,000 more than scrapping.
D)Scrapping, because profit will increase by $50,000 more than reworking.
E)Reworking because profit will increase by $450,000 more than scrapping.

Question 63

A company has already incurred a $55,000 cost in partially producing its three products.Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing.Based on this information, should any products be processed further? $$\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 72 & \$ 108 & \mathbf { \$ 5 } \\\hline \text { B } & 83 & 124 & 42 \\\hline \text { C } & 94 & 141 & 45 \\\hline\end{array}$$

A)All of these products should be processed further.
B)None of these products should be processed further.
C)Products A and B should be processed further.
D)Products B and C should be processed further.
E)Products A and C should be processed further.

Question 64

Wave-Zone Company has 10,000 units of its sole product that it produced last year at a cost of $50 each.This year's model is superior to last year's and the 10,000 units cannot be sold for their regular selling price of $75 each.Wave-Zone has two alternatives for these items: (1)they can be sold to a wholesaler for $5 each, or (2)they can be reworked at a total cost of $190,000 and then sold for $22.50 each.The company has enough idle capacity to rework these items without affecting any new production.Which choice would increase the company's profits the most?

A)Reworking, because profit will increase by $35,000 more than scrapping.
B)Scrapping, because profit will increase by $50,000 more than reworking.
C)Reworking, because profit will increase by $15,000 more than scrapping.
D)Scrapping, because profit will increase by $15,000 more than reworking.
E)Reworking because profit will increase by $50,000 more than scrapping.

Question 65

A company has already incurred a $24,000 cost in partially producing its two products.Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing.Based on this information, should any products be processed further? $$\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 900 & \$ 1,000 & \$ 65 \\\hline \text { B } & 600 & 675 & 76 \\\hline\end{array}$$

A)Both product A and product B should be processed further.
B)Neither product A nor product B should be processed further.
C)Only product B should be processed further.
D)Only product A should be processed further.
E)A processing further decision cannot be made from the available data.

Question 66

A company expects to produce and sell 15,000 units of a single product.Management desires a 15% return on assets of $2,000,000.The following additional company information is available: $\begin{array}{lr} \text { Variable costs (per unit) } \\ \text {Production costs } &\$ 65 \\ \text { Nonproduction costs } &\$7 \\ \text { Fixed costs (in total) } \\ \text {Overhead } &\$ 97,000 \\ \text { Nonproduction } &\$ 23,000\end{array}$ Compute selling price per unit given that markup percentage equals desired profit divided by total costs.

A)$80
B)$100
C)$20
D)$72
E)$92

Question 67

Termus Industries is operating at 85% of its manufacturing capacity of 50,000 product units per year.A customer has offered to buy an additional 4,000 units at $25 each and sell them outside the country so as not to compete with Termus.The following data are available: $\begin{array}{lrr}\text { Costs at 85\%/ capacity: } & { \text { Per } } & \\& \text { Urit } & \text { Total } \\\text { Direct materials } & \$ 10.00 & \$ 425,000 \\\text { Direct labor } & 8.00 & 340,000 \\\text { Overhead (fixed and variable) } & \underline{13.00} & \underline{552,500} \\\text { Totals } & \underline{\$ 31.00 }& \underline{\$ 1,317,500}\end{array}$ In producing 4,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $4 per unit would be incurred.What is the effect on income if Termus accepts this order?

A)Income will decrease by $6 per unit.
B)Income will increase by $6 per unit.
C)Income will increase by $7 per unit.
D)Income will decrease by $3 per unit.
E)Income will increase by $3 per unit.

Question 68

A company has already incurred a $15,000 cost in partially producing its three products.Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing.Based on this information, should any products be processed further? $$\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 750 & \$ 875 & \$ 130 \\\hline \text { B } & 850 & 1,000 & 155 \\\hline \text { C } & 950 & 1,200 & 255 \\\hline\end{array}$$

A)All of these products should be processed further.
B)None of these products should be processed further.
C)Only product A should be processed further.
D)Only product B should be processed further.
E)Only product C should be processed further.

Question 69

A company expects to produce and sell 20,000 units of a single product.Management desires a 22% return on assets of $3,000,000.The following additional company information is available: $\begin{array}{lr} \text { Variable costs (per unit) } \\ \text {Production costs } &\$ 105 \\ \text { Nonproduction costs } &\$9 \\ \text { Fixed costs (in total) } \\ \text {Overhead } &\$ 350,000 \\ \text { Nonproduction } &\$ 120,000\end{array}$ Compute selling price per unit given that markup percentage equals desired profit divided by total costs.

A)$137.50
B)$33.00
C)$170.50
D)$114.00
E)$122.50

Question 70

Wilder Inc.manufactures a product that contains a small computer chip.The company has always purchased this computer chip from a supplier for $110 each.Wilder recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers)to begin manufacturing the computer chip instead of buying it.The company prepared the following per unit cost projections of making the computer chip, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost. $$\begin{array} { l r } \text { Direct materials } & \$ 32 \\\text { Direct labor } & 40 \\\text { Overhead (fixed and } & \underline { 60} \\\text { variable) } & \\\text { Total } & \underline { \$ 132}\end{array}$$ The volume of output to produce the computer chip will not require any incremental fixed overhead.Incremental variable overhead cost is $42 per computer chip.What is the effect on income if Wilder decides to make the computer chips?

A)Income will decrease by $4 per unit.
B)Income will increase by $4 per unit.
C)Income will increase by $38 per unit.
D)Income will decrease by $38 per unit.
E)Income will increase by $44 per unit.

Question 71

Teeco Systems Inc.has a limited amount of direct material available for products 1A1 and 2B2.Each unit of 1A1 has a contribution margin of $12 and each unit of 2B2 has a contribution margin of $30.A unit of 2B2 uses three times as much direct material as a unit of 1A1.What is Teeco's most profitable sales mix, assuming there is unlimited demand for either product?

A)Make all 2B2.
B)Make all 1A1.
C)Make equal number of units of 1A1 and 2B2.
D)Make three times as many 1A1 as 2B2.
E)Make three times as many 2B2 as 1A1.

Question 72

Wade Company is operating at 75% of its manufacturing capacity of 140,000 product units per year.A customer has offered to buy an additional 20,000 units at $32 each and sell them outside the country so as not to compete with Wade.The following data are available: $\begin{array}{lrr}\text { Costs at 75\%/ capacity: } & { \text { Per } } & \\& \text { Urit } & \text { Total } \\\text { Direct materials } & \$ 12.00 & \$ 1,260,000 \\\text { Direct labor } & 9.00 & 945,000 \\\text { Overhead (fixed and variable) } & \underline{15.00} & \underline{1,575,000} \\\text { Totals } & \underline{\$ 36.00 }& \underline{\$ 3,780,000}\end{array}$ In producing 20,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $6 per unit would be incurred.What is the effect on income if Wade accepts this order?

A)Income will decrease by $4 per unit.
B)Income will increase by $4 per unit.
C)Income will increase by $5 per unit.
D)Income will decrease by $5 per unit.
E)Income will increase by $11 per unit.

Question 73

Paz Inc.manufactures a product that contains a small motor.The company has always purchased this motor from a supplier for $55 each.Paz recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers)to begin manufacturing the motor instead of buying it.The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost. $\begin{array}{lr}\text { Direct materials } & \$ 16 \\\text { Direct labor } & 20 \\\text { Overhead (fixed and } & \underline { 30 }\\\text { variable) } & \\\text { Total } & \underline { \$ 66}\end{array}$ The required volume of output to produce the motors will not require any incremental fixed overhead.Incremental variable overhead cost is $21 per motor.What is the effect on income if Paz decides to make the motors?

A)Income will decrease by $2 per unit.
B)Income will increase by $2 per unit.
C)Income will increase by $11 per unit.
D)Income will decrease by $11 per unit.
E)Income will increase by $19 per unit.

Question 74

A company expects to produce and sell 8,000 units of a single product.Management desires a 20% return on assets of $1,520,000.The following additional company information is available: $\begin{array}{lr} \text { Variable costs (per unit) } \\ \text {Production costs } &\$ 78 \\ \text { Nonproduction costs } &\$ 22 \\ \text { Fixed costs (in total) } \\ \text {Overhead } &\$ 110,000 \\ \text { Nonproduction } &\$ 40,000\end{array}$ Compute markup per unit.Assume that markup percentage equals desired profit divided by total costs.

A)$118.75
B)$156.75
C)$91.75
D)$38.00
E)$100.00

Question 75

A company has already incurred a $12,000 cost in partially producing its two products.Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing.Based on this information, should any products be processed further? $$\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 700 & \$ 775 & \$ 65 \\\hline \text { B } & \mathbf { 8 0 0 } & \mathbf { 8 8 8 } & \mathbf { 8 9 } \\\hline\end{array}$$

A)Both product A and product B should be processed further.
B)Neither product A nor product B should be processed further.
C)Only product B should be processed further.
D)Only product A should be processed further.
E)A processing further decision cannot be made from the available data.

Question 76

Altertech Inc.manufactures a product that contains a circuit board.The company has always purchased this circuit board from a supplier for $32 each.Altertech recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers)to begin manufacturing the circuit board instead of buying it.The company prepared the following per unit cost projections of making the circuit board, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 110% of direct labor cost. $$\begin{array} { l l } \text { Direct materials } & \$ 2 \\\text { Direct labor } & { 2 0 } \\\text { Overhead (fixed and } & \underline { 2 2 } \\\text { variable) } & \\\text { Total } & \underline { \$ 44}\end{array}$$ The required volume of output to produce the circuit boards will not require any incremental fixed overhead.Incremental variable overhead cost is $3 per circuit board.What is the effect on income if Altertech decides to make the circuit boards?

A)Income will decrease by $7 per unit.
B)Income will increase by $7 per unit.
C)Income will increase by $12 per unit.
D)Income will decrease by $12 per unit.
E)Income will increase by $10 per unit.

Question 77

Bandy Corporation owns a machine that manufactures lawn games.Production time for the croquet set is 10 units per hour and for the volley ball game is 8 units per hour.The machine's capacity is 1,500 hours per year.Both products are sold to a single customer who has agreed to buy all of the company's output up to a maximum of 4,000 croquet sets and 10,000 volleyball games.Selling prices and variable costs per unit are shown below.Based on this information, what is Bandy Corporation's most profitable sales mix? $\begin{array}{lcc} & \text { Croquet Set } & \text { Volleyball Game } \\\text { Selling price per unit } & \$ 75 & \$ 62 \\\text { Variable costs per unit } & 42 & 25\end{array}$

A)15,000 croquet sets.
B)12,000 volleyball games.
C)4,000 croquet sets and 10,000 volleyball games.
D)4,000 croquet sets and 8,800 volleyball games.
E)2,500 croquet sets and 10,000 volleyball games.

Question 78

Bath Company has a limited amount of direct material available for products 111 and 222.Each unit of 111 has a contribution margin of $5 and each unit of 222 has a contribution margin of $25.A unit of 222 uses four times as much direct material as a unit of 111.What is Bath's most profitable sales mix, assuming there is unlimited demand for either product?

A)Make all 222.
B)Make all 111.
C)Make equal number of units of 111 and 222.
D)Make four times as many 111 as 222.
E)Make four times as many 222 as 111.

Question 79

Roxie Company has 17,500 units of its sole product that it produced last year at a cost of $45 each.This year's model is superior to last year's and the 17,500 units cannot be sold for their regular selling price of $80 each.Roxie has two alternatives for these items: (1)they can be sold to a wholesaler for $35 each, or (2)they can be reworked at a total cost of $450,000 and then sold for $60 each.The company has enough idle capacity to rework these items without affecting any new production.Which choice would increase the company's profits the most?

A)Reworking, because profit will increase by $600,000 more than scrapping.
B)Scrapping, because profit will increase by $612,500 more than reworking.
C)Reworking, because profit will increase by $12,500 more than scrapping.
D)Scrapping, because profit will increase by $12,500 more than reworking.
E)Reworking because profit will increase by $450,000 more than scrapping.

Question 80

A company expects to produce and sell 9,000 units of a single product.Management desires an 18% return on assets of $1,750,000.The following additional company information is available: $\begin{array}{lr} \text { Variable costs (per unit) } \\ \text {Production costs } &\$ 79 \\ \text { Nonproduction costs } &\$ 5 \\ \text { Fixed costs (in total) } \\ \text {Overhead } &\$ 279,000 \\ \text { Nonproduction } &\$ 90,000\end{array}$ Compute markup per unit.Assume that markup percentage equals desired profit divided by total costs.

A)$35
B)$84
C)$110
D)$125
E)$160