Deck 7: How Are Relevant Revenues and Costs Used to Make Decisions

Question 1

Production capacity is the only consideration when evaluating special orders.

Answer 1

False

Question 2

All managers require one standard format for differential analysis.

Answer 2

False

Question 3

A sunk cost is the benefit foregone when one alternative is selected over another.

Answer 3

False

Question 4

A "make-or-buy" decision means a company is deciding whether to build the product or outsource the product.

Question 5

Allocated fixed costs are easily traceable to individual products.

Question 6

There are often qualitative advantages for keeping unprofitable customers.

Question 7

The differential analysis format for deciding whether to keep or drop a customer is similar to that used for making product line decisions.

Question 8

Avoidable costs are as also called differential costs.

Question 9

Sunk costs are costs incurred in the past that cannot be changed by future decisions.

Question 10

The theory of constraints starts with subordinating all nonbottleneck resources to the bottleneck.

Question 11

When deciding between alternatives,only those revenues and costs that differ from one alternative to another are relevant.

Question 12

Cost-plus pricing is often used by companies that produce custom products where market prices are not easily available.

Question 13

Allocated fixed costs are eliminated when a product line is eliminated.

Question 14

Individual product profitability will vary depending on which allocation method is chosen to allocate joint costs.

Question 15

One of the factors to consider when evaluating special orders is the impact that special pricing will have on long-run pricing with existing customers.

Question 16

Cost-plus pricing starts with considering the price of products at competing firms.

Question 17

Joint products are two or more products produced from a single input.

Question 18

Using activity-based costing information with differential analysis can lead to better decisions.

Question 19

Differential analysis can be used to decide whether to outsource production,but it is not used for product line decisions.

Question 20

Differential revenues and costs are also called incremental revenues and costs.

Question 21

Which of the following is not considered relevant when considering a make-or-buy decision?

A)The effect on variable costs.
B)The effect on employee morale.
C)The quality of the outsourced product.
D)The effect on unavoidable fixed costs.
E)None of the answer choices is correct.

Question 22

Exhibit 7-3
Cap Incorporated currently manufactures hats.Management is interested in outsourcing production to a reputable manufacturing company that can supply the hats for $5 per unit.Cap produces 20,000 hats each year.Variable production costs are $2 and annual fixed costs are $75,000.If production is outsourced,all variable costs and 60 percent of annual fixed costs will be eliminated.
Refer to Exhibit 7-3.What are the total production costs if the hats are outsourced?

A)$130,000
B)$145,000
C)$100,000
D)$60,000
E)None of the answer choices is correct.

Question 23

Exhibit 7-3
Cap Incorporated currently manufactures hats.Management is interested in outsourcing production to a reputable manufacturing company that can supply the hats for $5 per unit.Cap produces 20,000 hats each year.Variable production costs are $2 and annual fixed costs are $75,000.If production is outsourced,all variable costs and 60 percent of annual fixed costs will be eliminated.
Refer to Exhibit 7-3.If the hats are made internally,what are the total production costs?

A)$25,000
B)$100,000
C)$115,000
D)$175,000
E)None of the answer choices is correct.

Question 24

Exhibit 7-4
The following segmented annual income statement is for Paper Products,Inc.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Product Lines }$
$\begin{array}{lrrrr}& \text { Plain } & \text { Lined } & \text { Color } & \text { Total }\\\text { Sales revenue } & \$ 25,000 & \$ 100,000 & \$ 125,000 & \$ 250,000 \\\text { Variable costs } & 15,000 & 50,000 & 85,000 & 150,000\\\text { Contribution margin } & \$ 10,000 & \$ 50,000 & \$ 40,000 & \$ 100,000 \\\text { Direct fixed costs } & 4,000 & 6,000 & 9,000 & 19,000\\\text {Allocated fixed costs }&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{45,000}\\\text {Profit (loss)}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}\end{array}$


-Refer to Exhibit 7-4.If allocated fixed costs are based on sales revenue for each product line as a proportion of total sales revenue,what is the amount of allocated fixed costs for Color?

A)$18,000
B)$22,500
C)$15,000
D)$31,000
E)None of the answer choices is correct.

Question 25

Exhibit 7-1
Talmont Products has dropped the price per unit of its smart phone product from $1,060 to $500.There are some units in work-in-process inventory that have costs of $600 per unit associated with them.Talmont could sell these units in their current state for $400.It will cost Talmont $40 to complete these units so that they can be sold for $500 each.
Refer to Exhibit 7-1.Which of the following amounts is a sunk cost in this problem?

A)$1,060 per unit
B)$40 per unit
C)$600 per unit
D)$400 per unit
E)None of the answer choices is correct.

Question 26

Exhibit 7-2
Jake Company is considering a special order for 5,000 units at a price of $60 per unit.Jake's product normally sells for $84 per unit and has variable manufacturing costs of $45 per unit and variable selling costs of $9 per unit.Fixed manufacturing costs are $150,000 and fixed selling and administrative costs are $300,000.Jake has capacity to produce 30,000 units and is currently producing 20,000 units.If the order is accepted,,Jake will incur legal fees of $7,500 in connection with the order,but there will be no variable selling costs on the special order.
Refer to Exhibit 7-2.What are the differential revenues associated with the special order?

A)$75,000
B)$120,000
C)$420,000
D)$300,000
E)None of the answer choices is correct.

Question 27

All of the following are qualitative factors that a company should consider in a make-or-buy decision except:

A)Will the supplier consistently make a quality product?
B)Will the supplier have enough capacity if demand increases?
C)Will profit increase by outsourcing the product?
D)Will the morale of current employees be affected by outsourcing?
E)None of the answer choices is correct.

Question 28

Exhibit 7-3
Cap Incorporated currently manufactures hats.Management is interested in outsourcing production to a reputable manufacturing company that can supply the hats for $5 per unit.Cap produces 20,000 hats each year.Variable production costs are $2 and annual fixed costs are $75,000.If production is outsourced,all variable costs and 60 percent of annual fixed costs will be eliminated.
Refer to Exhibit 7-3.Which is the best alternative,producing internally or outsourcing?

A)Outsourcing the production of hats results in $15,000 in savings compared to internal production.
B)Outsourcing the production of hats results in $30,000 in savings compared to internal production.
C)Producing the hats internally results in $30,000 in savings compared to outsourcing production.
D)Producing the hats internally results in $15,000 in savings compared to outsourcing production.
E)None of the answer choices is correct.

Question 29

The best definition of an opportunity cost is a:

A)Cost reflecting benefits foregone when one alternative is selected over another.
B)Cost incurred in the past that cannot be changed by future decisions.
C)Fixed cost that cannot be traced directly to a product line.
D)Cost that can be avoided by selecting a particular course of action.
E)None of the answer choices is correct.

Question 30

Exhibit 7-1
Talmont Products has dropped the price per unit of its smart phone product from $1,060 to $500.There are some units in work-in-process inventory that have costs of $600 per unit associated with them.Talmont could sell these units in their current state for $400.It will cost Talmont $40 to complete these units so that they can be sold for $500 each.
Refer to Exhibit 7-1.When the incremental revenues and costs are analyzed,the company is better off by:

A)$500 per unit if they complete the units.
B)$40 per unit if they sell the units in their current state.
C)$200 per unit if they sell the units in their current state.
D)$60 per unit if they complete the units.
E)None of the answer choices is correct.

Question 31

Exhibit 7-1
Talmont Products has dropped the price per unit of its smart phone product from $1,060 to $500.There are some units in work-in-process inventory that have costs of $600 per unit associated with them.Talmont could sell these units in their current state for $400.It will cost Talmont $40 to complete these units so that they can be sold for $500 each.
Refer to Exhibit 7-1.Which of the following is not a relevant revenue or cost in this problem?

A)The old price of $1,060
B)The partially complete price of $400
C)The current price of $500
D)The cost to complete a unit of $40
E)None of the answer choices is correct.

Question 32

Exhibit 7-4
The following segmented annual income statement is for Paper Products,Inc.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Product Lines }$
$\begin{array}{lrrrr}& \text { Plain } & \text { Lined } & \text { Color } & \text { Total }\\\text { Sales revenue } & \$ 25,000 & \$ 100,000 & \$ 125,000 & \$ 250,000 \\\text { Variable costs } & 15,000 & 50,000 & 85,000 & 150,000\\\text { Contribution margin } & \$ 10,000 & \$ 50,000 & \$ 40,000 & \$ 100,000 \\\text { Direct fixed costs } & 4,000 & 6,000 & 9,000 & 19,000\\\text {Allocated fixed costs }&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{45,000}\\\text {Profit (loss)}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}\end{array}$


-Refer to Exhibit 7-4.If allocated fixed costs are based on sales revenue for each product line as a proportion of total sales revenue,what is the amount of allocated fixed costs for Lined?

A)$18,000
B)$44,000
C)$22,500
D)$15,000
E)None of the answer choices is correct.

Question 33

Exhibit 7-4
The following segmented annual income statement is for Paper Products,Inc.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Product Lines }$
$\begin{array}{lrrrr}& \text { Plain } & \text { Lined } & \text { Color } & \text { Total }\\\text { Sales revenue } & \$ 25,000 & \$ 100,000 & \$ 125,000 & \$ 250,000 \\\text { Variable costs } & 15,000 & 50,000 & 85,000 & 150,000\\\text { Contribution margin } & \$ 10,000 & \$ 50,000 & \$ 40,000 & \$ 100,000 \\\text { Direct fixed costs } & 4,000 & 6,000 & 9,000 & 19,000\\\text {Allocated fixed costs }&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{45,000}\\\text {Profit (loss)}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}\end{array}$


-Refer to Exhibit 7-4.If allocated fixed costs are based on sales revenue for each product line as a proportion of total sales revenue,what is the amount of allocated fixed costs for Plain?

A)$15,000
B)$6,000
C)$22,500
D)$4,500
E)None of the answer choices is correct.

Question 34

Which of the following is not relevant in a special order decision?

A)Variable costs.
B)Opportunity costs.
C)Sunk costs.
D)Avoidable fixed costs.
E)None of the answer choices is correct.

Question 35

Exhibit 7-2
Jake Company is considering a special order for 5,000 units at a price of $60 per unit.Jake's product normally sells for $84 per unit and has variable manufacturing costs of $45 per unit and variable selling costs of $9 per unit.Fixed manufacturing costs are $150,000 and fixed selling and administrative costs are $300,000.Jake has capacity to produce 30,000 units and is currently producing 20,000 units.If the order is accepted,,Jake will incur legal fees of $7,500 in connection with the order,but there will be no variable selling costs on the special order.
Refer to Exhibit 7-2.What amount of additional profit or loss will be incurred if the order is accepted?

A)$300,000
B)$67,500
C)($127,500)
D)($22,500)
E)None of the answer choices is correct.

Question 36

The best definition of differential analysis is:

A)an analysis of the benefits foregone when one alternative is selected over another.
B)an analysis of allocated fixed costs related to each product line.
C)an analysis of variable costs that are the same from one alternative course of action to another.
D)an analysis that looks at the difference in revenues and costs from one alternative course of action to another.
E)None of the answer choices is correct.

Question 37

The best definition of allocated fixed costs is:

A)Fixed costs that can be traced directly to a customer.
B)Fixed costs that are forgone when one alternative is selected over another.
C)Fixed costs that cannot be traced directly to a customer.
D)Fixed costs that differ between alternatives.
E)None of the answer choices is correct.

Question 38

Exhibit 7-1
Talmont Products has dropped the price per unit of its smart phone product from $1,060 to $500.There are some units in work-in-process inventory that have costs of $600 per unit associated with them.Talmont could sell these units in their current state for $400.It will cost Talmont $40 to complete these units so that they can be sold for $500 each.
Refer to Exhibit 7-1.Talmont is considering the option of throwing away the remaining smart phone units that are in work-in-process inventory.What effect would this decision have on net income?

A)Net income would decrease by $1,060 for each unit discarded.
B)Net income would decrease by $600 for each unit discarded.
C)Net income will increase by $200 for each unit discarded.
D)This decision would have no effect on net income.
E)None of the answer choices is correct.

Question 39

Exhibit 7-2
Jake Company is considering a special order for 5,000 units at a price of $60 per unit.Jake's product normally sells for $84 per unit and has variable manufacturing costs of $45 per unit and variable selling costs of $9 per unit.Fixed manufacturing costs are $150,000 and fixed selling and administrative costs are $300,000.Jake has capacity to produce 30,000 units and is currently producing 20,000 units.If the order is accepted,,Jake will incur legal fees of $7,500 in connection with the order,but there will be no variable selling costs on the special order.
Refer to Exhibit 7-2.What are the differential costs associated with the special order?

A)$232,500
B)$67,500
C)$127,500
D)$322,500
E)None of the answer choices is correct.

Question 40

Barkley Company currently makes a product internally,but is considering outsourcing production.Barkley rents a special machine used to make the product,and would no longer need this machine if the part is outsourced.The rent on the machine is what type of cost for this make-or-buy decision?

A)sunk and not differential.
B)avoidable and differential.
C)unavoidable and differential.
D)avoidable and not differential.
E)None of the answer choices is correct.

Question 41

Exhibit 7-4
The following segmented annual income statement is for Paper Products,Inc.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Product Lines }$
$\begin{array}{lrrrr}& \text { Plain } & \text { Lined } & \text { Color } & \text { Total }\\\text { Sales revenue } & \$ 25,000 & \$ 100,000 & \$ 125,000 & \$ 250,000 \\\text { Variable costs } & 15,000 & 50,000 & 85,000 & 150,000\\\text { Contribution margin } & \$ 10,000 & \$ 50,000 & \$ 40,000 & \$ 100,000 \\\text { Direct fixed costs } & 4,000 & 6,000 & 9,000 & 19,000\\\text {Allocated fixed costs }&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{45,000}\\\text {Profit (loss)}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}\end{array}$


-Refer to Exhibit 7-4.If allocated fixed costs are based on sales revenue for each product line as a proportion of total sales revenue,what is the profit or (loss)for Lined?

A)$29,000
B)$26,000
C)$44,000
D)$21,500
E)None of the answer choices is correct.

Question 42

Exhibit 7-4
The following segmented annual income statement is for Paper Products,Inc.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Product Lines }$
$\begin{array}{lrrrr}& \text { Plain } & \text { Lined } & \text { Color } & \text { Total }\\\text { Sales revenue } & \$ 25,000 & \$ 100,000 & \$ 125,000 & \$ 250,000 \\\text { Variable costs } & 15,000 & 50,000 & 85,000 & 150,000\\\text { Contribution margin } & \$ 10,000 & \$ 50,000 & \$ 40,000 & \$ 100,000 \\\text { Direct fixed costs } & 4,000 & 6,000 & 9,000 & 19,000\\\text {Allocated fixed costs }&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{45,000}\\\text {Profit (loss)}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}\end{array}$


-Refer to Exhibit 7-4.If allocated fixed costs are based on sales revenue for each product line as a proportion of total sales revenue,what is the total profit or (loss)for all product lines?

A)$250,000
B)$164,000
C)$126,000
D)$36,000
E)None of the answer choices is correct.

Question 43

Exhibit 7-6
Roseville,Inc.produces two types of gaming systems: Starter and Advanced.The gaming products are produced in separate departments and sent to the quality testing department before being packaged and shipped.A labor-hour bottleneck has been identified in the quality testing department due to the high skill requirements of the job.Roseville,Inc.has compiled the following data in order to optimize its use of labor hours for producing the most profitable product.
$$\begin{array} { l c c } & \begin{array} { c } \text { Quality Testing } \\\text { Labor-hours }\end{array} & \begin{array} { c } \text { Contribution } \\\text { Margin }\end{array} \\ \text { Starter } & 0.80 & \$ 200 \\\text { Advanced } & 0.50 & 150\end{array}$$

-Refer to Exhibit 7-6.What is the contribution margin per quality testing labor-hour for the Advanced product?

A)$275
B)$75
C)$300
D)$269
E)None of the answer choices is correct.

Question 44

The following monthly financial data is for Tennis Company,a maker of tennis balls.Tennis makes 50,000 tennis balls each month.
$$\begin{array} { l c c } & \text { Per unit } & \begin{array} { c } \text { Total mamthly data at } \\50,000 \text { tennis balls }\end{array} \\\text { Sales reverue } & \$ 2.00 & \$ 100,000 \\\text { Variable costs } & \underline { 0.35 } & 17,500 \\\text { Contribution margin } & \underline { \$ 1.65 } & \$ 82,500 \\\text { Fixed costs } & & 72,000 \\\text { Profit } & & \$ 10,500\end{array}$$
Tennis received an offer from a tennis club to purchase 15,000 tennis balls at $1.50 per ball.Variable costs per pair will remain at $0.35.Any special orders will result in reduced sales to regular customers.However,fixed costs will not change as a result of the special order.Which of the following statements describes the best course of action for Tennis Company?

A)Reject the special order since profit will be $7,500 greater without the special order.
B)Accept the special order since fixed costs will not change.
C)Accept the special order since it will yield $1.15 per tennis ball in profit.
D)Reject the special order since the company will experience a total net loss as a result of the special order.
E)None of the answer choices is correct.

Question 45

Exhibit 7-7
Fishing Products Company produces three types of fishing poles: Light,Medium,and Heavy.The poles are produced in separate departments and sent to the quality testing department before being shipped.A labor-hour bottleneck has been identified in the quality testing department due to the high skill requirements of the job.Fishing Products would like to optimize its use of labor hours by producing the two most profitable fishing poles.Information for each pole follows:
$$\begin{array} { l c c c } & \begin{array} { c } \text { Quality Testing } \\\text { Labor-hours }\end{array} & \text { Price } & \text { Variable Cost } \\ \text { Light } & 2 & \$ 300 & \$ 170 \\\text { Mediurn } & 3 & 500 & 200 \\\text { Heavy } & 5 & 1,200 & 380\end{array}$$

-Refer to Exhibit 7-7.What is the contribution margin per unit of constrained resource for the Heavy product?

A)$1,640
B)$82
C)$100
D)$164
E)None of the answer choices is correct.

Question 46

All of the following are steps of target costing except:

A)maximizing the contribution margin per unit of constrained resource.
B)engineering the product to achieve the target cost.
C)designing a product that provides the features and price demanded by customers.
D)deriving the target cost by subtracting the desired profit.
E)None of the answer choices is correct.

Question 47

Exhibit 7-4
The following segmented annual income statement is for Paper Products,Inc.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Product Lines }$
$\begin{array}{lrrrr}& \text { Plain } & \text { Lined } & \text { Color } & \text { Total }\\\text { Sales revenue } & \$ 25,000 & \$ 100,000 & \$ 125,000 & \$ 250,000 \\\text { Variable costs } & 15,000 & 50,000 & 85,000 & 150,000\\\text { Contribution margin } & \$ 10,000 & \$ 50,000 & \$ 40,000 & \$ 100,000 \\\text { Direct fixed costs } & 4,000 & 6,000 & 9,000 & 19,000\\\text {Allocated fixed costs }&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{45,000}\\\text {Profit (loss)}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}\end{array}$


-Refer to Exhibit 7-4.If allocated fixed costs are based on sales revenue for each product line as a proportion of total sales revenue,what is the profit or (loss)for Color?

A)$8,500
B)$16,000
C)$31,000
D)$13,000
E)None of the answer choices is correct.

Question 48

Exhibit 7-7
Fishing Products Company produces three types of fishing poles: Light,Medium,and Heavy.The poles are produced in separate departments and sent to the quality testing department before being shipped.A labor-hour bottleneck has been identified in the quality testing department due to the high skill requirements of the job.Fishing Products would like to optimize its use of labor hours by producing the two most profitable fishing poles.Information for each pole follows:
$$\begin{array} { l c c c } & \begin{array} { c } \text { Quality Testing } \\\text { Labor-hours }\end{array} & \text { Price } & \text { Variable Cost } \\ \text { Light } & 2 & \$ 300 & \$ 170 \\\text { Mediurn } & 3 & 500 & 200 \\\text { Heavy } & 5 & 1,200 & 380\end{array}$$

-Refer to Exhibit 7-7.What is the contribution margin per unit of constrained resource for the Light product?

A)$65
B)$100
C)$260
D)$17
E)None of the answer choices is correct.

Question 49

In which of the following cases is a customer most likely to be dropped?

A)When the customer's variable costs are more than its total fixed costs.
B)When the customer's avoidable fixed costs are more than its contribution margin.
C)When the customer's total fixed costs are more than its contribution margin.
D)When the customer's contribution margin is more than its avoidable fixed costs.
E)None of the answer choices is correct.

Question 50

Exhibit 7-7
Fishing Products Company produces three types of fishing poles: Light,Medium,and Heavy.The poles are produced in separate departments and sent to the quality testing department before being shipped.A labor-hour bottleneck has been identified in the quality testing department due to the high skill requirements of the job.Fishing Products would like to optimize its use of labor hours by producing the two most profitable fishing poles.Information for each pole follows:
$$\begin{array} { l c c c } & \begin{array} { c } \text { Quality Testing } \\\text { Labor-hours }\end{array} & \text { Price } & \text { Variable Cost } \\ \text { Light } & 2 & \$ 300 & \$ 170 \\\text { Mediurn } & 3 & 500 & 200 \\\text { Heavy } & 5 & 1,200 & 380\end{array}$$

-Refer to Exhibit 7-7.What is the contribution margin per unit of constrained resource for the Medium product?

A)$65
B)$100
C)$30
D)$900
E)None of the answer choices is correct.

Question 51

Exhibit 7-6
Roseville,Inc.produces two types of gaming systems: Starter and Advanced.The gaming products are produced in separate departments and sent to the quality testing department before being packaged and shipped.A labor-hour bottleneck has been identified in the quality testing department due to the high skill requirements of the job.Roseville,Inc.has compiled the following data in order to optimize its use of labor hours for producing the most profitable product.
$$\begin{array} { l c c } & \begin{array} { c } \text { Quality Testing } \\\text { Labor-hours }\end{array} & \begin{array} { c } \text { Contribution } \\\text { Margin }\end{array} \\ \text { Starter } & 0.80 & \$ 200 \\\text { Advanced } & 0.50 & 150\end{array}$$

-Refer to Exhibit 7-6.What is the contribution margin per quality testing labor-hour for the Starter product?

A)$160
B)$40
C)$269
D)$250
E)None of the answer choices is correct.

Question 52

Exhibit 7-4
The following segmented annual income statement is for Paper Products,Inc.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Product Lines }$
$\begin{array}{lrrrr}& \text { Plain } & \text { Lined } & \text { Color } & \text { Total }\\\text { Sales revenue } & \$ 25,000 & \$ 100,000 & \$ 125,000 & \$ 250,000 \\\text { Variable costs } & 15,000 & 50,000 & 85,000 & 150,000\\\text { Contribution margin } & \$ 10,000 & \$ 50,000 & \$ 40,000 & \$ 100,000 \\\text { Direct fixed costs } & 4,000 & 6,000 & 9,000 & 19,000\\\text {Allocated fixed costs }&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{\quad?\quad}&\underline{45,000}\\\text {Profit (loss)}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}&\underline{\$\quad?\quad}\end{array}$


-Refer to Exhibit 7-4.If allocated fixed costs are based on sales revenue for each product line as a proportion of total sales revenue,what is the profit or (loss)for Plain?

A)($9,000)
B)$6,000
C)$1,500
D)($16,500)
E)None of the answer choices is correct.

Question 53

Damon,Inc.currently produces 30,000 sweatshirts each year for its regular customers and charges $30 per sweatshirt.Damon has capacity to produce an additional 5,000 sweatshirts if sales grow in the future.Variable costs total $16 per sweatshirt and annual fixed costs total $60,000.The city of Loveland recently approached the company and proposed a one-time purchase of 1,000 sweatshirts for $24 each.Should Damon accept the special order proposal?

A)No,because total fixed costs will increase by $2,000 and total sales will decline by $6,000 from this special order.
B)Yes,because they will make $6 per shirt from this special order.
C)Yes,because they will make $8 per shirt from this special order.
D)No,because they will lose $6 per shirt from this special order.
E)None of the answer choices is correct.

Question 54

Exhibit 7-5
Accounting Services,Inc.has two customers.Customer X generates $600,000 in income after direct fixed costs are deducted,and Customer Z generates $580,000 in income after direct fixed costs are deducted.Allocated fixed costs total $1,000,000 and are assigned 40 percent to Customer X and 60 percent to Customer Z.Total allocated fixed costs remain the same regardless of how these costs are assigned to customers.
Refer to Exhibit 7-5.What is the amount of profit or (loss)for Customer Z?

A)$88,000
B)$200,000
C)($20,000)
D)$80,000
E)None of the answer choices is correct.

Question 55

Paradise Inc.estimates that it can sell 50,000 of its calculators for $50 each.Assuming a total target profit of $1,000,000,how much is the target cost per calculator?

A)$22.00
B)$30.00
C)$20.00
D)$50.00
E)There is not enough information to answer this question.

Question 56

Computer Inc.has developed a new computer that can be sold for $800.If management requires a profit equal to 60 percent of the selling price,what is the target cost of this product?

A)$480
B)$740
C)$60
D)$320
E)None of the answer choices is correct.

Question 57

Exhibit 7-5
Accounting Services,Inc.has two customers.Customer X generates $600,000 in income after direct fixed costs are deducted,and Customer Z generates $580,000 in income after direct fixed costs are deducted.Allocated fixed costs total $1,000,000 and are assigned 40 percent to Customer X and 60 percent to Customer Z.Total allocated fixed costs remain the same regardless of how these costs are assigned to customers.
Refer to Exhibit 7-5.Based on this information,which of the following best describes the course of action preferred by management regarding this customer decision?

A)Drop Customer Z because this customer generates a net loss.
B)Drop Customer Z because this customer generates less income after direct fixed costs than Customer X.
C)Keep Customer Z because eliminating this company would have the effect of increasing company profit by $580,000.
D)Keep Customer Z because eliminating this company would have the effect of decreasing company profit by $580,000.
E)None of the answer choices is correct.

Question 58

Exhibit 7-5
Accounting Services,Inc.has two customers.Customer X generates $600,000 in income after direct fixed costs are deducted,and Customer Z generates $580,000 in income after direct fixed costs are deducted.Allocated fixed costs total $1,000,000 and are assigned 40 percent to Customer X and 60 percent to Customer Z.Total allocated fixed costs remain the same regardless of how these costs are assigned to customers.
Refer to Exhibit 7-5.What is the amount of allocated fixed costs to be assigned to Customer Z?

A)$580,000
B)$420,000
C)$400,000
D)$600,000
E)None of the answer choices is correct.

Question 59

Davis Company has $20 per unit in variable costs and $800,000 per year in fixed costs.Demand is estimated to be 400,000 units per year.What is the desired price per unit if a markup of 30% on total cost is used to determine the price?

A)$26.00
B)$37.40
C)$28.60
D)$34.00
E)None of the answer choices is correct.

Question 60

Branford Company is bidding on a custom yacht.The company typically charges 30 percent above cost and estimates the yacht will cost $900,000 to build.What is the price bid that Branford should submit?

A)$900,000
B)$1,170,000
C)$1,530,000
D)$927,000
E)None of the answer choices is correct.

Question 61

Exhibit 7-8
Petro Inc.produces two joint products,product A and B.Prior to the split-off point,the company incurred $600,000 in joint costs.Production totaled 72,000 pounds for product A and 48,000 pounds for product B.
Refer to Exhibit 7-8.What amount of joint costs is allocated to product B using the physical quantities method (pounds)?

A)$360,000
B)$240,000
C)$80,000
D)$60,000
E)None of the answer choices is correct.

Question 62

When managers are making resource utilization decisions,the general rule is to:

A)minimize the use of the constrained resource.
B)maximize the contribution margin per unit.
C)maximize the contribution margin per unit of the constrained resource.
D)minimize the contribution margin per unit.
E)None of the answer choices is correct.

Question 63

Exhibit 7-9
Doughnuts Company uses flour to produce two joint products,Premium and Deluxe.When processed,each pound of flour yields 8 units of Premium and 12 units of Deluxe.Premium doughnuts sell for $1.00 per unit and Deluxe sell for $2.00 per unit.The total cost to process a 10-pound batch of flour is $12.00.
Refer to Exhibit 7-9.If the physical quantities method is used to allocate the $12 in joint costs,how much will be allocated to Premium doughnuts?

A)$10.00
B)$7.20
C)$6.00
D)$4.80
E)None of the answer choices is correct.

Question 64

The following monthly financial data is for Tina's T-Shirt Company.The company makes 25,000 T-shirts each month.
$\begin{array}{lrr}&& \text { Total monthly data at } \\&\text { Per unit } & 25,000 \text { units } \\\text { Sales revenue } & \$ 10.00 & \$ 250,000 \\\text { Variable costs } & \underline{5.50} & \underline{137,500} \\\text { Contribution margin } & \underline{\$ 4.50} & \$ 112,500 \\\text { Fixed costs } & & 98,000\\\text { Profit } & & \$ 14,500 \\\end{array}$
Tina is approached by a local youth camp that would like to have 2,000 T-shirts produced.The camp asked Tina to produce the shirts for $9.00 each rather than the standard price of $10.00.Tina can produce up to 28,000 shirts a month,so the special order will not affect regular customer sales.Variable costs per unit will remain at $5.50,but production of the shirts will require a special machine that costs $2,500.This special order will have no other effect on monthly fixed costs.
(1)Using differential analysis,determine whether Tina would be better off accepting or rejecting the special order.
(2)Assume Tina can only produce 25,000 T-shirts per month,and that regular customer sales would decrease as a result of the special order.Using differential analysis,determine whether Tina would be better off accepting or rejecting the special order.

Question 65

What are some of the qualitative factors management might consider if they are trying to decide whether to outsource production rather than keep the production within their company?

Question 66

Sandwiches Galore is a small shop looking to expand its product offerings.The company is evaluating two alternatives: tacos and soups.Annual projections for sales of tacos are as follows: Sales $144,000;variable costs $80,000;fixed costs $16,000.Annual projections for sales of soups are as follows: Sales $60,000;variable costs $20,000;no additional fixed costs.
Perform differential analysis to determine which alternative is more profitable,and by how much.Assume that adding tacos is alternative 1 and adding soups is alternative 2.

Question 67

Fruit Products Company purchased 60,000 pounds of fresh apples from a local grower for $24,000.The apples were separated into high quality grade A apples (18,000 pounds),and lower quality grade B apples (42,000 pounds).Fruit Products sells Grade A apples for $2.40 per pound,and grade B apples for $1.50 per pound.
(1)Allocate joint costs to each product using the physical quantities method (pounds),and calculate the profit or loss for each product and in total.
(2)Allocate joint costs to each product using the sales value method,and calculate the profit or loss for each product and in total.
(3)Assume grade B apples can be processed further into dried apples for an additional $0.40 per pound.Customers are willing to pay $1.80 per pound for the dried apples.Should Fruit Products process the grade B apples further? Explain.

Question 68

The following annual income statement is for Outboard Motors Inc. ,a maker of outboard motors for boats.
$\begin{array}{c}\text { Product Lines }\\\begin{array}{lr}&2 \mathrm{HP} &\\\text { Sales revenue } & \$ 400,000 \\\text { Variable costs } & 190,000 \\\text { Contribution margin } & \$ 210,000 \\\text { Direct fixed costs } & 196,000 \\\text { Allocated fixed costs } & 24,000 \\ \text { Profit (loss) } & \$(10,000)\\\end{array} \begin{array}{rrr} 5 \mathrm{HP} & 10 \mathrm{HP} & \text { Total }\\\$ 600,000 & \$ 250,000 & \$ 1,250,000 \\370,000 & 150,000 &710,000\\230,000 & \$ 100,000 & \$ 540,000 \\162,500 & 50,000 & 408,500 \\\quad 36,000 & 15,000 & 75,000 \\ 31,500 & \$ 35,000 & \$ 56,500\end{array}\end{array}$

Outboard Motors is concerned about the losses associated with the 2HP product line and is considering dropping this product line.Allocated fixed costs are assigned to product lines based on sales.If the company eliminates a product line,total allocated fixed costs are assigned to the remaining product lines.All variable costs and direct fixed costs are differential costs.
(1)Using differential analysis,determine whether the company would be better off dropping the 2HP product line or keeping the product line.Clearly state your conclusion.
(2)Assume the company can lease the warehouse space currently being used by the 2HP product line for $11,000 per year.Using a differential analysis,explain how this would affect the company's decision to keep or drop the 2HP product line.

Question 69

The following data is for Archery Unlimited,a maker of bows used by archery enthusiasts.All fixed costs are unavoidable regardless of the products offered,and Archery sells all the products it produces each year.
$\begin{array}{lrrr}&\text { Beginner}&\text { Intermediate } & \text { Advanced }\\\text { Unit Selling price } & \$ 40 & \$ 200 & \$ 400 \\\text { Unit variable cost } & \$ 35 & \$ 80 & \$ 120 \\\text { Total fixed cost } & \$ 60,000 & \$ 200,000 & \$ 245,000 \\\text { Annual volume } & 7,000 & 4,000 & 3,000\end{array}$

(1)Perform differential analysis to determine what will happen to total profits if the company drops the Beginner product.
(2)Based on the analysis,what would be your recommendation to management regarding dropping of the Beginner product?

Question 70

Exhibit 7-9
Doughnuts Company uses flour to produce two joint products,Premium and Deluxe.When processed,each pound of flour yields 8 units of Premium and 12 units of Deluxe.Premium doughnuts sell for $1.00 per unit and Deluxe sell for $2.00 per unit.The total cost to process a 10-pound batch of flour is $12.00.
Refer to Exhibit 7-9.If the sales value method is used to allocate the $12 in joint costs,how much will be allocated to Deluxe doughnuts?

A)$12
B)$3
C)$10
D)$9
E)None of the answer choices is correct.

Question 71

Exhibit 7-8
Petro Inc.produces two joint products,product A and B.Prior to the split-off point,the company incurred $600,000 in joint costs.Production totaled 72,000 pounds for product A and 48,000 pounds for product B.
Refer to Exhibit 7-8.What amount of joint costs is allocated to product A using the physical quantities method (pounds)?

A)$360,000
B)$240,000
C)$80,000
D)$60,000
E)None of the answer choices is correct.

Question 72

Snowboard Inc.currently produces snowboards.Management is interested in outsourcing production of snowboards to a reputable manufacturing company that can supply the snowboards for $250 per unit.Snowboard Inc.incurs the following annual production costs to produce 6,000 snowboards internally:
$$\begin{array} { l c c } & \text { Per Unit } & \begin{array} { c } \text { Tatal annual } \\\text { Cost at 6,000 units }\end{array} \\ \text { Variable praductim costs: } & & \\\text { Direct materials } & \$ 180 & \$ 1,080,000 \\\text { Direct labor } & 50 & 300,000 \\\text { Manufacturing overhead } & 20 & 120,000 \\\text { Fixcd production costs: } & & \\\text { Factory building and equiprnent lease } & & 220,000 \\\text { Factory insurarce } & & 90,000 \\\text { Production supervisor salary } & &65,000 \\\text { Total production costs } & & \$ 1,875,000\end{array}$$
Outsourcing production eliminates all variable production costs,the production supervisor's salary,and factory insurance costs.Factory building and equipment lease costs will remain the same regardless of the decision to outsource or to produce internally.
(1)Perform a differential analysis,assuming that making the snowboard internally is alternative 1,and buying the snowboard from an outside manufacturer is alternative 2.
(2)Explain which alternative is best and why.

Question 73

Exhibit 7-9
Doughnuts Company uses flour to produce two joint products,Premium and Deluxe.When processed,each pound of flour yields 8 units of Premium and 12 units of Deluxe.Premium doughnuts sell for $1.00 per unit and Deluxe sell for $2.00 per unit.The total cost to process a 10-pound batch of flour is $12.00.
Refer to Exhibit 7-9.If the physical quantities method is used to allocate the $12 in joint costs,how much will be allocated to Deluxe doughnuts?

A)$10.00
B)$7.20
C)$6.00
D)$4.80
E)None of the answer choices is correct.

Question 74

Exhibit 7-7
Fishing Products Company produces three types of fishing poles: Light,Medium,and Heavy.The poles are produced in separate departments and sent to the quality testing department before being shipped.A labor-hour bottleneck has been identified in the quality testing department due to the high skill requirements of the job.Fishing Products would like to optimize its use of labor hours by producing the two most profitable fishing poles.Information for each pole follows:
$$\begin{array} { l c c c } & \begin{array} { c } \text { Quality Testing } \\\text { Labor-hours }\end{array} & \text { Price } & \text { Variable Cost } \\ \text { Light } & 2 & \$ 300 & \$ 170 \\\text { Mediurn } & 3 & 500 & 200 \\\text { Heavy } & 5 & 1,200 & 380\end{array}$$

-Refer to Exhibit 7-7.Which two products would Fishing Products prefer to sell to optimize the use of labor hours in the quality testing department?

A)The Light and the Heavy.
B)The Medium and the Heavy.
C)The Light and the Medium.
D)None of the answer choices is correct.

Question 75

Exhibit 7-9
Doughnuts Company uses flour to produce two joint products,Premium and Deluxe.When processed,each pound of flour yields 8 units of Premium and 12 units of Deluxe.Premium doughnuts sell for $1.00 per unit and Deluxe sell for $2.00 per unit.The total cost to process a 10-pound batch of flour is $12.00.
Refer to Exhibit 7-9.If the sales value method is used to allocate the $12 in joint costs,what is the total amount that will be allocated to both products?

A)$12
B)$3
C)$10
D)$9
E)None of the answer choices is correct.

Question 76

Exhibit 7-9
Doughnuts Company uses flour to produce two joint products,Premium and Deluxe.When processed,each pound of flour yields 8 units of Premium and 12 units of Deluxe.Premium doughnuts sell for $1.00 per unit and Deluxe sell for $2.00 per unit.The total cost to process a 10-pound batch of flour is $12.00.
Refer to Exhibit 7-9.If the sales value method is used to allocate the $12 in joint costs,how much will be allocated to Premium doughnuts?

A)$12
B)$3
C)$10
D)$9
E)None of the answer choices is correct.