Question 1

Common costs are not directly traceable to an individual product line.

Accepted Answer

A) True 
 B)False

Question 2

Each pound of the raw material, ore, yields 5 units of Beta and 15 units of Gamma.Ore costs $20 per pound.A pound of ore has processing costs (not including the cost of the raw material) of $30 at the split-off point.The selling price for a unit of Beta is $80.The selling price for a unit of Gamma is $40.If the relative sales value method is used to allocate the joint costs, what is the total cost allocated to each unit of Beta?

Accepted Answer

A) $12.00 
B) $20.00 
C) $33.33 
D) $12.50

Question 3

Denray Deli has two locations, downtown and in the town mall.During March, the company reported total net income of $144,000 with sales of $1,200,000.The contribution margin in the downtown store was 30%.The contribution margin in the town mall store is $80,000.Total fixed costs are allocated as $110,000 in the downtown store and $90,000 in the town mall location.How much are sales at the downtown location?

Accepted Answer

A) $880,000 
B) $1,146,667 
C) $254,000 
D) None of these answer choices are correct.

Question 4

Avoidable costs are always incremental to business decisions.

Accepted Answer

A) True 
 B)False

Question 5

Teruba Melons purchased a truckload of watermelons weighing 3,000 pounds for $900.The company separated the melons into two grades: superior and economy.The superior grade melons have a total weight of 2,400 pounds and the economy grade melons total 600 pounds.The company sells the superior grade at $0.60 per pound and the economy grade at $0.30 per pound.How much of the $900 cost of the truckload will be allocated to the superior grade melons using the physical quantity method? Use five significant digits in calculations.

Accepted Answer

A) $540 
B) $720 
C) $771 
D) $1,440

Question 6

B&B Flooring produced 8,000 yards of its economy-grade carpet.In the coloring process, there was a pigment defect and the resulting color faded.The carpet normally sells for $18 per yard, with $6 of variable cost per yard and $3 of fixed cost per yard assigned to the carpet.The company realizes that it cannot sell the faded carpet for $18 per yard through its normal channels, unless the coloring process is repeated.The incremental cost of the coloring process is $4 per yard.Ace Apartments is willing to buy the carpet in its current faded condition for $13 per yard.Should B&B repeat the coloring process or sell the carpet to Ace Apartments?

Accepted Answer

A) Repeat coloring for $8,000 benefit 
B) Sell 'as is' to Ace for $32,000 benefit 
C) Repeat coloring for $56,000 benefit 
D) Sell 'as is' to Ace for $56,000 benefit

Question 7

One advantage of using an outside supplier is that

Accepted Answer

A) the adverse effect of a downturn in the business will be less severe. 
B) it will enhance the manager's control over the production process. 
C) the component produced will always be of a better quality. 
D) it will boost employee morale.

Question 8

Zanatech's market for its remote control has changed significantly, and Zanatech has had to drop the selling price per unit from $45 to $38.There are some units in the work in process inventory that have costs of $30 per unit associated with them.Zanatech can sell these units in their current state for $22 each.It will cost Zanatech $11 per unit to rework these units so that they can be sold for $38 each.A new employee looks at the analysis and exclaims, "We'll lose money with either of these alternatives! Let's just throw these units in the trash!" What effect will this option have on net income?

Accepted Answer

A) Profit will decrease by $45 per unit for each unit discarded. 
B) Profit will decrease by $30 per unit for each unit discarded. 
C) Profit will increase by $11 per unit since the completion costs will not have to be incurred. 
D) Profit will decrease by $5 per unit for each unit discarded.

Question 9

Zanatech's market for its remote control has changed significantly, and Zanatech has had to drop the selling price per unit from $45 to $38.There are some units in the work in process inventory that have costs of $30 per unit associated with them.Zanatech can sell these units in their current state for $22 each.It will cost Zanatech $11 per unit to rework these units so that they can be sold for $38 each.Which of the following is the amount of sunk costs in this problem?

Accepted Answer

A) $30 per unit 
B) $11 per unit 
C) $38 per unit 
D) $15 per unit

Question 10

Two or more products which result from common inputs are called cut-off products.

Accepted Answer

A) True 
 B)False

Question 11

Harrison Enterprises currently produces 8,000 units of part B13.Current unit costs for part B13 are as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 12 \
\text { Direct labor } & 9 \
\text { Factory rent } & 7 \
\text { Administrative costs } & 10 \
\text { General factory overhead (allocated) } & \underline { 7 } \
\text { Total } & \$ 45
\end{array}$$ If Harrison decides to buy part B13, 50% of the administrative costs would be avoided.All of the company's items, including part B13, are manufactured in the same rented production facility.The company has an offer from a wholesaler that wishes to sell the part to Harrison for $31 per unit.What will occur if the company accepts the offer?

Accepted Answer

A) The cost for this part will increase by $5 per unit. 
B) The cost for this part will be the same. 
C) The cost for this part will decrease by $14 per unit. 
D) The cost for this part will decrease by $10 per unit.

Question 12

Diva Footwear is contemplating if it should continue producing platform shoes.The following information is available for the company's segments $\begin{array}{lrrr}&\text { Platform Shoes }&\text { Athletic Shoes }&\text { Boots }\\hline
\text { Sales } & \$ 120,000 & \$ 420,000 & \$ 360,000 \
\text { Variable costs } & 64,000 & 220,000 & 140,000\\text { Contribution margin } & 56,000 & 200,000 & 220,000 \
\text { Direct fixed costs } & 45,000 & 70,000 & 90,000 \
\text { Allocated fixed costs } & 20,000 & 70,000 & 60,000 \\text { Net income }&(\$9,000)&\$60,000&\$70,000
\end{array}$ Based on the information provided, which of the following is most likely to be the basis of allocating the fixed costs to the segments?

Accepted Answer

A) Sales 
B) Direct fixed costs 
C) Net income 
D) Variable costs

Question 13

At the split-off point,

Accepted Answer

A) the production process stops and profitable products can be sold. 
B) inventory becomes obsolete. 
C) the company recognizes profit by selling the product. 
D) the cost incurred can be separated into individual joint products.

Question 14

Trebecker Construction plans to discontinue its roofing segment which last year generated a contribution margin of $65,000 and incurred $70,000 in fixed costs.If the segment is discontinued, half of the fixed costs will be avoided.What effect is expected to occur to the company's overall profit?

Accepted Answer

A) An increase of $5,000 
B) A decrease of $30,000 
C) A decrease of $5,000 
D) An increase of $30,000

Question 15

The stage of production at which individual products are identifiable is referred to as the spin-off point.

Accepted Answer

A) True 
 B)False

Question 16

Wilson is currently producing a component for one of its products.Wilson has received an offer to buy the component from an outside supplier.A machine is currently being rented to manufacture the component.If the company buys the component, the rental will be cancelled.What is the rent on the machine, in relation to the decision to make or buy the component?

Accepted Answer

A) Sunk and therefore not relevant 
B) Avoidable and therefore not relevant 
C) Avoidable and therefore relevant 
D) Unavoidable and therefore relevant

Question 17

Meehan Gifts manufactures a number of products from the same raw material.Joint processing costs total $4,000.Product Z could be sold at the cut-off point for $6,000 or it can be further processed at a cost of $9,000 and then sold for $14,000.Meehan Company should

Accepted Answer

A) sell product Z at the split-off point because its incremental costs will exceed incremental revenues by $5,000 than if processed further. 
B) further process product Z because its incremental revenues will exceed incremental costs by $1,000 with this option. 
C) sell product Z at the split-off point because its incremental costs will exceed incremental revenues by $1,000 than if processed further.

Question 18

Swell Computers has 12 obsolete computers that are carried in its inventory at a cost of $13,200.If these computers are upgraded at a cost of $7,500, they could be sold for $15,300.Alternatively, the computers could be sold "as is" for $9,000.What is the net advantage or disadvantage of upgrading the computers?

Accepted Answer

A) $6,300 advantage 
B) $1,200 disadvantage 
C) $5,400 disadvantage 
D) $3,000 advantage

Question 19

Diva Footwear is contemplating if it should continue producing platform shoes.The following information is available for the company's segments. $\begin{array}{lrrr}&\text { Platform Shoes }&\text { Athletic Shoes }&\text { Boots }\\hline
\text { Sales } & \$ 120,000 & \$ 420,000 & \$ 360,000 \
\text { Variable costs } & 64,000 & 220,000 & 140,000\\text { Contribution margin } & 56,000 & 200,000 & 220,000 \
\text { Direct fixed costs } & 45,000 & 70,000 & 90,000 \
\text { Allocated fixed costs } & 20,000 & 70,000 & 60,000 \\text { Net income }&(\$9,000)&\$60,000&\$70,000
\end{array}$ If platform shoes are dropped, sales of athletic shoes are expected to drop by 10%.What impact will occur to Diva Footwear's net income?

Accepted Answer

A) Income will decrease by $11,000. 
B) Income will decrease by $31,000. 
C) Income will decrease by $53,000. 
D) Income will increase by $9,000.

Question 20

When a department or product line is dropped, the common fixed costs that had been allocated to that department

Accepted Answer

A) are eliminated. 
B) become variable costs. 
C) are allocated to the remaining departments or product lines. 
D) become sunk costs.

Exam 7: The Use of Cost Information in Management Decision Making

Common costs are not directly traceable to an individual product line.

Avoidable costs are always incremental to business decisions.

One advantage of using an outside supplier is that

Two or more products which result from common inputs are called cut-off products.

At the split-off point,

Trebecker Construction plans to discontinue its roofing segment which last year generated a contribution margin of $65,000 and incurred $70,000 in fixed costs.If the segment is discontinued, half of the fixed costs will be avoided.What effect is expected to occur to the company's overall profit?

The stage of production at which individual products are identifiable is referred to as the spin-off point.

Meehan Gifts manufactures a number of products from the same raw material.Joint processing costs total $4,000.Product Z could be sold at the cut-off point for $6,000 or it can be further processed at a cost of $9,000 and then sold for $14,000.Meehan Company should

When a department or product line is dropped, the common fixed costs that had been allocated to that department