Deck 9: Measuring Relevant Costs and Revenues for Decision-Making

Question 1

If a cost is identical under each alternative under consideration within a given decision context, the cost is considered:

A)an alternative cost.
B)a discounted cost.
C)an irrelevant cost.
D)a procedural cost.

Answer 1

C

Question 2

Relevant costs are

A)past costs.
B)future costs.
C)full costs.
D)cost drivers.

Answer 2

B

Question 3

Which of the following costs is NOT relevant to a special-order decision?

A)the direct labour costs to manufacture the special-order units
B)the variable manufacturing overhead incurred to manufacture the special-order units
C)the portion of the cost of leasing the factory that is allocated to the special order
D)All of the above costs are relevant.

Answer 3

C

Question 4

The Titanic hit an iceberg and sank. In deciding whether or not to salvage the ship, its book value is a(n)

A)relevant cost.
B)sunk cost.
C)opportunity cost.
D)discretionary cost.

Question 5

Which of the following costs is relevant to a make-or-buy decision?

A)original cost of the production equipment
B)annual depreciation of the equipment
C)the amount that would be received if the production equipment were sold
D)the cost of direct materials purchased last month and used to manufacture the component

Question 6

Tactical decision-making relies

A)only on relevant cost information.
B)on qualitative factors.
C)on relevant costs as well as other qualitative factors.
D)on neither relevant costs or qualitative decisions.

Question 7

Which of the following costs is NOT relevant to a make-or-buy decision?

A)£10,000 of direct labour used to manufacture the parts
B)£30,000 of depreciation on the plant used to manufacture the parts
C)the supervisor's salary of £25,000 that will be avoided if the part is purchased from an outside supplier
D)£15,000 in rent from leasing the production space to another company if the part is purchased from an outside supplier

Question 8

An important qualitative factor to consider regarding a special order is the

A)variable costs associated with the special order.
B)avoidable fixed costs associated with the special order.
C)effect the sale of special-order units will have on the sale of regularly priced units.
D)incremental revenue from the special order.

Question 9

Which of the following statements is true when making a decision between two alternatives?

A)Variable costs may not be relevant when the decision alternatives have the same activity levels.
B)Variable costs are not relevant when the decision alternatives have different activity levels.
C)Sunk costs are always relevant.
D)Fixed costs are never relevant.

Question 10

____ are future costs that differ across alternatives.

A)Relevant costs
B)Irrelevant costs
C)Sunk costs
D)Past costs

Question 11

Qualitative factors that should be considered when evaluating a make-or-buy decision are

A)the quality of the outside supplier's product.
B)whether the outside supplier can provide the needed quantities.
C)whether the outside supplier can provide the product when it is needed.
D)all of the above.

Question 12

Figure 9-1
Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: $\begin{array}{lr}\text { Direct materials } & £ 150,000 \\\text { Direct labour } & 240,000 \\\text { Variable manufacturing overhead } & 90,000 \\\text { Fixed manufacturing overhead } & -120,000 \\\text { Total } & £ 600,000\end{array}$ An outside supplier has offered to sell the component for £25.50.

-Refer to Figure 9-1. What is the effect on income if Foster Industries purchases the component from the outside supplier?

A)£30,000 decrease
B)£30,000 increase
C)£90,000 decrease
D)£90,000 increase

Question 13

Which item is not an example of a sunk cost?

A)materials needed for production
B)purchase cost of machinery
C)depreciation
D)All are sunk costs.

Question 14

A decision to make a component internally versus through a supplier is a

A)special-order decision.
B)keep-or-drop a product-line decision.
C)make-or-buy decision.
D)Both a and c are correct.

Question 15

Figure 9-1
Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: $\begin{array}{lr}\text { Direct materials } & £ 150,000 \\\text { Direct labour } & 240,000 \\\text { Variable manufacturing overhead } & 90,000 \\\text { Fixed manufacturing overhead } & -120,000 \\\text { Total } & £ 600,000\end{array}$ An outside supplier has offered to sell the component for £25.50.

-Refer to Figure 9-1. What is the effect on income if Foster purchases the component from the outside supplier?

A)£45,000 increase
B)£15,000 increase
C)£75,000 decrease
D)£105,000 increase

Question 16

Sunk costs are

A)future costs that have no benefit.
B)relevant costs that have only short-run benefits.
C)target costs.
D)cannot be avoided.

Question 17

Which of the following costs is NOT relevant for special decisions?

A)incremental costs
B)sunk costs
C)avoidable costs
D)All of the above costs are relevant for special decisions.

Question 18

A purchasing agent has two potential firms from which to buy materials for production. If both firms charge the same price, the material cost is a(n)

A)irrelevant cost.
B)relevant cost.
C)sunk cost.
D)opportunity cost.

Question 19

Future costs that differ across alternatives describe

A)relevant costs.
B)target cost.
C)full costs.
D)activity-based costs.

Question 20

Which of the following BEST describes relevant costs?

A)present costs with similar decision alternatives
B)future costs that differ between competing decision alternatives
C)past costs that correspond solely on competing decision alternatives
D)present costs that differ between competing decision alternatives

Question 21

Figure 9-4
The following information pertains to Ewing Company's three products: $\begin{array}{llll}&D&E&F\\\text { Unit sales per month } & 900 & 1,400 & 800\\\text { Selling price per unit } & £ 6.00 & £ 11.25 & £ 7.50 \\\text { Variable costs per unit } & 3.00&9.00&7.80 \\\text { Unit contribution margin } & \underline{£ 3.00} & \underline{£ 2.25} & \underline{£(0.30)}\end{array}$

-Refer to Figure 9-4. Assume that product F is discontinued and the space used to produce product F is rented for £600 per month. Monthly profits will

A)increase by £360.
B)decrease by £5,400.
C)increase by £600.
D)increase by £840.

Question 22

Figure 9-6
The following information relates to a product produced by Creamer Company: $\begin{array}{lr}\text { Direct materials } & £ 24 \\\text { Direct labour } & 15 \\\text { Variable overhead } & 30 \\\text { Fixed overhead } & {18} \\\text { Unit cost } & £87\end{array}$ Fixed selling costs are £500,000 per year, and variable selling costs are £12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for £120 each. A customer has offered to buy 60,000 units for £90 each.

-Refer to Figure 9-6. The incremental cost per unit associated with the special order is

A)£84.
B)£81.
C)£69.
D)£64.

Question 23

Figure 9-5
Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: $\begin{array}{lr}\text { Direct materials } & £ 2,400 \\\text { Direct labour } & 960 \\\text { Factory overhead (30\% variable) } & 1,800 \\\text { Selling expenses ( } 50 \% \text { variable) } & 900 \\\text { Administrative expenses (10\% variable) } & 840 \\\text { Total per unit } & £ 6,900\end{array}$ Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'s capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order.

-Refer to Figure 9-5. How much will income change if the special order is accepted?

A)increase by £398,400
B)decrease by £180,000
C)increase by £111,600
D)no change

Question 24

Houston Ltd. manufacturers a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: Johnson Company has offered to sell Houston Ltd. 5,000 units of the part for £112 per unit. If Houston Ltd. accepts Johnson Company's offer, total fixed costs will be reduced to £60,000. What alternative is more desirable and by what amount is it more desirable?

Question 25

Figure 9-5
Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: $\begin{array}{lr}\text { Direct materials } & £ 2,400 \\\text { Direct labour } & 960 \\\text { Factory overhead (30\% variable) } & 1,800 \\\text { Selling expenses ( } 50 \% \text { variable) } & 900 \\\text { Administrative expenses (10\% variable) } & 840 \\\text { Total per unit } & £ 6,900\end{array}$ Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'s capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order.

-Refer to Figure 9-5. If Reggie Ltd. wants to increase its profit by £18,000 on the special order, what is the minimum price it should charge per unit?

A)£4,014
B)£4,164
C)£5,100
D)£6,900

Question 26

Figure 9-3
Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: $\begin{array}{lllr}\text { Variable costs per unit: } && {\text { Fixed costs per month: }} \\\text { Direct materials } & £ 9.00 & \text { Factory overhead } & £ 120,000 \\\text { Direct labour } & 4.50 & \text { Selling and admin. } & 60,000 \\\text { Factory overhead } & 3.00 & \text { Total } & \underline{E 180,000} \\\text { Distribution } &1.50 & & \\\text { Total } &£18.00 & &\end{array}$ The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year.

-Refer to Figure 9-3. A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced price of £24 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of £3,000. All other information remains the same as the original data. What is the effect on profits if the special order is accepted?

A)increase of £75,000
B)increase of £57,000
C)decrease of £168,000
D)increase of £12,000

Question 27

Figure 9-7
Meco Company produces a product that has a regular selling price of £360 per unit. At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to £270. Included in this average is £120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to £30,000 per month.
Meco Company has just received a special order for 1,000 units at £240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order.
Refer to Figure 9-7. Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be

A)a £60,000 increase.
B)a £60,000 decrease.
C)a £30,000 increase.
D)a £30,000 decrease.
E)no change in profits.

Question 28

Figure 9-3
Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: $\begin{array}{lllr}\text { Variable costs per unit: } && {\text { Fixed costs per month: }} \\\text { Direct materials } & £ 9.00 & \text { Factory overhead } & £ 120,000 \\\text { Direct labour } & 4.50 & \text { Selling and admin. } & 60,000 \\\text { Factory overhead } & 3.00 & \text { Total } & \underline{E 180,000} \\\text { Distribution } &1.50 & & \\\text { Total } &£18.00 & &\end{array}$ The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year.

-Refer to Figure 9-3. A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of £6.00 per unit. If Miller Company accepts the offer, it will be able to reduce variable costs by 30 per cent and rent unused space to an outside firm for £18,000 per year. All other information remains the same as the original data. What is the effect on profits if Miller Company buys from the Tennessee firm?

A)decrease of £19,000
B)increase of £19,000
C)increase of £13,000
D)decrease of £6,000

Question 29

Figure 9-3
Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: $\begin{array}{lllr}\text { Variable costs per unit: } && {\text { Fixed costs per month: }} \\\text { Direct materials } & £ 9.00 & \text { Factory overhead } & £ 120,000 \\\text { Direct labour } & 4.50 & \text { Selling and admin. } & 60,000 \\\text { Factory overhead } & 3.00 & \text { Total } & \underline{E 180,000} \\\text { Distribution } &1.50 & & \\\text { Total } &£18.00 & &\end{array}$ The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year.

-Refer to Figure 9-3. An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of £25.20 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of £6,000. In addition, assume that overtime production is not possible and that all other information remains the same as the original data. What is the effect on profits if the special order is accepted?

A)increase of £54,900
B)increase of £30,900
C)increase of £36,900
D)increase of £176,400

Question 30

The operations of Knickers Ltd. are divided into the Pacers Division and the Bulls Division. Projections for the next year are as follows: $\begin{array} {llll}&\text { Pacers } & \text { Bulls } & \\&\text { Divisi on } & \text { Division } & \text { Total }\\\text {Sales}&£ 420,000 & £ 252,000 & £ 672,000\\\text {Variable costs}&147,000 & 115,500 & 262,500\\\text {Contributi on margin}&£ 273,000 & £ 136,500 & £ 409,500\\\text {Direct fixed costs}&126,000 & 105,000 & 231,000\\\text {Segment margin}&£ 147,000 & £ 31,500 & £ 178,500\\\text {Allocated common costs}&63,000 &47,250 &110,250\\\text {Operating income (loss)}&£ 84,000 & £(15,750) & £ 68,250\\\end{array}$ Operating income for Knickers Ltd. as a whole if the Bulls Division were dropped would be

A)£99,750.
B)£84,000.
C)£68,250.
D)£36,750.

Question 31

Figure 9-5
Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: $\begin{array}{lr}\text { Direct materials } & £ 2,400 \\\text { Direct labour } & 960 \\\text { Factory overhead (30\% variable) } & 1,800 \\\text { Selling expenses ( } 50 \% \text { variable) } & 900 \\\text { Administrative expenses (10\% variable) } & 840 \\\text { Total per unit } & £ 6,900\end{array}$ Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'s capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order.

-Refer to Figure 9-5. What is the profit earned by Reggie Ltd. on the original 1,000 units?

A)£6,900,000
B)£8,400,000
C)£900,000
D)£2,640,000

Question 32

The following information pertains to Dodge Company's three products: $\begin{array}{lrrr}&A&B&C\\\text { Unit sales per year } & 250 & 400 & 250\\\text { Selling price per unit } & £ 9.00 & £ 12.00 & £ 9.00 \\\text { Variable costs per unit } & 3.60 & 9.00 & 9.90 \\\text { Unit contribution margin } & £ 5.40 & £ 3.00 & £(0.90) \\\text { Contribution margin ratio } & 60 \% &25\%& 10) \%\end{array}$ Assume that product C is discontinued and the extra space is rented for £300 per month. All other information remains the same as the original data. Annual profits will

A)increase by £75.
B)decrease by £75.
C)increase by £525.
D)remain the same.

Question 33

The operations of Smits Ltd. are divided into the Childs Division and the Jackson Division. Projections for the next year are as follows: $\begin{array} { llll} &\text { Childs } & \text { Jackson } & \\&\text { Division } & \text { Division } & \text { Total }\\\hline \text {Sales}&£ 250,000 & £ 180,000&£ 430,000\\\text {Variable costs}&90,000 & 100,000 & 190,000\\\text {Contributi on margin}&£ 160,000 & £ 80,000 & £ 240,000\\\text {Direct fixed costs}&75,000&62,500&137,500\\\text {Segment margin}&£ 85,000&£ 17,500 &£ 102,500\\\text {Allocated common costs}&35,000 & 27,500 & 62,500\\\text {Operating income (loss)}&£ 50,000 &£(10,000)&£ 40,000\\\end{array}$ Operating income for Smits Ltd. as a whole if the Jackson Division were dropped would be

A)£22,500.
B)£40,000.
C)£50,000.
D)£60,000.

Question 34

Firms may be asked to accept a special order of their product for a reduced price if

A)it can be concealed from the government.
B)excess capacity exists.
C)the order is small.
D)the plant is producing at maximum capacity.

Question 35

A decision that focuses on whether a specially priced order should be accepted or rejected is a

A)special-order decision.
B)keep-or-drop a product-line decision.
C)make-or-buy decision.
D)Both a and c are correct.

Question 36

Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part AA1 at this volume is as follows: $\begin{array}{lr}\text { Direct materials } & £ 10.00 \\\text { Direct labour } & 14.00 \\\text { Variable overhead } & 6.00 \\\text { Fixed overhead } & 4.00 \\\text { Total } & £ 34.00\end{array}$ An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of £31.00. If Harris Company accepts this offer, it can eliminate 50 per cent of the fixed costs assigned to part AA1. Furthermore, the space devoted to the manufacture of part AA1 would be rented to another company for £24,000 per year. If Harris Company accepts the offer of the outside supplier, annual profits will

A)increase by £29,000.
B)increase by £14,500.
C)increase by £22,000.
D)increase by £2,500.

Question 37

Figure 9-2
Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: $\begin{array}{lr}\text { Direct materials } & £ 75,000 \\\text { Direct labour } & 120,000 \\\text { Variable manufacturing overhead } & 45,000 \\\text { Fixed manufacturing overhead } & 60,000 \\\text { Total } & £ 300,000\end{array}$ An outside supplier has offered to sell the component for £12.75.

-Refer to Figure 9-2. What is the effect on income if Vest Industries purchases the component from the outside supplier?

A)£270,000 decrease
B)£270,000 increase
C)£30,000 decrease
D)£30,000 increase

Question 38

Figure 9-6
The following information relates to a product produced by Creamer Company: $\begin{array}{lr}\text { Direct materials } & £ 24 \\\text { Direct labour } & 15 \\\text { Variable overhead } & 30 \\\text { Fixed overhead } & {18} \\\text { Unit cost } & £87\end{array}$ Fixed selling costs are £500,000 per year, and variable selling costs are £12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for £120 each. A customer has offered to buy 60,000 units for £90 each.

-Refer to Figure 9-6. If the firm produces the special order, the effect on income would be a

A)£360,000 increase.
B)£360,000 decrease.
C)£540,000 increase.
D)£540,000 decrease.

Question 39

Figure 9-2
Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: $\begin{array}{lr}\text { Direct materials } & £ 75,000 \\\text { Direct labour } & 120,000 \\\text { Variable manufacturing overhead } & 45,000 \\\text { Fixed manufacturing overhead } & 60,000 \\\text { Total } & £ 300,000\end{array}$ An outside supplier has offered to sell the component for £12.75.

-Refer to Figure 9-2. What is the effect on income if Vest purchases the component from the outside supplier?

A)£225,000 increase
B)£195,000 increase
C)£165,000 decrease
D)£135,000 increase

Question 40

Figure 9-4
The following information pertains to Ewing Company's three products: $\begin{array}{llll}&D&E&F\\\text { Unit sales per month } & 900 & 1,400 & 800\\\text { Selling price per unit } & £ 6.00 & £ 11.25 & £ 7.50 \\\text { Variable costs per unit } & 3.00&9.00&7.80 \\\text { Unit contribution margin } & \underline{£ 3.00} & \underline{£ 2.25} & \underline{£(0.30)}\end{array}$

-Refer to Figure 9-4. Assume that product F is discontinued and the space is used to produce E. Product E's production is increased to 2,200 units per month, but E's selling price of all units of E is reduced to £10.20. Monthly profits will

A)decrease by £2,070.
B)increase by £1,200.
C)decrease by £270.
D)increase by £2,640.

Question 41

Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units: $\begin{array}{lr}\text { Direct materials } & £ 4 \\\text { Direct labour } & 12 \\\text { Variable manufacturing overhead } & 6 \\\text { Fixed manufacturing overhead } & 8\end{array}$ The company has the capacity to produce 40,000 units. The product regularly sells for £40. A wholesaler has offered to pay £32 a unit for 2,000 units. If the firm is at capacity and the special order is accepted, the effect on operating income would be

A)a £20,000 increase.
B)a £16,000 decrease.
C)a £4,000 increase.
D)£-0-.

Question 42

If there is excess capacity, the minimum acceptable price for a special order must cover

A)variable costs associated with the special order.
B)variable and fixed manufacturing costs associated with the special order.
C)variable and incremental fixed costs associated with the special order.
D)variable costs and incremental fixed costs associated with the special order plus the contribution margin usually earned on regular units.

Question 43

Rose Manufacturing Company had the following unit costs: $\begin{array}{lr}\text { Direct materials } & £ 24 \\\text { Direct labour } & 8 \\\text { Variable factory overhead } & 10 \\\text { Fixed factory overhead (allocated) } & 18\end{array}$ A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit (loss) will be generated by accepting the special order?

A)£12,000 profit
B)£96,000 profit
C)£84,000 loss
D)£24,000 loss

Question 44

If a firm is at full capacity, the minimum special order price must cover

A)variable costs associated with the special order.
B)variable and fixed manufacturing costs associated with the special order.
C)variable and incremental fixed costs associated with the special order.
D)variable costs and incremental fixed costs associated with the special order plus foregone contribution margin on regular units not produced.

Question 45

The Dot Company manufactures two products: X and Y. The contribution margin per unit is determined as follows: Total demand for Product X is 16,000 units and for Product Y is 8,000 units. Machine hours is a scarce resource. During the year, 42,000 machine hours are available. Product X requires 6 machine hours per unit, while Product Y requires 3 machine hours per unit. How many units of Products X and Y should Dot Company produce?

Question 46

Zandy Beverage Company plans to eliminate a branch that has a contribution margin of £50,000 and fixed costs of £75,000. Of the fixed costs, £55,000 cannot be eliminated. The effect of eliminating this branch on net income would be a(n)

A)decrease of £25,000.
B)increase of £25,000.
C)decrease of £30,000.
D)increase of £30,000.

Question 47

Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: $\begin{array}{lr}\text { Direct materials } & £ 2,400 \\\text { Direct labour } & 960 \\\text { Factory overhead (30\% variable) } & 1,800 \\\text { Selling expenses }(50 \% \text { variable) } & 900 \\\text { Administrative expenses (10\% variable }) & 840 \\\text { Total per unit } & \underline{£6,900}\end{array}$ Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales by 40 units in order to contract the special order. There are selling expenses on only the sales to the regular customers. What is the net income if the special order of 100 units is accepted?

A)£831,960
B)£876,960
C)£1,011,600
D)£900,000

Question 48

Figure 9-8
Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: $\begin{array}{lr}\text { Direct materials } & £ 12 \\\text { Direct labour } & 36 \\\text { Variable manufacturing overhead } & 18 \\\text { Fixed manufacturing overhead } & 24\end{array}$ The company has the capacity to produce 90,000 units. The product regularly sells for £120.

-Refer to Figure 9-8. A wholesaler has offered to pay £110 a unit for 7,500 units. If the special order is accepted, the effect on operating income would be a

A)£75,000 decrease.
B)£429,000 increase.
C)£495,000 increase.
D)£249,000 increase.

Question 49

If there is excess capacity, the minimum acceptable price for a special order must cover

A)only variable costs associated with the special order.
B)variable and fixed manufacturing costs associated with the special order.
C)variable and incremental fixed costs associated with the special order.
D)variable costs and incremental fixed costs associated with the special order, plus the contribution margin usually earned on regular units.

Question 50

Figure 9-9
Boone Products had the following unit costs: $\begin{array}{lr}\text { Direct materials } & £ 24 \\\text { Direct labour } & 10 \\\text { Variable factory overhead } & 8 \\\text { Fixed factory overhead (allocated) } & 18\end{array}$

-Refer to Figure 9-9. A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Because of capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is £8 per unit. How much additional profit (loss) will be generated by accepting the special order?

A)£30,000 loss
B)£4,000 loss
C)£24,000 loss
D)£4,000 profit

Question 51

Bridge Industries manufactures a product with the following costs per unit at the expected production of 78,000 units: $\begin{array}{lr}\text { Direct materials } & £ 15 \\\text { Direct labour } & 22 \\\text { Variable manufacturing overhead } & 12 \\\text { Fixed manufacturing overhead } & 19\end{array}$ The company has the capacity to produce 80,000 units. The product regularly sells for £90. A wholesaler has offered to pay £75 each for 2,000 units. If Bridge's special order is accepted, the effect on operating income would be a

A)£20,000 decrease.
B)£52,000 increase.
C)£14,000 increase.
D)none of the above.

Question 52

If the firm is at full capacity, the minimum special-order price must cover

A)variable costs associated with the special order.
B)variable and fixed manufacturing costs associated with the special order.
C)variable and incremental fixed costs associated with the special order.
D)variable costs and incremental fixed costs associated with the special order, plus foregone contribution margin on regular units not produced.

Question 53

Figure 9-9
Boone Products had the following unit costs: $\begin{array}{lr}\text { Direct materials } & £ 24 \\\text { Direct labour } & 10 \\\text { Variable factory overhead } & 8 \\\text { Fixed factory overhead (allocated) } & 18\end{array}$

-Refer to Figure 9-9. A one-time customer has offered to buy 1,000 units at a special price of £48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit (loss) will be generated from the special order?

A)£12,000 loss
B)£14,000 profit
C)£48,000 profit
D)£6,000 profit

Question 54

Salish Industries manufactures a product with the following costs per unit at the expected production of 60,000 units: $\begin{array}{lr}\text { Direct materials } & £ 8 \\\text { Direct labour } & 15 \\\text { Variable manufacturing overhead } & 10 \\\text { Fixed manufacturing overhead } & 12\end{array}$ The company has the capacity to produce 70,000 units. The product regularly sells for £60. A wholesaler has offered to pay £55 each for 5,000 units. If the special order is accepted, the effect on operating income would be a

A)£42,000 decrease.
B)£67,000 increase.
C)£110,000 increase.
D)£182,000 decrease.

Question 55

Which of the following is a qualitative factor that should be considered when evaluating a make-or-buy decision?

A)the quality of the outside supplier's product
B)whether the outside supplier can provide the needed quantities
C)whether the outside supplier can provide the product WHEN it is needed
D)all of the above

Question 56

When there is one scarce resource, the product that should be produced first is the product with the highest

A)contribution margin per unit of the scarce resource.
B)sales price per unit of the scarce resource.
C)demand.
D)contribution margin per unit.

Question 57

Figure 9-7
Meco Company produces a product that has a regular selling price of £360 per unit. At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to £270. Included in this average is £120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to £30,000 per month.
Meco Company has just received a special order for 1,000 units at £240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order.
Refer to Figure 9-7. Assuming Meco Company is operating at capacity and accepting the order would require an offsetting reduction in regular sales, the effect on profits of accepting the order would be a

A)£240,000 decrease.
B)£30,000 increase.
C)£120,000 decrease.
D)£150,000 decrease.

Question 58

For a cost or revenue to be relevant to a particular decision, the cost or revenue must

A)differ between the alternatives being considered.
B)be a past cost.
C)be a future cost.
D)Both a and c above are correct.

Question 59

Which of the following costs is NOT relevant to a make-or-buy decision?

A)£10,000 of direct labour used to manufacture the parts
B)£30,000 of depreciation on the equipment used to manufacture the parts
C)the supervisor's salary of £25,000, which would be avoided if the part is purchased from an outside supplier
D)£15,000 in rent from leasing the production space to another company if the part is purchased from an outside supplier

Question 60

Figure 9-8
Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: $\begin{array}{lr}\text { Direct materials } & £ 12 \\\text { Direct labour } & 36 \\\text { Variable manufacturing overhead } & 18 \\\text { Fixed manufacturing overhead } & 24\end{array}$ The company has the capacity to produce 90,000 units. The product regularly sells for £120.

-Refer to Figure 9-8. If a wholesaler offered to buy 4,500 units for £100 each, the effect of the special order on income would be a

A)£153,000 increase.
B)£45,000 increase.
C)£450,000 increase.
D)£90,000 decrease.

Question 61

KnitWorks Ltd. produces three kinds of yarn. Details of each type of yarn are as follows: $\begin{array}{lccc}&\text { Type I } & \text { Type II } & \text { Type III } \\\text { Price per unit } & £ 200 & £ 250 & £ 100 \\\text { Unit variable cost } & £ 150 & £ 100 & £ 60 \\\text { Machine hours required } & 0.5 & 2.0 & 0.1\end{array}$ KnitWorks has 15,000 machine hours available for production.
a.Determine the amount of each type of yarn that KnitWorks should produce.
b.Assume that the demand for each type of yarn is limited to 10,000 units each. Determine the amount of each type of yarn that KnitWorks should produce.
c.Assume that the demand for each type of yarn is limited to 10,000 units each. Determine KnitWorks' contribution margin.

Question 62

Throughput is calculated as

A)Sales revenue - Unit-level variable cost.
B)Sales revenue - Total manufacturing cost.
C)Unit-level cost + Batch-level cost + Facilities-level cost.
D)Unit-level cost + Nonunit-level cost.

Question 63

The management of James Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A £200 cost per component was determined as follows: $\begin{array}{lr}\text { Direct materials } & £ 15 \\\text { Direct labour } & 40 \\\text { Variable manufacturing overhead } & 10 \\\text { Fixed manufacturing overhead } & 35 \\\text { Total } & £ 100\end{array}$
James Industries uses 4,000 components per year. After Light, SA., submitted a bid of £80 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Light, SA., James's unused production facilities could be leased to another company for £50,000 per year.
a.Determine the maximum amount per unit James should pay an outside supplier.
b.Indicate if the company should make or buy the component and the total monetary difference in favor of that alternative.
c.Assume the company could eliminate production supervisors with salaries totaling £30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total monetary difference in favor of that alternative.

Question 64

Application of the theory of constraints will improve all of the following EXCEPT

A)net income.
B)debt-to-equity ratio.
C)cash flow.
D)return on investment.

Question 65

Bonilla Ltd., which produces one product, had the following income statement for a recent month: $\begin{array}{c}\text {Bonilla Ltd.}\\\text {Income Statement}\\\text {For the Month of April 2011}\\\\\begin{array}{lr}\text { Sales } & £ 30,000 \\\text { Cost of goods sold } & -\underline{27,000} \\\text { Gross profit } & {£ 3,000}\\ \text { Selling and administrative } &2,500 \\\text { Net income }&£ 500\end{array}\end{array}$
There were no beginning or ending inventories of work-in-process or finished goods. Bonilla's manufacturing costs were as follows: $\begin{array}{lr}\text { Direct materials }(1,200 \text { units } \times £ 5) & £ 6,000 \\\text { Direct labour }(1,200 \text { units } \times £ 8) & 9,600 \\\text { Variable overhead (1,200 units } \times £ 4.50) & 5,400 \\\text { Fixed overhead } & \underline{627,000} \\\text { Total } & \underline{£ 27,000} \\\\\text {Average cost per unit}&\underline{£ 22.50}\end{array}$
Selling and administrative expenses are all fixed.
Bonilla has just received a special order from a firm in Canada to purchase 800 units at £20 each. The order will not affect the selling price to regular customers.

a.Prepare a differential analysis of the relevant costs and revenues associated with the decision to accept or reject the special order, assuming Bonilla has excess capacity.
b.Determine the net advantage or disadvantage (profit increase or decrease) of accepting the order, assuming Bonilla does not have excess capacity.

Question 66

Solomon Company manufactures 20,000 components per year. The manufacturing cost per unit of the components is as follows: $\begin{array}{lr}\text { Direct materials } & £ 10 \\\text { Direct labour } & 14 \\\text { Variable overhead } & 6 \\\text { Fixed overhead } & 83 \\\text { Total unit cost } & £ 38\end{array}$
Assume that the fixed overhead reflects the cost of Solomon's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Solomon for £32.

Required:
a.What is the effect on income if Solomon purchases the component from the outside supplier?
b.Assume that Solomon can avoid £50,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Solomon purchases the component from the outside supplier?

Question 67

Rippey Ltd. manufactures a single product with the following unit costs for 5,000 units: $\begin{array}{lr}\text { Direct materials } & £ 60 \\\text { Direct labour } & 30 \\\text { Factory overhead }(40 \% \text { variable) } & 90 \\\text { Selling expenses }(60 \% \text { variable) } & 30 \\\text { Administrative expenses }(20 \% \text { variable }) & 15 \\\text { Total per unit } & £ 225\end{array}$ Recently, a company approached Rippey Ltd. about buying 1,000 units for £225. Currently, the models are sold to dealers for £412.50. Rippey's capacity is sufficient to produce the extra 1,000 units. No additional selling expenses would be incurred on the special order.
a.What is the profit earned by Rippey Ltd. on the original 5,000 units?
b.Should Rippey accept the special order if its goal is to maximize short-run profits? How much will income be affected?
c.Determine the minimum price Rippey would want to receive in order to increase profits by £7,500 on the special order.
d.When making a special order decision, what nonquantitative aspects of the decision should Rippey Ltd. consider?

Question 68

The theory of constraints focuses on

A)throughput.
B)inventory.
C)operating expenses.
D)all of the above.

Question 69

Caddo Ltd. produces two products using the same manufacturing equipment. Information about the two products is as follows: $$\begin{array} { l r r } & \text { Alpha } & \text { Beta } \\\text { Sales } & £ 15 & £ 35 \\\text { Variable costs } & £ 5 & £ 10 \\\text { Machine hours required } & 0.5 & 2.0 \\\text { Demand (units) } & 30,000 & 10,000 \\\text { Demand (machine hours) } & 15,000 & 20,000\end{array}$$ If Caddo can produce only one of the products in the next period, which product should be produced?

A)Alpha should be produced because it requires less machine hours.
B)Beta should be produced because it generates more revenue.
C)Beta should be produced because it generates more contribution margin per unit.
D)none of the above

Question 70

Scott Company has an annual capacity of 18,000 units. Budgeted operating results for 2011 are as follows: $\begin{array}{llr}\text { Revenues (16,000 units } @ £ 60)& & £ 960,000 \\\text { Variable costs: } & & \\\text { Manufacturing } & £ 384,000 & \\\text { Selling } & -128,000 & \underline{512,000}\\\text { Contribution margin }&&{£ 448,000}\\\\\text { Fixed costs: }\\\text { Manufacturing } & £ 160,000 & \\\text { Selling and administrative } & \underline{120,000} & \underline{280,000} \\\text { Operating income } & & £ 168,000\end{array}$ A foreign wholesaler wants to buy 1,000 units at a price of £40 per unit. All fixed costs would remain within the relevant range. Variable selling costs on the special order would be the same as variable selling costs for regular orders.
a.Determine the effect on operating income if the company produces the special order.
b.Should the company produce the special order?
c.Determine operating income if the customer had wanted a special order of 3,000 units and the company produced the special order.
d.Should the company produce the 3,000-unit special order?
e.Discuss any nonquantitative factors the company might want to consider when making the decision.

Question 71

The Bilko Company manufactures two products: widgets and gadgets. Information about the products is as follows: $\begin{array}{lrr}&\text { Widgets } &\text { Gadgets }\\\text { Revenue per unit } & £ 200 & £ 150 \\\text { Variable costs per unit } & -110 & \underline{90} \\\text { Contribution margin per unit } & \underline{£ 90} & \underline{£ 60}\\\\\text { Total demand } & 20,000 \text { units } & 20,000 \text { units } \\\text { Direct labour hours per unit } & 1.5 \mathrm{DLH} & 1.2 \mathrm{DLH}\end{array}$
There are 40,000 direct labour hours available during the year.
a.Which of the products should Bilko Company produce if it can only produce one of the products?
b.Assume that Bilko Company uses half of the hours available to produce widgets and half of the hours available to produce gadgets. What is Bilko's total contribution margin?
c.Assume that Bilko Company produces the product mix that will maximize profit. What is Bilko's total contribution margin?

Question 72

The operations of Grant Ltd. are divided into the Fix Division and the Roach Division. Projections for the next year are as follows: $\begin{array}{llll}&\text {Fix}&\text {Roach}\\&\text { Division}&\text { Division }&\text {Total }\\\text { Sales } & £ 60,000 & £ 40,000 & £ 100,000 \\\text { Variable costs } & \underline{20,000} & \underline{15,000} &\underline{35,000}\\\text { Contribution margin } & £ 40,000 & £ 25,000 &{£ 65,000} \\\text { Direct fixed costs } & \underline{12,500} &\underline{30,000}& \underline{42,500} \\ \text { Segment margin } &{£ 27,500}&{£(5,000)} & {£ 22,500}\\\text { Allocated common costs }& \underline{10,000}& \underline{7,500}& \underline{17,500} \\\text { Operating income(loss) } & {£ 17,500} & {£(12,500)} &{£ 5,000}\end{array}$
a.Determine operating income for Grant Ltd. as a whole if the Roach Division is dropped.
b.Should the Roach Division be eliminated?

Question 73

Majestic Company manufactures a product that has the following unit costs: direct materials, £5; direct labour, £7; variable overhead, £3; and fixed overhead, £5. Fixed selling costs are £200,000 per year. Variable selling costs of £1 per unit cover the transportation cost. Although production capacity is 80,000 units per year, the company expects to produce only 65,000 units next year. The product normally sells for £30 each. A customer has offered to buy 10,000 units for £18 each. The customer will pay the transportation charge on the units purchased.
Required:
a.What is the incremental cost per unit to Majestic Company for the special order?
b.What is the effect on Majestic's income if the special order is accepted?

Question 74

The Dash Company manufactures two products: A and B. Information about the products is as follows: $\begin{array}{lrr}&\text { Product A } & \text { Product B }\\\text { Revenue per unit } & £ 150 & £ 125 \\\text { Variable costs per unit } & -80 & -70 \\\text { Contribution margin per unit } & \underline{£ 70} & \underline{£ 55}\\\\\text { Total demand } & 15,000 \text { units } & 12,000 \text { units } \\\text { Machine hours per unit } & .5 \mathrm{MH} & .25 \mathrm{MH}\\\end{array}$
There are 5,000 machine hours available during the quarter.

Required:
a.Which of the products should Dash Company produce if it can only produce one of the products?
b.Assume that Dash Company uses half of the hours available to produce Product A and half of the hours available to produce Product B. What is Dash's total contribution margin?
c.Assume that Dash Company produces the product mix that will maximize profit. What is Dash's total contribution margin?

Question 75

WJE Company has only 4,000 machine hours available each month. The following information on the company's three products is available: $\begin{array}{lccc}&\text { Product } & \text { Product } & \text { Product } \\&\text { AA } & \text { B B } & \text { CC } \\\text { Contribution margin per unit } & £ 10 & £ 13 & £ 5 \\\text { Machine hours per unit } & 2 & 1.5 & 0.5\end{array}$ If demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

A)Product AA first, Product BB second, and Product CC third
B)Product BB first, Product AA second, and Product CC third
C)Product CC first, Product BB second, and Product AA third
D)Product CC first, Product AA second, and Product BB third

Question 76

Vance Company manufactures a product that has the following unit costs: direct materials, £15; direct labour, £12; variable overhead, £8; and fixed overhead, £12. Fixed selling costs are £1,500,000 per year. Variable selling costs of £4 per unit cover the transportation cost. Although production capacity is 800,000 units per year, the company expects to produce only 650,000 units next year. The product normally sells for £70 each. A customer has offered to buy 50,000 units for £45 each. The customer will pay the transportation charge on the units purchased.
Required:
a.What is the incremental cost to Vance Company for the special order?
b.What is the effect on Vance's income if the special order is accepted?

Question 77

Mills SA. manufactures 50,000 components per year. The manufacturing cost per unit of the components is as follows:
$\begin{array}{lr}\text { Direct materials } & £ 12 \\\text { Direct labour } & 13 \\\text { Variable overhead } & 5 \\\text { Fixed overhead } & -10 \\\quad \text { Total unit cost } & £ 40\end{array}$
An outside supplier has offered to sell the component to Mills SA. for £35.

Required:
a.What is the effect on income if Mills SA. purchases the component from the outside supplier?
b.Assume that Mills SA. can avoid £700,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Mills SA. purchases the component from the outside supplier?