Deck 12: Relevant Costs for Decision Making

Question 1

A sunk cost is a cost that has already been incurred but that can be avoided at least in part depending on the action a manager takes.

Answer 1

False

Question 2

Two or more different products that are manufactured in the same production period are known as joint products.

Answer 2

False

Question 3

A differential cost is a variable cost.

Answer 3

False

Question 4

The book value of old equipment is not a relevant cost in a decision.

Question 5

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

A)avoidable costs
B)sunk costs
C)opportunity costs
D)fixed costs

Question 6

Managers should pay little attention to bottleneck operations because they have limited capacity for producing output.

Question 7

For which of the following decisions are opportunity costs relevant?

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

Question 8

In a decision to drop a segment,the opportunity cost of the space occupied by the segment would be the profit that could be derived from the best alternative use of the space.

Question 9

Defective units should be detected and scrapped or reworked after the bottleneck operation rather than before it.

Question 10

All other things equal,it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from further processing exceeds the incremental costs of further processing.

Question 11

A cost that will be incurred regardless of which course of action a manager takes is relevant to the manager's decision.

Question 12

A merchandising company that buys all of its inventory from outside suppliers is an example of a company that is vertically integrated.

Question 13

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

A)the variable manufacturing cost of the component.
B)the total manufacturing cost of the component.
C)the fixed manufacturing cost of the component.
D)zero.

Question 14

One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.

Question 15

Opportunity costs are recorded in the accounts of an organization.

Question 16

Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product.

Question 17

In deciding whether to manufacture a part or buy it from an outside supplier,which of the following costs are relevant?

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

Question 18

All future costs are relevant in decision making.

Question 19

Allocated common fixed costs:

A)can make a product line appear to be unprofitable.
B)are always incremental costs.
C)are always relevant in decisions involving dropping a product line.
D)responses A,B,and C are all correct.

Question 20

Variable costs are always relevant costs.

Question 21

Vanikoro Corporation currently has two divisions which had the following operating results for last year: Since the Rubber Division sustained a loss,the president of Vanikoro is considering the elimination of this division.All of the fixed costs for the division could be eliminated if the division was dropped.If the Rubber Division was dropped at the beginning of last year,how much higher or lower would Vanikoro's total net operating income have been for the year?

A)$10,000 higher
B)$40,000 lower
C)$50,000 higher
D)$100,000 lower

Question 22

Lounsberry Inc.regularly uses material O55P and currently has in stock 360 liters of the material for which it paid $2,484 several weeks ago.If this were to be sold as is on the open market as surplus material,it would fetch $6.35 per liter.New stocks of the material can be purchased on the open market for $6.90 per liter,but it must be purchased in lots of 1,000 liters.You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer.The relevant cost of the 800 liters of material O55P is:

A)$5,080
B)$5,322
C)$5,520
D)$6,900

Question 23

Nowak Corporation is a specialty component manufacturer with idle capacity.Management would like to use its extra capacity to generate additional profits.A potential customer has offered to buy 1,600 units of component FHB.Each unit of FHB requires 8 units of material N95 and 1 unit of material K78.Data concerning these two materials follow: Material N95 is in use in many of the company's products and is routinely replenished.Material K78 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials,in total,for purposes of determining a minimum acceptable price for the order for product FHB?

A)$65,658
B)$61,279
C)$62,135
D)$64,160

Question 24

Govoni Corporation is a specialty component manufacturer with idle capacity.Management would like to use its extra capacity to generate additional profits.A potential customer has offered to buy 9,500 units of component AIG.Each unit of AIG requires 6 units of material M51 and 4 units of material M93.Data concerning these two materials follow: Material M51 is in use in many of the company's products and is routinely replenished.Material M93 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials,in total,for purposes of determining a minimum acceptable price for the order for product AIG?

A)$505,667
B)$502,550
C)$458,850
D)$464,550

Question 25

Green Company produces 1,000 parts per year,which are used in the assembly of one of its products.The unit product cost of these parts is: The part can be purchased from an outside supplier at $20 per unit.If the part is purchased from the outside supplier,two thirds of the fixed manufacturing costs can be eliminated.The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be:

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

Question 26

Consider a decision facing a company of either accepting or rejecting a special offer for one of its products.A cost that is not relevant is:

A)direct materials.
B)variable overhead.
C)fixed overhead that will be avoided if the special offer is accepted.
D)common fixed overhead that will continue if the special offer is not accepted.

Question 27

JB Lumber Corporation is downsizing operations and has to decide which of its large saws should be sold.JB currently has four saws but only needs to keep three.All four saws have a remaining useful life of 3 years and will all have a salvage value of zero at the end of those 3 years.Also,all four saws have equal annual operating costs and output efficiency.Information related to the four saws is provided below: In order to maximize profits for the next three years,which machine would be most beneficial for JB to sell?

A)1
B)2
C)3
D)4

Question 28

The management of Austin Corporation is considering dropping product R97C.Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $34,000 of the fixed manufacturing expenses and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is discontinued.What would be the effect on the company's overall net operating income if product R97C were dropped?

A)Overall net operating income would increase by $20,000.
B)Overall net operating income would increase by $10,000.
C)Overall net operating income would decrease by $20,000.
D)Overall net operating income would decrease by $10,000.

Question 29

Curly Inc.is considering whether to continue to make a component or to buy it from an outside supplier.The company uses 16,000 of the components each year.The unit product cost of the component according to the company's cost accounting system is given as follows: Assume that direct labor is a variable cost.Of the fixed manufacturing overhead,30% is avoidable if the component were bought from the outside supplier.In addition,making the component uses 1 minute on the machine that is the company's current constraint.If the component were bought,this machine time would be freed up for use on another product that requires 2 minutes on the constraining machine and that has a contribution margin of $8.10 per unit. When deciding whether to make or buy the component,what cost of making the component should be compared to the price of buying the component?

A)$20.60
B)$17.52
C)$24.65
D)$21.57

Question 30

Degner Inc.has some material that originally cost $19,500.The material has a scrap value of $13,300 as is,but if reworked at a cost of $2,100,it could be sold for $14,000.What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?

A)-$20,900
B)$11,900
C)-$7,600
D)-$1,400

Question 31

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

A)decrease by $25,000 per year
B)increase by $25,000 per year
C)decrease by $10,000 per year
D)increase by $10,000 per year

Question 32

In a plant operating at capacity:

A)every machine and person in the plant is working at the maximum possible rate.
B)only some specific machines or processes are operating at the maximum rate possible.
C)profits are maximized.
D)managers should produce those products with the highest contribution margin in order to deal with the constrained resource.

Question 33

A year ago,Crunchy Cola Corporation bought a stamping machine to make the cans for its cola.The cost of the machine was $60,000.The machine has a useful life of 5 years and a salvage value of zero at the end of those five years.Annual depreciation on the machine is $12,000.One year of depreciation has been recorded.The variable manufacturing cost of producing the cans is $0.05 per can.The only fixed manufacturing cost is the annual depreciation of $12,000 on the stamping machine.Crunchy needs 200,000 cans annually.Dagmar Stamping Company recently gave Crunchy an offer to supply all of its can needs for the next four years at $0.07 per can.If Crunchy buys from Dagmar,the stamping machine would not be needed and would be sold for $35,000.If Crunchy buys from Dagmar,what will be the total dollar increase or decrease in income for the next four years?

A)$16,000 decrease
B)$19,000 increase
C)$29,000 decrease
D)$32,000 increase

Question 34

Mcneilly Inc.is considering using stocks of an old raw material in a special project.The special project would require all 220 kilograms of the raw material that are in stock and that originally cost the company $1,804 in total.If the company were to buy new supplies of this raw material on the open market,it would cost $8.55 per kilogram.However,the company has no other use for this raw material and would sell it at the discounted price of $7.75 per kilogram if it were not used in the special project.The sale of the raw material would involve delivery to the purchaser at a total cost of $97.00 for all 220 kilograms.What is the relevant cost of the 220 kilograms of the raw material when deciding whether to proceed with the special project?

A)$1,705
B)$1,881
C)$1,804
D)$1,608

Question 35

Sheela Dairy Corporation buys unprocessed cows' milk from local farmers.At the dairy,this unprocessed milk is broken down into cream and low-fat milk.The cream can be sold at this point or can be further processed into butter.Which of the following would be relevant in the decision to further process the cream into butter?

A)the amount paid to the farmers to purchase the unprocessed milk.
B)the cost of breaking down the unprocessed milk into cream and low-fat milk.
C)the portion of corporate fixed expenses that are currently being allocated to cream.
D)none of the above.

Question 36

Product L28N has been considered a drag on profits at Beets Corporation for some time and management is considering discontinuing the product altogether.Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $41,000 of the fixed manufacturing expenses and $25,000 of the fixed selling and administrative expenses are avoidable if product L28N is discontinued.What would be the effect on the company's overall net operating income if product L28N were dropped?

A)Overall net operating income would decrease by $73,000.
B)Overall net operating income would increase by $10,000.
C)Overall net operating income would decrease by $10,000.
D)Overall net operating income would increase by $73,000.

Question 37

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

A)Only I
B)Only III
C)Only I and II
D)Only II and III

Question 38

United Industries manufactures a number of products at its highly automated factory.The products are very popular,with demand far exceeding the factory's capacity.To maximize profit,management should rank products based on their:

A)gross margin
B)contribution margin
C)selling price
D)contribution margin per unit of the constrained resource

Question 39

Corado Corporation has in stock 77,000 kilograms of material N that it bought five years ago for $7.15 per kilogram.This raw material was purchased to use in a product line that has been discontinued.Material N can be sold as is for scrap for $4.50 per kilogram.An alternative would be to use material N in one of the company's current products,M01Y,which currently requires 2 kilograms of a raw material that is available for $7.15 per kilogram.Material N can be modified at a cost of $0.94 per kilogram so that it can be used as a substitute for this material in the production of product M01Y.However,after modification,4 kilograms of material N is required for every unit of product M01Y that is produced.Corado Corporation has now received a request from a company that could use material N in its production process.Assuming that Corado Corporation could use all of its stock of material N to make product M01Y or the company could sell all of its stock of the material at the current scrap price of $4.50 per kilogram,what is the minimum acceptable selling price of material N to the company that could use material N in its own production process?

A)$1.86
B)$2.64
C)$4.52
D)$4.50

Question 40

Knedler Corporation is preparing a bid for a special order that would require 720 liters of material C01D.The company already has 200 liters of this raw material in stock that originally cost $9.90 per liter.Material C01D is used in the company's main product and is replenished on a periodic basis.The resale value of the existing stock of the material is $9.60 per liter.New stocks of the material can be readily purchased for $10.10 per liter.What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order?

A)$7,232
B)$7,272
C)$6,912
D)$6,972

Question 41

Two products,TD and IB,emerge from a joint process.Product TD has been allocated $31,200 of the total joint costs of $48,000.A total of 5,000 units of product TD are produced from the joint process.Product TD can be sold at the split-off point for $24 per unit,or it can be processed further for an additional total cost of $15,000 and then sold for $26 per unit.If product TD is processed further and sold,what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?

A)$5,000 less profit
B)$115,000 more profit
C)$36,200 less profit
D)$26,200 more profit

Question 42

Hobbins Corporation makes three products that use compound W,the current constrained resource.Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable.In other words,rank the products in the order in which they should be emphasized.

A)UT,RC,DQ
B)DQ,RC,UT
C)RC,DQ,UT
D)UT,DQ,RC

Question 43

The constraint at Bulman Corporation is time on a particular machine.The company makes three products that use this machine.Data concerning those products appear below: Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product.Up to how much should the company be willing to pay to acquire more of the constrained resource?

A)$28.31 per unit
B)$12.20 per minute
C)$14.90 per minute
D)$69.54 per unit

Question 44

Scales Corporation has received a request for a special order of 6,000 units of product Y45 for $13.70 each.Product Y45's unit product cost is $11.50,determined as follows: Direct labor is a variable cost.The special order would have no effect on the company's total fixed manufacturing overhead costs.The customer would like modifications made to product Y45 that would increase the variable costs by $8.10 per unit and that would require an investment of $20,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales.The company has ample spare capacity for producing the special order.If the special order is accepted,the company's overall net operating income would increase (decrease) by:

A)($26,600)
B)$13,200
C)($55,400)
D)($21,300)

Question 45

Gudger Corporation processes sugar cane in batches.The company purchases a batch of sugar cane for $53 from farmers and then crushes the cane in the company's plant at the cost of $10.Two intermediate products,cane fiber and cane juice,emerge from the crushing process.The cane fiber can be sold as is for $29 or processed further for $15 to make the end product industrial fiber that is sold for $60.The cane juice can be sold as is for $38 or processed further for $22 to make the end product molasses that is sold for $52.Which of the intermediate products should be processed further?

A)Cane fiber should be processed into industrial fiber;Cane juice should NOT be processed into molasses
B)Cane fiber should NOT be processed into industrial fiber;Cane juice should be processed into molasses
C)Cane fiber should NOT be processed into industrial fiber;Cane juice should NOT be processed into molasses
D)Cane fiber should be processed into industrial fiber;Cane juice should be processed into molasses

Question 46

Chrisjohn Beet Processors,Inc. ,processes sugar beets in batches.A batch of sugar beets costs $51 to buy from farmers and $16 to crush in the company's plant.Two intermediate products,beet fiber and beet juice,emerge from the crushing process.The beet fiber can be sold as is for $23 or processed further for $18 to make the end product industrial fiber that is sold for $47.The beet juice can be sold as is for $46 or processed further for $20 to make the end product refined sugar that is sold for $59.How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is?

A)($74)
B)($23)
C)($7)
D)($41)

Question 47

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

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

Question 48

Outram Corporation is presently making part I14 that is used in one of its products.A total of 8,000 units of this part are produced and used every year.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to make and sell the part to the company for $14.80 each.If this offer is accepted,the supervisor's salary and all of the variable costs can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company,none of which would be avoided if the part were purchased instead of produced internally.If management decides to buy part I14 from the outside supplier rather than to continue making the part,what would be the annual impact on the company's overall net operating income?

A)Net operating income would decline by $15,200 per year.
B)Net operating income would increase by $15,200 per year.
C)Net operating income would increase by $52,800 per year.
D)Net operating income would decline by $52,800 per year.

Question 49

Part J88 is used in one of Quinney Corporation's products.The company makes 3,000 units of this part each year.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce this part and sell it to the company for $32.10 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company.If the outside supplier's offer were accepted,only $3,000 of these allocated general overhead costs would be avoided. If management decides to buy part J88 from the outside supplier rather than to continue making the part,what would be the annual impact on the company's overall net operating income?

A)Net operating income would decline by $22,200 per year.
B)Net operating income would decline by $16,200 per year.
C)Net operating income would decline by $5,400 per year.
D)Net operating income would decline by $19,200 per year.

Question 50

Supreme Celery Corporation manufactures four celery based products.Floods and fire on the west coast are going to cause a shortage of celery for Supreme next month.Information related to the four celery products that it produces are shown below.The numbers relate to the cost per case and the amount of celery per case of product: To maximize profit next month,in what order would it be best for Supreme to schedule production (first to last)?

A)Jelly,Cracker Spread,Soup,Snack Bars
B)Jelly,Snack Bars,Cracker Spread,Soup
C)Cracker Spread,Snack Bars,Jelly,Soup
D)Snack Bars,Jelly,Soup,Cracker Spread

Question 51

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

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

Question 52

Badal Corporation processes sugar beets in batches.A batch of sugar beets costs $55 to buy from farmers and $18 to crush in the company's plant.Two intermediate products,beet fiber and beet juice,emerge from the crushing process.The beet fiber can be sold as is for $20 or processed further for $16 to make the end product industrial fiber that is sold for $53.The beet juice can be sold as is for $33 or processed further for $23 to make the end product refined sugar that is sold for $60.How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

A)($20)
B)$21
C)$1
D)($112)

Question 53

Crick Corporation makes 11,000 units of part W28 each year.This part is used in one of the company's products.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to make and sell the part to the company for $25.50 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company.If the outside supplier's offer were accepted,only $18,000 of these allocated general overhead costs would be avoided.In addition,the space used to produce part W28 would be used to make more of one of the company's other products,generating an additional segment margin of $12,000 per year for that product. What would be the impact on the company's overall net operating income of buying part W28 from the outside supplier?

A)Net operating income would decline by $65,000 per year.
B)Net operating income would increase by $5,800 per year.
C)Net operating income would decline by $89,000 per year.
D)Net operating income would increase by $12,000 per year.

Question 54

An automated turning machine is the current constraint at Greenleaf Corporation.Three products use this constrained resource.Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable.In other words,rank the products in the order in which they should be emphasized.

A)DK,BG,QU
B)DK,QU,BG
C)QU,BG,DK
D)BG,QU,DK

Question 55

Isaac Corporation processes sugar beets in batches that it purchases from farmers for $47 a batch.A batch of sugar beets costs $14 to crush in the company's plant.Two intermediate products,beet fiber and beet juice,emerge from the crushing process.The beet fiber can be sold as is for $22 or processed further for $13 to make the end product industrial fiber that is sold for $42.The beet juice can be sold as is for $45 or processed further for $27 to make the end product refined sugar that is sold for $67.Which of the intermediate products should be processed further?

A)beet fiber should NOT be processed into industrial fiber;beet juice should NOT be processed into refined sugar
B)beet fiber should NOT be processed into industrial fiber;beet juice should be processed into refined sugar
C)beet fiber should be processed into industrial fiber;beet juice should NOT be processed into refined sugar
D)beet fiber should be processed into industrial fiber;beet juice should be processed into refined sugar

Question 56

Cybil Baunt just inherited a 1958 Chevy Impala from her late Aunt Joop.Aunt Joop purchased the car 25 years ago for $5,000.Cybil is either going to sell the car for $2,000 or have it restored and sell it for $16,000.The restoration will cost $10,000.Cybil would be better off by:

A)$4,000 to have the vehicle restored
B)$6,000 to have the vehicle restored
C)$9,000 to have the vehicle restored
D)$11,000 to have the vehicle restored

Question 57

Arline Cane Products,Inc. ,processes sugar cane in batches.The company buys a batch of sugar cane from farmers for $56 which is then crushed in the company's plant at a cost of $14.Two intermediate products,cane fiber and cane juice,emerge from the crushing process.The cane fiber can be sold as is for $24 or processed further for $14 to make the end product industrial fiber that is sold for $34.The cane juice can be sold as is for $40 or processed further for $23 to make the end product molasses that is sold for $80.How much profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

A)$13
B)($6)
C)($107)
D)$7

Question 58

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800.If these calculators are upgraded at a total cost of $10,000,they can be sold for a total of $30,000.As an alternative,the calculators can be sold in their present condition for $11,200.
What is the net advantage or disadvantage to the company from upgrading the calculators?

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

Question 59

A customer has requested that Daleske Corporation fill a special order for 2,000 units of product D84 for $20.30 a unit.While the product would be modified slightly for the special order,product D84's normal unit product cost is $18.50: Direct labor is a variable cost.The special order would have no effect on the company's total fixed manufacturing overhead costs.The customer would like modifications made to product D84 that would increase the variable costs by $2.50 per unit and that would require an investment of $7,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales.The company has ample spare capacity for producing the special order.If the special order is accepted,the company's overall net operating income would increase (decrease) by:

A)($14,900)
B)($5,800)
C)$3,600
D)($8,400)

Question 60

Part N19 is used by Malouf Corporation to make one of its products.A total of 7,000 units of this part are produced and used every year.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to make the part and sell it to the company for $24.50 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including the direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company,none of which would be avoided if the part were purchased instead of produced internally.In addition,the space used to make part N19 could be used to make more of one of the company's other products,generating an additional segment margin of $25,000 per year for that product.What would be the impact on the company's overall net operating income of buying part N19 from the outside supplier?

A)Net operating income would decline by $21,900 per year.
B)Net operating income would decline by $60,700 per year.
C)Net operating income would decline by $10,700 per year.
D)Net operating income would increase by $25,000 per year.

Question 61

Kava Inc.manufactures industrial components.One of its products,which is used in the construction of industrial air conditioners,is known as K65.Data concerning this product are given below: The above per unit data are based on annual production of 4,000 units of the component.Direct labor can be considered to be a variable cost.
The company has received a special,one-time-only order for 500 units of component K65.There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order.However,assume that Kava has no excess capacity and this special order would require 10 minutes of the constraining resource,which could be used instead to produce products with a total contribution margin of $11,000.What is the minimum price per unit on the special order below which the company should not go?

A)$60
B)$81
C)$100
D)$22

Question 62

Rowena Corporation manufactures laser printers.Rowena currently manufactures the 32,000 imaging drums that it uses in its printers.The annual costs to manufacture these 32,000 drums are as follows: Hardware Solutions,Inc.has offered to provide Rowena with all of its imaging drum needs for $72 per drum.If Rowena accepts this offer,70% of the fixed manufacturing cost above could be totally eliminated.Also,Rowena will be able to use the freed up space to generate $240,000 of income each year in the production of alternative products.
Assume that demand for Rowena printers goes up from 32,000 annually to 40,000 annually.Also assume that Rowena has the idle capacity to produce the extra 8,000 drums needed for the printers.Under these conditions,would Rowena be better off to make the drums or buy the drums and by how much? (Assume that there is no change in cost structure. )

A)$96,000 better to buy
B)$160,000 better to buy
C)$204,000 better to make
D)$264,000 better to make

Question 63

The management of Dorl Corporation has been concerned for some time with the financial performance of its product I54J and has considered discontinuing it on several occasions.Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $95,000 of the fixed manufacturing expenses and $85,000 of the fixed selling and administrative expenses are avoidable if product I54J is discontinued.
According to the company's accounting system,what is the net operating income earned by product I54J?

A)$14,000
B)($357,000)
C)($14,000)
D)$357,000

Question 64

Libbee Corporation is presently making part I50 that is used in one of its products.A total of 8,000 units of this part are produced and used every year.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $24.50 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company,none of which would be avoided if the part were purchased instead of produced internally.
In addition to the facts given above,assume that the space used to produce part I50 could be used to make more of one of the company's other products,generating an additional segment margin of $24,000 per year for that product.What would be the impact on the company's overall net operating income of buying part I50 from the outside supplier and using the freed space to make more of the other product?

A)Net operating income would increase by $24,000 per year.
B)Net operating income would increase by $17,600 per year.
C)Net operating income would decline by $8,800 per year.
D)Net operating income would decline by $30,400 per year.

Question 65

Two alternatives,code-named X and Y,are under consideration at Donat Corporation.Costs associated with the alternatives are listed below.
Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question. )

A)Both materials costs and processing costs are relevant
B)Only materials costs are relevant
C)Only processing costs are relevant
D)Neither materials costs nor processing costs are relevant

Question 66

Rowena Corporation manufactures laser printers.Rowena currently manufactures the 32,000 imaging drums that it uses in its printers.The annual costs to manufacture these 32,000 drums are as follows: Hardware Solutions,Inc.has offered to provide Rowena with all of its imaging drum needs for $72 per drum.If Rowena accepts this offer,70% of the fixed manufacturing cost above could be totally eliminated.Also,Rowena will be able to use the freed up space to generate $240,000 of income each year in the production of alternative products.
Based on the information presented,would Rowena be better off to make the drums or buy the drums and by how much?

A)$112,000 better to make
B)$128,000 better to buy
C)$526,400 better to buy
D)$704,000 better to make

Question 67

The management of Dorl Corporation has been concerned for some time with the financial performance of its product I54J and has considered discontinuing it on several occasions.Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $95,000 of the fixed manufacturing expenses and $85,000 of the fixed selling and administrative expenses are avoidable if product I54J is discontinued.
What would be the effect on the company's overall net operating income if product I54J were dropped?

A)Overall net operating income would decrease by $177,000.
B)Overall net operating income would increase by $177,000.
C)Overall net operating income would increase by $14,000.
D)Overall net operating income would decrease by $14,000.

Question 68

The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams.The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped.The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson.If the Tax product were dropped,there would be no change in the fixed manufacturing costs of the company.
Assume that discontinuing the Tam product would result in a $120,000 increase in the contribution margin of other product lines.How many Tams would have to be sold next year for the company to be as well off as if it just dropped the line and enjoyed the increase in contribution margin from other products?

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

Question 69

Kava Inc.manufactures industrial components.One of its products,which is used in the construction of industrial air conditioners,is known as K65.Data concerning this product are given below: The above per unit data are based on annual production of 4,000 units of the component.Direct labor can be considered to be a variable cost.
The company has received a special,one-time-only order for 500 units of component K65.There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order.Assuming that Kava has excess capacity and can fill the order without cutting back on the production of any product,what is the minimum price per unit on the special order below which the company should not go?

A)$180
B)$38
C)$59
D)$78

Question 70

Kava Inc.manufactures industrial components.One of its products,which is used in the construction of industrial air conditioners,is known as K65.Data concerning this product are given below: The above per unit data are based on annual production of 4,000 units of the component.Direct labor can be considered to be a variable cost.
Refer to the original data in the problem.What is the current contribution margin per unit for component K65 based on its selling price of $180 and its annual production of 4,000 units?

A)$142
B)$102
C)$40
D)$140

Question 71

The management of Zorrilla Corporation is considering dropping product R10C.Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system.Further investigation has revealed that $42,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product R10C is discontinued.
What would be the effect on the company's overall net operating income if product R10C were dropped?

A)Overall net operating income would decrease by $28,000.
B)Overall net operating income would decrease by $45,000.
C)Overall net operating income would increase by $28,000.
D)Overall net operating income would increase by $45,000.

Question 72

The management of Zorrilla Corporation is considering dropping product R10C.Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system.Further investigation has revealed that $42,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product R10C is discontinued.
According to the company's accounting system,what is the net operating income earned by product R10C?

A)($28,000)
B)$28,000
C)$135,000
D)($135,000)

Question 73

The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams.The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped.The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson.If the Tax product were dropped,there would be no change in the fixed manufacturing costs of the company.
Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines.If the company discontinues the Tam product line,the change in annual operating income (or loss) should be:

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

Question 74

Libbee Corporation is presently making part I50 that is used in one of its products.A total of 8,000 units of this part are produced and used every year.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $24.50 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company,none of which would be avoided if the part were purchased instead of produced internally.
If management decides to buy part I50 from the outside supplier rather than to continue making the part,what would be the annual impact on the company's overall net operating income?

A)Net operating income would decline by $6,400 per year.
B)Net operating income would decline by $32,800 per year.
C)Net operating income would increase by $32,800 per year.
D)Net operating income would increase by $6,400 per year.

Question 75

Mccubbin Corporation is considering two alternatives: A and B.Costs associated with the alternatives are listed below:
Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question. )

A)Neither materials costs nor processing costs are relevant
B)Both materials costs and processing costs are relevant
C)Only processing costs are relevant
D)Only materials costs are relevant

Question 76

Two alternatives,code-named X and Y,are under consideration at Donat Corporation.Costs associated with the alternatives are listed below.
What is the differential cost of Alternative Y over Alternative X,including all of the relevant costs?

A)$140,000
B)$123,000
C)$34,000
D)$106,000

Question 77

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800.If these calculators are upgraded at a total cost of $10,000,they can be sold for a total of $30,000.As an alternative,the calculators can be sold in their present condition for $11,200.
Assume that Tolar decides to upgrade the calculators.At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition?

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

Question 78

Kleffman Corporation is presently making part X31 that is used in one of its products.A total of 2,000 units of this part are produced and used every year.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $23.40 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company.If the outside supplier's offer were accepted,only $1,000 of these allocated general overhead costs would be avoided.
In addition to the facts given above,assume that the space used to produce part X31 could be used to make more of one of the company's other products,generating an additional segment margin of $23,000 per year for that product.What would be the impact on the company's overall net operating income of buying part X31 from the outside supplier and using the freed space to make more of the other product?

A)Net operating income would increase by $17,400 per year.
B)Net operating income would increase by $21,200 per year.
C)Net operating income would decline by $28,600 per year.
D)Net operating income would increase by $23,000 per year.

Question 79

Mccubbin Corporation is considering two alternatives: A and B.Costs associated with the alternatives are listed below:
What is the differential cost of Alternative B over Alternative A,including all of the relevant costs?

A)$161,000
B)$131,500
C)$59,000
D)$102,000

Question 80

Kleffman Corporation is presently making part X31 that is used in one of its products.A total of 2,000 units of this part are produced and used every year.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $23.40 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company.If the outside supplier's offer were accepted,only $1,000 of these allocated general overhead costs would be avoided.
If management decides to buy part X31 from the outside supplier rather than to continue making the part,what would be the annual impact on the company's overall net operating income?

A)Net operating income would decline by $5,600 per year.
B)Net operating income would decline by $1,800 per year.
C)Net operating income would decline by $4,600 per year.
D)Net operating income would decline by $6,600 per year.