True/False 1. Only future costs that differ between alternatives are relevant in decision making. Answer: T 2. Future costs that do not differ between the alternatives in a decision are avoidable costs. Answer: F 3. The book value of a machine, as shown on the balance sheet, is not relevant in a decision concerning the replacement of that machine by another machine. (Ignore taxes.) Answer: T 4. A cost that is relevant in one decision may not be relevant in another decision. Answer: T 5. Opportunity costs are not usually recorded in the accounts of a business. Answer: T 6. A cost that can be avoided by choosing one alternative over another is not relevant for decision purposes. Answer: F 7. The book value of old equipment is a relevant cost in a decision to replace that equipment. (Ignore taxes.) Answer: F 8. An avoidable cost is a cost that can be completely eliminated irrespective of whether one chooses one alternative or another in a decision. Answer: F 9. A fixed cost cannot be a differential cost. Answer: F 10. One of the advantages of allocating common fixed costs to a product is that such allocations more accurately reflect the product’s true profitability. Answer: F 11. Fixed costs may or may not be sunk costs. Answer: T 12. A product whose revenues do not cover the sum of its variable costs, its traceable fixed costs, and its allocated share of general corporate administrative expenses should usually be dropped. Answer: F 13. In a decision to drop a segment, the opportunity cost of the space occupied by the segment is the cost of renting or building similar space nearby. Answer: F 14. Fixed costs may or may not be relevant in decisions about whether a product should be dropped. Answer: T 15. In a decision to drop a product, the product should not be charged for factory rent if the space in which the product is produced has no alternative use and the rental payment is unavoidable. 16. When a company is involved in only one activity in the entire value chain, it is vertically integrated. Answer: F
17. A vertically integrated company is more dependent on its suppliers than a company that is not vertically integrated. Answer: F 18. A disadvantage of vertical integration is that by pooling demand for parts from a number of companies, a supplier will face diseconomies of scale that result in lower quality and higher cost than if every company makes its own parts. Answer: F 19. In a special order situation, any fixed cost that could be avoided if the special order were not accepted would be irrelevant. Answer: T 20. Depreciation expense on existing factory equipment is usually irrelevant in a decision of whether to accept or reject a special offer for a company's product. Answer: T 21. When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the lowest contribution margin per unit of the constrained resource. Answer: F 22. One way to increase the effective utilization of a bottleneck is to put less emphasis on preventing defects and simply discard defective units at final inspection before sending them to customers. Answer: F 23. Defective units should be detected and scrapped or reworked before the bottleneck operation rather than after it. Answer: T 24. In a factory operating at capacity, not every machine and person should be working at the maximum possible rate. Answer: T 25. Eliminating nonproductive processing time is particularly important in work stations that do not contain bottlenecks. Answer: F 26. The split-off point in a process that produces joint products is the point in the manufacturing process at which the joint products are sent to separate customers. Answer: F 27. Joint costs are relevant in the decision to sell a product at the split-off point or to process the product further. Answer: F 28. The term joint cost is used to describe the costs incurred after the split-off point in a process involving joint products. Answer: F 29. Joint products are products that are sold to customers as a set or as part of a group of products. Answer: F
Multiple Choice 30. Hal currently works as the fry guy at Burger Haven but is thinking of quitting his job to attend college full time next semester. Which of the following would be considered an opportunity cost of attending college? A) the cost of the textbooks B) the cost of the cola that Hal will consume during class C) Hal's lost wages at Burger Haven D) the cost of commuting to the Burger Haven job Answer: C 31. Opportunity costs are: A) not used for decision making. B) the same as variable costs. C) the same as historical costs. D) relevant in decision making. Answer: D 32. Consider the following statements: I. A division's net operating income, after deducting both traceable and allocated common fixed costs, is negative. II. The division's avoidable fixed costs exceed its contribution margin. III. The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin. Which of the above statements is a valid reason for eliminating the division? A) Only I B) Only II C) Only III D) Only I and II Answer: B 33. In a make-or-buy decision, relevant costs include: A) unavoidable fixed costs B) avoidable fixed costs C) fixed factory overhead costs applied to products D) fixed selling and administrative expenses Answer: B 34. Management is considering a one-time-only special order. There is sufficient idle capacity to fill the order without affecting any normal sales. Which one of the following is NOT relevant in making the decision? A) absorption costing unit product costs B) variable costs C) incremental costs D) differential costs Answer: A 35. When a multi-product factory operates at full capacity, decisions must be made about which products to emphasize. In making such decisions, products should be ranked based on: A) selling price per unit B) contribution margin per unit C) contribution margin per unit of the constraining resource D) unit sales volume Answer: C 36. Which of the following is not an effective way of dealing with a production constraint (i.e., bottleneck)?
A) Reduce the number of defective units produced at the bottleneck. B) Pay overtime to workers assigned to the bottleneck. C) Pay overtime to workers assigned to work stations located after the bottleneck in the production process. D) Subcontract work that would otherwise require use of the bottleneck. Answer: C 37. Two or more products produced from a common input are called: A) common costs. B) joint products. C) joint costs. D) sunk costs. Answer: B 38. In a sell or process further decision, which of the following costs is relevant? I. A variable production cost incurred after split-off. II. A fixed production cost incurred prior to split-off. A) Only I B) Only II C) Both I and II D) Neither I nor II Answer: A 39. Moyer 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 2,300 units of component TIB. Each unit of TIB requires 9 units of material F58 and 7 units of material D66. Data concerning these two materials follow:
Material F58 ............. D66 .............
Units in Stock 18,940 15,700
Original Cost Per Unit $4.40 $6.10
Current Market Price Per Unit $4.65 $6.50
Disposal Value Per Unit $4.35 $4.80
Material F58 is in use in many of the company's products and is routinely replenished. Material D66 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 TIB? A) $189,290 B) $174,215 C) $168,533 D) $200,905 Answer: B Feedback: Materials requirements for F58: 2,300 units of TIB × 9 units of F58 per unit of TIB = 20,700 units of F58 Materials requirements for D66: 2,300 units of TIB × 7 units of D66 per unit of TIB = 16,100 units of D66 Relevant cost of F58: 20,700 units of F58 × current market of $4.65 per unit of F58 ..... Relevant cost of D66: In inventory: 15,700 units of D66 × disposal value of $4.80 per unit of D66 ................ Purchase: 400 units* of D66 × current market value of $6.50 per unit of D66 ............. Relevant cost of materials ................................................................................................ * 16,100 units – 15,700 units = 400 units
$96,255 75,360 2,600 $174,215
40. Bosques Corporation has in stock 35,800 kilograms of material L that it bought five years ago for $5.55 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material L can be sold as is for scrap for $1.67 per kilogram. An alternative would be to use material L in one of the company's current products, Q08C, which currently requires 2 kilograms of a raw material that is available for $9.15 per kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it can be used as a substitute for this material in the production of product Q08C. However, after modification, 4 kilograms of material L is required for every unit of product Q08C that is produced. Bosques Corporation has now received a request from a company that could use material L in its production process. Assuming that Bosques Corporation could use all of its stock of material L to make product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67 per kilogram, what is the minimum acceptable selling price of material L to the company that could use material L in its own production process? A) $5.365 per kg B) $3.795 per kg C) $2.133 per kg D) $1.675 per kg Answer: B Feedback: Cost of alternative material to produce a unit of Q08C: 2 kgs × $9.15 per kg ........................................................................ $18.30 Cost of using material L to produce a unit of Q08C: 4 kgs × $0.78 per kg ........................................................................ 3.12 Savings from using material L to produce a unit of Q08C (a) ............. $15.18 Kilograms of material L per unit of Q08C (b) ....................................... 4 kgs Value per kg of material L when used to produce Q08C (a) ÷ (b) ...... $3.795 per kg The value of using material L to produce Q08C is greater than its scrap value, so the company would be giving up benefits of $3.795 per kilogram if it were to sell material L. Therefore, the minimum acceptable price is $3.795 per kilogram. 41. Zemlya Corporation currently records $4,000 of depreciation each year on the computer that it uses for its major data processing needs. The computer currently has one more year of useful life left and it will have a salvage value of zero at the end of that year. Jennifer, one of the accountants at Zemlya, suggested that the computer be sold immediately for $3,000 and that the company hire a data processing firm to handle the corporation's data processing needs. The computer currently requires $25,000 in annual operating costs in addition to the depreciation. The data processing firm would charge $10,000 per year for its services. If Zemlya decides to implement this change, what effect will this have on the corporation's net cash flow for the last year of the computer's useful life? A) increase of $15,000 B) increase of $18,000 C) decrease of $22,000 D) decrease of $25,000 Answer: B Feedback: Keep the Sell the Computer Computer Differential Annual operating costs ................... $25,000 Data process firm services ............. $10,000 Less: sales value now .................... (3,000) Net expense ................................... $25,000 $7,000 $18,000 If the computer is sold and the data processing firm is hired, data processing expense would be reduced by $18,000 and hence net cash flow would be increased by $18,000. 42. Yehle Inc. regularly uses material Y51B and currently has in stock 460 liters of the material for which it paid $2,530 several weeks ago. If this were to be sold as is on the open market as surplus material, it would
fetch $4.55 per liter. New stocks of the material can be purchased on the open market for $5.45 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 720 liters of the material to be used in a job for a customer. The relevant cost of the 720 liters of material Y51B is: A) $3,924 B) $5,450 C) $3,510 D) $3,276 Answer: A Feedback: The relevant cost is the current market value: 720 liters × current market $5.45 per liter = $3,924 43. Roddey 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 2,900 units of component GEE. Each unit of GEE requires 3 units of material R39 and 8 units of material I59. Data concerning these two materials follow:
Material R39 ............. I59 ...............
Units in Stock 340 23,700
Original Cost Per Unit $4.70 $8.20
Current Market Price Per Unit $4.35 $8.05
Disposal Value Per Unit $3.95 $6.85
Material R39 is in use in many of the company's products and is routinely replenished. Material I59 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 GEE? A) $224,605 B) $196,765 C) $228,204 D) $193,285 Answer: B Feedback: Materials requirements for R39: 2,900 units of GEE × 3 units of R39 per unit of GEE = 8,700 units of R39 Materials requirements for I59: 2,900 units of GEE × 8 units of I59 per unit of GEE = 23,200 units of I59 Relevant cost of R39: 8,700 units × current market price of $4.35 per unit ......... Relevant cost of I59: 23,200 units × disposal value of $6.85 per unit .................. Relevant cost of materials ....................................................................................
$37,845 158,920 $196,765
44. Mankus Inc. is considering using stocks of an old raw material in a special project. The special project would require all 120 kilograms of the raw material that are in stock and that originally cost the company $816 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.75 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 $50 for all 120 kilograms. What is the relevant cost of the 120 kilograms of the raw material when deciding whether to proceed with the special project? A) $810 B) $870 C) $760 D) $816 Answer: C Feedback: The company’s relevant cost in this case is how much it could earn by selling the 120 kilograms at the discounted price of $6.75 per kilogram, less delivery costs of $50 for all 120 kilograms.
Proceeds of sale at the discounted price: 120 kgs × $6.75 per kg .. Less delivery cost ............................................................................. Relevant cost ....................................................................................
$810 50 $760
45. Narciso Corporation is preparing a bid for a special order that would require 880 liters of material R19S. The company already has 280 liters of this raw material in stock that originally cost $6.10 per liter. Material R19S 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 $5.45 per liter. New stocks of the material can be readily purchased for $6.20 per liter. What is the relevant cost of the 880 liters of the raw material when deciding how much to bid on the special order? A) $5,006 B) $5,456 C) $4,796 D) $5,456 Answer: B Feedback: The relevant cost is the current market cost which is 880 liters × current market $6.20 per liter = $5,456. 46. Wenig Inc. has some material that originally cost $73,500. The material has a scrap value of $45,600 as is, but if reworked at a cost of $6,600, it could be sold for $58,100. 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) decrease of $22,000 B) decrease of $67,600 C) increase of $51,500 D) increase of $5,900 Answer: D Feedback: Sales value of reworked material .............................. $58,100 Less: Cost to rework material .................................... 6,600 Net sales value .......................................................... 51,500 Current scrap value ................................................... 45,600 Net effect of reworking rather than selling as scrap .. $ 5,900 47. Fabio Corporation is considering eliminating a department that has a contribution margin of $30,000 and $60,000 in fixed costs. Of the fixed costs, $15,000 cannot be avoided. The effect of eliminating this department on Fabio's overall net operating income would be: A) a decrease of $30,000. B) an increase of $30,000. C) a decrease of $15,000. D) an increase of $15,000. Answer: C Feedback: Avoidable fixed costs = $60,000 – $15,000 = $45,000 Contribution margin ...................................... Avoidable fixed costs .................................... Segment margin ...........................................
$ 30,000 45,000 $(15,000)
If the department were eliminated, the company would eliminate the department’s negative segment margin of $15,000 and overall net operating income would increase by $15,000 per year. 48. Lusk Corporation produces and sells 20,000 units of Product X each month. The selling price of Product X is $30 per unit, and variable expenses are $21 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $50,000 of the $250,000 in fixed expenses charged to
Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the company’s overall net operating income would: A) decrease by $70,000 per month. B) increase by $70,000 per month. C) increase by $20,000 per month. D) decrease by $20,000 per month. Answer: C Feedback: Keep Drop Product X Product X Difference Sales (20,000 units × $30 per unit) ...................... $600,000 $ 0 $(600,000) Variable expenses (20,000 units × $21 per unit) . 420,000 0 420,000 Contribution margin .............................................. 180,000 0 (180,000) Fixed expenses .................................................... 250,000 50,000 200,000 Net operating income (loss) ................................. $( 70,000) $(50,000) $ 20,000 Net operating income would increase by $20,000 if Product X were dropped. Therefore, the product should be dropped. 49. The following information relates to next year's projected operating results of the Consumer Division of Xampa Corporation: $1,800,000 Contribution margin ....... Fixed expenses ............. Net operating loss .........
2,100,000 $(300,000)
If the Consumer Division is eliminated, $1,600,000 of the above fixed expenses could be avoided. What will be the effect on Xampa’s profit next year if Consumer Division is eliminated? A) $300,000 increase B) $300,000 increase C) $200,000 decrease D) $200,000 increase Answer: C Feedback: Contribution margin .............................. $1,800,000 Avoidable fixed expenses ..................... 1,600,000 Segment margin ................................... $ 200,000 Because the segment margin is a positive $200,000, profit would decrease by $200,000 if the Consumer Division is eliminated. 50. Vanikord Corporation currently has two divisions which had the following operating results for last year:
Sales............................................................. Variable costs ............................................... Contribution margin ...................................... Traceable fixed costs ................................... Segment margin ........................................... Allocated common corporate fixed costs ..... Net operating income (loss) .........................
Cork Division $500,000 210,000 290,000 130,000 160,000 90,000 $ 70,000
Rubber Division $400,000 300,000 100,000 70,000 30,000 50,000 $(20,000)
Because the Rubber Division sustained a loss, the president of Vanikoro is considering the elimination of this division. All of the division’s traceable fixed costs could be avoided if the division was dropped. None of the
allocated common corporate fixed costs could be avoided. 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) $20,000 higher B) $50,000 higher C) $50,000 lower D) $30,000 lower Answer: D Feedback: If the Rubber Division had been eliminated, Vanikord would have lost its segment margin of $30,000. Consequently, overall net operating income would have been $30,000 lower. 51. A study has been conducted to determine if Product A should be dropped. Sales of the product total $400,000 per year; variable expenses total $270,000 per year. Fixed expenses charged to the product total $160,000 per year. The company estimates that $70,000 of these fixed expenses are not avoidable even if the product is dropped. If Product A is dropped, the company’s overall net operating income would: A) decrease by $40,000 per year B) increase by $40,000 per year C) decrease by $30,000 per year D) increase by $30,000 per year Answer: A Feedback: Keep the Drop the Product Product Difference Sales.................................................. $400,000 $ 0 $(400,000) Variable expenses ............................. 270,000 0 270,000 Contribution margin ........................... 130,000 0 (130,000) Fixed manufacturing expenses ......... 160,000 70,000 90,000 Net operating income (loss) .............. $(30,000) $(70,000) $ (40,000) Net operating income would decrease by $40,000 if Product A were dropped. 52. Weston Corporation is considering eliminating a department that has a contribution margin of $70,000 and $140,000 in fixed costs. Of the fixed costs, $100,000 cannot be avoided. The effect of eliminating this department on Weston's overall net operating income would be: A) an increase of $70,000. B) a decrease of $70,000. C) an increase of $30,000. D) a decrease of $30,000. Answer: D Feedback: Avoidable fixed costs = $140,000 – $100,000 = $40,000 Contribution margin ...................................... Avoidable fixed costs .................................... Segment margin ...........................................
$70,000 40,000 $30,000
If the department were eliminated, the company would lose the department’s segment margin of $30,000 and overall net operating income would decrease by $30,000 per year. 53. The Milham Corporation has two divisions—East and West. The divisions have the following revenues and expenses:
Sales....................................................... Variable costs .........................................
East $720,000 370,000
West $350,000 240,000
Traceable fixed costs ............................. Allocated common corporate costs ........ Net operating income (loss) ...................
130,000 120,000 $100,000
80,000 50,000 $(20,000)
Management at Milham is considering the elimination of the West Division. If the West Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would result in an overall company net operating income of: A) $100,000 B) $80,000 C) $120,000 D) $50,000 Answer: D Feedback: Effect on net operating income of dropping the West Division: Sales..................................................................... $(350,000) Variable expenses ................................................ 240,000 Contribution margin .............................................. (110,000) Traceable fixed expenses .................................... 80,000 Effect on net operating income ............................ $ (30,000) The company currently has a net operating income of $80,000—the combined effect of the apparent $20,000 loss in the West Division and the apparent $100,000 profit in the East Division. Dropping the West Division would reduce net operating income by $30,000. Therefore, after dropping the West Division, the overall company net operating loss would be $50,000 (= $80,000 – $30,000). 54. A study has been conducted to determine if one of the departments in Barry Corporation should be discontinued. The contribution margin in the department is $60,000 per year. Fixed expenses charged to the department are $75,000 per year. It is estimated that $34,000 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 $26,000 per year B) increase by $26,000 per year C) decrease by $15,000 per year D) increase by $15,000 per year Answer: A Feedback: Contribution margin ...................................... $60,000 Avoidable fixed costs .................................... 34,000 Segment margin ........................................... $26,000 If the department were eliminated, the company would lose the department’s segment margin of $26,000 and overall net operating income would decrease by $26,000 per year. 55. Claris Corporation (a multi-product company) produces and sells 7,000 units of Product X each year. Each unit of Product X sells for $12 and has a contribution margin of $4. If Product X is discontinued, $19,000 of the $32,000 in fixed costs charged to Product X could be eliminated. If Product X is discontinued, the company's overall operating income would: A) decrease by $4,000 per year. B) increase by $4,000 per year. C) decrease by $9,000 per year. D) increase by $9,000 per year. Answer: C Feedback: Contribution margin ($4 per unit × 7,000 units) ............ $28,000 Avoidable fixed costs .................................................... 19,000
Segment margin ...........................................................
$ 9,000
If Product X were eliminated, the company would lose the product’s segment margin of $9,000. This would decrease overall net operating income by $9,000. 56. Product Q77H has been considered a drag on profits at Zenke Corporation for some time and management is considering discontinuing the product altogether. Data from the company's accounting system appear below: Sales.................................................................. Variable expenses ............................................. Fixed manufacturing expenses ......................... Fixed selling and administrative expenses ........
$380,000 $171,000 $133,000 $80,000
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $71,000 of the fixed manufacturing expenses and $43,000 of the fixed selling and administrative expenses are avoidable if product Q77H is discontinued. What would be the effect on the company's overall net operating income if product Q77H were dropped? A) Overall net operating income would decrease by $95,000. B) Overall net operating income would increase by $95,000. C) Overall net operating income would increase by $4,000. D) Overall net operating income would decrease by $4,000. Answer: A Feedback: Product Q77H Sales..................................................................... $380,000 Variable expenses ................................................ 171,000 Contribution margin .............................................. 209,000 Traceable fixed expenses: Fixed manufacturing expenses ......................... 71,000 Fixed selling and administrative expenses ....... 43,000 114,000 Segment margin ................................................... $95,000 The segment margin of $95,000 would be lost if product Q77H were dropped and net operating income would decrease by $95,000. Therefore, the product should not be dropped. Another way of saying this is that the company is actually currently making $95,000 on this product. 57. The management of Fannin Corporation is considering dropping product H58S. Data from the company's accounting system appear below: Sales.................................................................. Variable expenses ............................................. Fixed manufacturing expenses ......................... Fixed selling and administrative expenses ........
$490,000 $221,000 $152,000 $98,000
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $90,000 of the fixed manufacturing expenses and $42,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the company's overall net operating income if product H58S were dropped? A) Overall net operating income would decrease by $137,000. B) Overall net operating income would increase by $137,000. C) Overall net operating income would decrease by $151,000. D) Overall net operating income would increase by $151,000. Answer: A Feedback: Product H58S
Sales..................................................................... Variable expenses ................................................ Contribution margin .............................................. Traceable fixed expenses: Fixed manufacturing expenses ......................... Fixed selling and administrative expenses ....... Segment margin ...................................................
$490,000 221,000 269,000 90,000 42,000
132,000 $137,000
The segment margin of $137,000 would be lost if product H58S were dropped and net operating income would decrease by $137,000. Therefore, the product should not be dropped. Another way of saying this is that the company is actually currently making $137,000 on this product. 58. Part S00 is used in one of Morsey Corporation's products. The company makes 6,000 units of this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
Direct materials ..................................... Direct labor ............................................ Variable manufacturing overhead ......... Supervisor's salary ................................ Depreciation of special equipment ........ Allocated general overhead...................
Per Unit $1.40 $2.40 $7.20 $3.60 $8.90 $4.50
An outside supplier has offered to produce this part and sell it to the company for $16.10 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 $6,000 of these allocated general overhead costs would be avoided. If management decides to buy part S00 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 decrease by $3,000 per year. B) Net operating income would decrease by $71,400 per year. C) Net operating income would decrease by $77,400 per year. D) Net operating income would decrease by $65,400 per year. Answer: A Feedback: Make Direct materials (6,000 units × $1.40 per unit) .............................. $ 8,400 Direct labor (6,000 units × $2.40 per unit) ..................................... 14,400 Variable overhead (6,000 units × $7.20 per unit) .......................... 43,200 Supervisor’s salary (6,000 units × $3.60 per unit) ......................... 21,600 Depreciation of special equipment (not relevant) .......................... 0 Allocated general overhead (avoidable only) ................................ 6,000 Total relevant cost to make ........................................................... $93,600 Total cost to purchase (6,000 units × $16.10 per unit) .................. Total relevant cost to make ........................................................... Higher cost to purchase ................................................................
$96,600 93,600 $3,000
Net operating income would decrease by $3,000 per year if the part were purchased rather than made internally. 59. Zuppa Corporation currently maintains its own printing department. The annual costs of running this department are as follows:
Variable costs ....... Fixed costs ........... Total......................
$30,000 60,000 $90,000
Somatic Copy Service has offered to provide Zuppa with all of its printing needs at a total annual cost of $68,000. If Zuppa went with this offer, they would close down their printing department. Except for 30% of the fixed costs, all of the annual printing department costs above can be avoided if it was closed down. Based on this information, would Zuppa be better off to keep its printing department or to shut it down and take Somatic's offer and by how much? A) $4,000 better off to go with Somatic B) $5,000 better off to keep the department C) $20,000 better off to keep the department D) $22,000 better off to go with Somatic Answer: A Feedback: Relevant cost to make: $30,00 Variable costs .......................... 0 Fixed costs ($60,000 × 70%) .. 42,000 Total relevant cost to make ..... 72,000 Total cost to buy ...................... 68,000 Cost saved by outsourcing ...... $ 4,000 60. Ramon Corporation makes 18,000 units of part E44 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:
Direct materials ..................................... Direct labor ............................................ Variable manufacturing overhead ......... Supervisor's salary ................................ Depreciation of special equipment ........ Allocated general overhead...................
Per Unit $2.20 $5.40 $8.00 $7.30 $6.60 $1.80
An outside supplier has offered to make and sell the part to the company for $23.30 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 $5,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part E44 would be used to make more of one of the company's other products, generating an additional segment margin of $21,000 per year for that product. What would be the impact on the company's overall net operating income of buying part E44 from the outside supplier? A) Net operating income would increase by $21,000 per year. B) Net operating income would increase by $18,800 per year. C) Net operating income would decrease by $123,000 per year. D) Net operating income would decrease by $165,000 per year. Answer: B Feedback: Make Direct materials (18,000 units × $2.20 per unit) ............................ $ 39,600 Direct labor (18,000 units × $5.40 per unit) ................................... 97,200 Variable overhead (18,000 units × $8.00 per unit) ........................ 144,000 Supervisor’s salary (18,000 units × $7.30 per unit) ....................... 131,400
Depreciation of special equipment (not relevant) .......................... Allocated general overhead (avoidable only) ................................ Opportunity cost ............................................................................ Total relevant cost to make ...........................................................
0 5,000 21,000 $438,200
Total relevant cost to make ........................................................... Total cost to buy (18,000 units × $23.30 per unit) ......................... Higher cost to make ......................................................................
$438,200 419,400 $ 18,800
Net operating income would increase by $18,800 per year if the part were bought from the outside supplier. 61. Part A42 is used by Elgin Corporation to make one of its products. A total of 16,000 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:
Direct materials ..................................... Direct labor ............................................ Variable manufacturing overhead ......... Supervisor's salary ................................ Depreciation of special equipment ........ Allocated general overhead...................
Per Unit $7.50 $8.90 $5.50 $5.60 $8.00 $5.30
An outside supplier has offered to make the part and sell it to the company for $30.40 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 A42 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 A42 from the outside supplier? A) Net operating income would decrease by $23,400 per year. B) Net operating income would decrease by $143,400 per year. C) Net operating income would increase by $23,000 per year. D) Net operating income would decrease by $189,400 per year. Answer: A Feedback: Make Direct materials (16,000 units × $7.50 per unit) ............................ $ 120,000 Direct labor (16,000 units × $8.90 per unit) ................................... 142,400 Variable overhead (16,000 units × $5.50 per unit) ........................ 88,000 Supervisor’s salary (16,000 units × $5.60 per unit) ....................... 89,600 Depreciation of special equipment (not relevant) .......................... 0 Allocated general overhead (avoidable only) ................................ 0 Opportunity cost ............................................................................ 23,000 Total relevant cost to make ........................................................... $486,400 Outside purchase price (16,000 units × $30.40 per unit) .............. Total relevant cost to make ........................................................... Higher cost to purchase ................................................................
$463,000 486,400 $23,400
Net operating income would decrease by $23,400 per year if the part were purchased rather than made internally.
62. Barrus Corporation makes 30,000 motors to be used in the productions of its power lawn mowers. The average cost per motor at this level of activity is as follows: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ...........
$9.50 $8.60 $3.75 $4.35
This motor has recently become available from an outside supplier for $25 per motor. If Barrus decides not to make the motors, none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities. If Barrus decides to continue making the motor, how much higher or lower will the company's net operating income be than if the motors are purchased from the outside supplier? Assume that direct labor is a variable cost in this company. A) $36,000 lower B) $207,000 higher C) $94,500 higher D) $130,500 higher Answer: C Feedback: Relevant cost to make: Direct materials ($9.50 per unit × 30,000 units) ................................. $285,000 Direct labor ($8.60 per unit × 30,000 units) ........................................ 258,000 Variable manufacturing overhead ($3.75 per unit × 30,000 units) ..... 112,500 Total relevant cost to make ................................................................ 655,500 Total cost to buy ($25.00 per unit × 30,000 units) .............................. 750,000 Cost saved by making the units ......................................................... $ 94,500 63. Tish Corporation produces a part used in the manufacture of one of its products. The unit product cost is $26, computed as follows: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Unit product cost ................................
$10 7 1 8 $26
An outside supplier has offered to provide the annual requirement of 5,000 of the parts for only $21 each. The company estimates that 75% of the fixed manufacturing overhead cost above could be eliminated if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision. Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be: A) $1 disadvantage B) $5 advantage C) $3 advantage D) $4 disadvantage Answer: C Feedback: Make Direct materials ........................................................................ $10 Direct labor ............................................................................... 7 Variable manufacturing overhead ............................................ 1 Avoidable fixed manufacturing overhead (75% × $8) .............. 6 Relevant cost to make .............................................................. $24
Because the part could be purchased from the outside supplier for $21, but costs $24 to make internally, purchasing the parts from the outside supplier would yield a $3 advantage. 64. Kampmann Corporation is presently making part Z95 that is used in one of its products. A total of 5,000 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:
Direct materials ..................................... Direct labor ............................................ Variable manufacturing overhead ......... Supervisor's salary ................................ Depreciation of special equipment ........ Allocated general overhead...................
Per Unit $3.50 $7.10 $1.30 $5.00 $5.40 $8.60
An outside supplier has offered to make and sell the part to the company for $24.10 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 Z95 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 decrease by $36,000 per year. B) Net operating income would decrease by $34,000 per year. C) Net operating income would increase by $34,000 per year. D) Net operating income would increase by $36,000 per year. Answer: A Feedback: Make Direct materials (5,000 units × $3.50 per unit) .............................. $ 17,500 Direct labor (5,000 units × $7.10 per unit) ..................................... 35,500 Variable overhead (5,000 units × $1.30 per unit) .......................... 6,500 Supervisor’s salary (5,000 units × $5.00 per unit) ......................... 25,000 Depreciation of special equipment (not relevant) .......................... 0 Allocated general overhead (avoidable only) ................................ 0 Total relevant cost to make ........................................................... $84,500 Total cost to buy (5,000 units × $24.10 per unit) ........................... Total relevant cost to make ........................................................... Higher cost to buy .........................................................................
$120,500 84,500 $36,000
Net operating income would decrease by $36,000 per year if the part were purchased from the outside supplier. 65. Teich Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 15,000 of the components each year. The unit product cost of the component according to the company's absorption cost accounting system is given as follows: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Unit product cost ................................
$7.90 2.10 1.10 4.00 $15.10
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 10% is avoidable if the component were bought from the outside supplier; the remainder is not avoidable. In addition, making the
component uses 3 minutes on the machine that is the company's current constraint. If the component were bought, time would be freed up for use on another product that requires 6 minutes on this 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) $15.55 per unit B) $11.50 per unit C) $19.15 per unit D) $15.10 per unit Answer: A Feedback: Make Direct materials ....................................................................................... $7.90 Direct labor .............................................................................................. 2.10 Variable manufacturing overhead ........................................................... 1.10 Fixed manufacturing overhead (10% × $4.00 is avoidable) .................... 0.40 Opportunity cost ($8.10 per unit ÷ 6 minutes per unit) × 3 minute .......... 4.05 Total cost ................................................................................................. $15.55 66. Gwinnett Barbecue Sauce Corporation manufactures a specialty barbecue sauce. Gwinnett has the capacity to manufacture and sell 10,000 cases of sauce each year but is currently only manufacturing and selling 9,000. The following costs relate to annual operations at 9,000 cases:
Variable manufacturing cost ......................... Fixed manufacturing cost ............................. Variable selling and administrative cost ....... Fixed selling and administrative cost ...........
Total Cost $126,000 $45,000 $18,000 $27,000
Gwinnett normally sells its sauce for $30 per case. A local school district is interested in purchasing Gwinnett's excess capacity of 1,000 cases of sauce but only if they can get the sauce for $15 per case. This special order would not affect regular sales or total fixed costs or variable costs per unit. If this special order is accepted, Gwinnett's profits for the year will: A) increase by $600 B) decrease by $1,000 C) decrease by $4,000 D) decrease by $6,600 Answer: B Feedback: $1 Variable manufacturing cost per unit ($126,000 ÷ 9,000 cases) ......... 4 Variable selling and administrative cost ($18,000 ÷ 9,000 cases) ...... $2 Incremental revenue (1,000 cases × $15 per unit) ..................................... Less incremental costs: Variable manufacturing cost (1,000 cases × $14 per unit) ...................... Variable selling and administrative cost (1,000 cases × $2 per unit) ...... Total incremental cost ................................................................................. Incremental net operating income ...............................................................
$15,000 14,000 2,000 16,000 $(1,000)
67. Farnsworth Television makes and sells portable television sets. Each television regularly sells for $200. The following cost data per television are based on a full capacity of 12,000 televisions produced each period: Direct materials ................................................................................... Direct labor ..........................................................................................
$75 $55
Manufacturing overhead (75% variable, 25% unavoidable fixed) .......
$48
A special order has been received by Farnsworth for a sale of 2,500 televisions to an overseas customer. The only selling costs that would be incurred on this order would be $10 per television for shipping. Farnsworth is now selling 7,200 televisions through regular distributors each period. What should be the minimum selling price per television in negotiating a price for this special order? A) $200 B) $166 C) $178 D) $176 Answer: D Feedback: Direct materials ............................................................ $ 75 Direct labor ................................................................... 55 Manufacturing overhead (75% of $48) ......................... 36 Shipping cost ................................................................ 10 $17 Relevant cost ................................................................ 6 The selling price should at least cover the relevant cost. 68. Wiacek Corporation has received a request for a special order of 4,000 units of product F65 for $26.60 each. Product F65's unit product cost is $25.80, determined as follows: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Unit product cost ................................
$ 2.40 7.70 6.80 8.90 $25.80
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 F65 that would increase the variable costs by $3.00 per unit and that would require an investment of $23,000 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) $(31,800) B) $3,800 C) $3,200 D) $(48,400) Answer: B Feedback: Incremental revenue (4,000 units × $26.60 per unit) ............. $106,400 Less incremental costs: Direct materials (4,000 units × $2.40 per unit) .................... 9,600 Direct labor (4,000 units × $7.70 per unit) .......................... 30,800 Variable manufacturing overhead (4,000 units × ($6.80 per unit + $3.00 per unit)) ............. 39,200 Special molds ...................................................................... 23,000 Total incremental cost ............................................................ 102,600 Incremental net operating income .......................................... $3,800 69. A customer has requested that Gamba Corporation fill a special order for 3,000 units of product Q41 for $25.00 a unit. While the product would be modified slightly for the special order, product Q41's normal unit product cost is $21.40:
Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Unit product cost ................................
$ 5.70 3.40 5.80 6.50 $21.40
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 Q41 that would increase the variable costs by $7.00 per unit and that would require an investment of $15,000 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) $(5,700) B) $(21,300) C) $(25,200) D) $10,800 Answer: A Feedback: Incremental revenue (3,000 units × $25.00 per unit) ................ $75,000 Less incremental costs: Direct materials (3,000 units × $5.70 per unit) ....................... 17,100 Direct labor (3,000 units × $3.40 per unit) ............................. 10,200 Variable manufacturing overhead (3,000 units × ($5.80 per unit + $7.00 per unit)) ................ 38,400 Special molds ......................................................................... 15,000 Total incremental cost ............................................................... 80,700 Incremental net operating income ............................................. $(5,700) 70. Hoang Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:
Selling price per unit ................. Variable cost per unit ................ Centiliters of compound W .......
KI $252.42 $199.92 4.20
LH $543.75 $426.30 8.70
RP $222.84 $163.80 3.60
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) RP,KI,LH B) RP,LH,KI C) KI,RP,LH D) LH,RP,KI Answer: B Feedback: KI LH RP Selling price per unit ................................................. $252.42 $543.75 $222.84 Variable cost per unit ................................................ 199.92 426.30 163.80 Contribution margin per unit (a)................................ $52.50 $117.45 $59.04 Amount of the constrained resource required to produce one unit (b) ............................................. 4.20 8.70 3.60 Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. $12.50 $13.50 $16.40 Ranking .................................................................... 3 2 1
71. Manico Corporation produces three products -- X, Y, & Z -- with the following characteristics: X Selling price per unit ................... Variable cost per unit .................. Contribution margin per unit ....... Machine hours per unit ...............
$20 12 $8 5
Y 100% 60% 40%
$16 12 $4 3
Z 100 % 75% 25%
$15 6 $9 6
100 % 40% 60%
The company has only 2,000 machine-hours available each month. If demand exceeds the company's capacity, in what sequence should orders be filled if the company wants to maximize its total contribution margin? A) orders for Z first, X second, and Y third B) orders for X first, Z second, and Y third C) orders for Y first, X second, and Z third D) orders for Z first and no orders for X or Y Answer: B Feedback: X Y Z Contribution margin per unit (a)............................................................ $8 $4 $9 Amount of the constrained resource required to produce one unit (b). 5 3 6 Contribution margin per unit of the constrained resource (a) ÷ (b) ...... $1.60 $1.33 $1.50 Ranking ................................................................................................ 1 3 2 72. Oruro Chemical Corporation manufactures a variety of household cleaners, solvents, and beverages. Because of a recent shortage of mytron, a key ingredient needed for three of its products, the corporation has to decide what amount of each product would be most advantageous to produce. Information related to the three products that use mytron are shown below:
Contribution margin per case .................... Contribution margin ratio ........................... Mytron required per case (in ounces) ....... Maximum monthly demand (in cases) ......
Hand Soap $24 50% 3 500
Paint Remover $20 70% 5 200
Root Beer $12 60% 2 2,000
Assume that Oruro only has 3,000 ounces of mytron available next month. What is the maximum amount of contribution margin that Oruro can generate next month from the three products above given the shortage of mytron? A) $16,000 B) $19,000 C) $21,000 D) $24,000 Answer: C Feedback: Hand Soap Paint Remover Root Beer Contribution margin per case .................... $24 $20 $12 Mytron required per case (in ounces) ....... 3 5 2 Contribution margin per ounce of mytron .. $8 $4 $6 Rank in terms of profitability ...................... 1 3 2 Monthly demand for Hand Soap ................................................................. Amount of constrained resource required to produce one unit of Hand Soap ........................................................................................................ Total amount of constrained resource required to produce Hand Soap ..... Remaining amount of constrained resource available (3,000 ounces – 1,500 ounces) ...............................................................
500 3 1,500 1,500
Monthly demand for Root Beer ................................................................... Amount of constrained resource required to produce one unit of Root Beer ................................................................................................................. Production of Root Beer (1,500 ounces ÷ 2 ounces per unit) ..................... Hand Soap $24 500 $12,000
Contribution margin per case .................... Production ................................................. Total contribution margin ...........................
Root Beer $12 750 $9,000
2,000 2 750 Total
$21,000
73. Consider the following production and cost data for two products, Q and P:
Contribution margin per unit ............... Machine minutes needed per unit ......
Product Q $40 8 minutes
Product P $36 6 minutes
A total of 24,000 machine minutes are available each period and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period? A) $120,000 B) $144,000 C) $456,000 D) $132,000 Answer: B Level of Difficulty: 2 Medium Learning Objective: 10-05 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Product Q Product P Contribution margin per unit (a)................................... $40 $36 Machine minutes per unit (b) ....................................... 8 6 Contribution margin per machine-minute (a) ÷ (b) ...... $5 $6 Rank in terms of profitability ........................................ 2 1 Because there is unlimited demand for each product, all of the available capacity should be used to produce Product P. Production of Product P = 24,000 machine minutes ÷ 6 machine-minutes per unit = 4,000 units Total contribution margin = $36 per unit × 4,000 units = $144,000 [QUESTION] 74. Fahringer Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:
Selling price per unit ................. Variable cost per unit ................ Centiliters of compound W .......
BJ $480.80 $396.00 8.00
XS $365.40 $276.08 5.80
QR $70.29 $51.70 1.10
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) XS,BJ,QR B) QR,BJ,XS
C) BJ,QR,XS D) QR,XS,BJ Answer: D Level of Difficulty: 1 Easy Learning Objective: 10-05 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Selling price per unit ................................................. Variable cost per unit ................................................ Contribution margin per unit (a)................................ Amount of the constrained resource required to produce one unit (b) ............................................. Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. Ranking ....................................................................
BJ $480.80 396.00 $84.80
XS $365.40 276.08 $89.32
QR $70.29 51.70 $18.59
8.00
5.80
1.10
$10.60 3
$15.40 2
$16.90 1
75. Consider the following production and cost data for two products, L and C:
Contribution margin per unit ............... Machine set-ups needed per unit .......
Product L $130 10 set-ups
Product C $120 8 set-ups
The company can only perform 65,000 machine set-ups each period due to limited skilled labor and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period? A) $845,000 B) $975,000 C) $910,000 D) $1,820,000 Answer: B Feedback: Product L Product C Contribution margin per unit ............... $130 $120 Machine set-ups needed per unit ....... 10 8 Contribution margin per set-up ........... $13 $15 Rank in terms of profitability ............... 2 1 Number of units of Product C that can be produced each period = 65,000 set-ups ÷ 8 set-ups per unit = 8,125 units Total contribution margin = $120 per unit × 8,125 units = $975,000 76. The constraint at Johngrass Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:
Selling price per unit ............... Variable cost per unit .............. Minutes on the constraint .......
VT $100.00 $77.76 1.60
UV $301.44 $233.76 4.80
LQ $484.27 $392.63 7.90
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) $11.60 per minute B) $14.10 per minute C) $91.64 per unit D) $22.24 per unit Answer: A Feedback: VT UV LQ Selling price per unit ................................................. $100.00 $301.44 $484.27 Variable cost per unit ................................................ 77.76 233.76 392.63 Contribution margin per unit (a)................................ $22.24 $67.68 $91.64 Amount of the constrained resource required to produce one unit (b) ............................................. 1.60 4.80 7.90 Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. $13.90 $14.10 $11.60 Ranking .................................................................... 2 1 3 The company should be willing to pay up to $11.60 per minute to produce more LQ. 77. Palinkas Cane Products, Inc., processes sugar cane in batches. The company buys a batch of sugar cane from farmers for $80 which is then crushed in the company's plant at a cost of $11. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $22 or processed further for $10 to make the end product industrial fiber that is sold for $30. The cane juice can be sold as is for $41 or processed further for $27 to make the end product molasses that is sold for $101. How much more profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses? A) $(128) B) $3 C) $(28) D) $31 Answer: B Feedback: Combined final sales value ($30 + $101) .......................... $131 Less costs of producing the end products: Cost of sugar cane ......................................................... $80 Cost of crushing ............................................................. 11 Combined costs of further processing ($10 + $27) ........ 37 128 Profit (loss) ........................................................................ $3 78. Crooks Corporation processes sugar beets in batches that it purchases from farmers for $57 a batch. A batch of sugar beets costs $12 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 $28 or processed further for $17 to make the end product industrial fiber that is sold for $67. The beet juice can be sold as is for $39 or processed further for $24 to make the end product refined sugar that is sold for $54. Which of the intermediate products should be processed further? A) beet fiber should be processed into industrial fiber; beet juice should be processed into refined sugar B) beet fiber should be processed into industrial fiber; beet juice should NOT be processed into refined sugar C) beet fiber should NOT be processed into industrial fiber; beet juice should be processed into refined sugar D) beet fiber should NOT be processed into industrial fiber; beet juice should NOT be processed into refined sugar Answer: B Feedback: Industrial Refined Fiber Sugar
Final sales value after further processing .................. Less sales value at split-off point ............................... Incremental revenue from further processing ............ Less cost of further processing .................................. Profit (loss) from further processing ...........................
$67 28 39 17 $22
$54 39 15 24 $(9)
Beet fiber should be processed into industrial fiber. Beet juice should not be processed into refined sugar—it should be sold as is at the split-off point. 79. Kosakowski Corporation processes sugar beets in batches. A batch of sugar beets costs $66 to buy from farmers and $17 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 $13 to make the end product industrial fiber that is sold for $36. The beet juice can be sold as is for $42 or processed further for $20 to make the end product refined sugar that is sold for $84. How much more profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar? A) $(18) B) $4 C) $22 D) $(116) Answer: B Feedback: Combined final sales value ($36 + $84) ..................... $120 Less costs of producing the end products: Cost of further processing ($13 + $20) ................... $33 Cost of crushing ...................................................... 17 Cost of sugar beets ................................................. 66 116 Profit (loss) ................................................................. $4 80. Gary Corporation produces products X, Y, and Z from a single raw material input. Budgeted data for the next month is as follows:
Units produced .............................................. Per unit sales value at split-off ...................... Added processing costs per unit ................... Per unit sales value if processed further .......
Product X 2,500 $20.00 $8.00 $30.00
Product Y 3,000 $22.00 $8.50 $30.00
Product Z 4,000 $25.00 $8.00 $35.00
If the cost of raw material input is $150,000, which of the products should be processed beyond the split-off point? Product X A) no B) no C) yes D) yes Answer: C Feedback:
Product Y yes yes no yes
Product Z no yes yes no
Product X Product Y Final sales value after further processing .................. $30.00 $30.00 Less sales value at split-off point ............................... 20.00 22.00 Incremental revenue from further processing ............ $10.00 $8.00 Less cost of further processing .................................. 8.00 8.50 Profit (loss) from further processing ........................... $2.00 $(0.50) Only Product X and Product Z should be processed beyond the split-off point.
Product Z $35.00 25.00 $10.00 8.00 $2.00
81. Gierlach Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beets costs $27 to buy from farmers and $17 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 $27 or processed further for $14 to make the end product industrial fiber that is sold for $34. The beet juice can be sold as is for $32 or processed further for $29 to make the end product refined sugar that is sold for $58. How much more profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is? A) $(47) B) $(20) C) $(3) D) $(25) Answer: C Feedback: Refined Sugar Final sales value after further processing .................. $58 Less sales value at split-off point............................... 32 Incremental revenue from further processing ............ 26 Less cost of further processing .................................. 29 Profit (loss) from further processing .......................... $(3) 82. Yukon Perfume Corporation manufactures three distinct perfumes (I, II, and III) from a single joint process. The three perfumes can be sold to discount stores in the form they are in at the split-off point. However, if the perfumes are further processed, they can be sold to specialty stores. Costs related to each batch of perfume separation is as follows:
Sales value at split-off point .................... Allocated joint costs ................................. Sales value after further processing ........ Cost of further processing .......................
Perfume I $1,500 $1,000 $3,500 $1,600
Perfume II $800 $1,000 $2,500 $1,400
Perfume III $900 $1,000 $2,000 $500
For which product(s) above would it be more profitable for Yukon to sell after further processing rather than at the split-off point? A) I only B) III only C) I and II only D) II and III only E) I, II, and III Answer: E Feedback: Perfume I Perfume II Perfume III Final sales value after further processing .................. $3,500 $2,500 $2,000 Less sales value at split-off point ............................... 1,500 800 900 Incremental revenue from further processing ............ 2,000 1,700 1,100 Less cost of further processing .................................. 1,600 1,400 500 Profit (loss) from further processing ........................... $400 $300 $600 83. Two products, LB and NH, emerge from a joint process. Product LB has been allocated $30,800 of the total joint costs of $44,000. A total of 2,000 units of product LB are produced from the joint process. Product LB can be sold at the split-off point for $13 per unit, or it can be processed further for an additional total cost of $14,000 and then sold for $15 per unit. If product LB 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 splitoff point?
A) $16,000 more profit B) $20,800 more profit C) $40,800 less profit D) $10,000 less profit Answer: D Feedback: Final sales value after further processing ($15 per unit × 2,000 units) ....... Less sales value at split-off point ($13 per unit × 2,000 units) .................... Incremental revenue from further processing ............................................. Less cost of further processing ................................................................... Profit (loss) from further processing ............................................................
Product LB $30,000 26,000 4,000 14,000 $(10,000)
84. Arenz 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 $15. 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 $18 to make the end product industrial fiber that is sold for $40. The cane juice can be sold as is for $41 or processed further for $25 to make the end product molasses that is sold for $72. Which of the intermediate products should be processed further? A) Cane fiber should be processed into industrial fiber; Cane juice should be processed into molasses B) Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be processed into molasses C) Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed into molasses D) Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into molasses Answer: D Feedback: Industrial Fiber Molasses Final sales value after further processing .................. $40 $72 Less sales value at split-off point ............................... 24 41 Incremental revenue from further processing ............ 16 31 Less cost of further processing .................................. 18 25 Profit (loss) from further processing ........................... $ (2) $6 Cane fiber should NOT be processed into industrial fiber but cane juice should be processed into molasses. 85. Cybil Baunt just inherited a 1958 Chevy Impala from her late Aunt Joop. Aunt Joop purchased the car 40 years ago for $6,000. Cybil is either going to sell the car for $8,000 or have it restored and sell it for $22,000. The restoration will cost $6,000. Cybil would be better off by: A) $2,000 to have the vehicle restored B) $6,000 to have the vehicle restored C) $8,000 to have the vehicle restored D) $10,000 to have the vehicle restored Answer: C Feedback: Final sales value after restoration .............................. $22,000 Less sales value before restoration ........................... 8,000 Incremental revenue from restoration ........................ 14,000 Less cost of restoration .............................................. 6,000 Profit (loss) from restoration ....................................... $8,000
Reference: CHRef1
Jebb's Lettuce Stand currently sells 60,000 heads of lettuce each year for $1.00 per head. Jebb is thinking of expanding operations and serving the customer better by purchasing a "slice and dice" machine that will cut up each head of lettuce into bite-size pieces that can be used for salads. Jebb expects he will then be able to sell his lettuce for $1.70 per head. Jebb has prepared the following analysis for each option based on sales of 60,000 heads of lettuce: Per Head
Total
Selling Unsliced Lettuce: Variable costs ........................ Fixed costs ............................ Total.......................................
$0.25 0.30 $0.55
$15,000 18,000 $33,000
Selling Sliced Lettuce: Variable costs ........................ Fixed costs ............................ Total.......................................
$0.30 0.90 $1.20
$18,000 54,000 $72,000
86. Based on the information above, what will be Jebb's increase or decrease in profit for the year if he chooses to start slicing up the lettuce instead of selling it whole? A) $3,000 increase B) $3,000 decrease C) $12,000 decrease D) $30,000 increase Answer: A Level of Difficulty: 2 Medium Feedback: Final sales value after further processing (60,000 heads × $1.70 per head) ...... $102,000 Less sales value before further processing (60,000 heads × $1.00 per head) .... 60,000 Incremental revenue from further processing ...................................................... 42,000 Less cost of further processing ($72,000 – $33,000) ........................................... 39,000 Profit (loss) from further processing ..................................................................... $ 3,000 87. Assume that Jebb is currently selling only 50,000 heads of lettuce per year instead of 60,000. Under this scenario, what will be Jebb's increase or decrease in profit for the year if he chooses to start slicing up the lettuce instead of selling it whole? A) $2,000 increase B) $2,500 decrease C) $3,000 increase D) $3,500 decrease Answer: D Feedback: Final sales value after further processing (50,000 heads × $1.70 per head) ...... $85,000 Less sales value before further processing (50,000 heads × $1.00 per head) .... 50,000 Incremental revenue from further processing ...................................................... 35,000 Less cost of further processing* ........................................................................... 38,500 Profit (loss) from further processing ..................................................................... $(3,500) * [($0.30 per head × 50,000 heads) + $54,000] – [($0.25 per head × 50,000 heads) + $18,000] = $69,000 – $30,500 = $38,500
Nesmith Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below:
Materials costs ..........
Alternative A $33,000
Alternative B $53,000
Processing costs ....... Equipment rental ....... Occupancy costs .......
$38,000 $11,000 $18,000
$57,000 $11,000 $29,000
88. 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) Both materials costs and processing costs are relevant B) Only materials costs are relevant C) Neither materials costs nor processing costs are relevant D) Only processing costs are relevant Answer: A Feedback: Both costs are relevant because they differ between the alternatives. 89. What is the differential cost of Alternative B over Alternative A, including all of the relevant costs? A) $150,000 B) $100,000 C) $125,000 D) $50,000 Answer: D Feedback: Differential Alternative A Alternative B Costs Materials costs........... $ 33,000 $ 53,000 $20,000 Processing costs ....... 38,000 57,000 19,000 Equipment rental ....... 11,000 11,000 0 Occupancy costs ....... 18,000 29,000 11,000 Total expenses .......... $100,000 $150,000 $50,000
Tawstir Corporation has 800 obsolete personal computers that are carried in inventory at a total cost of $1,100,000. If these computers are upgraded at a total cost of $40,000, they can be sold for a total of $750,000. As an alternative, the computers can be sold in their present condition for $690,000. 90. The sunk cost in this situation is: A) $40,000 B) $750,000 C) $690,000 D) $1,100,000 Answer: D Feedback: The carrying value of the computers in inventory is their original cost, which is a sunk cost. 91. What is the net advantage or disadvantage to the company from upgrading the computers rather than selling them in their present condition? A) $20,000 advantage B) $20,000 disadvantage C) $60,000 advantage D) $60,000 disadvantage Answer: A Feedback: Sales value of upgraded computers ........................... $750,000 Less sales value as is ................................................ 690,000 Incremental revenue from upgrading ......................... 60,000 Less cost of upgrading ............................................... 40,000
Profit (loss) from upgrading ........................................
$ 20,000
92. Suppose the selling price of the upgraded computers has not been set. At what selling price per unit would the company be as well off upgrading the computers as if it just sold the computers in their present condition? A) $86.50 B) $887.50 C) $912.50 D) $562.50 Answer: C Feedback: (Price per computer × 800 computers) – $40,000 > $690,000 Price per computer × 800 computers > $690,000 + $40,000 Price per computer × 800 computers > $730,000 Price per computer > $730,000 ÷ 800 computers = $912.50 per computer
Two alternatives, code-named X and Y, are under consideration at Brahler Corporation. Costs associated with the alternatives are listed below.
Materials costs .......... Processing costs ....... Equipment rental ....... Occupancy costs .......
Alternative X $39,000 $44,000 $10,000 $15,000
Alternative Y $39,000 $58,000 $10,000 $29,000
93. 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) Only processing costs are relevant B) Both materials costs and processing costs are relevant C) Only materials costs are relevant D) Neither materials costs nor processing costs are relevant Answer: A Feedback: The materials costs do not differ between the alternatives and hence are not relevant. The processing costs do differ between the alternatives and hence are relevant. 94. What is the differential cost of Alternative Y over Alternative X, including all of the relevant costs? A) $122,000 B) $136,000 C) $108,000 D) $28,000 Answer: D Feedback: Differential Alternative X Alternative Y Costs Materials costs........... $ 39,000 $ 39,000 $ 0 Processing costs ....... 44,000 58,000 14,000 Equipment rental ....... 10,000 10,000 0 Occupancy costs ....... 15,000 29,000 14,000 Total ........................... $108,000 $136,000 $28,000
The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below:
Sales.................................................................. Variable expenses ............................................. Fixed manufacturing expenses ......................... Fixed selling and administrative expenses ........
$890,000 $374,000 $329,000 $258,000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $184,000 of the fixed manufacturing expenses and $200,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued. 95. According to the company's accounting system, what is the net operating income earned by product V41B? Include all costs in this calculation—whether relevant or not. A) $71,000 B) $516,000 C) $(516,000) D) $(71,000) Answer: D Feedback: Sales.................................................................. $890,000 Less expenses: Variable expenses ......................................... $374,000 Fixed manufacturing expenses ...................... 329,000 Fixed selling and administrative expenses .... 258,000 961,000 Net operating income (loss) .............................. $(71,000) 96. What would be the effect on the company's overall net operating income if product V41B were dropped? A) Overall net operating income would increase by $71,000. B) Overall net operating income would increase by $132,000. C) Overall net operating income would decrease by $132,000. D) Overall net operating income would decrease by $71,000. Answer: C Feedback: Sales............................................................... $890,000 Variable expenses .......................................... 374,000 Contribution margin ........................................ 516,000 Less avoidable fixed expenses: Fixed manufacturing expenses ................... $184,000 Fixed selling and administrative expenses . 200,000 384,000 Effect on net operating income ...................... $132,000 Net operating income would drop by $132,000 if this product were dropped.
The Flint Fan Corporation is considering the addition of a new model fan, the F-27, to its current products. The expected cost and revenue data for the F-27 fan are as follows: Annual sales ............................................ Unit selling price ...................................... Unit variable costs: Production ............................................ Selling .................................................. Avoidable fixed costs per year: Production ............................................ Selling .................................................. Allocated common fixed costs per year ..
4,000 units $58 $34 $4 $20,000 $30,000 $55,000
If the F-27 is added as a new product, it is expected that the contribution margin of other products will drop by $7,000 per year. 97. If the F-27 product is added next year, the change in operating income should be: A) $30,000 increase B) $5,000 decrease C) $23,000 increase D) $15,000 increase Answer: C Feedback: Sales (4,000 units × $58 per unit) ............................................. $232,000 Less costs: Variable production costs (4,000 units × $34 per unit) .......... 136,000 Variable selling costs (4,000 units × $4 per unit) ................... 16,000 Avoidable fixed production costs ........................................... 20,000 Avoidable fixed selling costs .................................................. 30,000 Decline in existing product line contribution margin 7,000 Total cost ................................................................................... 209,000 Net operating income (loss) ...................................................... $23,000 98. At what selling price would the new product be just breaking even? A) $52.25 per unit B) $50.50 per unit C) $55.75 per unit D) $49.00 per unit Answer: A Feedback: Costs: Variable production costs (4,000 units × $34 per unit) .......... $136,000 Variable selling costs (4,000 units × $4 per unit) ................... 16,000 Avoidable fixed production costs ........................................... 20,000 Avoidable fixed selling costs .................................................. 30,000 Decline in existing product line contribution margin 7,000 Total cost ................................................................................... $209,000 The selling price would have to cover all of the costs of $209,000. On a per unit basis, the cost is $52.25 per unit (= $209,000 ÷ 4,000 units).
The management of Cackowski Corporation has been concerned for some time with the financial performance of its product I11S and has considered discontinuing it on several occasions. Data from the company's accounting system appear below: Sales.................................................................. Variable expenses ............................................. Fixed manufacturing expenses ......................... Fixed selling and administrative expenses ........
$760,000 $350,000 $258,000 $198,000
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $185,000 of the fixed manufacturing expenses and $132,000 of the fixed selling and administrative expenses are avoidable if product I11S is discontinued. 99. According to the company's accounting system, what is the net operating income earned by product I11S? Include all costs in this calculation—whether relevant or not. A) $410,000
B) $46,000 C) $(46,000) D) $(410,000) Answer: C Feedback: $760,000 Sales.................................................................. Less expenses: Variable expenses ......................................... Fixed manufacturing expenses ...................... Fixed selling and administrative expenses .... Net operating income (loss) ..............................
$350,000 258,000 198,000
806,000 $(46,000)
100. What would be the effect on the company's overall net operating income if product I11S were dropped? A) Overall net operating income would decrease by $46,000. B) Overall net operating income would increase by $93,000. C) Overall net operating income would increase by $46,000. D) Overall net operating income would decrease by $93,000. Answer: D Feedback: Sales............................................................... $760,000 Variable expenses .......................................... 350,000 Contribution margin ........................................ 410,000 Less avoidable fixed expenses: Fixed manufacturing expenses ................... $185,000 Fixed selling and administrative expenses . 132,000 317,000 Effect on net operating income ...................... $ 93,000 Overall net operating income would decrease by $93,000.
Bailey Corporation manufactures and sells a number of products, including Product G. Results for last year for the manufacture and sale of Product G are as follows: Sales........................................................ Less expenses: Variable production costs ..................... Sales commissions .............................. Salary of product manager ................... Fixed product advertising ..................... Fixed manufacturing overhead ............ Net operating loss ...................................
$750,000 $450,00 0 110,000 95,000 80,000 70,000
805,000 $(55,000)
Bailey is trying to decide whether or not to discontinue the manufacture and sale of Product G. All expenses other than fixed manufacturing overhead are avoidable if the product is dropped. None of the fixed manufacturing overhead is avoidable. 101. Assume that dropping Product G will have no effect on other product lines. If the company drops Product G, the change in annual net operating income due to this decision will be a: A) $10,000 decrease B) $55,000 increase C) $15,000 decrease D) $40,000 decrease Answer: C
Feedback: Sales...................................................... Less avoidable expenses: Variable production costs ................... Sales commissions ............................ Salary of product manager ................. Fixed product line advertising ............ Profit ......................................................
$750,000 $450,000 110,000 95,000 80,000
735,000 $ 15,000
The company would lose $750,000 in sales while saving $735,000 in expenses, so the net effect would be a $15,000 decrease in net operating income. 102. Assume that dropping Product G would result in a $40,000 increase in the contribution margin of other product lines. If Bailey chooses to drop Product G, then the change in net operating income next year due to this action will be a: A) $95,000 increase B) $95,000 decrease C) $25,000 decrease D) $25,000 increase Answer: D Feedback: Sales...................................................... $750,000 Less avoidable expenses: Variable production costs ................... $450,000 Sales commissions ............................ 110,000 Salary of product manager ................. 95,000 Fixed product line advertising ............ 80,000 735,000 Profit ...................................................... $ 15,000 The company would lose $750,000 in sales while saving $735,000 in expenses—a net effect of a $15,000 decrease. However, this would be more than offset by the $40,000 increase in contribution margin of other products, so the net effect would be a $25,000 increase in net operating income.
Hermenegildo Corporation is presently making part P42 that is used in one of its products. A total of 10,000 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:
Direct materials ..................................... Direct labor ............................................ Variable overhead ................................. Supervisor's salary ................................ Depreciation of special equipment ........ Allocated general overhead...................
Per Unit $4.20 $4.40 $7.70 $6.70 $3.10 $3.30
An outside supplier has offered to produce and sell the part to the company for $23.90 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 $4,000 of these allocated general overhead costs would be avoided. 103. If management decides to buy part P42 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 $5,000 per year. B) Net operating income would decline by $59,000 per year.
C) Net operating income would decline by $51,000 per year. D) Net operating income would decline by $55,000 per year. Answer: A Feedback: Direct materials (10,000 units × $4.20 per unit) ............................ Direct labor (10,000 units × $4.40 per unit) ................................... Variable overhead (10,000 units × $7.70 per unit) ........................ Supervisor’s salary (10,000 units × $6.70 per unit) ....................... Depreciation of special equipment (not relevant) .......................... Allocated general overhead (avoidable only) ................................ Outside purchase price (10,000 units × $23.90 per unit) .............. Total cost .......................................................................................
Make $42,000 44,000 77,000 67,000 0 10,000 $234,000
Buy
$239,000 $239,000
Net operating income would decline by $5,000 per year. 104. In addition to the facts given above, assume that the space used to produce part P42 could be used to make more of one of the company's other products, generating an additional segment margin of $13,000 per year for that product. What would be the impact on the company's overall net operating income of buying part P42 from the outside supplier and using the freed space to make more of the other product? A) Net operating income would increase by $13,000 per year. B) Net operating income would increase by $8,000 per year. C) Net operating income would decline by $42,000 per year. D) Net operating income would decline by $68,000 per year. Answer: B Feedback: Make Buy Direct materials (10,000 units × $4.20 per unit) ............................ $42,000 Direct labor (10,000 units × $4.40 per unit) ................................... 44,000 Variable overhead (10,000 units × $7.70 per unit) ........................ 77,000 Supervisor’s salary (10,000 units × $6.70 per unit) ....................... 67,000 Depreciation of special equipment (not relevant) .......................... 0 Allocated general overhead (avoidable only) ................................ 10,000 Outside purchase price (10,000 units × $23.90 per unit) .............. $239,000 Opportunity cost (13,000) Total cost ....................................................................................... $234,000 $226,000 Buying the part rather than making it would increase net operating income by $8,000 per year.
Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs that would be allocated to this part amount to $300,000 per year. 105. The change in the company’s overall annual net operating income that would result from making the component, rather than buying it, would be: A) $17,000 increase. B) $1,000 decrease. C) $14,000 decrease. D) $5,000 increase. Answer: B Feedback:
Variable production cost (5,000 units × $4.10 per unit) ................ Additional supervisory costs .......................................................... Total relevant cost .........................................................................
Make $20,500 18,000 $38,500
The cost of buying the part externally is $37,500 (= 5,000 units × $7.50 per unit). Therefore, the company would incur additional costs of $1,000 to make the part and this would decrease net operating income by the same amount. 106. What would the annual cost of additional supervision have to be in order for Hadley to be indifferent between making or buying the component? (Assume everything else remains the same.) A) $20,000 B) $19,000 C) $18,000 D) $17,000 Answer: D Feedback: Cost to buy the part = 5,000 units × $7.50 per unit = $37,500 Cost to make the part = Variable production cost + Additional supervisory costs = (5,000 units × $4.10 per unit) + Additional supervisory costs = $20,500 + Additional supervisory costs The company would be indifferent between making the part or buying it on the outside market if the cost of making it equals the cost of buying it. Cost to buy the part = Cost to make the part $37,500 = $20,500 + Additional supervisory costs Additional supervisory costs = $37,500 – $20,500 = $17,000
The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 100,000 wheels annually are: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ...........
$30,000 $50,000 $20,000 $70,000
An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45,000 per year. Direct labor is a variable cost. 107. If Talbot chooses to buy the wheel from the outside supplier, then annual net operating income would: A) increase by $35,000. B) decrease by $10,000. C) increase by $45,000. D) increase by $70,000. Answer: A Feedback: Make Buy Direct materials ........................................................................ $ 30,000 Direct labor .............................................................................. 50,000 Variable manufacturing overhead ............................................ 20,000 Avoidable fixed manufacturing overhead ................................. 15,000 Outside purchase price (100,000 wheels × $1.25 per wheel) .. $125,000
Opportunity cost ....................................................................... Total cost ..................................................................................
$115,000
(45,000) $80,000
Annual net operating income would increase by $35,000. 108. At what purchase price for the wheels would Talbot be indifferent between making or buying the wheels? A) $1.70 per wheel B) $1.60 per wheel C) $1.55 per wheel D) $1.15 per wheel Answer: B Feedback: Relevant cost to make: Direct materials .......................................................................... $ 30,000 Direct labor ................................................................................. 50,000 Variable manufacturing overhead .............................................. 20,000 Avoidable fixed manufacturing overhead ................................... 15,000 Total relevant cost to make ........................................................... 115,000 Opportunity cost ............................................................................ 45,000 Total ............................................................................................... $160,000 The company would be indifferent at a price of $1.60 per wheel ($160,000 ÷ 100,000 wheels).
Rama Corporation is presently making part J56 that is used in one of its products. A total of 4,000 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:
Direct materials ..................................... Direct labor ............................................ Variable overhead ................................. Supervisor's salary ................................ Depreciation of special equipment ........ Allocated general overhead...................
Per Unit $1.80 $7.80 $7.90 $2.30 $6.90 $6.60
An outside supplier has offered to produce and sell the part to the company for $30.80 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. 109. If management decides to buy part J56 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 increase by $44,000 per year. B) Net operating income would increase by $10,000 per year. C) Net operating income would decline by $10,000 per year. D) Net operating income would decline by $44,000 per year. Answer: D Feedback: Make Direct materials (4,000 units × $1.80 per unit) .............................. $ 7,200 Direct labor (4,000 units × $7.80 per unit) ..................................... 31,200 Variable overhead (4,000 units × $7.90 per unit) .......................... 31,600 Supervisor’s salary (4,000 units × $2.30 per unit) ......................... 9,200
Depreciation of special equipment (not relevant) .......................... Allocated general overhead (not avoidable) .................................. Total relevant cost to make ...........................................................
0 0 $79,200
Total cost to purchase from the outside supplier (4,000 units × $30.80 per unit) ................................................. Total relevant cost to make ........................................................... Additional cost to purchase ...........................................................
$123,200 79,200 $ 44,000
Because of the higher cost to purchase, net operating income would decline by $44,000 per year. 110. In addition to the facts given above, assume that the space used to produce part J56 could be used to make more of one of the company's other products, generating an additional segment margin of $13,000 per year for that product. What would be the impact on the company's overall net operating income of buying part J56 from the outside supplier and using the freed space to make more of the other product? A) Net operating income would decline by $31,000 per year. B) Net operating income would decline by $23,000 per year. C) Net operating income would increase by $3,000 per year. D) Net operating income would increase by $13,000 per year. Answer: A Feedback: Make Direct materials (4,000 units × $1.80 per unit) .............................. $ 7,200 Direct labor (4,000 units × $7.80 per unit) ..................................... 31,200 Variable overhead (4,000 units × $7.90 per unit) .......................... 31,600 Supervisor’s salary (4,000 units × $2.30 per unit) ......................... 9,200 Depreciation of special equipment (not relevant) .......................... 0 Allocated general overhead (not avoidable) .................................. 0 Opportunity cost 13,000 Total relevant cost to make ........................................................... $92,200 Total cost to purchase from the outside supplier (4,000 units × $30.80 per unit) ................................................. Total relevant cost to make ........................................................... Additional cost to purchase ...........................................................
$123,200 92,200 $ 31,000
Because of the higher cost of purchasing, net operating income would decline by $31,000 per year.
Aholt Corporation makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Unit product cost ................................
$11.30 22.70 1.20 24.70 $59.90
An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.
111. How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part? A) $38.00 per unit B) $59.90 per unit C) $35.20 per unit D) $22.70 per unit Answer: A Feedback: Direct materials ......................................................................... $11.30 Direct labor ................................................................................ 22.70 Variable manufacturing overhead ............................................. 1.20 Avoidable fixed manufacturing overhead ($24.70 – $21.90) .... 2.80 Total relevant cost to make ....................................................... $38.00 112. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? A) $264,000 B) $(328,000) C) $548,000 D) $(64,000) Answer: D Feedback: Relevant cost to make: Direct materials ......................................................................... $11.30 Direct labor ................................................................................ 22.70 Variable manufacturing overhead ............................................. 1.20 Avoidable fixed manufacturing overhead ($24.70 – $21.90) .... 2.80 Total relevant cost to make ....................................................... $38.00 Analysis of purchasing rather than making: Cost savings ($38.00 per unit × 40,000 units) ............................ Cost to purchase ($46.20 per unit × 40,000 units) ...................... Additional contribution margin from alternative use of facilities .. Net cost of purchasing .................................................................
$1,520,000 (1,848,000) 264,000 $ (64,000)
113. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year? A) $6.60 per unit B) $44.60 per unit C) $59.90 per unit D) $66.50 per unit Answer: B per unit Feedback: Relevant cost to make: Direct materials ................................................................................... $11.30 Direct labor .......................................................................................... 22.70 Variable manufacturing overhead ....................................................... 1.20 Avoidable fixed manufacturing overhead ($24.70 – $21.90) .............. 2.80 Total relevant cost to make ................................................................. 38.00 Additional contribution margin from alternative use of facilities ($264,000 ÷ 40,000 units) ............................................................... 6.60 Maximum amount the company would be willing to pay ..................... $44.60
Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: Direct materials ............................................... Direct labor ...................................................... Variable manufacturing overhead ................... Fixed manufacturing overhead ........................ Variable selling & administrative expense ....... Fixed selling & administrative expense ...........
$42.60 $8.10 $1.10 $17.30 $1.80 $8.00
The normal selling price of the product is $86.10 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would not change the total amount of the company’s fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. 114. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $76.40 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? A) $(17,000) B) $13,400 C) $48,000 D) $(5,000) Answer: C Feedback: Incremental revenue (2,000 units × $76.40 per unit) ....................................... $152,800 Less incremental costs: Direct materials (2,000 units × $42.60 per unit) ............................................ 85,200 Direct labor (2,000 units × $8.10 per unit) .................................................... 16,200 Variable manufacturing overhead (2,000 units × $1.10 per unit) ................. 2,200 Fixed manufacturing overhead ..................................................................... 0 Variable selling & administrative expense (2,000 units × $0.60 per unit) ..... 1,200 Fixed selling & administrative expense ......................................................... 0 Total incremental cost ...................................................................................... 104,800 Incremental net operating income .................................................................... $48,000 115. What is the contribution margin per unit for normal sales? A) $32.50 B) $8.40 C) $9.70 D) $7.20 Answer: A Feedback: Direct materials ................................................... Direct labor .......................................................... Variable manufacturing overhead ....................... Variable selling & administrative expense ........... Variable cost per unit ...........................................
$42.60 8.10 1.10 1.80 $53.60
Normal selling price per unit ................................ Variable cost per unit on normal sales ................ Unit contribution margin on normal sales ............
$86.10 53.60 $32.50
116. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 700 units for regular customers. The minimum acceptable price per unit for the special order is closest to: A) $86.10 B) $78.90 C) $69.10 D) $63.78 Answer: D Feedback: Variable cost on normal sales: Direct materials ................................................... $42.60 Direct labor .......................................................... 8.10 Variable manufacturing overhead ....................... 1.10 Variable selling & administrative expense ........... 1.80 Variable cost per unit on normal sales ................ $53.60 Normal selling price per unit ................................ Variable cost per unit on normal sales ................ Unit contribution margin on normal sales ............
$86.10 53.60 $32.50
Variable cost on special order: Direct materials ................................................... Direct labor .......................................................... Variable manufacturing overhead ....................... Variable selling & administrative expense ........... Variable cost per unit on special order ................
$42.60 8.10 1.10 0.60 $52.40
Minimum acceptable price: Unit contribution margin on normal sales (a) ................. Displaced normal sales (b) ............................................ Lost contribution margin displaced sales (a) × (b) ......... Total variable cost on special order ($52.40 per unit × 2,000 units) ................................... Total (c) .......................................................................... Number of units in special order (d) ............................... Minimum acceptable price on special order (c) ÷ (d) .....
$32.50 700 $22,750 104,800 $127,550 2,000 $63.775
Dockwiller Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as D53. Data concerning this product are given below:
Selling price ..................................................... Direct materials ............................................... Direct labor ...................................................... Variable manufacturing overhead ................... Fixed manufacturing overhead ........................ Variable selling expense ................................. Fixed selling and administrative expense .......
Per Unit $150 $26 $3 $1 $17 $2 $18
The above per unit data are based on annual production of 8,000 units of the component. Direct labor is a variable cost. 117. The company has received a special, one-time-only order for 500 units of component D53. 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 Dockwiller has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit below which the company should not accept the special order? A) $67 per unit B) $30 per unit C) $150 per unit D) $47 per unit Answer: B Feedback: The selling price for the special order would have to at least cover the variable cost per unit of $30. Direct materials................................................... $26 Direct labor ......................................................... 3 Variable manufacturing overhead ...................... 1 Variable cost per unit .......................................... $30 118. The company has received a special, one-time-only order for 300 units of component D53. 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 Dockwiller has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $1,800. What is the minimum price per unit on the special order below which the company should not go? A) $73 per unit B) $36 per unit C) $53 per unit D) $6 per unit Answer: B Feedback: Variable cost per unit for special order: Direct materials................................................... $26 Direct labor ......................................................... 3 Variable manufacturing overhead ...................... 1 Variable cost per unit for special order ............... $30 The selling price for the special order would have to cover both the $26 variable cost per unit and the opportunity cost of $6,900. Variable cost per unit for special order ............... Opportunity cost ($1,800 ÷ 300 units) ................ Minimum selling price .........................................
$30 6 $36
119. Refer to the original data in the problem. What is the current contribution margin per unit for component D53 based on its selling price of $150 and its annual production of 8,000 units? A) $83 per unit B) $118 per unit C) $32 per unit D) $120 per unit Answer: B Feedback: Selling price ........................................................ $150 Direct materials ................................................... $26 Direct labor ......................................................... 3 Variable manufacturing overhead....................... 1 Variable selling expense ..................................... 2 32 Contribution margin per unit ............................... $118
The Molis Corporation has the capacity to produce 15,000 haks each month. Current regular production and sales are 10,000 haks per month at a selling price of $15 each. Based on this level of activity, the following unit costs are incurred: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Variable selling expense .................... Fixed administrative expense .............
$5.00 $3.00 $0.75 $1.50 $0.25 $1.00
The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 10,000 to 15,000 haks per month. Direct labor is a variable cost. The Molis Corporation has received a special order from a customer who wants to pay a reduced price of $10 per hak. There would be no selling expense in connection with this special order. And, this order would have no effect on the company's other sales. 120. Suppose the special order is for 4,000 haks this month. If this offer is accepted by Molis, the company's operating income for the month will: A) increase by $6,000 B) decrease by $6,000 C) increase by $5,000 D) decrease by $5,000 Answer: C Feedback: Incremental revenue (4,000 units × $10.00 per unit) .................................. $40,000 Less incremental costs: Direct materials (4,000 units × $5.00 per unit) ......................................... 20,000 Direct labor (4,000 units × $3.00 per unit) ............................................... 12,000 Variable manufacturing overhead (4,000 units × $0.75 per unit) ............ 3,000 Total incremental cost ................................................................................. 35,000 Incremental net operating income ............................................................... $5,000 121. Suppose the special order is for 6,000 haks this month and thus some regular sales would have to be given up. If this offer is accepted by Molis, the company's operating income for the month will: A) increase by $6,000 B) increase by $7,500 C) increase by $5,000 D) increase by $1,500 Answer: D Feedback: Incremental revenue [(6,000 units × $10.00 per unit) – (1,000 units × $15 per unit)] .................................................................................................. $45,000 Less incremental costs: Direct materials (5,000 units × $5.00 per unit) ......................................... 25,000 Direct labor (5,000 units × $3.00 per unit) ............................................... 15,000 Variable manufacturing overhead (5,000 units × $0.75 per unit) ............ 3,750 Total incremental cost ................................................................................. 43,750 Incremental effect before the savings in selling expenses 1,250 Plus savings in selling expenses (1,000 units × $0.25 per unit) 250 Incremental net operating income ............................................................... $1,500
The following are the Jensen Corporation's unit costs of making and selling an item at a volume of 1,000 units per month (which represents the company's capacity): Manufacturing: Direct materials ..................... Direct labor ............................ Variable overhead ................. Fixed overhead ..................... Selling and Administrative: Variable ................................. Fixed .....................................
$1.00 $2.00 $0.50 $0.40 $2.00 $0.80
Present sales amount to 700 units per month. An order has been received from a customer in a foreign market for 100 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 700 units and 1,000 units. The variable selling and administrative expenses would have to be incurred on this special order as well as for all other sales. Direct labor is a variable cost. 122. How much will the company's profits be increased or (decreased) if it prices the 100 units at $7 each? A) $(30) B) $150 C) $0 D) $310 Answer: B Feedback: Incremental revenue (100 units × $7.00 per unit) ................................... $700 Less incremental costs: Direct materials (100 units × $1.00 per unit) ........................................ $100 Direct labor (100 units × $2.00 per unit) .............................................. 200 Variable manufacturing overhead (100 units × $0.50 per unit) ........... 50 Variable selling and administrative (100 units × $2.00 per unit) .......... 200 550 Incremental net operating income ........................................................... $150 123. Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company's other sales. Which of the following costs is relevant in this decision? A) $3.50 variable manufacturing cost B) $3.90 unit product cost C) $2.00 variable selling and administrative cost D) $6.70 full cost Answer: C Feedback: The manufacturing costs are all sunk costs and are not relevant.
The Melrose Corporation produces a single product, Product C. Melrose has the capacity to produce 70,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Variable selling expense .................... Fixed selling expense .........................
$20 $17 $13 $14 $12 $8
The regular selling price of one unit of Product C is $100. A special order has been received by Melrose from Moore Corporation to purchase 7,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost $10,500 and will have no use after the special order is filled. Assume that direct labor is a variable cost. 124. Assume that Melrose expects to sell 60,000 units of Product C to regular customers next year. At what selling price for the 7,000 units would Melrose be economically indifferent between accepting and rejecting the special order from Moore? A) $53.00 B) $54.50 C) $75.00 D) $76.50 Answer: B Feedback: Incremental costs: Direct materials (7,000 units × $20 per unit) ............................................ $140,000 Direct labor (7,000 units × $17 per unit) .................................................. 119,000 Variable manufacturing overhead (7,000 units × $13 per unit) ............... 91,000 Variable selling expenses (7,000 units × 0.25 × $12 per unit) ................. 21,000 Special machine ....................................................................................... 10,500 Total incremental cost ................................................................................. $381,500 Units in special order ................................................................................... 7,000 Incremental cost per unit ............................................................................. $54,50 125. Assume Melrose expects to sell 60,000 units of Product C to regular customers next year. If Moore company offers to buy the 7,000 special units at $90 per unit, the effect of accepting the special order on Melrose's net operating income for next year will be: A) $42,000 increase B) $54,000 decrease C) $105,000 increase D) $248,500 increase Answer: D Feedback: Incremental revenue (7,000 units × $90 per unit) ....................................... $630,000 Less incremental costs: Direct materials (7,000 units × $20 per unit) ............................................ 140,000 Direct labor (7,000 units × $17 per unit) .................................................. 119,000 Variable manufacturing overhead (7,000 units × $13 per unit) ............... 91,000 Variable selling expenses (7,000 units × 0.25 × $12 per unit) ................. 21,000 Special machine ....................................................................................... 10,500 Total incremental cost ................................................................................. 381,500 Incremental net operating income ............................................................... $248,500 126. Suppose Melrose can sell 68,000 units of Product C to regular customers next year. If Moore Corporation offers to buy the special order units at $90 per unit, the effect of accepting the special order for 7,000 units on Melrose's net operating income for next year will be a: A) $79,500 increase B) $104,000 increase C) $114,500 increase D) $294,000 increase Answer: A Feedback:
Because only 70,000 units can be produced and the demand from regular customers is 68,000 units, only 2,000 units can be produced with the spare capacity. Therefore, the special order of 7,000 units would reduce sales to regular customers by 5,000 units. Incremental revenue [(7,000 units × $90 per unit) – (5,000 units × $100 per unit)] .................................................................................................. $130,000 Less incremental costs: Direct materials (2,000 units × $20 per unit) ............................................ 40,000 Direct labor (2,000 units × $17 per unit) .................................................. 34,000 Variable manufacturing overhead (2,000 units × $13 per unit) ............... 26,000 Variable selling expenses [(7,000 units × 0.25 × $12 per unit) – (5,000 units × $12 per unit)] ............................................................................ (39,000) Special machine ....................................................................................... 10,500 Total incremental cost ................................................................................. 50,500 Incremental net operating income ............................................................... $79,500
The Madison Corporation produces three products with the following costs and selling prices: P r o d u c t Product A B C Selling price per unit ................ $15 $20 $20 Variable cost per unit ............... $8 $10 $12 Direct labor hours per unit ....... 1.0 1.5 2.0 Machine hours per unit ............ 3.5 2.0 2.5 127. If Madison has a limit of 10,000 direct labor hours but no limit on machine hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is: A) A, B, C B) B, C, A C) C, A, B D) A, C, B Answer: A Feedback: A B C Selling price per unit ............................................................................... $15 $20 $20 Variable cost per unit .............................................................................. 8 10 12 Contribution margin per unit (a).............................................................. $7 $10 $8 Amount of the constrained resource required to produce one unit (b)... 1.0 1.5 2.0 Contribution margin per unit of the constrained resource (a) ÷ (b) ........ $7.00 $6.67 $4.00 Ranking .................................................................................................. 1 2 3 128. If Madison has a limit of 15,000 machine hours but no limit on direct labor hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is: A) A, B, C B) B, C, A C) A, C, B D) C, A, B Answer: B Feedback: A B C Selling price per unit ............................................................................... $15 $20 $20
Variable cost per unit .............................................................................. Contribution margin per unit (a).............................................................. Amount of the constrained resource required to produce one unit (b)... Contribution margin per unit of the constrained resource (a) ÷ (b) ........ Ranking ..................................................................................................
8 $7 3.5 $2.00 3
10 $10 2.0 $5.00 1
12 $8 2.5 $3.20 2
Brown Corporation makes four products in a single facility. These products have the following unit product costs:
A Direct materials ....................................... Direct labor .............................................. Variable manufacturing overhead ........... Fixed manufacturing overhead ................
$15.60 17.60 4.40 27.50
Unit product cost .....................................
$65.10
Products B C $12.5 $19.50 0 21.00 15.40 5.60 8.10 14.40 14.50 $50.5 $60.50 0
D $15.2 0 9.40 5.10 16.50 $46.2 0
Additional data concerning these products are listed below.
Grinding minutes per unit ........................ Selling price per unit ................................ Variable selling cost per unit ................... Monthly demand in units .........................
A 2.00 $78.70 $2.60 3,000
Products B C 1.10 0.70 $71.10 $67.90 $3.10 $2.80 2,000 2,000
D 0.30 $62.60 $3.50 4,000
The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labor is a variable cost in this company. 129. How many minutes of grinding machine time would be required to satisfy demand for all four products? A) 10,500 B) 10,700 C) 11,000 D) 10,800 Answer: D Feedback: Products A B C D Total Grinding minutes per unit .............. 2.00 1.10 0.70 0.30 Monthly demand in units ................ 3,000 2,000 2,000 4,000 Minutes of grinding time ................ 6,000 2,200 1,400 1,200 10,800 130. Which product makes the LEAST profitable use of the grinding machines? A) Product A B) Product B C) Product C D) Product D Answer: A Feedback: Products A B C D Direct materials ....................................... $15.60 $19.5 $12.5 $15.2
Direct labor .............................................. Variable manufacturing overhead ........... Variable selling cost per unit
17.60 4.40 2.60
Variable cost per unit ...............................
$40.20
Selling price per unit ................................................. Variable cost per unit ................................................ Contribution margin per unit (a)................................ Amount of the constrained resource required to produce one unit (b) ............................................. Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. Ranking ....................................................................
0 21.00 5.60 3.10 $49.2 0
0 15.40 8.10 2.80 $38.8 0
0 9.40 5.10 3.50 $33.2 0
A $78.7 0 40.20 $38.5 0
B $71.1 0 49.20 $21.9 0
C $67.9 0 38.80 $29.1 0
D $62.6 0 33.20 $29.4 0
2.00 $19.2 5 4
1.10 $19.9 1 3
0.70 $41.5 7 2
0.30 $98.0 0 1
131. Which product makes the MOST profitable use of the grinding machines? A) Product A B) Product B C) Product C D) Product D Answer: D Feedback: Products A B C D $19.5 $12.5 $15.2 Direct materials ....................................... $15.60 0 0 0 Direct labor .............................................. 17.60 21.00 15.40 9.40 Variable manufacturing overhead ........... 4.40 5.60 8.10 5.10 Variable selling cost per unit 2.60 3.10 2.80 3.50 $49.2 $38.8 $33.2 Variable cost per unit ............................... $40.20 0 0 0
Selling price per unit ................................................. Variable cost per unit ................................................ Contribution margin per unit (a)................................ Amount of the constrained resource required to produce one unit (b) ............................................. Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. Ranking ....................................................................
A $78.7 0 40.20 $38.5 0
B $71.1 0 49.20 $21.9 0
C $67.9 0 38.80 $29.1 0
D $62.6 0 33.20 $29.4 0
2.00 $19.2 5 4
1.10 $19.9 1 3
0.70 $41.5 7 2
0.30 $98.0 0 1
132. Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.) A) $10.60 B) $21.90 C) $0 D) $19.25
Answer: D Feedback: Products B C
A Direct materials ....................................... Direct labor .............................................. Variable manufacturing overhead ........... Variable selling cost per unit
$15.60 17.60 4.40 2.60
$19.50 21.00 5.60 3.10
$12.50 15.40 8.10 2.80
Variable cost per unit ...............................
$40.20
$49.20
$38.80
Selling price per unit ................................................. Variable cost per unit ................................................ Contribution margin per unit (a)................................ Amount of the constrained resource required to produce one unit (b) ............................................. Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. Ranking ....................................................................
D $15.2 0 9.40 5.10 3.50 $33.2 0
A $78.70 40.20 $38.50
B $71.10 49.20 $21.90
C $67.90 38.80 $29.10
D $62.60 33.20 $29.40
2.00
1.10
0.70
0.30
$19.25 4
$19.91 3
$41.57 2
$98.00 1
There is more demand for time on the grinding machine than it has capacity. The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $19.25 per minute for Product A.
The Madison Corporation produces three products with the following costs and selling prices:
Selling price per unit ................... Variable cost per unit .................. Contribution margin per unit ....... Direct labor hours per unit .......... Machine hours per unit ...............
A $16 7 $9 1.0 4.5
Product B C $21 $21 11 13 $10 $8 1.5 2.0 2.0 2.5
133. If direct labor-hours is the company's production constraint, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is: A) A, B, C B) B, C, A C) C, A. B D) A, C, B Answer: A Feedback: A B C Contribution margin per unit (a)................................ $9.00 $10.00 $8.00 Amount of the constrained resource required to produce one unit (b) ............................................. 1.0 1.5 2.0 Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. $9.00 $6.67 $4.00 Ranking .................................................................... 1 2 3
134. If machine-hours is Madison's production constraint, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is: A) A, B, C
B) A, C, B C) B, C, A D) C, A, B Answer: C sFeedback: Contribution margin per unit (a)................................ Amount of the constrained resource required to produce one unit (b) ............................................. Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. Ranking ....................................................................
A $9.00
B $10.00
C $8.00
4.5
2.0
2.5
$2.00 3
$5.00 1
$3.20 2
The constraint at Bonavita Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:
Selling price per unit ........ Variable cost per unit ....... Minutes on the constraint
UN $261.99 $184.91 4.10
ZG $463.24 $341.14 7.40
PW $448.01 $339.38 7.10
135. 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) PW,UN,ZG B) UN,ZG,PW C) ZG,PW,UN D) UN,PW,ZG Answer: B Feedback: UN ZG PW Selling price per unit ................................................. $261.99 $463.24 $448.01 Variable cost per unit ................................................ 184.91 341.14 339.38 Contribution margin per unit (a)................................ $ 77.08 $ 122.10 $ 108.63 Amount of the constrained resource required to produce one unit (b) ............................................. 4.10 7.40 7.10 Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. $18.80 $16.50 $15.30 Ranking .................................................................... 1 2 3 136. 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 this constrained resource? A) $15.30 per minute B) $18.80 per minute C) $77.08 per unit D) $122.10 per unit Answer: A Feedback: UN ZG PW Selling price per unit ................................................. $261.99 $463.24 $448.01 Variable cost per unit ................................................ 184.91 341.14 339.38 Contribution margin per unit (a)................................ $ 77.08 $ 122.10 $ 108.63 Amount of the constrained resource required to produce one unit (b) ............................................. 4.10 7.40 7.10 Contribution margin per unit of the constrained $18.80 $16.50 $15.30
resource (a) ÷ (b) .................................................. Ranking ....................................................................
1
2
3
The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $15.30 per minute for PW.
Crane Corporation makes four products in a single facility. Data concerning these products appear below:
A Selling price per unit .....................................
$35.30
Variable manufacturing cost per unit ............ Variable selling cost per unit ........................ Milling machine minutes per unit .................. Monthly demand in units ..............................
$16.50 $3.80 3.30 4,000
Products B C $30.2 $20.8 0 0 $15.8 0 $7.90 $1.60 $1.90 1.70 2.10 1,000 3,000
D $26.0 0 $8.50 $3.30 2.50 1,000
The milling machines are potentially the constraint in the production facility. A total of 22,600 minutes are available per month on these machines. 137. How many minutes of milling machine time would be required to satisfy demand for all four products? A) 22,600 B) 23,700 C) 18,400 D) 9,000 Answer: B Feedback: Product A B C D Total Milling machine minutes per unit ......... 3.30 1.70 2.10 2.50 Monthly demand in units ...................... 4,000 1,000 3,000 1,000 13,20 23,700 Minutes of milling time ......................... 0 1,700 6,300 2,500 138. Which product makes the LEAST profitable use of the milling machines? A) Product A B) Product B C) Product C D) Product D Answer: A Feedback: A B C $35.3 $30.2 $20.8 Selling price per unit ................................................. 0 0 0 Variable manufacturing cost per unit ........................ 16.50 15.80 7.90 Variable selling cost per unit .................................... 3.80 1.60 1.90 $15.0 $12.8 $11.0 Contribution margin per unit (a)................................ 0 0 0 Amount of the constrained resource required to produce one unit (b) ............................................. 3.30 1.70 2.10 Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. $4.55 $7.53 $5.24 Ranking .................................................................... 4 1 3
D $26.0 0 8.50 3.30 $14.2 0 2.50 $5.68 2
Product A makes the least profitable use of the milling machines. 139. Which product makes the MOST profitable use of the milling machines? A) Product A B) Product B C) Product C D) Product D Answer: B Feedback: A B C $35.3 $30.2 $20.8 Selling price per unit ................................................. 0 0 0 Variable manufacturing cost per unit ........................ 16.50 15.80 7.90 Variable selling cost per unit .................................... 3.80 1.60 1.90 $15.0 $12.8 $11.0 Contribution margin per unit (a)................................ 0 0 0 Amount of the constrained resource required to produce one unit (b) ............................................. 3.30 1.70 2.10 Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. $4.55 $7.53 $5.24 Ranking .................................................................... 4 1 3
D $26.0 0 8.50 3.30 $14.2 0 2.50 $5.68 2
Product B makes the most profitable use of the milling machines. 140. Up to how much should the company be willing to pay for one additional minute of milling machine time if the company has made the best use of the existing milling machine capacity? (Round your answer to the nearest whole cent.) A) $11.00 B) $0.00 C) $4.55 D) $15.00 Answer: C Feedback: A B C D $35.3 $30.2 $20.8 $26.0 Selling price per unit ................................................. 0 0 0 0 Variable manufacturing cost per unit ........................ 16.50 15.80 7.90 8.50 Variable selling cost per unit .................................... 3.80 1.60 1.90 3.30 $15.0 $12.8 $11.0 $14.2 Contribution margin per unit (a)................................ 0 0 0 0 Amount of the constrained resource required to produce one unit (b) ............................................. 3.30 1.70 2.10 2.50 Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. $4.55 $7.53 $5.24 $5.68 Ranking .................................................................... 4 1 3 2 The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $4.55 per minute for Product A.
Tillison Corporation makes three products that use the current constraint whcih is a particular type of machine. Data concerning those products appear below:
Selling price per unit ............... Variable cost per unit ..............
TC $373.86 $304.42
KA $82.29 $60.97
PA $78.26 $64.22
Minutes on the constraint .......
6.20
1.30
1.30
141. 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) TC,KA,PA B) PA,TC,KA C) TC,PA,KA D) KA,TC,PA Answer: D Feedback: TC KA PA $373.8 Selling price per unit ................................................. 6 $82.29 $78.26 Variable cost per unit ................................................ 304.42 60.97 64.22 Contribution margin per unit (a)................................ $69.44 $21.32 $14.04 Amount of the constrained resource required to produce one unit (b) ............................................. 6.20 1.30 1.30 Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. $11.20 $16.40 $10.80 Ranking .................................................................... 2 1 3 142. Assume that sufficient constraint time is available 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) $10.80 per minute B) $69.44 per unit C) $16.40 per minute D) $14.04 per unit Answer: A Feedback: TC KA PA $373.8 Selling price per unit ................................................. 6 $82.29 $78.26 Variable cost per unit ................................................ 304.42 60.97 64.22 Contribution margin per unit (a)................................ $69.44 $21.32 $14.04 Amount of the constrained resource required to produce one unit (b) ............................................. 6.20 1.30 1.30 Contribution margin per unit of the constrained resource (a) ÷ (b) .................................................. $11.20 $16.40 $10.80 Ranking .................................................................... 2 1 3 The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $10.80 per minute for PA.
Duarte Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $31 to buy from farmers and $15 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 $27 or processed further for $14 to make the end product industrial fiber that is sold for $44. The beet juice can be sold as is for $32 or processed further for $29 to make the end product refined sugar that is sold for $50. 143. How much more profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar? A) $(8) B) $13 C) $(89)
D) $5 Answer: D Feedback: Combined final sales value ($44 + $50) ..................... Less costs of producing the end products: Cost of sugar beets ................................................. Cost of crushing ...................................................... Combined costs of further processing ($14 + $29) . Profit (loss) .................................................................
$94 $31 15 43
89 $5
144. How much more profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is? A) $(34) B) $(11) C) $(26) D) $(57) Answer: B Feedback: Refined Sugar Final sales value after further processing .................. $50 Less sales value at split-off point ............................... 32 Incremental revenue from further processing ............ 18 Less cost of further processing .................................. 29 Profit (loss) from further processing ........................... $(11) The company incurs a loss of $11 a unit by processing the intermediate product beet juice into refined sugar rather than selling it as is. 145. Which of the intermediate products should be processed further? A) beet fiber should be processed into industrial fiber; beet juice should be processed into refined sugar B) beet fiber should NOT be processed into industrial fiber; beet juice should NOT 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 NOT be processed into industrial fiber; beet juice should be processed into refined sugar Answer: C Feedback: Industrial Refined Fiber Sugar Final sales value after further processing .................. $50 $50 Less sales value at split-off point ............................... 27 32 Incremental revenue from further processing ............ 23 18 Less cost of further processing .................................. 14 29 Profit (loss) from further processing ........................... $9 $(11) Beet fiber should be processed into industrial fiber; beet juice should NOT be processed into refined sugar.
Paulsen Corporation makes two products, W and P, in a joint process. At the split-off point, 50,000 units of W and 60,000 units of P are available each month. Monthly joint production costs are $290,000. Product W can be sold at the split-off point for $5.60 per unit. Product P either can be sold at the split-off point for $4.75 per unit or it can be further processed and sold for $7.20 per unit. If P is processed further, additional processing costs of $3.10 per unit will be incurred.
146. If P is processed further and then sold, rather than being sold at the split-off point, the change in monthly net operating income would be a: A) $147,000 decrease B) $147,000 increase C) $39,000 increase D) $39,000 decrease Answer: D Feedback: Per Unit Final sales value after further processing .................. $7.20 Less sales value at split-off point ............................... 4.75 Incremental revenue from further processing ............ 2.45 Less cost of further processing .................................. 3.10 Profit (loss) from further processing ........................... $(0.65) Total profit (loss) = –$0.65 per unit × 60,000 units = –$39,000
147. What would the selling price per unit of Product P need to be after processing in order for Paulsen Corporation to be economically indifferent between selling P at the split-off point or processing P further? A) $7.85 B) $8.58 C) $9.49 D) $11.68 Answer: A Profit from further processing The company would be indifferent between selling Product P at the split-off point or processing Product P further when the sales value at the split-off point equals the incremental profit that the company could earn by processing further. Sales value at split-off point = Final sales value after further processing – Cost of further processing $4.75 = Final sales value after further processing – $3.10 Final sales value after further processing = $4.75 + $3.10 = $7.85
Wehn Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is processed in batches. A batch of sugar cane costs $40 to buy from farmers and $13 to crush in the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $28 or processed further for $18 to make the end product industrial fiber that is sold for $37. The cane juice can be sold as is for $31 or processed further for $25 to make the end product molasses that is sold for $66. 148. How much more profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses? A) $(96) B) $1 C) $7 D) $6 Answer: C Feedback: Combined final sales value ($37 + $66) ..................... $103 Less costs of producing the end products: Cost of sugar cane .................................................. $40 Cost of crushing ...................................................... 13 Combined costs of further processing ($18 + $25) . 43 96
Profit (loss) .................................................................
$7
149. How much more profit (loss) does the company make by processing the intermediate product cane juice into molasses rather than selling it as is? A) $(43) B) $(17) C) $10 D) $(3) Answer: C Feedback: Molasses Final sales value after further processing .................. $66 Less sales value at split-off point ............................... 31 Incremental revenue from further processing ............ 35 Less cost of further processing .................................. 25 Profit (loss) from further processing ........................... $10 150. Which of the intermediate products should be processed further? A) Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into molasses B) Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be processed into molasses C) Cane fiber should 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 Answer: A Feedback: Industrial Fiber Molasses Final sales value after further processing .................. $37 $66 Less sales value at split-off point ............................... 28 31 Incremental revenue from further processing ............ 9 35 Less cost of further processing .................................. 18 25 Profit (loss) from further processing ........................... $(9) $10 Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into molasses.
Dowchow Corporation makes two products from a common input. Joint processing costs up to the split-off point total $38,400 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:
Allocated joint processing costs .............. Sales value at split-off point .................... Costs of further processing ..................... Sales value after further processing ........
Product X $20,800 $26,000 $22,600 $45,000
Product Y $17,600 $22,000 $20,400 $45,900
Total $38,400 $48,000 $43,000 $90,900
151. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? A) $1,600 B) $22,400 C) $27,600 D) $(3,600) Answer: D Feedback: Final sales value after further processing .................. $45,000
Less sales value at split-off point ............................... Incremental revenue from further processing ............ Less cost of further processing .................................. Profit (loss) from further processing ...........................
26,000 19,000 22,600 $(3,600)
152. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? A) $3,500 B) $7,900 C) $29,900 D) $25,500 Answer: A Feedback: Final sales value after further processing .................. $45,900 Less sales value at split-off point ............................... 22,000 Incremental revenue from further processing ............ 23,900 Less cost of further processing .................................. 20,400 Profit (loss) from further processing ........................... $3,500 153. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? A) $22,400 B) $43,400 C) $20,800 D) $45,000 Answer: A Feedback: Product X Sales value after further processing .......... $45,000 Costs of further processing ........................ 22,600 Benefit of further processing ...................... $22,400 The minimum amount the company should accept for Product X if it is to be sold at the split-off point is $22,400.
Essay [QUESTION] 154. Nicklin Corporation is considering two alternatives that are code-named M and N. Costs associated with the alternatives are listed below:
Supplies costs .......... Assembly costs ........ Power costs .............. Inspection costs ........
Alternative M $32,000 $47,000 $28,000 $16,000
Alternative N $58,000 $47,000 $23,000 $16,000
Required: a. Which costs are relevant and which are not relevant in the choice between these two alternatives? b. What is the differential cost between the two alternatives? Answer: a. Supplies costs .......... Relevant, since costs differ between alternatives Assembly costs ......... Not relevant since the costs do not differ between alternatives Power costs .............. Relevant, since costs differ between alternatives Inspection costs ........ Not relevant since the costs do not differ between alternatives b. Supplies costs .......... Assembly costs ......... Power costs .............. Inspection costs ........ Total .......................... Level of Difficulty: 1 Easy Learning Objective: 10-01 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement
Alternative M $32,000 47,000 28,000 16,000 $123,000
Alternative N $58,000 47,000 23,000 16,000 $144,000
Differential $26,000 0 (5,000) 0 $21,000
[QUESTION] 155. Costs associated with two alternatives, code-named Q and R, being considered by Hunnicutt Corporation are listed below:
Supplies costs .......... Power costs .............. Inspection costs ........ Assembly costs ........
Alternative Q $69,000 $38,000 $15,000 $40,000
Alternative R $69,000 $38,000 $26,000 $28,000
Required: a. Which costs are relevant and which are not relevant in the choice between these two alternatives? b. What is the differential cost between the two alternatives? Answer: a. Supplies costs .......... Not relevant since the costs do not differ between alternatives Power costs .............. Not relevant since the costs do not differ between alternatives Inspection costs ........ Relevant, since costs differ between alternatives Assembly costs ......... Relevant, since costs differ between alternatives b. Supplies costs ..........
Alternative Q $69,000
Alternative R $69,000
Differential $0
Power costs .............. Inspection costs ........ Assembly costs ......... Total .......................... Level of Difficulty: 1 Easy Learning Objective: 10-01 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement
38,000 15,000 40,000 $162,000
38,000 26,000 28,000 $161,000
0 11,000 (12,000) ($1,000)
[QUESTION] 156. The management of Bercegeay Corporation is considering dropping product Y25C. Data from the company's accounting system appear below: Sales.................................................................. Variable expenses ............................................. Fixed manufacturing expenses ......................... Fixed selling and administrative expenses ........
$610,000 $244,000 $226,000 $171,000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $117,000 of the fixed manufacturing expenses and $78,000 of the fixed selling and administrative expenses are avoidable if product Y25C is discontinued. Required: a. What is the net operating income earned by product Y25C according to the company's accounting system? Show your work! b. What would be the effect on the company's overall net operating income of dropping product Y25C? Should the product be dropped? Show your work! Answer: Keep the Drop the Product Product Difference Sales.................................................................. $610,000 $0 ($610,000) Variable expenses ............................................. 244,000 0 244,000 Contribution margin ........................................... 366,000 0 ( 366,000) Fixed expenses: Fixed manufacturing expenses ...................... 226,000 109,000 117,000 Fixed selling and administrative expenses .... 171,000 93,000 78,000 Total fixed expenses ......................................... 397,000 202,000 195,000 ($202,000 Net operating income (loss) .............................. ($31,000) ) ($171,000) a. According to the company's accounting system, the product's net operating loss is $31,000. b. Net operating income would decline by $171,000 if product Y25C were dropped. Therefore, the product should not be dropped. Level of Difficulty: 1 Easy Learning Objective: 10-02 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement
[QUESTION] 157. The management of Leinberger Corporation is considering dropping product S48J. Data from the company's accounting system appear below: Sales.................................................................. Variable expenses ............................................. Fixed manufacturing expenses ......................... Fixed selling and administrative expenses ........
$120,000 $64,000 $38,000 $30,000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $28,000 of the fixed manufacturing expenses and $21,000 of the fixed selling and administrative expenses are avoidable if product S48J is discontinued. Required: What would be the effect on the company's overall net operating income if product S48J were dropped? Should the product be dropped? Show your work! Answer: Keep the Drop the Product Product Difference $120,000 Sales.................................................................. $0 ($120,000) Variable expenses ............................................. 64,000 0 64,000 Contribution margin ........................................... 56,000 0 (56,000) Fixed expenses: Fixed manufacturing expenses ...................... 38,000 10,000 28,000 Fixed selling and administrative expenses .... 30,000 9,000 21,000 Total fixed expenses ......................................... 68,000 19,000 49,000 Net operating income (loss) .............................. ($12,000) ($19,000) ($7,000) Net operating income would decline by $7,000 if product S48J were dropped. Therefore, the product should not be dropped. Level of Difficulty: 1 Easy Learning Objective: 10-02 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 158. Costabile Corporation is considering dropping product G41O. Data from the company's accounting system appear below: Sales.................................................................. Variable expenses ............................................. Fixed manufacturing expenses ......................... Fixed selling and administrative expenses ........
$450,000 $185,000 $149,000 $113,000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $117,000 of the fixed manufacturing expenses and $46,000 of the fixed selling and administrative expenses are avoidable if product G41O is discontinued. Required: a. According to the company's accounting system, what is the net operating income earned by product G41O? Show your work!
b. What would be the effect on the company's overall net operating income of dropping product G41O? Should the product be dropped? Show your work! Answer: Keep the Drop the Product Product Difference Sales.................................................................. $450,000 $0 ($450,000) Variable expenses ............................................. 185,000 0 185,000 Contribution margin ........................................... 265,000 0 (265,000) Fixed expenses: Fixed manufacturing expenses ...................... 149,000 32,000 117,000 Fixed selling and administrative expenses .... 113,000 67,000 46,000 Total fixed expenses ......................................... 262,000 99,000 163,000 Net operating income (loss) .............................. $3,000 ($99,000) ($102,000) a. According to the company's accounting system, the product's net operating income is $3,000. b. Net operating income would decline by $102,000 if product G41O were dropped. Therefore, the product should not be dropped. Level of Difficulty: 1 Easy Learning Objective: 10-02 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 159. Northern Stores is a retailer in the upper Midwest. The most recent monthly income statement for Northern Stores is given below:
Sales........................................ Variable expenses ................... Contribution margin ................. Traceable fixed expenses ....... Segment margin ...................... Common fixed expenses ......... Net operating income ..............
Total $2,100,000 1,260,000 840,000 420,000 420,000 350,000 $ 70,000
Store I $1,300,000 882,000 418,000 231,000 187,000 210,000 $ (23,000)
Store II $800,000 378,000 422,000 189,000 233,000 140,000 $ 93,000
Northern is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue. Also, the closing of Store I would result in a 20% decrease in sales in Store II. Northern allocates common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were shut down. Required: Compute the overall increase or decrease in the net operating income of Northern Stores if Store I is closed. Answer: Loss in contribution is Store I is closed: Store I contribution margin lost ............................................. $(418,000) Store II contribution margin lost (20% × 422,000) ................ (84,400) Total lost contribution ............................................................... (502,400) Fixed costs avoided if Store I is closed (0.75 × 231,000) ..... 173,250 Net decrease in income of closing Store I ................................ $(329,150) Level of Difficulty: 2 Medium Learning Objective: 10-02
Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 160. The most recent monthly income statement for Kennaman Stores is given below:
Sales........................................ Variable expenses ................... Contribution margin ................. Traceable fixed expenses ....... Segment margin ...................... Common fixed expenses ......... Net operating income ..............
Total $2,000,000 1,200,000 800,000 400,000 400,000 300,000 $ 100,000
Store I $1,200,000 840,000 360,000 220,000 140,000 180,000 $ (40,000)
Store II $800,000 360,000 440,000 180,000 260,000 120,000 $140,000
Kennaman is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue unchanged. Also, the closing of Store I would result in a 20% decrease in sales in Store II. Kennaman allocates common fixed expenses on the basis of sales dollars. Required: Compute the overall increase or decrease in Kennaman's net operating income if Store I is closed. Answer: Loss in contribution margin: Store I loss ....................................... $(360,000) Store II loss (20% × $440,000) ........ (88,000) Total lost contribution margin .............. (448,000) Fixed costs avoided (75% × 220,000) .............................. 165,000 Net decrease in operating income ...... $(283,000) Level of Difficulty: 2 Medium Learning Objective: 10-02 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 161. Hanson, Inc. makes 1,000 units per year of a part called a prositron for use in one of its products. Data concerning the unit production costs of the prositron follow: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Total manufacturing cost per unit .......
$342 80 48 520 $990
An outside supplier has offered to sell Hanson, Inc. all of the prositrons it requires. If Hanson, Inc. decided to discontinue making the prositrons, 10% of the above fixed manufacturing overhead costs could be avoided. Required:
a. Assume Hanson, Inc. has no alternative use for the facilities presently devoted to production of the prositrons. If the outside supplier offers to sell the prositrons for $850 each, should Hanson, Inc. accept the offer? Fully support your answer with appropriate calculations. b. Assume that Hanson, Inc. could use the facilities presently devoted to production of the prositrons to expand production of another product that would yield an additional contribution margin of $50,000 annually. What is the maximum price Hanson, Inc. should be willing to pay the outside supplier for prositrons? Answer: a. The analysis of the alternatives follows below: Make Purchase cost ..................................... Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead* ......... Total cost ............................................
$342 80 48 52 $522
Buy $850
$850
* 10% × $520 The company should make the part rather than buy it from the outside supplier because it costs $328 less under that alternative. b. The maximum acceptable price is $572 because that is the cost to the company of making the part itself when the opportunity cost is included: Total cost of making the part internally .............. Opportunity cost per unit ($50,000 ÷ 1,000) ....... Total.................................................................... Level of Difficulty: 3 Hard Learning Objective: 10-03 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement
$522 50 $572
[QUESTION] 162. Lindon Company uses 5,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $80,000 as follows: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Total costs ..........................................
$18,000 20,000 12,000 30,000 $80,000
An outside supplier has offered to provide Part X at a price of $13 per unit. If Lindon Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated. Required: Prepare an analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer. Answer: Make Buy $65,00 Outside purchase price ...... 0 Direct materials .................. $18,000
Direct labor ......................... Variable overhead .............. Fixed overhead* .................
20,000 12,000 10,000
Total....................................
$60,000
$65,00 0
* 1/3 of $30,000 Therefore, the annual advantage to making the parts is $5,000. Level of Difficulty: 1 Easy Learning Objective: 10-03 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 163. Bulan Inc. makes a range of products. The company's predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data: Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Direct labor-hours ...............................
$140,000 $560,000 35,000
Component T6 is used in one of the company's products. The unit product cost of the component according to the company's cost accounting system is determined as follows: Direct materials ................................. Direct labor ........................................ Manufacturing overhead applied ....... Unit product cost ...............................
$45.00 32.00 40.00 $117.00
An outside supplier has offered to supply component T6 for $101 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Bulan chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why? Answer: Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The variable portion of the manufacturing overhead rate is computed as follows: Variable manufacturing overhead ........................................ ÷ Direct labor-hours .............................................................. = Variable portion of the predetermined overhead rate .......
$140,000 35,000 $4.00
The direct-labor hours per unit for the special order can be determined as follows: Manufacturing overhead applied ....... ÷ Predetermined overhead rate......... = Direct labor-hours ...........................
$40.00 $20.00 2.00
Consequently, the variable manufacturing overhead for the special order would be:
Variable portion of the predetermined overhead rate ....... × Direct labor-hours ........................................................... = Variable manufacturing overhead ..................................
$4.00 2.00 $8.00
Putting this all together: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Total variable cost ..............................
$45.00 32.00 8.00 $85.00
Since the outside supplier has offered to sell the component for $101.00 each, but it only costs the company $85.00 to make the component internally, this is not a financially attractive offer. Level of Difficulty: 3 Hard Learning Objective: 10-03 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Source: CIMA, adapted [QUESTION] 164. Part O43 is used in one of Scheetz Corporation's products. The company's Accounting Department reports the following costs of producing the 6,000 units of the part that are needed every year.
Direct materials ..................................... Direct labor ............................................ Variable overhead ................................. Supervisor's salary ................................ Depreciation of special equipment ........ Allocated general overhead...................
Per Unit $8.20 $6.90 $1.80 $4.00 $8.80 $1.70
An outside supplier has offered to make the part and sell it to the company for $26.40 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. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part O43 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose? Answer: a. Direct materials (6,000 units × $8.20 per unit) .................... Direct labor (6,000 units × $6.90 per unit) .......................... Variable overhead (6,000 units × $1.80 per unit) ................ Supervisor's salary (6,000 units × $4.00 per unit)............... Depreciation of special equipment (not relevant)................ Allocated general overhead (avoidable only) ...................... Outside purchase price (6,000 units × $26.40 per unit) ...... Total cost .............................................................................
Make $49,200 41,400 10,800 24,000 0 1,000 $126,400
Buy
$158,400 $158,400
b. The total cost of the make alternative is lower by $32,000. Thus, net operating income would decline by $32,000 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself. Level of Difficulty: 1 Easy Learning Objective: 10-03 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 165. Foster Company makes 20,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Unit product cost ................................
$24.70 16.30 2.30 13.40 $56.70
An outside supplier has offered to sell the company all of these parts it needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $44,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: a. How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part? b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year? Answer: a. Relevant cost per unit: Direct materials ................................... $24.70 Direct labor .......................................... 16.30 Variable manufacturing overhead ....... 2.30 Fixed manufacturing overhead ........... 8.30 Relevant manufacturing cost .............. $51.60 b. Net advantage (disadvantage): Manufacturing cost savings ............ Additional contribution margin ........ Cost of purchasing the part ............ Net advantage (disadvantage) .......
$1,032,000 44,000 (1,036,000) $40,000
c. Maximum acceptable purchase price: Manufacturing cost savings ............ $1,032,000 Additional contribution margin ........ 44,000 Total benefit .................................... $1,076,000 Number of units .............................. 20,000
Benefit per unit ............................... Level of Difficulty: 3 Hard Learning Objective: 10-03 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement
$53.80
[QUESTION] 166. Kerbow Corporation uses part B76 in one of its products. The company's Accounting Department reports the following costs of producing the 12,000 units of the part that are needed every year.
Direct materials ..................................... Direct labor ............................................ Variable overhead ................................. Supervisor's salary ................................ Depreciation of special equipment ........ Allocated general overhead...................
Per Unit $7.20 $7.10 $3.50 $4.70 $3.40 $2.40
An outside supplier has offered to make the part and sell it to the company for $27.40 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 $6,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part B76 could be used to make more of one of the company's other products, generating an additional segment margin of $29,000 per year for that product. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part B76 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose? Answer: a. Make Buy Direct materials (12,000 units × $7.20 per unit) .................... $86,400 Direct labor (12,000 units × $7.10 per unit) .......................... 85,200 Variable overhead (12,000 units × $3.50 per unit) ................ 42,000 Supervisor's salary (12,000 units × $4.70 per unit) .............. 56,400 Depreciation of special equipment (not relevant).................. 0 Allocated general overhead (avoidable only) ........................ 6,000 Outside purchase price (12,000 units × $27.40 per unit) ...... $328,800 Opportunity cost .................................................................... (29,000) Total cost ............................................................................... $276,000 $299,800 b. The total cost of the make alternative is lower by $23,800. Thus, net operating income would decline by $23,800 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself. Level of Difficulty: 2 Medium Learning Objective: 10-03 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement
[QUESTION] 167. Juett Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is as follows: Direct materials ............................................... Direct labor ...................................................... Variable manufacturing overhead ................... Fixed manufacturing overhead ........................ Variable selling & administrative expense ....... Fixed selling & administrative expense ...........
$29.60 $5.80 $2.50 $17.20 $1.80 $6.70
The normal selling price of the product is $72.90 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.10 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Required: a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $66.10 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,300 units for regular customers. What would be the minimum acceptable price per unit for the special order? Answer: a. Variable cost per unit on normal sales: Direct materials ................................................... $29.60 Direct labor .......................................................... 5.80 Variable manufacturing overhead ....................... 2.50 Variable selling & administrative expense ........... 1.80 Variable cost per unit on normal sales ................ $39.70 Variable cost per unit on special order: Normal variable cost per unit............................... Reduction in variable selling & admin. ................ Variable cost per unit on special order ................
$39.70 1.10 $38.60
Selling price for special order .............................. Variable cost per unit on special order ................ Unit contribution margin on special order ............ Number of units in special order ......................... Increase (decrease) in net operating income ......
$66.10 38.60 $27.50 2,000 $55,000
b. The opportunity cost is just the contribution margin on normal sales: Normal selling price per unit ........................... $72.90 Variable cost per unit on normal sales ........... 39.70 Unit contribution margin on normal sales ....... $33.20 c. Minimum acceptable price: Unit contribution margin on normal sales ............ Displaced normal sales ....................................... Lost contribution margin displaced sales ............
$33.20 1,300 $43,160
Total variable cost on special order .................... Number of units in special order ......................... Minimum acceptable price on special order ........ Level of Difficulty: 3 Hard Learning Objective: 10-04 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement
77,200 $120,360 2,000 $60.18
[QUESTION] 168. Globe Manufacturing Company has just obtained a request for a special order of 12,000 units to be shipped at the end of the current year at a discount price of $7.00 each. The company has a production capacity of 90,000 units per year. At present, Globe is only selling 80,000 units per year through regular channels at a selling price of $11.00 each. Globe's per unit costs at an 80,000 unit level of production and sales are as follows: Variable production cost ...................................... Fixed production cost .......................................... Variable selling and administrative expense ....... Fixed selling and administrative expense ...........
$4.60 $1.80 $1.00 $0.45
Variable selling and administrative expense will drop to $0.30 per unit on the special order units. The special order has to be taken in its entirety. This means that by accepting the special order, Globe will be forced to not sell 2,000 units to its regular customers. Required: If Globe accepts this special order, by what amount will its net operating income increase or decrease? SHOW YOUR COMPUTATIONS. Answer: Incremental revenue [(12,000 units × $7 per unit) – (2,000 units × $11 per unit)] .................... $62,000 Less incremental costs: Variable production cost (10,000 units × $4.60 per unit) ......................... 46,000 Variable selling and administrative expense [(12,000 units × $0.30 per unit) – (2,000 units × $1.00 per unit)] ........ 1,600 Total incremental cost ................................................................................. 47,600 Incremental net operating income ............................................................... $14,400 Level of Difficulty: 3 Hard Learning Objective: 10-04 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 169. Pilgrim Corporation makes a range of products. The company's predetermined overhead rate is $23 per direct labor-hour, which was calculated using the following budgeted data: Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Direct labor-hours ...............................
$200,000 $375,000 25,000
Management is considering a special order for 800 units of product N89E at $69 each. The normal selling price of product N89E is $88 and the unit product cost is determined as follows: Direct materials ................................. Direct labor ........................................ Manufacturing overhead applied ....... Unit product cost ...............................
$28.00 22.50 34.50 $85.00
If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order. Required: If the special order were accepted, what would be the impact on the company's overall profit? Answer: Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The variable portion of the manufacturing overhead rate is computed as follows: Variable manufacturing overhead ........................................ ÷ Direct labor-hours .............................................................. = Variable portion of the predetermined overhead rate .......
$200,000 25,000 $8.00
The direct-labor hours per unit for the special order can be determined as follows: Manufacturing overhead applied ....... ÷ Predetermined overhead rate......... = Direct labor-hours ...........................
$34.50 $23.00 1.50
Consequently, the variable manufacturing overhead for the special order would be: Variable portion of the predetermined overhead rate ....... × Direct labor-hours ........................................................... = Variable manufacturing overhead ..................................
$8.00 1.50 $12.00
Putting this all together: Special order price .................................................... Variable costs: Direct materials ...................................................... Direct labor ............................................................. Variable manufacturing overhead .......................... Total variable cost ..................................................... Contribution margin ................................................... × Units ordered .......................................................... = Total increase in profit from the special order ........ Level of Difficulty: 3 Hard Learning Objective: 10-04 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Source: CIMA, adapted
$69.00 28.00 22.50 12.00 62.50 $6.50 800 $5,200
[QUESTION] 170. Tullius Corporation has received a request for a special order of 8,000 units of product C64 for $50.00 each. The normal selling price of this product is $53.25 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product C64 is computed as follows: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Unit product cost ................................
$18.10 7.40 5.20 4.80 $35.50
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 some modifications made to product C64 that would increase the variable costs by $5.00 per unit and that would require a one-time investment of $43,000 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. Required: Determine the effect on the company's total net operating income of accepting the special order. Show your work! Answer: Incremental revenue (8,000 units × $50.00 per unit) ........................ $400,000 Less incremental costs: Direct materials (8,000 units × $18.10 per unit) ............................. 144,800 Direct labor (8,000 units × $7.40 per unit) ..................................... 59,200 Variable manufacturing overhead (8,000 units × $5.20 per unit) .. 41,600 Modifications (8,000 units × $5.00 per unit) ................................... 40,000 Special molds ................................................................................. 43,000 Total incremental cost ....................................................................... 328,600 Incremental net operating income ..................................................... $71,400 Level of Difficulty: 1 Easy Learning Objective: 10-04 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 171. Albertine Co. manufactures and sells trophies for winners of athletic and other events. Its manufacturing plant has the capacity to produce 16,000 trophies each month; current monthly production is 12,800 trophies. The company normally charges $113 per trophy. Cost data for the current level of production are shown below: Variable costs: Direct materials .................... Direct labor ........................... Selling and administrative .... Fixed costs: Manufacturing ...................... Selling and administrative ....
$614,400 $256,000 $35,840 $294,400 $94,720
The company has just received a special one-time order for 1,200 trophies at $61 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.
Required: Should the company accept this special order? Why? Answer: Only the direct materials and direct labor costs are relevant in this decision. To make the decision, we must compute the average direct materials and direct labor cost per unit. Direct materials .................................................................... Direct labor ........................................................................... Total...................................................................................... Current monthly production .................................................. Average direct materials and direct labor cost per unit ........
$614,400 256,000 $870,400 12,800 $68
Since price on the special order is $61 per trophy and the relevant cost is $68, the company would suffer a loss of $7 per trophy. Therefore, the special order should not be accepted. Level of Difficulty: 2 Medium Learning Objective: 10-04 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Source: CMA, adapted [QUESTION] 172. A customer has asked Goes Corporation to supply 6,000 units of product Y19, with some modifications, for $31.30 each. The normal selling price of this product is $46.50 each. The normal unit product cost of product Y19 is computed as follows: Direct materials .................................. Direct labor ......................................... Variable manufacturing overhead ...... Fixed manufacturing overhead ........... Unit product cost ................................
$16.40 8.30 4.40 1.90 $31.00
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 some modifications made to product Y19 that would increase the variable costs by $8.90 per unit and that would require a one-time 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. Required: Determine the effect on the company's total net operating income of accepting the special order. Show your work! Answer: Incremental revenue (6,000 units × $31.30 per unit) ........................ $187,800 Less incremental costs: Direct materials (6,000 units × $16.40 per unit) ............................. 98,400 Direct labor (6,000 units × $8.30 per unit) ..................................... 49,800 Variable manufacturing overhead (6,000 units × $4.40 per unit) .. 26,400 Modifications (6,000 units × $8.90 per unit) ................................... 53,400 Special molds ................................................................................. 20,000 Total incremental cost ....................................................................... 248,000 Incremental net operating income ..................................................... ($60,200) Level of Difficulty: 1 Easy
Learning Objective: 10-04 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 173. Adamyan Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing plant has the capacity to produce 15,000 medals each month; current monthly production is 12,750 medals. The company normally charges $120 per medal. Cost data for the current level of production are shown below: Variable costs: Direct materials .................... Direct labor ........................... Selling and administrative .... Fixed costs: Manufacturing ...................... Selling and administrative ....
$624,750 $306,000 $15,300 $506,175 $123,675
The company has just received a special one-time order for 700 medals at $83 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs. Required: Should the company accept this special order? Why? Answer: Only the direct materials and direct labor costs are relevant in this decision. To make the decision, we must compute the average direct materials and direct labor cost per unit. Direct materials .................................................................... Direct labor ........................................................................... Total...................................................................................... Current monthly production .................................................. Average direct materials and direct labor cost per unit ........
$624,750 306,000 $930,750 12,750 $73
Since price on the special order is $83 per medal and the relevant cost is only $73, the company would earn a profit of $10 per medal. Therefore, the special order should be accepted. Level of Difficulty: 2 Medium Learning Objective: 10-04 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Source: CMA, adapted [QUESTION] 174. The constraint at Fulena Inc. is an expensive milling machine. The three products listed below use this constrained resource.
Selling price per unit .......................... Variable cost per unit ......................... Time on the constraint (minutes) .......
WP $72.96 $56.40 1.20
PG $175.45 $142.39 2.90
LC $60.70 $47.20 1.00
Required: a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work! b. Assume that sufficient constraint time is available 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? Answer: a. WP PG LC Selling price per unit ................................................................ $72.96 $175.45 $60.70 Variable cost per unit .............................................................. 56.40 142.39 47.20 Contribution margin per unit .................................................... $16.56 $33.06 $13.50 Time on the constraint (minutes) ............................................ 1.20 2.90 1.00 Contribution margin per unit of the constrained resource ....... $13.80 $11.40 $13.50 Ranking ................................................................................... 1 3 2 Resulting ranking of products: WP, LC, PG b. The company should be willing to pay up to $11.40 per minute to obtain more of the constrained resource since this is the value to the company of using this constrained resource to make more of product PG. By assumption, enough of the other two products will already have been produced to fully satisfy demand. Level of Difficulty: 1 Easy Learning Objective: 10-05 Learning Objective: 10-06 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 175. Holt Company makes three products in a single facility. Data concerning these products follow:
A Selling price per unit ................................
$67.90
Direct materials ....................................... Direct labor .............................................. Variable manufacturing overhead ........... Variable selling cost per unit ................... Mixing minutes per unit ........................... Monthly demand in units .........................
$12.10 $14.10 $2.60 $2.50 2.70 1,000
Products B C $57.7 0 $43.90 $10.3 0 $8.60 $8.00 $6.80 $2.20 $1.80 $2.20 $2.50 3.30 4.70 3,000 3,000
The mixing machines are potentially the constraint in the production facility. A total of 25,800 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a. How many minutes of mixing machine time would be required to satisfy demand for all three products? b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.) c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.) Answer: a. Demand on the mixing machine:
Mixing minutes per unit ............ Monthly demand in units ..........
A 2.70 1,000
Products B 3.30 3,000
Total minutes required ..............
2,700
9,900
Total C 4.70 3,000 14,10 0
26,70 0
b. Optimal production plan: A Selling price per unit ................................ Direct materials ....................................... Direct labor .............................................. Variable manufacturing overhead ........... Variable selling cost per unit ................... Total variable cost per unit ......................
$67.90 12.10 14.10 2.60 2.50 31.30
Contribution margin per unit .................... Mixing minutes per unit ...........................
$36.60 2.70
Contribution margin per minute ............... Rank in terms of profitability .................... Optimal production ..................................
$13.56 1 1,000
Products B $57.7 0 10.30 8.00 2.20 2.20 22.70 $35.0 0 3.30 $10.6 1 2 3,000
C $43.9 0 8.60 6.80 1.80 2.50 19.70 $24.2 0 4.70 $5.15 3 2,809
c. The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $5.15. Level of Difficulty: 2 Medium Learning Objective: 10-05 Learning Objective: 10-06 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 176. Wright, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:
Selling price ........................................... Variable costs ........................................ Fixed costs ............................................ Tapping machine time (minutes) ...........
C $9 0 $3 5 $4 5 5
Product D $3 0 $1 0 $1 5 4
E $6 0 $2 0 $3 0 2
Fixed costs are applied to the products on the basis of direct labor hours. Demand for the three products exceeds the company's productive capacity. The tapping machine is the constraint, with only 2,400 minutes of tapping machine time available this week. Required:
a. Given the tapping machine constraint, which product should be emphasized? Support your answer with appropriate calculations. b. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of tapping machine time? Answer: a. The product to emphasize can be determined by computing the contribution margin per unit of the scarce resource, which in this case is tapping machine time. Product C D E Selling price ........................................... $90 $30 $60 Variable costs ........................................ 35 10 20 Contribution margin ............................... $55 $20 $40 Tapping machine time (minutes) ........... 5 4 2 Contribution margin per minute ............. $11 $5 $20 Product E should be emphasized because it has the greatest contribution margin per unit of the scarce resource. b. If additional tapping machine time would be used to produce more of Product E, the time would be worth 60 × $20 = $1,200 per hour. Level of Difficulty: 3 Hard Learning Objective: 10-05 Learning Objective: 10-06 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 177. Falsetta Corporation makes three products that use the current constraint, which is a particular type of machine. Data concerning those products appear below:
Selling price per unit .......................... Variable cost per unit ......................... Time on the constraint (minutes) .......
ZA $402.67 $307.53 6.70
JK $462.82 $344.56 7.30
DH $374.06 $285.56 5.90
Required: a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work! b. Assume that sufficient constraint time is available 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? Answer: a . ZA JK DH Selling price per unit ................................................................ $402.67 $462.82 $374.06 Variable cost per unit ............................................................... 307.53 344.56 285.56 Contribution margin per unit .................................................... $95.14 $118.26 $88.50 Time on the constraint (minutes) ............................................. 6.70 7.30 5.90 Contribution margin per unit of the constrained resource ....... $14.20 $16.20 $15.00 Ranking .................................................................................... 3 1 2 Resulting ranking of products: JK, DH, ZA
b. The company should be willing to pay up to $14.20 per minute to obtain more of the constrained resource since this is the value to the company of using this constrained resource to make more of product ZA. By assumption, the other products will already have been produced up to demand. Level of Difficulty: 1 Easy Learning Objective: 10-05 Learning Objective: 10-06 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 178. Glocker Company makes three products in a single facility. These products have the following unit product costs:
A Direct materials ....................................... Direct labor .............................................. Variable manufacturing overhead ........... Fixed manufacturing overhead ................
$10.90 12.50 2.40 11.60
Unit product cost .....................................
$37.40
Product B $15.8 0 12.60 1.20 7.20 $36.8 0
C $ 8.00 9.90 1.40 7.80 $27.1 0
Additional data concerning these products are listed below.
Mixing minutes per unit .................. Selling price per unit ....................... Variable selling cost per unit .......... Monthly demand in units ................
A 2.00 $55.80 $2.10 2,000
Product B 1.00 $54.60 $1.40 1,000
C 0.50 $43.10 $1.90 3,000
The mixing machines are potentially the constraint in the production facility. A total of 5,900 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a. How many minutes of mixing machine time would be required to satisfy demand for all three products? b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.) c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.) Answer: a. Demand on the mixing machine: Product A B C Mixing minutes per unit ............ 2.00 1.00 0.50 Monthly demand in units .......... 2,000 1,000 3,000 Total minutes required .............. 4,000 1,000 1,500 Total time required for all products: 6,500
b. Optimal production plan: A Selling price per unit ................................ Direct materials ....................................... Direct labor .............................................. Variable manufacturing overhead ........... Variable selling cost per unit ................... Total variable cost per unit ......................
$55.80 10.90 12.50 2.40 2.10 27.90
Contribution margin per unit .................... Mixing minutes per unit ...........................
$27.90 2.00
Contribution margin per minute ............... Rank in terms of profitability .................... Optimal production ..................................
$13.95 3 1,700
Product B $54.6 0 15.80 12.60 1.20 1.40 31.00 $23.6 0 1.00 $23.6 0 2 1,000
C $43.10 8.00 9.90 1.40 1.90 21.20 $21.90 0.50 $43.80 1 3,000
c. The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $13.95. Level of Difficulty: 3 Hard Learning Objective: 10-05 Learning Objective: 10-06 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 179. Bowen Corporation produces products P, Q, and R from a joint production process. Each product may be sold at the split-off point or processed further. Joint production costs of $80,000 per year are allocated to the products based on the relative number of units produced. Data for Bowen's operations for last year follow:
Product P .... Product Q ... Product R....
Units Produced 3,000 6,000 1,000
Sales Values at Split-Off $37,500 $46,500 $15,500
Sales Values If Processed Further $50,000 $65,000 $25,000
Costs of Processing Further $10,000 $30,000 $5,000
Required: Which products should be processed beyond the split-off point? Answer: Product P Product Q Sales value after further processing ........ $50,000 $ 65,000 Sales value at split-off ............................. 37,500 46,500 Added sales value from processing ........ 12,500 18,500 Added processing costs .......................... 10,000 30,000 Net gain (loss) from processing............... $ 2,500 $(11,500)
Product R $25,000 15,500 9,500 5,000 $4,500
Products P and R should be processed beyond the split-off point. Product Q should be sold at split-off. Note that the joint production costs are not relevant in the decision to sell at split- off or to process further. Level of Difficulty: 1 Easy Learning Objective: 10-07
Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 180. Iaci Company makes two products from a common input. Joint processing costs up to the split-off point total $42,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:
Allocated joint processing costs .............. Sales value at split-off point .................... Costs of further processing ..................... Sales value after further processing ........
Product X $22,400 $32,000 $11,600 $40,800
Product Y $19,600 $28,000 $25,300 $54,200
Total $42,000 $60,000 $36,900 $95,000
Required: a. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? c. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d. What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point? Answer: a. & b. Product X Product Y Sales value after further processing ........ $40,800 $54,200 Costs of further processing ..................... 11,600 25,300 Benefit of further processing ................... 29,200 28,900 Less: Sales value at split-off point ........... 32,000 28,000 Net advantage (disadvantage) ................ $(2,800) $900 c. & d. Minimum selling price at split-off ............... Level of Difficulty: 3 Hard Learning Objective: 10-07 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement
Product X $29,200
Product Y $28,900
[QUESTION] 181. Mitchener Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $300,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. Each product may be sold at the split-off point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are:
Sales Value at Split-Off Product M ....... $200,000
Further Processing Costs $85,000
Sales Value After Further Processing $300,000
Product N........ Product P ........
$155,000 $325,000
$110,000 $65,000
$285,000 $370,000
Required: Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations. Answer: Product M Product N Product P Sales value after further processing ........ $300,000 $285,000 $370,000 Sales value at split-off ............................. 200,000 155,000 325,000 Incremental revenue ................................ 100,000 130,000 45,000 Further processing costs ......................... 85,000 110,000 65,000 Incremental income (loss) ....................... $15,000 $20,000 $(20,000) Products M and N should be sold after further processing beyond the split-off point. Product P should be sold at the split-off point without any further processing. Level of Difficulty: 2 Medium Learning Objective: 10-07 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 182. Lafoe Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into end product X. Intermediate product B can be further processed into Product Y. The common input is purchased in batches that cost $40 each and the cost of processing a batch to produce intermediate products A and B is $18. Intermediate product A can be sold as is for $28 or processed further for $19 to make Product X that is sold for $50. Intermediate product B can be sold as is for $30 or processed further for $21 to make product Y that is sold for $49. Required: a. Assuming that no other costs are involved in processing the common input or in selling products, what is the profit (loss) from processing one batch of the common input into the products X and Y? Show your work! b. Should each of the intermediate products, A and B, be sold as is or processed further? Explain. Answer: a. Analysis of the profitability of the overall operation: $9 Combined final sales value ($50 + $49) .............. 9 Less costs of producing the end products: Cost of common input ......................................... $40 Cost of processing common input ....................... 18 Cost of further processing product A ................... 19 Cost of further processing product B ................... 21 98 Profit (loss) .......................................................... $1 b. Analysis of sell or process further: Final sales value after further processing ............ Less sales value at split-off point ......................... Incremental revenue from further processing ...... Less cost of further processing ............................ Profit (loss) from further processing .....................
Product X $50 28 22 19 $3
Product Y $49 30 19 21 ($2)
Product X should be produced, but not Product Y. Level of Difficulty: 2 Medium Learning Objective: 10-07 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 183. Benjamin Signal Company produces products R, J, and C from a joint production process. Each product may be sold at the split-off point or be processed further. Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced. Data for Benjamin's operations for the current year are as follows:
Product R.... Product J .... Product C....
Units Produced 8,000 10,000 5,000
Allocated Joint Production Cost $32,000 $40,000 $20,000
Sales Value at Split-off $76,000 $71,000 $48,000
Product R can be processed beyond the split-off point for an additional cost of $26,000 and can then be sold for $105,000. Product J can be processed beyond the split-off point for an additional cost of $38,000 and can then be sold for $117,000. Product C can be processed beyond the split-off point for an additional cost of $12,000 and can then be sold for $57,000. Required: Which products should be processed beyond the split-off point? Answer: Product R Product J Sales value after further processing ............. $105,000 $117,000 Sales value at split-off .................................. 76,000 71,000 Added sales value from processing ............. 29,000 46,000 Added processing costs ............................... 26,000 38,000 Net gain (loss) from further processing ........ $3,000 $8,000
Product C $57,000 48,000 9,000 12,000 $(3,000)
Products R and J should be processed beyond the split-off point. Product C should be sold at split-off. Joint production costs are not relevant to the decision to sell at split-off or to process further. Level of Difficulty: 1 Easy Learning Objective: 10-07 Topic Area: Blooms: Apply AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 184. Bowdish Corporation purchases potatoes from farmers. The potatoes are then peeled, producing two intermediate products-peels and depeeled spuds. The peels can then be processed further to make a cocktail of organic nutrients. And the depeeled spuds can be processed further to make frozen french fries. A batch of potatoes costs $37 to buy from farmers and $14 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $22 or processed further for $13 to make the cocktail of nutrients that are sold for $40. The depeeled spuds can be sold as is for $37 or processed further for $21 to make frozen french fries that are sold for $53. Required:
a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries? Show your work! b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or processed further into an end product? Explain. Answer: a. Analysis of the profitability of the overall operation: $9 Combined final sales value ($40 + $53) .............. 3 Less costs of producing the end products: Cost of potatoes .................................................. $37 Cost of peeling .................................................... 14 Cost of further processing peels.......................... 13 Cost of further processing depeeled spuds ......... 21 85 Profit (loss) .......................................................... $8 b. Analysis of sell or process further:
Final sales value after further processing ............ Less sales value at split-off point ......................... Incremental revenue from further processing ...... Less cost of further processing ............................ Profit (loss) from further processing .....................
Cocktail of Organic Nutrients $40 22 18 13 $5
Frozen French Fries $53 37 16 21 ($5)
The cocktail of organic nutrients should be produced, but not the frozen french fries.
