Chapter 13 5e

Chapter 13—Short-Run Decision Making: Relevant Costing TRUE/FALSE 1. The first step in making a short-run decision is to identify alternatives as possible solutions to the problem. ANS: F The first step in making a short-run decision is to define the problem. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 2. In making a short-run decision, all alternatives need to be considered. ANS: F In making a short-run decision, all alternatives need not be considered. Only feasible alternatives are considered. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 1 min. 3. In short-run decision making, the alternative with the lowest overall cost is always chosen. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 4. Irrelevant costs are costs that are the same for more than one alternative. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 5. The benefit sacrificed when one alternative is chosen over another is called sunk cost. ANS: F The benefit sacrificed when one alternative is chosen over another is called opportunity cost. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial

Accounting Features/Costs NOT: 1 min.

KEY: Bloom's: Knowledge

6. Short-run decision making only involves short-run decisions that have nothing to do with the firm's overall strategy. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 1 min. 7. A sunk cost is always relevant. ANS: F A sunk cost is never relevant. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 1 min. 8. Future costs that differ across alternatives are relevant costs. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 9. Fixed costs are never relevant. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 10. Resources that are acquired in advance of usage are flexible resources. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: BB-Resource Management |AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 11. Flexible resources may have unused capacity. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: BB-Resource Management |AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min.

12. A choice between internal and external production is a keep-or-drop decision. ANS: F A choice between internal and external production is a make-or-buy decision. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 13. Typically in a special-order decision, a customer wants to pay more than the usual price. ANS: F Typically in a special-order decision, a customer wants to pay less than the usual price. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 14. In keep-or-drop decisions, both the segment's contribution margin and its segment margin are useful in evaluating the performance of the segment. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 1 min. 15. A segment margin is always greater than or equal to zero. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 1 min. 16. At split-off, the joint costs of production for joint products are not relevant to the sell-or-processfurther decision. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 17. In deciding the optimal mix of products that use a constrained resource, it is important to determine the contribution margin per unit of scarce resource. ANS: T OBJ: LO: 13-3

PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic

STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 18. Linear programming is a special technique that can be used to determine the optimal product mix when there are multiple constraints. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 19. A situation in which management tells divisions that they must reduce costs by 10% is called target costing. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 20. Bellair Company produces a product that has manufacturing cost of $30 per unit. Bellair's policy is to charge a price equal to cost plus 30%. The 30% is pure profit to Bellair. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 1 min. 21. In determining the target price of a good, the company must first determine the target cost and the desired profit. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 22. Demand is one side of the pricing equation; supply is the other side. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 23. The markup includes desired profit and any costs not included in the base cost. ANS: T The markup is a percentage applied to the base cost; it includes desired profit and any costs not included in the base cost.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 24. Many companies start with cost to determine price since revenue must cover cost for the firm to make a profit. ANS: T Since revenue must cover cost for the firm to make a profit, many companies start with cost to determine price. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 25. A major advantage of markup pricing is that standard markups are easy to apply. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 26. Target costing is a method of determining the cost of a product or service based on the price (target price) that customers are willing to pay. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: BB-Marketing |AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 27. Target costing involves much more up-front work than cost-based pricing. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 28. Target costing can be used most effectively in the design and development stage of the product life cycle. ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min.

MATCHING Match each statement with the correct item below. a. the difference in total cost between the alternatives in a decision b. determine whether or not a segment should be kept or dropped c. limited resources and limited demand for each product d. a specific set of procedures that produces a decision e. the point that products that have common processes and costs of production become distinguishable f. method of determining the cost of a product based on the price that customers are willing to pay g. decisions involving a choice between internal and external production h. products that have common processes and costs of production up to a point i. past costs that cannot be affected by future decisions j. a percentage applied to the base cost to cover other costs plus profit k. determine whether a specially priced order should be accepted or rejected l. determine whether it is more profitable to process a joint product further 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Decision model Sunk costs Differential cost Joint products Keep-or-drop decisions Make-or-buy decisions Sell-or-process-further decision Special-order decisions Split-off point Constraints Markup Target costing

1. ANS: D PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-25-Managerial Characteristics/Terminology KEY: Bloom's: Knowledge NOT: 1 min. 2. ANS: I PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 3. ANS: A PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 4. ANS: H PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. 5. ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic

6.

7.

8.

9.

10.

11.

12.

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. ANS: G PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. ANS: L PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. ANS: K PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. ANS: E PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: BB-Resource Management | IMA: Decision Analysis | ACBSP: APC-25-Managerial Characteristics/Terminology KEY: Bloom's: Knowledge NOT: 1 min. ANS: J PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min. ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 1 min.

COMPLETION 1. ____________________ consists of choosing among alternatives with an immediate or limited end in view. ANS: Short-run decision making PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min.

2. A _________________ can be used to structure the decision maker’s thinking and to organize the information to make a good decision. ANS: decision model PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 3. The difference between the summed costs of two alternatives in a decision is known as the __________________. ANS: differential cost PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 4. _____________________ are simply those factors that are hard to put a number on, including things like political pressure and product safety. ANS: Qualitative factors PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: BB-Industry | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 5. Most short-run decisions require extensive consideration of ___________. ANS: cost behavior. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. 6. If a future cost is the same for more than one alternative, and it has no effect on the decision is known as a(n) _____________ cost. ANS: irrelevant PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min.

7. In order to be classified as a _________________, a cost must possess two characteristics, that they are future costs and they differ across alternatives. ANS: relevant cost PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 8. The benefit sacrificed or foregone when one alternative is chosen over another is known as the ____________________. ANS: opportunity cost. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 9. A cost that cannot be affected by any future action is called a(n) _______________. ANS: sunk cost. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 10. A manager will make a __________________ when determining if a specially priced order should be accepted or rejected. ANS: special-order decision PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 11. Segmented reports are helpful for managers to make _______________ decisions. ANS: keep-or-drop PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min.

12. The decision on whether to produce a product internally or purchase it from a supplier is an example of a _______________. ANS: make-or-buy decision. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 13. __________________ have common processes and costs of production up to a split-off point. ANS: Joint products PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: BB-Industry | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 14. ______________ is the point at which products become distinguishable after passing through a common process. ANS: Split-off point PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: BB-Industry | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 15. _______________________ focuses on whether a product should be processed beyond the split-off point. ANS: Sell-or-process-further decision PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 16. Limited resources or a limited demand for a product are examples of ______________. ANS: constraints. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: BB-Resource Management | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 17. In the presence of multiple constraints the solution is considerably more complex than for one constraint and requires a technique known as ____________________.

ANS: linear programming. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 18. ________________ refers to the relative amount of each product manufactured by a company. ANS: Product mix PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 19. The percentage that is applied to the base cost is known as the _____________. ANS: markup. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: BB-Industry | IMA: Cost Management | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 20. A method of determining the cost of a product or service based on the price that customers are willing to pay is called ________________. ANS: target costing. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: BB-Marketing | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. MULTIPLE CHOICE 1. Pasha Company produced 50 defective units last month at a unit manufacturing cost of $30. The defective units were discovered before leaving the plant. Pasha can sell them "as is" for $20 or can rework them at a cost of $15 and sell them at the regular price of $50. Which of the following is not relevant to the sell-or-rework decision? a. $15 for rework b. $20 selling price of defective units c. $30 manufacturing cost d. $50 regular selling price e. All of these are relevant. ANS: C PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension

NOT: 3 min. 2. Which of the following is not a step in the decision-making model? a. define the problem b. identify alternatives c. consider qualitative factors d. total relevant costs and benefits for each alternative e. determine costs and benefits for both feasible and unfeasible alternatives ANS: E PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 3. The act of choosing among alternatives with an immediate or limited end in view is termed a. assessing feasible alternative. b. strategic decision making. c. constructing a decision model. d. short-run decision making. e. None of these. ANS: D PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 4. Future costs that differ across alternatives are a. opportunity costs. b. sunk costs. c. relevant costs. d. variable costs. e. product costs. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 5. Depreciation of equipment is an example of a(n) a. relevant cost. b. opportunity cost. c. sunk cost. d. variable cost. e. None of these. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 6. Resources that can be purchased in the amount needed and at the time of use are

a. b. c. d. e.

lumpy resources. flexible resources. committed resources. product resources. implicit resources.

ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: BB-Resource Management |AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 7. A company is considering a special order for 1,000 units to be priced at $8.90 (the normal price would be $11.50). The order would require specialized materials costing $4.00 per unit. Direct labor and variable factory overhead would cost $2.15 per unit. Fixed factory overhead is $1.20 per unit. However, the company has excess capacity and acceptance of the order would not raise total fixed factory overhead. The warehouse, however, would have to add capacity costing $1,300. Which of the following is relevant to the special order? a. $11.50 normal selling price b. $1.20 fixed factory overhead per unit c. $7.35 spent on donuts and coffee d. $8.90 selling price per unit of special order e. None of these. ANS: D PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 3 min. 8. Walloon Company produced 150 defective units last month at a unit manufacturing cost of $30. The defective units were discovered before leaving the plant. Walloon can sell them as is for $20 or can rework them at a cost of $15 and sell them at the regular price of $50. The total relevant cost of reworking the defective units is a. $4,500. b. $6,750. c. $7,500. d. $3,000. e. $2,250. ANS: E Cost of reworking the defective units = 150($15) = $2,250 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 9. An important qualitative factor to consider regarding a special order is the a. variable costs associated with the special order. b. avoidable fixed costs associated with the special order. c. effect the sale of special-order units will have on the sale of regularly priced units. d. incremental revenue from the special order.

ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 10. Qualitative factors that should be considered when evaluating a make-or-buy decision are a. the quality of the outside supplier's product. b. whether the outside supplier can provide the needed quantities. c. whether the outside supplier can provide the product when it is needed. d. All of these. ANS: D PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. 11. Abbott Company is considering purchasing a new machine to replace a machine purchased one year ago that is not achieving the expected results. The following information is available: Expected maintenance costs of new machine Purchase price of existing machine Expected cost savings of new machine Expected maintenance costs of existing machine Resale value of existing machine

$ 12,000 per year $150,000 $ 20,000 per year $ 8,000 per year $ 35,000

Which of these items is irrelevant? a. Expected maintenance costs of new machine b. Purchase cost of existing machine c. Expected maintenance costs of existing machine d. Expected resale value of existing machine ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. Figure 13-1. Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order. Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether or not the special order is accepted. Fuller's policy is to avoid layoffs to the extent possible. 12. Refer to Figure 13-1. Which costs of the special order relate to flexible resources? a. wood and glass b. wood, glass, and variable overhead c. depreciation on machinery d. wood, glass, and direct labor e. wood, glass, direct labor, and setup labor

ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: BB-Resource Management | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 13. Refer to Figure 13-1. Which of the following is a qualitative factor that Fuller would consider in making the decision to accept or reject the special order? a. cost of yarn and backing b. cost of setup labor c. the no-layoff policy d. the use of machinery e. the machining and electricity ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 14. Refer to Figure 13-1. Which of the following is irrelevant to the special order decision? a. cost of wood and glass b. direct labor cost c. machining and electricity cost d. $40 price e. All of these are relevant. ANS: B PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. 15. Refer to Figure 13-1. If Fuller accepts the special order, by how much will operating income increase or decrease? a. $14,400 increase b. $12,000 decrease c. $12,000 increase d. $21,600 increase e. There will be no effect on operating income. ANS: C Sales ($40 x 600) Less: wood and glass ($16 x 600) Variable overhead ($4 x 600) Increase in operating income

$24,000 $9,600 $2,400 $12,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min.

16. Which of the following costs is not relevant to a decision to sell a product at split-off or process the product further and then sell the product? a. joint costs allocated to the product b. the selling price of the product at split-off c. the additional processing costs after split-off d. the selling price of the product after further processing ANS: A PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 | LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. 17. A decision involving a choice between internal and external production is what kind of decision? a. relevant b. keep-or-drop c. sell-or-process-further d. special-order e. make-or-buy ANS: E PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 18. A decision that focuses on whether a specially priced order should be accepted or rejected is what kind of decision? a. relevant b. make-or-buy c. sell-or-process-further d. special-order e. keep-or-drop ANS: D PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 19. A decision in which a manager needs to determine whether a product line (or segment) should continue or be eliminated is what kind of decision? a. relevant b. make-or-buy c. sell-or-process-further d. special-order e. keep-or-drop ANS: E PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min.

20. Piersall Company makes a variety of paper products. One product is 20 lb copier paper, packaged 5,000 sheets to a box. One box normally sells for $18. A large bank offered to purchase 3,000 boxes at $14 per box. Costs per box are as follows: Direct materials Direct labor Variable overhead Fixed overhead

$8 3 1 5

No variable marketing costs would be incurred on the order. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. Should Piersall accept the order? a. Yes, income will increase by $6,000. b. Yes, income will increase by $9,000. c. No, income will decrease by $3,000. d. No, income will decrease by $6,000. e. It doesn't matter; there will be no impact on income. ANS: A Yes, Piersall will make $6,000 if the order is accepted. $6,000 = ($14  8  3  1)  3,000 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 21. Aerotoy Company makes toy airplanes. One plane is an excellent replica of a 737; it sells for $5. Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying unaccompanied. Costs per plane are as follows: Direct materials Direct labor Variable overhead Fixed overhead

$1.00 0.50 0.10 0.90

No variable marketing costs would be incurred. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. However, Vacation Airlines wants its own logo and colors on the planes. The cost of the decals is $0.01 per plane and a special machine costing $1,500 would be required to affix the decals. After the order is complete, the machine would be scrapped. Should the special order be accepted? a. Yes, income will increase by $300. b. No, income will decrease by $180. c. No, income will decrease by $1,500. d. Yes, income will increase by $180. e. It doesn't matter; there will be no change in income. ANS: D Contribution margin [($1.75  1.61) 12,000] Less: cost of special machine Increased income

$1,680 1,500 $ 180

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 22. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labor Inspecting products Providing power Providing supervision Setting up equipment Moving materials Total

$150,000 240,000 60,000 30,000 40,000 60,000 20,000 $600,000

If the component is not produced by Foster, inspection of products and provision of power costs will only be 10% of the current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs; and supervision costs will amount to only 40% of the production amount. An outside supplier has offered to sell the component for $25.50. What is the effect on income if Foster Industries purchases the component from the outside supplier? a. $25,000 increase b. $45,000 increase c. $90,000 decrease d. $90,000 increase ANS: A SUPPORTING CALCULATIONS: Make: Direct materials Direct labor Inspecting products (avoid 90%) Providing power (avoid 90%) Providing supervision (avoid 60%) Setting up equipment (avoid 50%) Moving materials (avoid 50%) Total

$(150,000) (240,000) (54,000) (27,000) (24,000) (30,000) (10,000) $(535,000)

Buy: Purchase price (20,000  $25.50)

$(510,000)

$510,000  $535,000 = $25,000 increase in income Or Compare total “buy” cost to total “make” cost Buy cost = 6,000 + 3,000 + 16,000 + 40,000 + 510,000 = 575,000 Make cost = 600,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 5 min. 23. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 75,000 120,000 45,000 60,000 $300,000

An outside supplier has offered to sell the component for $12.75. Fixed costs will remain the same if the component is purchased from an outside supplier. What is the effect on income if Vest Industries purchases the component from the outside supplier? a. $270,000 decrease b. $270,000 increase c. $30,000 decrease d. $30,000 increase ANS: A SUPPORTING CALCULATIONS: Make: Direct materials Direct labor Variable overhead Total

$ (75,000) (120,000) (45,000) $(240,000)

Buy: Purchase price (40,000  $12.75)

$(510,000)

$510,000  $240,000 = $270,000 decrease in income PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 24. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 75,000 120,000 45,000 60,000 $300,000

An outside supplier has offered to sell the component for $12.75. Fixed cost will remain the same if the component is purchased from an outside supplier.

Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier. What is the effect on income if Vest purchases the component from the outside supplier? a. $225,000 decrease b. $195,000 increase c. $165,000 decrease d. $135,000 increase ANS: A SUPPORTING CALCULATIONS: Make: Direct materials Direct labor Variable overhead Total

$ (75,000) (120,000) (45,000) $(240,000)

Buy: Purchase price (40,000  $12.75) Rental income Total

$(510,000) 45,000 $(465,000)

$465,000  $240,000 = $225,000 decrease in income PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 25. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows: Variable costs per unit: Direct materials Direct labor Factory overhead Distribution Total

Fixed costs per month: $ 9.00Factory overhead 4.50Selling and admin. 3.00Total 1.50 $18.00

$120,000 60,000 $180,000

The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00 per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on profits if Miller Company buys from the Tennessee firm? a. decrease of $8,000 b. increase of $9,000 c. increase of $8,000 d. decrease of $6,000 ANS: C

SUPPORTING CALCULATIONS: Cost to buy ($17  20,000) Cost to make: Variable costs ($16.50  20,000) Opportunity costs Profit will increase by

$340,000 $330,000 18,000

348,000 $ 8,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 26. Houston Corporation manufacturers a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 32 40 16 32 $120

Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If Houston Corporation accepts Johnson Company's offer, total fixed costs will be reduced to $60,000. What alternative is more desirable and by what amount is it more desirable? a. b. c. d.

Alternative Amount Make $ 20,000 Make $120,000 Buy $ 40,000 Buy $100,000

ANS: A SUPPORTING CALCULATIONS: Make ($120  5,000) Buy [($112  5,000) + $60,000] Make increases profits by

$600,000 620,000 $ 20,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 27. The operations of Smits Corporation are divided into the Child Division and the Jackson Division. Projections for the next year are as follows:

Sales revenue Variable expenses Contribution margin Direct fixed expenses

Child Division $250,000 90,000 $160,000 75,000

Jackson Division $180,000 100,000 $ 80,000 62,500

Total $430,000 190,000 $240,000 137,500

Segment margin Allocated common costs Total relevant benefit (loss)

$ 85,000 35,000 $ 50,000

$ 17,500 27,500 $(10,000)

$102,500 62,500 $ 40,000

Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be a. $22,500. b. $40,000. c. $50,000. d. $60,000. ANS: A SUPPORTING CALCULATIONS: $85,000  $62,500 = $22,500 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 28. The operations of Knickers Corporation are divided into the Pacers Division and the Bulls Division. Projections for the next year are as follows:

Sales revenue Variable expenses Contribution margin Direct fixed expenses Segment margin Allocated common costs Total relevant benefit (loss)

Pacers Division $420,000 147,000 $273,000 126,000 $147,000 63,000 $ 84,000

Bulls Division $252,000 115,500 $136,500 105,000 $ 31,500 47,250 $(15,750)

Total $672,000 262,500 $409,500 231,000 $178,500 110,250 $ 68,250

Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be a. $99,750. b. $84,000. c. $68,250. d. $36,750. ANS: D SUPPORTING CALCULATIONS: $147,000  $110,250 = $36,750 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 29. The following information pertains to Dodge Company's three products: Unit sales per year

A 250

B 400

C 250

Selling price per unit Variable costs per unit Unit contribution margin Contribution margin ratio

$9.00 3.60 $5.40 60%

$12.00 9.00 $ 3.00 25%

$ 9.00 9.90 $(0.90) (10)%

Assume that product C is discontinued and the extra space is rented for $300 per month. All other information remains the same as the original data. Annual profits will a. increase by $75. b. decrease by $75. c. increase by $525. d. remain the same. ANS: C SUPPORTING CALCULATIONS: (250  $0.90) + $300 = $525 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 30. The following information relates to a product produced by Creamer Company: Direct materials Direct labor Variable overhead Fixed overhead Unit cost

$24 15 30 18 $87

Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each. The incremental cost per unit associated with the special order is a. $84. b. $81. c. $69. d. $64. ANS: B SUPPORTING CALCULATIONS: Direct materials Direct labor Variable overhead Variable selling

$24 15 30 12 $81

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min.

31. Meco Company produces a product that has a regular selling price of $360 per unit. At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order. Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be a. $60,000 increase. b. $60,000 decrease. c. $30,000 increase. d. $30,000 decrease. ANS: C SUPPORTING CALCULATIONS: 1,000  [$240  ($270  $120,000/2,000)] = $30,000 increase PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 32. The following information relates to a product produced by Creamer Company: Direct materials Direct labor Variable overhead Fixed overhead Unit cost

$24 15 30 18 $87

Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each. If the firm produces the special order, the effect on income would be a a. $360,000 increase. b. $360,000 decrease. c. $540,000 increase. d. $540,000 decrease. ANS: C SUPPORTING CALCULATIONS: Incremental revenue (60,000  $90) Less: Incremental costs (60,000  $81) Incremental profit

$5,400,000 4,860,000 $ 540,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application

NOT: 3 min. 33. Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units: Direct materials Direct labor Variable overhead Fixed overhead

$ 4 12 6 8

The company has the capacity to produce 30,000 units. The product regularly sells for $40. A wholesaler has offered to pay $32 per unit for 2,000 units. If the firm chooses to accept the special order and reject some regular sales, the effect on operating income would be a. a $20,000 increase. b. a $16,000 decrease. c. a $4,000 increase. d. $-0-. ANS: B SUPPORTING CALCULATIONS: 2,000  ($40  $32) = $16,000 decrease PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 34. Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: Direct materials Direct labor Variable overhead Fixed overhead

$12 36 18 24

The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered to pay $110 per unit for 7,500 units. If the special order is accepted, the effect on operating income would be a a. $75,000 decrease. b. $429,000 increase. c. $495,000 increase. d. $249,000 increase. ANS: D SUPPORTING CALCULATIONS: Incremental revenue (7,500  $110) Lost revenue from regular sales (1,500  $120) Incremental costs: Direct materials (6,000  $12) Direct labor (6,000  $36)

$ 825,000 (180,000) $ 72,000 216,000

Variable overhead (6,000  $18) Incremental profit

108,000

(396,000) $ 249,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 35. Rose Manufacturing Company had the following unit costs: Direct materials Direct labor Variable overhead Fixed overhead (allocated)

$24 8 10 18

A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit or loss will be generated by accepting the special order? a. $12,000 profit b. $96,000 profit c. $84,000 loss d. $24,000 loss ANS: A SUPPORTING CALCULATIONS: 2,000  ($48  $42) = $12,000 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 36. Reggie Corporation manufactures a single product with the following unit costs for 1,000 units: Direct materials Direct labor Overhead (30% variable) Selling expenses (50% variable) Administrative expenses (10% variable) Total per unit

$2,400 960 1,800 900 840 $6,900

Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order. How much will income change if the special order is accepted? a. increase by $398,400 b. decrease by $180,000 c. increase by $111,600 d. no change

ANS: C SUPPORTING CALCULATIONS: 100  ($5,100  $2,400  $960  ($1,800  0.30)  ($840  0.10)) = $111,600 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 37. Boone Products had the following unit costs: Direct materials Direct labor Variable overhead Fixed factory (allocated)

$24 10 8 18

A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is $8 per unit. How much additional profit or loss will be generated by accepting the special order? a. $30,000 loss b. $4,000 loss c. $24,000 loss d. $4,000 profit ANS: D SUPPORTING CALCULATIONS: 1,000  ($48  $42) = 1,000  ($48  $50) =

$6,000 (2,000) $4,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 38. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint process. The joint costs amount to $200,000.

Product A1 B2 C3 D4

Units Produced 3,000 5,000 4,000 6,000

If Product B2 is processed further, profits will a. increase by $30,000. b. decrease by $3,000. c. increase by $32,000. d. increase by $2,000.

Sales Value at Split-Off $10,000 30,000 20,000 40,000

If Processed Further Additional Sales Costs Value $2,500 $15,000 3,000 35,000 4,000 25,000 6,000 45,000

ANS: D SUPPORTING CALCULATIONS: $35,000  $30,000  $3,000 = $2,000 increase PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 39. Manning Company uses a joint process to produce products W, X, Y, and Z. Each product may be sold at its split-off point or processed further. Additional processing costs of specific products are entirely variable. Joint processing costs for a single batch of joint products are $120,000. Other relevant data are as follows: Product W X Y Z

Sales Value at Split-Off $ 40,000 $ 12,000 $ 20,000 $ 28,000 $100,000

Additional Processing Costs $ 60,000 $ 4,000 $ 32,000 $ 20,000 $116,000

Sales Value of Final Product $ 80,000 $ 20,000 $120,000 $ 32,000 $252,000

Which products should Manning process further? a. All. b. All except Z. c. Y and X. d. None. ANS: C SUPPORTING CALCULATIONS: Product W X Y Z

Additional Revenues $ 40,000 $ 8,000 $100,000 $ 4,000

Additional Costs $60,000 $ 4,000 $32,000 $20,000

DifferencesDecision ($20,000)Sell now $ 4,000 Process on $68,000 Process on ($16,000)Sell now

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 40. Information about three joint products follows: Anticipated production Selling price/lb. at split-off Additional processing costs/lb. after split-off (all variable) Selling price/lb. after further processing

A 5,000 lbs. $10

B 1,000 lbs. $30

C 2,000 lbs. $16

$ 6 $20

$12 $40

$24 $50

The cost of the joint process is $60,000. Which of the joint products should be sold at split-off?

a. b. c. d.

A. B. C. Both A and B.

ANS: B SUPPORTING CALCULATIONS: Split-Off Process Further A $10 $20  $ 6 = $14 B $30 $40  $12 = $28 C $16 $50  $24 = $26

*Sell now

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 41. Information about three joint products follows: Anticipated production Selling price/lb. at split-off Additional processing costs/lb. after split-off (all variable) Selling price/lb. after further processing

X 12,000 lbs. $16

Y 8,000 lbs. $26

Z 7,000 lbs. $48

$ 8 $20

$20 $40

$20 $70

The cost of the joint process is $140,000. Which of the joint products should be processed further? a. X. b. Y. c. Z. d. Both X and Y. ANS: C SUPPORTING CALCULATIONS: Split-Off Process Further X $16 $20  $ 8 = $12 Y $26 $40  $20 = $20 Z $48 $70  $20 = $50

*Process on

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. Figure 13-2. ColorPro uses part 87A in the production of color printers. Unit manufacturing costs for part 87A are: Direct materials Direct labor Variable overhead Fixed overhead

$8 2 1 4

ColorPro uses 100,000 units of 87A per year. Filbert Company has offered to sell ColorPro 100,000 units of 87A per year for $12. Fixed overhead is unavoidable. 42. Refer to Figure 13-2. Should ColorPro make or buy the part? a. Make the part because it will save $100,000 over buying it. b. Buy the part because it will save $100,000 over making it. c. Make the part because it will save $1,100,000 over buying it. d. Buy the part because it will save 1,100,000 over making it. e. Buy the part because it will save $300,000 over making it. ANS: A Direct materials Direct labor Variable overhead Purchase price Total relevant costs

Make $8 2 1 --$11

Buy ------$12 $12

It is cheaper to make the part in-house. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 43. Refer to Figure 13-2. Now suppose that ColorPro discovers that other costs will increase by $7,000 per year if the component is purchased rather than made internally. Should ColorPro make or buy the part? a. Make the part because it will save $100,000 over buying it. b. Buy the part because it will save $100,000 over making it. c. Make the part because it will save $107,000 over buying it. d. Buy the part because it will save $107,000 over making it. e. Make the part because it will save $10,000 over buying it. ANS: C Direct materials Direct labor Variable overhead Purchase price Materials handling cost Total costs

Make $ 800,000 200,000 100,000 ----$1,100,000

Buy ------$1,200,000 7,000 $1,207,000

It is cheaper by $107,000 to make the part in-house. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 44. Refer to Figure 13-2. Which of the following is a qualitative factor that might affect ColorPro's decision?

a. Filbert has an outstanding reputation for quality. b. Ordering from Filbert would give ColorPro a chance to see how well Filbert could meet JIT standards for ColorPro's other products. c. Filbert is known for the reliability of its products. d. Making the part in-house would help ColorPro avoid layoffs of direct and indirect labor. e. All of these. ANS: E PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. Figure 13-6. Autry Company manufactures veterinary products. One joint process involves refining a chemical (dactylyte) into two chemicals  dac and tyl. One batch of 5,000 gallons of dactylyte can be converted to 2,000 gallons of dac and 3,000 gallons of tyl at a total joint processing cost of $12,000. At the splitoff point, dac can be sold for $3 per gallon and tyl can be sold for $4 per gallon. Autry has just learned of a new process to convert dac into prodac. The new process costs $4,000 and yields 1,700 gallons of prodac for every 2,000 gallons of dac. Prodac sells for $5 per gallon. 45. Refer to Figure 13-6. What is Autry's profit from refining one batch of dactylyte if both dac and tyl are sold at the split-off point? a. $6,000 b. $12,000 c. $7,000 d. $18,000 e. $15,000 ANS: A Revenue [(2,000  $3) + (3,000  $4)] Less: Joint processing cost Gross profit

$18,000 12,000 $ 6,000

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 46. Refer to Figure 13-6. Should Autry process dac further? a. No, income will be $1,500 lower. b. No, income will be $5,000 lower. c. Yes, income will be $1,500 higher. d. Yes, income will be $5,000 higher. e. It doesn't matter; income will be the same. ANS: A Revenue Less: further processing of dac Less: Joint processing cost Gross profit

Sell Dac & Tyl @ Split-off $18,000 12,000 $ 6,000

Process Dac Further $20,500* 4,000 12,000 $ 4,500

($3  2,000) = $6,000 Sales of Dac that would not occur if action taken. ($5  $1,700) = $8,500 Sales of Prodac that would occur if action taken. *Revenue 2nd option $18,000  $6,000 + $8,500 = $20,500. Gross profit is $1,500 less ($4,500  $6,000). PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. Figure 13-7. Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house. An outside company has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows: Direct materials Direct labor Variable overhead Fixed overhead

$3.00 $1.50 $2.75 $5.00

47. Refer to Figure 13-7. Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should Ring purchase the part from the outside supplier? a. No, income will decrease by $71,500. b. No, income will decrease by $15,000. c. Yes, income will increase by $74,500. d. No, income will decrease by $10,500. e. Yes, income will increase by $10,500. ANS: A Relevant cost per unit= $3.00 + $1.50 + $2.75 + $1.50 = $8.75 Fixed overhead = $5.00 - ($5.00 x 70%) = $1.50 Decrease in income if purchased = ($12.00 - $8.75) x 22,000 = $71,500 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 48. Refer to Figure 13-7. Assume that all of the fixed overhead is allocated and cannot be avoided. Should Ring purchase the part from the outside supplier? a. Yes, income will increase by $104,500. b. No, income will decrease by $104,500. c. Yes, income will increase by $78,500. d. Yes, income will increase by $95,500. e. Yes, income will increase by $137,500.

ANS: B Relevant cost per unit = $3.00 + $1.50 + $2.75 = $7.25 Decrease in income if purchased = ($7.25 - $12.00) x 22,000 = $104,500 added cost if purchased PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. Figure 13-8. Kerrigan Lumber Yard receives 12,000 large trees each year that they process into rough logs. Currently, Kerrigan sells the rough logs for $75 each. Kerrigan is considering processing the logs further into refined lumber. Each log can be processed into 200 feet of refined lumber at an additional cost of $0.40 per foot. The refined lumber can be sold for $0.95 per foot. 49. Refer to Figure 13-8. Should Kerrigan process the rough logs into refined lumber? a. Yes, income will increase by $35 per log. b. Yes, income will increase by $110 per log. c. Yes, income will increase by $75 per log. d. No, income will decrease by $35 per log. e. No, income will decrease by $110 per log. ANS: A Sell at Split-Off Process Further Revenue $75.00 $190.00 Less: Processing cost $0.00 $80.00 Income $75.00 $110.00 Increase of $35.00 per log ($110.00 - $75.00) PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 50. Refer to Figure 13-8. Assume that the cost of getting the 12,000 large trees falls by half. Should Kerrigan sell the rough logs at split-off or process it further? a. Process further, the reduction in the cost of trees makes that option more profitable than it was before. b. Sell at split-off because the decrease in the cost of the trees makes that option more profitable than it was before. c. Sell at split-off, the reduction in the cost of the trees is irrelevant. d. Process further, the reduction in the cost of the trees will lower further processing costs. e. Process further because the reduction in the cost of the trees is irrelevant. ANS: E PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 3 min.

51. A decision that involves potential further processing of joint products is which kind of decision? a. relevant b. make-or-buy c. sell-or-process-further d. special-order e. keep-or-drop ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. 52. When managers are considering the optimal product mix, they are most concerned with a. maximizing revenue. b. minimizing cost. c. maximizing profit. d. minimizing selling and administrative expense. e. balancing productive capacity. ANS: C PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management Functions KEY: Bloom's: Comprehension NOT: 2 min. 53. Limited resources and limited demand for a product are generally referred to as a. resources. b. problems. c. constraints. d. optima. e. contribution factors. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-25-Managerial Characteristics/Terminology KEY: Bloom's: Knowledge NOT: 2 min. 54. The solution of the product mix problem in the presence of multiple constraints requires the use of a. linear programming. b. relevant costing. c. differential costing. d. excel programming. e. contribution margin per unit of scarce resource. ANS: A PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-25-Managerial Characteristics/Terminology KEY: Bloom's: Knowledge NOT: 2 min. Figure 13-3.

Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed a line of sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and have variable costs of $80. The tubs sell for $600 and have variable costs of $450. The glass and ceramic sinks and tubs require the use of specialized molding equipment. The specialized molding equipment has 4,050 hours of capacity per year. A sink uses an average of 2 hours of specialized molding equipment time; a tub uses an average of 5 hours of specialized molding equipment time. 55. Refer to Figure 13-3. What is the contribution margin per hour of specialized molding equipment time for sinks? a. $35 b. $33.33 c. $70 d. $200 e. $68.33 ANS: A Contribution margin CM per hour of molding for sinks = $70/2 = $35 per hour of constrained resource (molding) PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 56. Refer to Figure 13-3. Assume that EBP can sell as many as 1,000 sinks and 500 tubs per year. How many tubs should EBP produce? a. 1,000 b. 500 c. 410 d. 675 e. 0 ANS: C Contribution Margin per molding hour for Sinks is ($150  $80)/2 or $35. Contribution Margin per molding hour for Tubs is ($600  $450)/2 or $30. To maximize profits, they should make as many sinks as will sell since the margin per molding hour is greater. Solving for the maximum sinks of 1,000, the number of tubs would be 410. Expressed mathematically the equation is: 2  sinks + 5  tubs = 4,050 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 4 min. 57. Refer to Figure 13-3. What is the contribution margin per hour of specialized molding time for tubs? a. $35 b. $68.33 c. $70 d. $200 e. $30

ANS: E Contribution margin per hour of molding for tubs = $150/5 = $30 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 58. Refer to Figure 13-3. Assuming that specialized molding equipment time is the only constrained resource, and that EBP can sell as many tubs and sinks as it can produce, how many sinks should be sold? a. 2,050 b. 2,025 c. 0 d. 4,050 e. 810 ANS: B Contribution margin per hour of molding for tubs = $150/5 = $30 Contribution margin CM per hour of molding for sinks = $70/2 = $35 Because the contribution margin per hour for sinks ($35) is higher than that of tubs ($30), EBP would prefer to use the molding equipment as much as possible to make sinks. EBP has capacity for 2,025 sinks (4,050 hours/2 hours). PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 4 min. Figure 13-4. Connolly Company produces two types of lamps, classic and fancy, with unit contribution margins of $13 and $21, respectively. Each lamp must spend time on a special machine. The firm owns four machines that together provide 18,000 hours of machine time per year. The classic lamp requires 0.20 hours of machine time, the fancy lamp requires 0.50 hours of machine time. 59. Refer to Figure 13-4. What is the contribution margin per hour of machine time for a classic lamp? a. $26 b. $104 c. $16 d. $65 e. $13 ANS: D Contribution margin per unit Hours of machine time Contribution margin per hour of machine time PTS: NAT: STA: KEY:

Classic lamp Fancy lamp $13.00 $21.00 0.2 0.5 $65.00 $42.00

1 DIF: Difficulty: Easy OBJ: LO: 13-3 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 3 min.

60. Refer to Figure 13-4. What is the contribution margin per hour of machine time for a fancy lamp? a. $21 b. $42 c. $13 d. $8 e. $6 ANS: B Contribution margin per unit Hours of machine time Contribution margin per hour of machine time PTS: NAT: STA: KEY:


1 DIF: Difficulty: Easy OBJ: LO: 13-3 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 3 min.

61. Refer to Figure 13-4. How many of each type of lamp must be sold to optimize total contribution margin? a. 18,000 classic lamps; 0 fancy lamps b. 0 classic lamps; 30,000 fancy lamps c. 10,000 classic lamps; 10,000 fancy lamps d. 0 classic lamps; 9,000 fancy lamps e. 90,000 classic lamps; 0 fancy lamps ANS: E

Contribution margin per unit Hours of machine time Contribution margin per hour of machine time


Since classic lamps have a contribution margin per hour of machine time of $65 (as opposed to fancy lamps $42), all machine time should go to the production of classic lamps. Number of classic lamps = 18,000/0.20 hours per unit = 90,000 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 62. Refer to Figure 13-4. What is the total contribution margin of the optimal mix of classic and fancy lamps? a. $1,280,000 b. $950,000 c. $1,000,000 d. $1,170,000 e. $90,000 ANS: D

Since classic lamps have a contribution margin per hour of machine time of $65 (as opposed to fancy lamps $42), all machine time should go to the production of classic lamps. The optimal mix is 90,000 classic lamps and zero fancy lamps. Total contribution margin = 90,000 x $13 = $1,170,000 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. Figure 13-5. Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit contribution margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14. Each model must spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time. 63. Refer to Figure 13-5. What is the amount of machine time for model K-3 in terms of percent of a machine hour? a. 10% b. 20% c. 25% d. 40% e. 50% ANS: C Model K-3 requires 15/60 or 25% machine hours. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 3 min. 64. Refer to Figure 13-5. What is the contribution margin per unit of scarce resource (machine time) for Model K-3? a. $24 b. $12 c. $6 d. $14 e. $28 ANS: A Model K-3 requires 15/60 or 25% machine hours. Model P-4 requires 30/60 or 50% machine hours. Contribution margin per unit Hours of machine time Contribution margin per hour of machine time PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic

Model K-3 $ 6.00 0.25 $24.00

Model P-4 $14.00 0.50 $28.00 OBJ: LO: 13-3

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis |ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 65. Refer to Figure 13-5. What is the amount of machine time for model P-4 in terms of percent of a machine hour? a. 10% b. 20% c. 25% d. 30% e. 50% ANS: E Model P-4 requires 30.60 or 50% of machine hours. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 3 min. 66. Refer to Figure 13-5. What is the contribution margin per unit of scarce resource (machine time) for Model P-4? a. $6 b. $12 c. $24 d. $14 e. $28 ANS: E Model K-3 requires 15/60 or 0.25 machine hours. Model P-4 requires 30/60 or 0.50 machine hours. Contribution margin per unit Hours of machine time Contribution margin per hour of machine time

Model K-3 $ 6.00 0.25 $24.00

Model P-4 $14.00 0.50 $28.00

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis |ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 67. Refer to Figure 13-5. Now suppose that Santorino Company can sell only 5,500 units of each model. How many units of Model K-3 should be produced? a. 5,500 b. 312 c. 1,250 d. 2,750 e. 5,000 ANS: E Model K-3 requires 15/60 or 0.25 machine hours. Model P-4 requires 30/60 or 0.50 machine hours. Contribution margin per unit

Model K-3 $ 6.00

Model P-4 $14.00

Hours of machine time Contribution margin per hour of machine time

0.25 $24.00

0.50 $28.00

Since P-4 has the higher contribution margin per hour of machine time, produce 5,500 units of P-4, which will take 2,750 hours of machine time. Remaining hours of machine time = 4,000  2,750 = 1,250 hours Model K-3 units = 1,250/0.25 = 5,000 units PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis |ACBSP: APC-30-Contribution Margin | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 4 min. 68. Refer to Figure 13-5. Now suppose that Santorino Company can sell only 5,500 units of each model. How many units of Model P-4 should be produced? a. 5,500 b. 5,000 c. 1,250 d. 2,750 e. 1,375 ANS: A Model K-3 requires 15/60 or 0.25 machine hours. Model P-4 requires 30/60 or 0.50 machine hours. Model K-3 $ 6.00 0.25 $24.00

Contribution margin per unit Hours of machine time Contribution margin per hour of machine time

Model P-4 $14.00 0.50 $28.00

Since P-4 has the higher contribution margin per hour of machine time, produce 5,500 units of P-4. (Any remaining machine time can be used to produce Model K-3.) PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis |ACBSP: APC-30-Contribution Margin | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 4 min. Figure 13-9. Sabor Inc. is a medical testing laboratory that performs several tests and analyses for hospitals in the area. Four of the tests that they perform require the use of a specialized machine that can supply 14,000 hours per year. Information on the four lab tests follows:

Charging rate Variable cost Machine hours

Test A $65 $25 3

Test B $51 $18 2

Test C $48 $13 1

Test D $32 $8 0.5

69. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test A? a. $40

b. c. d. e.

$65 $25.50 $13.33 $15.67

ANS: D (1/3) completed x $40 CM = $13.33 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 13-3 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 3 min.

70. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test B? a. $20.50 b. $33 c. $16.25 d. $16.50 e. $18 ANS: D 0.5 completed in 1 hour x $33 CM = $16.50 PTS: NAT: STA: KEY:


71. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test C? a. $48 b. $35 c. $13 d. $16 e. $24 ANS: B 1 completed in 1 hour x $35 CM = $35 PTS: NAT: STA: KEY:


72. Refer to Figure 13-9. What is the contribution margin per unit of machine time for Test D? a. $20 b. $32 c. $8 d. $48 e. $24 ANS: D 2 completed in 1 hour x $24 CM = $48 PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

OBJ: LO: 13-3

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 73. Raffles Company routinely bids on construction jobs. Raffles first determines the budgeted product cost of the job and then applies a markup of 50%. If a bid of $15,000 is submitted for a new job, which of the following is true? a. Budgeted product cost is $15,000. b. $5,000 is pure profit. c. All costs pertaining to the job total $15,000. d. $5,000 includes fixed overhead, selling and administrative expense, and profit. e. $5,000 includes selling and administrative expense, and profit. ANS: E PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 74. The method of determining the cost of a product or service based on the price that customers are willing to pay is called a. relevant costing. b. differential costing. c. target costing. d. product costing. e. overall costing. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 75. Moss Company charges cost plus 35%. What is the price of an item with cost equal to $65? a. $73.25 b. $95.80 c. $87.75 d. $65.50 e. $22.75 ANS: C Price = $65 + ($65 x 35%) = $87.75 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 2 min. 76. Stadium Company charges cost plus 60%. If the price of an item is $260, what is the item's cost? a. $180 b. $162.50 c. $100 d. $125.50 e. $150.75

ANS: B Price = COGS + (markup  COGS) or Price = COGS  (1 + markup) thus COGS = price/(1 + markup) COGS

= $260/(1 + .60) = $260/1.60 = $162.50

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 77. Mattson Construction charges each customer a price equal to the cost of direct materials, direct labor, and overhead plus 40%. Job #1845 included the following costs: Direct materials Direct labor Overhead

$39,000 $67,000 $26,000

What is price charged for Job 1845? a. $86,000 b. $42,400 c. $106,000 d. $184,800 e. $166,154 ANS: D Price = ($39,000 + $67,000 + $26,000)  1.4 = $184,800 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 78. Super Pet Supplies sets prices at cost plus 70% of cost. The cost of an aquarium start-up kit is $110. What price does Super Pet Supplies charge for the aquarium start-up kit? a. $195 b. $200 c. $187 d. $77 e. $180 ANS: C Price = $110  1.7 = $187 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min.

79. Curtis Company sets price equal to cost plus 50%. Recently, Curtis charged a customer a price of $150 for an item. What was the cost of the item to Curtis? a. $50 b. $75 c. $100 d. $40 e. $80 ANS: C Cost = $150/1.50 = $100 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 80. Wilson Custom Cabinetry makes cabinets to order and prices the completed jobs at product cost plus 40%. Recently, Wilson finished a job and billed the customer $560. If direct materials for the job cost $130, and direct labor cost $180, what was the applied overhead for the job? a. $250 b. $179 c. $350 d. $400 e. $90 ANS: E Applied overhead = $400*  $130  $180 = $90 *Cost = $560/1.4 = $400 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 81. Welker Company is designing an all-in-one grill and cooler aimed at sports fans. The company believes that the product can be sold for $180; and it requires a 30% profit on new products. What is the target cost of the all-in-one grill and cooler? a. $140 b. $54 c. $175 d. $126 e. $168 ANS: D Target cost = $180  $54* = $126 *Desired profit = 0.3  $180 = $54 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 3 min.

82. Shear-it, Inc., produces paper shredders. Shear-it is considering a new shredder design for home offices. The marketing vice president believes that a basic unit in a variety of attractive colors could be sold for $70. Shear-it requires that all new products yield 30% profit. What is the target cost of the new shredder? a. $21 b. $91 c. $49 d. $100 e. $63.70 ANS: C Target cost = $70  $21* = $49 *Desired profit = 0.3  $70 = $21 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 83. Brorsen, Inc., has just designed a new product with a target cost of $64. Brorsen requires new product to have a profit of 20%. What is the target price for the new product? a. $64 b. $12.80 c. $320 d. $80 e. $53 ANS: D Target price  desired profit = Target cost Target price  0.2 (target price) = $64 Target price = $80 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 84. Teller Company has designed a caller ID machine with a large screen that can be seen easily from across the room. The Sales Department believes that this product can be sold for $30 each. Teller requires that all new products yield 15% profit. What is the target cost of the new product? a. $26 b. $4.50 c. $30 d. $25.50 e. $28.50 ANS: D Target cost = $30  $4.50* = $25.50 *Desired profit = 0.15  $30 = $4.50 PTS: 1

DIF: Difficulty: Easy

OBJ: LO: 13-4

NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 85. Fester Company was making a product for $60 and selling it for $80. A competitor began selling the same product for $68. If Fester is to meet the competition's price, and maintain the same amount of profit per unit, what is target cost? a. $40 b. $60 c. $48 d. $17 e. $63 ANS: C Target cost = $68  20* = $48 *Profit = $80  60 = $20 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 86. Victor's Detailing customers would be willing to pay $57 per detail. The company requires an 80% markup on each job. The average job would cost $30. Victor's Detailing uses markup pricing to set the price on each job. What is the price Victor should quote a new customer? a. $30 b. $24 c. $54 d. $84 e. $240 ANS: C Price = Cost + (Cost  Markup) or Price = Cost  (1 + markup) $54 = $30 + ($30  0.80) = $30 + $24 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 87. Victor's Detailing customers would be willing to pay $57 per detail. The company requires a 40% profit on each job. The average job would cost $30. Victor's Detailing uses target-costing. What is the price they should quote a new customer? a. $30 b. $24 c. $57 d. $54 e. $84

ANS: C Target costing is a method of determining the cost of a product or service based on the price (target price) that customers are willing to pay. They would charge what the market could bear, which is $57. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 88. Victor's Detailing customers would be willing to pay $57 per detail. The company requires a 40% profit on each job. The average job would cost $30. Victor's uses target costing. Victor's Detailing should: a. sell their business. b. ask their customers to pay more. c. sell their services at the price customers are willing to pay. d. find a way to reduce costs. e. reduce their required percentage to stay in business. ANS: C Target cost = Price  (price  profit percent) = $57  ($57  0.40) = $57  $22.80 = $34.20 Victor's cost is below the target cost. He should sell at what the market will pay. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 3 min. PROBLEM 1. Sherrell Washington owns a successful hole-in-the-wall bagel shop called Big Apple Bagels. Sherrell wants to expand the shop by leasing the space next door for $500 per month, and adding tables and chairs so that customers can dine in. She figures that the tables and chairs will cost $4,000 and that the bagel machine, that cost $3,500 five years ago, would have to be scrapped in favor of a larger machine costing $6,400. She thinks sales would increase by $4,000 per month. Variable costs are 50% of sales. A. B.

What are the relevant costs and benefits of expanding into the new space? What are the irrelevant costs and benefits of expanding into the new space?

ANS: A.

The relevant costs and benefits include: Rent on additional space Table and chairs $4,000 New bagel machine $6,400 Increased sales $4,000 Variable costs on new sales

B.

Irrelevant costs and benefits include:

Rent paid for current space Current bagel machine cost $3,500 Current sales Current variable costs PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 2. Kara Ring owns a successful flower shower called Always Blooming. Kara wants to expand the shop by leasing the space next door for $1,200 per month, and adding refrigerators to keep the flowers fresh and two checkout counters so the customers do not have to wait in long lines. She currently pays $1,000 per month for her current store space and has two refrigerators that cost her $6,000 each two years ago. She figures that the new refrigerators and counters will cost $25,000. She also has determined that the current cash register that initially cost her $1,000 two years ago and has been depreciated $250 each year would have to be replaced with two new cash registers costing $1,500 each. She thinks sales would increase by $10,000 per month. Variable costs are 40% of sales. Required: A. What are the relevant costs and benefits of expanding into the new space? B. What are the irrelevant costs and benefits of expanding into the new space? ANS: A. Relevant costs and benefits: Rental of the new space $1,200 Refrigerators and counters $25,000 Two new cash registers $1,500 each Increased sales volume of $10,000 Variable cost on new sales volume B. Irrelevant costs and benefits: Current rental cost $1,000 Purchase price of the two refrigerators from 2 years ago $6,000 each Purchase price of the cash register two years ago $1,000 and the depreciation of $250 per year Current sales volume Current variable costs PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 5 min. 3. Veblen Company manufactures a variety of athletic shoes: basketball, running, and tennis. Sales of the tennis shoes have fallen off. Veblen is considering several options: 1) drop the tennis shoe line; 2) replace the tennis shoe line with golf shoes; 3) retool the tennis shoe line to make "Airtennies." Price and cost data are as follows: Price Variable cost/unit

Basketball $90 $45

Running $65 $40

Tennis $40 $35

Golf $60 $43

Airtennies $70 $50

Fixed costs Number of units

$200,000 10,000

$210,000 15,000

$50,000 2,500

$50,000 25,000

$90,000 6,000

If the tennis shoe line is dropped, the $50,000 fixed cost is totally avoidable. A. B. C. D. E.

Calculate the impact on operating income, using relevant amounts only, for keeping the tennis shoe line. Calculate the impact on operating income, using relevant amounts only, for option 1. Calculate the impact on operating income, using relevant amounts only, for option 2. Calculate the impact on operating income, using relevant amounts only, for option 3. Which option is best?

ANS: Sales COGS & Net FC Net Change E.

A. Keep Tennis $100,000 137,500 $(37,500)

B. Option 1 $100,000 137,500 $ 37,500

C. Option 2 $1,400,000 987,500 $ 412,500

D. Option 3 $320,000 252,500 $ 67,500

As is.

Increase Income

Increase Income

Increase Income

Clearly, the status quo (keeping the tennis shoe line) is the worst option and option 2 (replace tennis shoes with golf shoes) is the most profitable. Option 2 Sales Increase = 25,000  $60 $1,500,000  100,000 = $1,400,000 25,000  $43 $1,075,000 +$50,000  137,500 = $987,500 Net Increase = $1,400,000  $987,500 = $412,500 Option 3 Sales Increase = 6,000  $70 $420,000  100,000 = $320,000 Option 3 COGS and Fixed Cost Increase = 6,000  $50 $300,000 +90,000  137,500 = $252,500 Net Increase = $320,000  $252,500 = $67,500

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 15 min. 4. Tyler Company has been approached by a new customer with an offer to purchase 6,000 units of its product KR200 at a price of $11 each. The existing sales would not be affected by this special order. Tyler normally produces 40,000 units but plans to produce and sell 30,000 in the coming year. The normal sales price is $18 per unit. Unit cost information is as follows: Direct materials

$4.00

Direct labor Variable overhead Fixed overhead Total

$2.75 $1.50 $3.25 $11.50

If Tyler accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity. Required: A. By how much will profit increase or decrease if the order is accepted? B. Should Tyler accept the special order? ANS: A. Direct materials Direct labor Variable overhead

$4.00 $2.75 $1.50 $8.25

$11 - $8.25 = $2.75 $2.75 x 6,000 = $16,500 increase B. Yes the order should be accepted. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 5 min. 5. Junior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Junior Company that a 20% increase will take effect next year. Junior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): Direct materials Direct labor Variable overhead Fixed overhead Total

$16 12 12 10 $50

If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for $20,000 per year if the parts are purchased externally. Required: Should Junior Company buy the part externally or make it internally? ANS: Produce internally; it saves $120,000. ($1,620,000  $1,500,000) If purchased externally: Purchase price (30,000  $40  1.20) Fixed costs

$1,440,000 200,000

Rent received Net cost to purchase

(20,000) $1,620,000

If produced internally: Cost to produce (30,000  $50)

$1,500,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management Functions KEY: Bloom's: Application NOT: 10 min. 6. Tapeo Company has always made its electronic components that go into their GPS systems in-house. Streeter Company has offered to supply these electronic components at a price of $38 each. Tapeo uses 18,000 units of these components each year. The cost per unit of this component is as follows: Direct material Direct labor Variable overhead Fixed overhead Total

$13.75 $16.00 $7.00 $8.25 $45.00

Assume that 45% of Tapeo Company's fixed overhead would be eliminated if the electronic component was no longer produced in-house. Required: A. If Tapeo decided to purchase the electronic component from Streeter Company how much would its operating income increase or decrease? B. Should Tapeo continue to make the electronic component or buy it from Streeter Company? ANS: A. Make

Direct material Direct labor Variable overhead Avoidable Fixed overhead Purchase cost Total

$13.75 $16.00 $7.00 $3.71 $0.00 $40.46

Buy

$0.00 $0.00 $0.00 $0.00 $38.00 $38.00

Differential Costs to Make $13.75 $16.00 $7.00 $3.71 -$38.00 $2.46

$2.46 x 18,000 = $44,280 increase in operating income B. Tapeo should buy the electronic component. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management Functions KEY: Bloom's: Application NOT: 10 min.

7. Island Princess Pineapples purchases pineapples from area farmers and processes them into rings, juice, and skins. The cost of the pineapples is a joint cost, as is the initial processing in which the fruits are skinned, cored, and sliced into rings. At the split-off point, Island Princess sells the skins (for fertilizer). Juice and rings are processed further (further processing costs occurs for cooking and canning). Data for the three products follows: Sales Rings Juice Fertilizer Further processing costs: Rings Juice Joint costs A. B.

$2,000 $1,500 $ 400 500 300 $1,600

Prepare a segmented income statement for Island Princess, showing results for rings, juice, fertilizer, and in total. Do not allocate joint costs individually. Now suppose that Island Princess is considering the option of processing the skins further into pet food which would sell for $1,000. Additional costs would be $450. Should this be done?

ANS: A. Sales Further processing costs Product margin Joint costs Operating income B.

Rings $2,000 500 $1,500

Juice $1,500 300 $1,200

Fertilizer $400 0 $400

Total $3,900 800 $3,100 1,600 $1,500

Yes. Further processing costs are $450, additional income is $550 ($1,000  $450). Note that the joint costs do not come into play.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 5 min. 8. Rippey Corporation manufactures a single product with the following unit costs for 5,000 units: Direct materials Direct labor Factory overhead (40% variable) Selling expenses (60% variable) Administrative expenses (20% variable) Total per unit

$ 60 30 90 30 15 $225

Recently, a company approached Rippey Corporation about buying 1,000 units for $225. Currently, the models are sold to dealers for $412.50. Rippey's capacity is sufficient to produce the extra 1,000 units. No additional selling expenses would be incurred on the special order. Required:

A. B. C. D.

What is the profit earned by Rippey Corporation on the original 5,000 units? Should Rippey accept the special order if its goal is to maximize short-run profits? How much will income be affected? Determine the minimum price Rippey would want to receive in order to increase profits by $7,500 on the special order. When making a special-order decision, what qualitative aspects of the decision should Rippey Corporation consider?

ANS: A.

Sales (5,000  $412.50) Less: costs (5,000  $225) Net income

B.

Yes, profit will increase by:

$2,062,500 1,125,000 $ 937,500

Increase in sales (1,000  $225) Less: Increase in direct materials (1,000  $60) Increase in direct labor (1,000  $30) Increase in var. overhead (1,000  $90  0.40) Increase in var. selling (1,000  $30  0.60) Increase in var. adm. (1,000  $15  0.20) Increase in profits

$ 225,000 (60,000) (30,000) (36,000) (18,000) (3,000) $ 78,000

C.

$60 + $30 + ($90  0.40) + ($30  0.60) + ($15  0.20) + ($7,500/1,000) = $154.50 per unit

D.

What is the impact on regular customers? Will regular customers demand a similar price? Do we have the capacity to produce the extra units? Will we lose some regular customers? Will we be penetrating new markets?

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management Functions | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 15 min. 9. Salley Company makes pagers. Currently, Salley purchases 10,000 plastic housings per year from an outside company for $1 each. One of Salley's engineers suggested that the company make its plastic housings in-house. Estimated unit costs are as follows: Direct materials Direct labor Variable overhead Fixed overhead*

$0.30 0.20 0.15 0.40

* Fixed overhead is $2,400 per year in equipment costs specifically traceable to the plastic housing line and $1,600 per year in general overhead costs to be allocated to this line

A. B. C.

If Salley makes the housing in-house, net income will be $__________________ Higher or Lower? What is the highest price per unit that Salley would pay an outside company for the housings? Now assume that all of the fixed overhead is allocated fixed overhead and will not be affected by making the product in-house or purchasing it. If Salley makes the housing in-house, net income will be $__________________ (Higher / Lower).

ANS: A.

$1,100 higher ( = [$1.00  ($0.30 + 0.20 + 0.15 + 0.24)]  10,000). The allocated fixed overhead is irrelevant. (fixed traceable equipment costs are $2,400/10,000 units or .24)

B.

$0.89 = $0.30 + 0.20 + 0.15 + 0.24

C.

$3,500 higher ( = [$1.00  ($0.30 + 0.20 + 0.15)]  10,000). ALL allocated and traceable fixed overhead is irrelevant.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management Functions | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 10 min. Figure 13-10. Goutam Company prints a variety of publications and colored inserts for newspapers. Currently, Goutam produces its own ink, including a special metallic color. India Inks has offered to supply Goutam with the 25,000 ounces of metallic ink that it needs each year for $1.24 per ounce. Goutam is interested because this is a particularly difficult ink to make. The purchasing department must make special efforts to locate suppliers, the metallic component requires special handling, and, since the metallic ink uses machinery that is also used to make other colors of ink, the machinery must be cleaned very well before every batch of metallic. The accounting department supplied the following unit costs: Direct materials Direct labor Variable overhead Fixed overhead*

$0.40 0.15 0.06 0.50

*Fixed overhead is applied on the basis of a plantwide rate based on direct labor hours. 10. Refer to Figure 13-10. A. B.

Based on the cost figures, if Goutam purchases metallic ink from the outside supplier, operating income will be $__________________ (Higher / Lower)? What is the highest price per ounce that Goutam would pay an outside supplier for the ink?

ANS: A.

$15,750 lower = [$1.24  ($0.40 + 0.15 + 0.06)]  25,000 The allocated fixed overhead is irrelevant.

B.

$0.61 since this is the avoidable cost of making the ink in-house, Goutam would not pay an outside company more than this.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management Functions | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 10 min. 11. Refer to Figure 13-10. Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier, Jim Webb, the production supervisor said "That's nuts! This ink is a real pain to make and $1.24 per ounce sounds like a bargain to me!" Based on Jim's feelings, Anna Ruiz (a new CMA in the accounting office) did an ABC analysis of ink production. She came up with the same direct materials, direct labor and variable overhead, as well as the following information on activities required by metallic ink production. Setups Purchasing

$ 60,000600 setups per year $270,0009,000 purchase orders per year

The metallic ink requires 300 purchase orders per year and 80 setups. A. B.

If Goutam purchases the ink from the outside supplier, operating income would be $__________________ Higher Lower (circle one) What is the highest price per ounce that Goutam would pay an outside company for the ink?

ANS: A.

$1,250 higher = [$1.24  ($0.40 + 0.15 + 0.06 + 0.68)]  25,000 ($0.68 is the per ounce cost of setups and purchasing) Setups = [($60,000/600)  80]/25,000 = 0.32 Purchasing = [($270,000/9,000)  300]/25,000 = 0.36

B.

$1.29, since this is the avoidable cost of making the ink in-house, Goutam would not pay an outside company more than this.

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management Functions | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 15 min. 12. Sherpa Company manufactures tents and sleeping bags. Tents are priced at $80, have variable cost of $55, and direct fixed costs of $120,000. Sleeping bags are priced at $60, have variable cost of $35, and direct fixed costs of $66,000. Common fixed costs equal $200,000. Last year, the division sold 5,000 tents and 10,000 sleeping bags. A. B. C. D.

What was the segment margin for tents last year? What was the segment margin for sleeping bags last year? What was Sherpa's operating income last year? If Sherpa stopped making tents, what would operating income be?

ANS: Tents $400,000 275,000 $125,000 120,000 $ 5,000

Sales Less: Variable cost Contribution margin Less: Direct fixed overhead Segment margin Less: Common fixed overhead Operating income A. B. C. D.

Sleeping Bags $600,000 350,000 $250,000 66,000 $184,000

Total $1,000,000 625,000 $ 375,000 186,000 $ 189,000 200,000 ($11,000)

Segment margin for tents = $5,000 Segment margin for sleeping bags = $184,000 Operating income = ($11,000) Operating income without tents = ($16,000)

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 10 min. 13. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint process is $30,000. Information about the three products follows: Anticipated production Selling price/lb. at split-off Additional processing costs/lb. after split-off (all variable) Selling price/lb. after further processing Allocated joint costs

X 5,600 lbs. $2.00

Y 10,000 lbs. $1.00

Z 2,500 lbs. $3.00

$1.50 $2.50 $12,000

$1.25 $3.75 $10,500

$.75 $6.25 $7,500

Required: A. Determine whether each product should be sold at split-off or processed further. B. Determine the firm's income if the firm processed all three products beyond split-off. ANS: A. X

Sell at Split-Off $11,200

Process Further Then Sell Decision $14,000 (8,400)Sell at split-off $ 5,600

Y

$10,000

$37,500 (12,500)Process further $25,000

Z

$ 7,500

$15,625 (1,875)Process further $13,750

The joint costs are not relevant to the decision. B.

$14,350 ($13,750 + $25,000 + $5,600  $30,000)

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 10 min. 14. The operations of Grant Corporation are divided into the Fix Division and the Roach Division. Projections for the next year are as follows:

Sales revenue Variable expenses Contribution margin Direct fixed expenses Segment margin Allocated common costs Total relevant benefit (loss)

Fix Division $60,000 20,000 $40,000 12,500 $27,500 10,000 $17,500

Roach Division $40,000 15,000 $25,000 30,000 $ (5,000) 7,500 $(12,500)

Total $100,000 35,000 $ 65,000 42,500 $ 22,500 17,500 $ 5,000

Required: A. Determine operating income for Grant Corporation as a whole if the Roach Division is dropped. B. Should the Roach Division be eliminated? ANS: A.

B.

Sales Variable costs Contribution margin Direct fixed costs Segment margin Allocated common costs: ($10,000 + $7,500) Operating income

$60,000 20,000 $40,000 12,500 $27,500 17,500 $10,000

Yes. The Roach division should be dropped, since it has a negative segment margin of $5,000. Dropping the Roach Division increases the firm's income by $5,000.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 10 min. 15. Classy Carry manufactures two types of handbags, the Clutch and the Tote, with unit contribution margins of $9 and $15, respectively. Regardless of the type, each handbag must go through a stitching machine. The company owns 4 stitching machines and each provides 3,000 hours of machine time per year. Each Clutch handbag requires 12 minutes of machine time and each Tote handbag requires 30 minutes of machine time. There are no other constraints.

Required: A. What is the contribution margin per hour of machine time for each type of handbag? B. What is the optimal mix of handbags? C. What is the total contribution margin earned for the optimal mix? ANS: A. Clutch

Tote

$9 0.2 $45

$15 0.5 $30

Contribution margin per unit Required machine time per unit Contribution margin per hour of machine time 12 minutes/60 minutes = .20

30 minutes/60 minutes = .50

B. Since the Clutch handbag produces a $45 contribution margin per machine hour, all the machine time (12,000 hours) should be devoted to the production of the Clutch handbag. 12,000 hours = 60,000 Clutch bags 0.20 hour per Clutch handbag 60,000 Clutch handbags and 0 Tote handbags C. 60,000 Clutch handbags x $9 CM = $540,000 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 10 min. 16. Gordon Company produces two types of gears, Gear Q and Gear S, with unit contribution margins of $2 and $5, respectively. Each gear must spend time on a special machine. The firm owns ten machines that together provide 25,000 hours of machine time per year. Gear Q requires 0.10 hours of machine time; Gear S requires 0.4 hours of machine time. A. B. C.

What is the contribution margin per hour of machine time for Gear Q? Gear S? If Gordon faces only the production constraint (25,000 hours of machine time), how many units of Gear Q should be produced? Gear S? What is the total contribution margin from this product mix? Now suppose that Gordon cannot sell more than 200,000 units of each type of gear. How many units of Gear Q should be produced? Gear S? What is the total contribution margin from this product mix?

ANS: A. Contribution margin per unit Hours of machine time Contribution margin per hour of machine time

Gear Q $ 2.00 0.10 $20.00

Gear S $ 5.00 0.40 $12.50

B.

Since Gear Q has the higher contribution margin per hour of the scarce resource, Gordon should produce only Gear Q, and no Gear S. Gear Q units = 25,000/0.10 = 250,000 Gear S units = 0 Total contribution margin = $2(250,000) = $500,000

C.

Gear Q units = 200,000 Remaining machine time = 25,000 hours  (200,000  0.1) = 5,000 machine hours Gear S units = 5,000/0.4 = 12,500 Total contribution margin = $2(200,000) + $5(12,500) = $462,500

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 10 min. 17. David Company produces two types of gears, Gear A and Gear B, with unit contribution margins of $6 and $8, respectively. Each gear must spend time on a special machine. The firm owns five machines that together provide 12,000 hours of machine time per year. Gear A requires 12 minutes of machine time; Gear B requires 24 minutes of machine time. A. B. C.

What is the contribution margin per hour of machine time for Gear A? Gear B? If David faces only the production constraint (12,000 hours of machine time), how many units of Gear A should be produced? Gear B? What is the total contribution margin from this product mix? Now suppose that David cannot sell more than 45,000 units of each type of gear. How many units of Gear A should be produced? Gear B? What is the total contribution margin from this product mix?

ANS: A. Contribution margin per unit Hours of machine time Contribution margin per hour of machine time B.

Gear A $ 6.00 0.20 $30.00

Since Gear A has the higher contribution margin per hour of the scarce resource, Gordon should produce only Gear A, and no Gear B. Gear A units = 12,000/0.20 = 60,000 Gear B units = 0 Total contribution margin = $6(60,000) = $360,000

C.

Gear B $ 8.00 0.40 $20.00

Gear A units = 45,000 Remaining machine time = 12,000 hours  (45,000  0.2) = 3,000 machine hours Gear B units = 3,000/0.4 = 7,500

Total contribution margin = $6(45,000) + $8(7,500) = $330,000 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 10 min. 18. Auden makes three types of vitamin supplements, all of which require the use of encapsulating machines that have capacity of 10,000 hours. Information on the three types (per case) follows: Selling price Variable cost Machine hours A. B. C.

Basic $100 50 0.4

Vita-Stress $125 70 0.50

Antioxidant+ $160 90 0.8

What is the contribution margin per case for each type? What is the contribution margin per hour of machine time for each type? Based on your analysis in requirement B, if the company can sell all that it can make of all of the products, how many of each type should be sold to maximize total contribution margin?

ANS: A. Price  Variable cost Contribution margin

Basic $100 50 $ 50

Vita-Stress $125 70 $ 55

Antioxidant+ $160 90 $ 70

B.

Basic = (1 hour/0.4)  $50 = $125 Vita-Stress = (1 hour/0.5)  $55 = $110 Antioxidant+ = (1 hour/0.8)  $70 = $87.50

C.

Basic has the highest contribution margin per machine hour. Therefore, the company would devote all of its encapsulating machine time to the production of Basic and make 25,000 cases of it. Basic = (1 hour/0.4 cases per hour)  10,000 hours Vita-Stress = 0 Antioxidant+ = 0

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 5 min. 19. The Exchange Company is in the process of developing a new product called LS500. The company requires a 35% profit. The LS500 current design carries with it a total cost of $125. Required: A. What is the sales price of the LS500 using markup costing?

B. Assume that the Exchange Company’s marketing department has determined that consumers are willing to pay $140 for the LS500. What is the target cost for this product? ANS: A. $125 x 1.35 = $168.75 B. .35 x $140 = $49 desired profit per unit $140 - $49 = $91 target cost PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management Functions KEY: Bloom's: Application NOT: 3 min. ESSAY 1. "The accounting decision making model is not useful in real life because it only looks at the numbers." Critique this statement and give an example for which it does not hold true. ANS: The decision-making model described in Chapter 13 does indeed focus on quantitative factors. However, before the decision is made, the decision maker must identify the relevant qualitative factors and use them in making his/her decision. For example, a student may be considering graduate school and look at a number of schools. The low cost school may be farther from home and have a lesser reputation than the higher cost school. The student might rationally choose the higher cost, higher reputation school. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Communication STA: AICPA: BB-Critical Thinking | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 5 min. 2. Why does a special order decision frequently ignore fixed overhead? ANS: Special-order decisions are, by definition, one time orders that will yield less than the usual price or margin. The firm will usually only consider these if it is operating below capacity. As a result, the fixed overhead will exist whether or not the order is accepted. The fixed overhead is a sunk cost and can be ignored for purposes of deciding on the special order. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Communication STA: AICPA: BB-Critical Thinking |AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 5 min. You decide

3. The managers of Computer World are trying to determine the best method of deciding the price of their new ultra minicomputer. This computer will present the customers with several unique features that their other computers do not offer. They have asked you to explain the advantages and disadvantages of the two costing methods they are considering; markup costing and target costing. ANS: Markup costing is a percentage applied to the base cost. This includes desired profit and any costs not included in the base cost. A major advantage of markup pricing is that standard markups are easy to apply versus adjusting prices as needed if demand is less than anticipated. The effectiveness of costing plus pricing relies heavily on the accuracy of the cost system and pricing managers’ understanding of the firm’s cost structure. If they do not have an accurate cost system than they could be setting prices either too high-which would be undercut by competitors with more appropriate lower prices- or too low- and would not cover all costs, therefore resulting in a net loss. Target costing is a method of determining the cost of a product or service based on the price (target price) that customers are willing to pay. Target costing involves much more up front work than costbased pricing. Target costing can be used most effectively in the design and development stage of the product life cycle because the features of the product as well as its costs are still fairly easy to adjust. Some may argue that this is the better of the two choices. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Communication STA: AICPA: BB-Critical Thinking | IMA: Cost Management | ACBSP: APC-26-Management Functions KEY: Bloom's: Comprehension NOT: 10 min.

Chapter 13 5e

Recommend Documents