Test Bank - Chapter13 Relevant Costing

Chapter 13 Relevant Costs for Decision-Making

True/False 1. T Medium

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

2. T Medium

Future costs that do not differ among the alternatives are not relevant in a decision.

3. F Medium

Variable costs are always relevant costs.

4. T Easy

An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another.

5. T Easy

A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of what action is chosen.

6. T Easy

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

7. F Medium

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

8. T Easy

If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin, then the firm is better off economically if the product is dropped.

9. T Easy

The cost of a resource that has no alternative use in a make or buy decision problem has an opportunity cost of zero.

10. F Hard

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

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11. F Easy

Opportunity costs are recorded in the accounts of an organization.

12. T Easy

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

13. F Medium

Joint production costs are relevant costs in decisions about what to do with a product from the splitoff point onward in the production process.

14. F Medium

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

15. F Easy

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

Multiple Choice 16. B Easy

Costs which are always relevant in decision making are those costs which are: a. variable. b. avoidable. c. sunk. d. fixed.

17. D Easy

Consider a decision facing a firm of either accepting or rejecting a special offer for one of its products. A cost that is not relevant is: a. direct materials. b. variable overhead. c. fixed overhead that will be avoided if the special offer is accepted. d. common fixed overhead that will continue if the special offer is not accepted.

18. C Easy

To maximize total contribution margin, a firm faced with a production constraint should: a. promote those products having the highest unit contribution margins. b. promote those products having the highest contribution margin ratios. c. promote those products having the highest contribution margin per unit of constrained resource. d. promote those products have the highest contribution margins and contribution margin ratios.

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19. B Hard

A plant operating at capacity would suggest that: a. every machine and person in the plant is working at the maximum possible rate. b. only some specific machines or processes are operating at the maximum rate possible. c. fixed costs will need to change to accommodate increased demand. d. managers should produce those products with the highest contribution margin in order to deal with the constrained resource.

20. C Medium

Which of the following is not an effective way of dealing with a production constraint (i.e., bottleneck)? a. Reduce the number of defective units produced at the bottleneck. b. Pay overtime to workers assigned to the bottleneck. c. Pay overtime to workers assigned to work stations located after the bottleneck in the production process. d. Subcontract work that would otherwise required use of the bottleneck.

21. D Medium

The opportunity cost of making a component part in a factory with no excess capacity is the: a. variable manufacturing cost of the component. b. fixed manufacturing cost of the component. c. cost of the production given up in order to manufacture the component. d. net benefit foregone from the best alternative use of the capacity required.

22. D Easy

A joint product is: a. any product which consists of several parts. b. any product produced by a firm with more than one product line. c. any product involved in a make or buy decision. d. one of several products produced from a common input.


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23. D Medium

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

24. A Easy CPA adapted

The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of $20,000. If the lanterns are remachined for $5,000, they could be sold for $9,000. Alternatively, the lanterns could be sold for scrap for $1,000. Which alternative is more desirable and what are the total relevant costs for that alternative? a. remachine and $5,000. b. remachine and $25,000. c. scrap and $20,000. d. scrap and $19,000.

25. B Medium CPA adapted

Relay Corporation manufactures batons. Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000. Based on Relay's predictions for next year, 240,000 batons will be sold at the regular price of $5.00 each. In addition, a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased or decreased as a result of the special order? a. $60,000 decrease. b. $30,000 increase. c. $36,000 increase. d. $180,000 increase.


26. B Medium CPA adapted

The manufacturing capacity of Jordan Company's facilities is 30,000 units a year. A summary of operating results for last year follows: Sales (18,000 units @ $100) .... $1,800,000 Variable costs ................. 990,000 Contribution margin ........... 810,000 Fixed costs .................... 495,000 Net operating income ........... $ 315,000 A foreign distributor has offered to buy 15,000 units at $90 per unit next year. Jordan expects its regular sales next year to be 18,000 units. If Jordan accepts this offer and rejects some business from regular customers so as not to exceed capacity, what would be the total net operating income next year? (Assume that the total fixed costs would be the same no matter how many units are produced and sold.) a. $390,000. b. $705,000. c. $840,000. d. $855,000.

27. A Easy CPA adapted

Wagner Company sells product A for $21 per unit. Wagner's unit product cost based on the full capacity of 200,000 units is as follows: Direct materials ..................... $ 4 Direct labor ......................... 5 Manufacturing overhead ............... 6 Unit product cost .................. $15 A special order offering to buy 20,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $3 per unit for shipping. Wagner has sufficient idle capacity to manufacture the additional units. Twothirds of the manufacturing overhead is fixed and would not be affected by this order. Assume that direct labor is an avoidable cost in this decision. In negotiating a price for the special order, the minimum acceptable selling price per unit should be: a. $14. b. $15. c. $16. d. $18.


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28. C Easy

A study has been conducted to determine if one of the departments in Parry Company should be discontinued. The contribution margin in the department is $50,000 per year. Fixed expenses charged to the department are $65,000 per year. It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, the company's overall net operating income would: a. decrease by $25,000 per year. b. increase by $25,000 per year. c. decrease by $10,000 per year. d. increase by $10,000 per year.

29. C Easy

A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would: a. decrease by $20,000 per year. b. increase by $20,000 per year. c. decrease by $10,000 per year. d. increase by $30,000 per year.

30. A Easy

Lusk Company produces and sells 15,000 units of Product A each month. The selling price of Product A is $20 per unit, and variable expenses are $14 per unit. A study has been made concerning whether Product A should be discontinued. The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product was discontinued. These data indicate that if Product A is discontinued, the company's overall net operating income would: a. decrease by $60,000 per month. b. increase by $10,000 per month. c. increase by $20,000 per month. d. decrease by $20,000 per month.

31. B Easy CPA adapted

Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs. Of the fixed costs, $21,000 cannot be avoided. The effect of this discontinuance on Manor's overall net operating income would be a(an): a. decrease of $3,000. b. increase of $3,000. c. decrease of $24,000. d. increase of $24,000.


32. C Easy CPA adapted

Gata Co. plans to discontinue a department that has a $48,000 contribution margin and $96,000 of fixed costs. Of these fixed costs, $42,000 cannot be avoided. What would be the effect of this discontinuance on Gata's overall net operating income? a. Increase of $48,000 b. Decrease of $48,000 c. Increase of $6,000 d. Decrease of $6,000

33. B Medium

The Cook Company has two divisionsEastern and Western. The divisions have the following revenues and expenses: Eastern Western Sales ......................... $550,000 $500,000 Variable costs ................ 275,000 200,000 Direct fixed costs ............ 180,000 150,000 Allocated corporate costs ..... 170,000 135,000 Net income (loss) ............. (75,000) 15,000 The management of Cook is considering the elimination of the Eastern Division. If the Eastern Division were eliminated, the direct fixed costs associated with this division could be avoided. However, corporate costs would still be $305,000 in total. Given these data, the elimination of the Eastern Division would result in an overall company net income (loss) of: a. $15,000. b. ($155,000). c. ($75,000). d. ($60,000).

34. B Medium

Manor Company plans to discontinue a department that has a contribution margin of $25,000 and $50,000 in fixed costs. Of the fixed costs, $21,000 cannot be eliminated. The effect on the profit of Manor Company of discontinuing this department would be: a. a decrease of $4,000. b. an increase of $4,000. c. a decrease of $25,000. d. an increase of $25,000.

35. D Easy

Green Company produces 1,000 parts per year, which are used in the assembly of one of its products. The unit product cost of these parts is: Variable manufacturing cost ..... $12 Fixed manufacturing cost ........ 9 Unit product cost ............. $21 The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be: a. $1,000 increase.


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b. $1,000 decrease. c. $5,000 increase. d. $2,000 decrease.

36. A Easy

Pitkin Company produces a part used in the manufacture of one of its products. The unit product cost of the part is $33, computed as follows: Direct materials ..................... $12 Direct labor ......................... 8 Variable manufacturing overhead ...... 3 Fixed manufacturing overhead ......... 10 Unit product cost .................. $33 An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each. The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision. Based on these data, the per unit dollar advantage or disadvantage of purchasing the parts from the outside supplier would be: a. $3 advantage. b. $1 advantage. c. $1 disadvantage. d. $4 disadvantage.



Cardinal Company needs 20,000 units of a certain part to use in one of its products. The following information is available: Cost to Cardinal to make the part: Direct materials ................. $ 4 Direct labor ..................... 16 Variable manufacturing overhead .. 8 Fixed manufacturing overhead ..... 10 $38 Cost to buy the part from the Oriole Company ............. $36 Oriole Company has offered to sell this part to Cardinal company for $36 each. If Cardinal buys the part from Oriole instead of making it, Cardinal would not have any use for the released capacity. In addition, 60% of the fixed manufacturing overhead costs will continue regardless of what decision is made. Assume that direct labor is an avoidable cost in this decision. In deciding whether to make or buy the part, the total relevant costs to make the part are: a. $560,000. b. $640,000. c. $720,000. d. $760,000.


Golden, Inc., has been manufacturing 5,000 units of Part 10541 which is used in one of its products. At this level of production, the unit product cost of Part 10541 is as follows: Direct materials ..................... $ 2 Direct labor ......................... 8 Variable manufacturing overhead ...... 4 Fixed manufacturing overhead ......... 6 Unit product cost .................. $20 Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit. Golden has determined that two thirds of the fixed manufacturing overhead will continue even if Part 10541 is purchased from Brown. Assume that direct labor is an avoidable cost in this decision. To determine whether to accept Brown's offer, the relevant costs to Golden of manufacturing the parts internally are: a. $70,000. b. $80,000. c. $90,000. d. $95,000.


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The following standard costs pertain to a component part manufactured by Ashby Company: Direct materials ................. $ 2 Direct labor ..................... 5 Manufacturing overhead ........... 20 Standard cost per unit ........ $27 The company can purchase the part from an outside supplier for $25 per unit. The manufacturing overhead is 60% fixed and this fixed portion would not be affected by this decision. Assume that direct labor is an avoidable cost in this decision. What is the relevant amount of the standard cost per unit to be considered in a decision of whether to make the part internally or buy it from the external supplier? a. $2 b. $15 c. $19 d. $27

40. B Medium

The SP Company makes 40,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials ............ $5.50 Direct labor ................ $5.60 Variable factory overhead ... $4.75 Fixed factory overhead ...... $4.45 An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Company for this motor is $18. If SP Company decides not to make the motors, there would be no other use for the production facilities and total fixed factory overhead costs would not change. If SP Company decides to continue making the motor, how much higher or lower would net income be than if the motors are purchased from the outside suppler? Assume that direct labor is a variable cost in this company. a. $276,000 higher. b. $86,000 higher. c. $92,000 lower. d. $178,000 higher.


41. B Medium

Manico Company produces three products X, Y, & Z with the following characteristics: X Y Z o Selling price per unit ...... $20 100% $16 100% $15 100% Variable cost per unit ...... 12 60 12 75 6 40 Contribution margin per unit $ 8 40% $ 4 25% $ 9 60% Machine hours per unit ...... 5 3 6 The company has only 2,000 machinehours available each month. If demand exceeds the company's capacity, in what sequence should orders be filled if the company wants to maximize its total contribution margin? a. orders for Z first, X second, and Y third. b. orders for X first, Z second, and Y third. c. orders for Y first, X second, and Z third. d. orders for Z first and no orders for X or Y.

42. B Medium

Consider the following production and cost data for two products, L and C: Product L Product C Contribution margin per unit ....... $130 $120 Machine setups needed per unit .... 10 setups 8 setups The company can only perform 65,000 machine setups each period due to limited skilled labor and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period? a. $845,000. b. $975,000. c. $910,000. d. $1,820,000.

43. B Medium

Products A, B, and C are produced from a single raw material input. The raw material costs $90,000, from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period. Product A can be sold at the splitoff point for $2 per unit, or it can be processed further at a cost of $12,500 and then sold for $5 per unit. Product A should be: a. sold at the splitoff point, since further processing would result in a loss of $0.50 per unit. b. processed further, since this will increase profits by $2,500 each period. c. sold at the splitoff point, since further processing will result in a loss of $2,500 each period. d. processed further, since this will increase profits by $12,500 each period.


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44. C Easy

The Wyeth Company produces three products, A, B, and C, from a single raw material input. Product A can be sold at the splitoff point for $40,000, or it can be processed further at a total cost of $15,000 and then sold for $58,000. Joint product costs total $60,000 annually. Product A should be: a. discontinued since revenues after further processing are less than total joint product costs. b. sold at the splitoff point. c. processed further and then sold. d. processed further only if its share of the total joint product costs is less than the incremental revenues from further processing.

45. A Medium

WP Company produces products X, Y, and Z from a single raw material input in a joint production process. Budgeted data for the next month is as follows: X Y Z o Units produced ............................. 1,500 2,000 3,000 Per unit sales value at splitoff .......... $19 $21 $24 Added processing costs per unit ............ $ 7 $7.50 $ 7 Per unit sales value if processed further .. $29 $29 $30 The cost of the joint raw material input is $149,000. Which of the products should be processed beyond the splitoff point? X Y Z o a. yes yes no b. no yes no c. yes no yes d. no yes yes

Reference: 131 The following are the Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month (which represents the company's capacity): Manufacturing: Direct materials ............ $1.00 Direct labor ................ 2.00 Variable overhead ........... 0.50 Fixed overhead .............. 0.90 Selling and administrative: Variable .................... 1.50 Fixed ....................... 0.60 Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labor is a variable cost. 227Managerial Accounting, 9/e

46. D Medium Refer To: 131

How much will the company's net operating income be increased or (decreased) if it prices the 1,000 units in the special order at $6 each? a. ($500) b. $400 c. $2,500 d. $1,000

47. C Medium Refer To: 131

Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. What cost is relevant as a guide for setting a minimum price on these defective units? a. $6.50 b. $5.00 c. $1.50 d. $3.50

Reference: 132 The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200. 48. B Easy Refer To: 132

The sunk cost in this situation is: a. $10,000. b. $26,800. c. $11,200. d. $0

49. A Medium Refer To: 132

What is the net advantage or disadvantage to the company from upgrading the calculators? a. $8,800 advantage b. $18,000 disadvantage c. $20,000 advantage d. $8,000 disadvantage

50. C Hard Refer To: 132

Assume that Tolar decides to upgrade the calculators. At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition? a. $8 b. $30 c. $53 d. $67


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Reference: 133 The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: Variable production cost ... $4.60 Fixed production cost ...... 1.80 Variable selling expense ... 1.00 If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. 51. A Medium Refer To: 133

If Immanuel accepts this special order, the change in the monthly net operating income will be a: a. $12,600 increase. b. $14,400 increase. c. $3,600 increase. d. $1,800 increase.


At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer? a. $7.40 b. $7.70 c. $6.40 d. $4.90

53. B Hard Refer To: 133

Suppose that regular sales of jigs total 85,000 units per month. All other conditions remain the same. If Immanuel accepts the special order, the change in monthly operating income will be: a. $14,400 increase. b. $7,200 increase. c. $3,600 decrease. d. $5,400 decrease.

Reference: 134 The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level follow: Direct materials .................... $20 Direct labor ........................ 10 Variable manufacturing overhead ..... 5 Fixed manufacturing overhead ........ 7 Variable selling expense ............ 8 Fixed selling expense ............... 2 The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order were accepted, variable selling expense would be reduced by 25%. However, Varone would have 229Managerial Accounting, 9/e

to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labor is a variable cost. 54. D Medium Refer To: 134

If Varone can expect to sell 32,000 Homs next year through regular channels and the special order is accepted at 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a: a. $52,000 increase. b. $80,000 increase. c. $24,000 decrease. d. $68,000 increase.

55. C Hard Refer To: 134

If Varone can expect to sell 32,000 Homs next year through regular channels, at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order? a. $51.00 b. $48.20 c. $42.50 d. $39.60

56. A Hard Refer To: 134

If Varone has an opportunity to sell 37,960 Homs next year through regular channels and the special order is accepted for 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a: a. $33,320 decrease b. $33,320 increase c. $35,480 decrease d. $35,480 increase

Reference: 135 Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: Direct materials .......................... $42.60 Direct labor .............................. 8.10 Variable manufacturing overhead ........... 1.10 Fixed manufacturing overhead .............. 17.30 Variable selling & administrative expense . 1.80 Fixed selling & administrative expense .... 8.00 The normal selling price of the product is $86.10 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Managerial Accounting, 9/e

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Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $76.40 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? a. ($17,000) b. $13,400 c. $48,000 d. ($5,000)


Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? a. $32.50 b. $8.40 c. $9.70 d. $7.20

59. D Hard Refer To: 135

Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 700 units for regular customers. The minimum acceptable price per unit for the special order is closest to: a. $86.10. b. $78.90. c. $69.10. d. $63.78.

Reference: 136 The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. Sales (6,500 Tams at $130 each) ............... $845,000 Variable cost of sales ........................ 390,000 Variable distribution costs ................... 65,000 Fixed advertising expense ..................... 275,000 Salary of product line manager ................ 25,000 Fixed manufacturing overhead .................. 145,000 Net loss ...................................... ($ 55,000) Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tax product were dropped, there would be no change in the fixed manufacturing costs of the company.



Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines. If the company discontinues the Tam product line, the change in annual operating income (or loss) should be: a. $55,000 decrease. b. $65,000 decrease. c. $90,000 decrease. d. $70,000 increase.


Assume that discontinuing the Tam product would result in a $120,000 increase in the contribution margin of other product lines. How many Tams would have to be sold next year for the company to be as well off as if it just dropped the line and enjoyed the increase in contribution margin from other products? a. 5,000 units b. 6,000 units c. 6,500 units d. 7,000 units

Reference: 137 Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement. Mall Town Total Store Store Sales ....................... $200,000 $80,000 $120,000 Less variable costs ......... 116,000 32,000 84,000 Contribution margin ......... 84,000 48,000 36,000 Less traceable fixed expenses .................. 60,000 20,000 40,000 Store segment margin ........ 24,000 28,000 (4,000) Less common fixed expenses .................. 10,000 4,000 6,000 Operating income ............ $ 14,000 $24,000 $(10,000) Threequarters of each store's traceable fixed expenses are avoidable if the store were to be closed. Cosmo allocates common fixed expenses to each store on the basis of sales dollars. Management estimates that closing the Town Store would result in a ten percent decrease in Mall Store sales, while closing the Mall Store would not affect Town Store sales. The operating results for November are representative of all months.


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62. B Hard CMA adapted Refer To: 137

A decision by Cosmo Inc. to close the Town Store would result in a monthly increase (decrease) in Cosmo's operating income of: a. $4,000. b. $(10,800). c. $(800). d. $(6,000).

63. D Hard CMA adapted Refer To: 137

Cosmo is considering a promotional campaign at the Town Store that would not affect the Mall Store. Increasing annual promotional expenses at the Town Store by $60,000 in order to increase Town Store sales by ten percent would result in a monthly increase (decrease) in Cosmo's operating income of: a. $(16,800). b. $3,400. c. $7,000. d. $(1,400).

Reference: 138 The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: Annual sales ..................................... 3,000 units Selling price per unit ........................... $309 Variable costs per unit: Production ..................................... $130 Selling ........................................ $ 50 Avoidable fixed costs per year: Production ..................................... $51,000 Selling ........................................ $75,000 Unavoidable allocated fixed corporate costs per year ............................... $54,000 If the new product is added to the existing product line, then sales of existing products will decline. As a consequence, the contribution margin of the other existing product lines is expected to drop $78,000 per year. 64. C Hard Refer To: 138

If the new product is added next year, the increase in net income resulting from this decision would be: a. $387,000. b. $261,000. c. $183,000. d. $207,000.


What is the lowest selling price per unit among those listed below that could be charged for the new product and still make it economically desirable to add the new product? a. $240. b. $222. c. $291. d. $249


Reference: 139 Bingham Company manufactures and sells a product, Product J. Results for last year for the manufacture and sale of Product J are as follows: Sales10,000 units at $160 each .................... $1,600,000 Less costs: Variable production costs ......................... 960,000 Sales commissions15% of sales ................... 240,000 Salaries of line supervisors ...................... 195,000 Traceable fixed advertising expense ............... 180,000 Fixed general factory overhead (allocated to products on the basis of square feet occupied) .. 170,000 Total costs ..................................... 1,745,000 Net loss ............................................ $ (145,000) Bingham Company anticipates no change in the operating result for Product J in the foreseeable future if the product is produced. Bingham is reexamining all of its products and is trying to decide whether to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision. 66. A Medium Refer To: 139

Assume that discontinuing the manufacture and sale of Product J will not affect the sale of other products. If the company discontinues Product J, the change in annual net income due to this decision will be a: a. $25,000 decrease. b. $145,000 increase. c. $170,000 decrease. d. $315,000 decrease.


Assume that discontinuing Product J would result in a $30,000 increase in the contribution margin of other product lines. If Bingham chooses to discontinue Product J, then the change in net income next year due to this action will be a: a. $145,000 increase. b. $145,000 decrease. c. $5,000 increase. d. $120,000 increase.


Assume that discontinuing Product J would result in a $100,000 increase in the contribution margin of other product lines. How many units of Product J would have to be sold next year for the company to be as well off as if it just dropped Product J and enjoyed the increase in contribution margin from other products? a. 2,500 units. b. 11,875 units. c. 16,125 units. d. 15,500 units.


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Reference: 1310 Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs that would be allocated to this part amount to $300,000 per year. 69. B Medium Refer To: 1310

The change in the company’s overall annual net operating income that would result from making the component, rather than buying it, would be: a. $17,000 increase. b. $1,000 decrease. c. $14,000 decrease. d. $5,000 increase.


What would the annual cost of additional supervision have to be in order for Hadley to be economically indifferent between making or buying the component? (Assume all other conditions stay the same.) a. $20,000. b. $19,000. c. $18,000. d. $17,000.

Reference: 1311 The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: Direct materials .................... $4.20 Direct labor ........................ $12.00 Variable manufacturing overhead ..... $5.80 Fixed manufacturing overhead ........ $6.50 Rogers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labor is a variable cost.


71. B Medium Refer To: 1311

Assume that there is no other use for the capacity now being used to produce the component and the total fixed manufacturing overhead of the company would be unaffected by this decision. If Rogers Company purchases the components rather than making them internally, what would be the impact on the company's annual net operating income? a. $94,500 increase. b. $81,000 decrease. c. $237,600 decrease. d. $124,000 increase.


Assume that if the component is purchased from the outside supplier, $35,100 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the component would be rented to another company for $64,800 per year. If Rogers chooses to buy the component from the outside supplier under these circumstances, then the impact on annual net operating income due to accepting the offer would be: a. $18,900 decrease. b. $18,900 increase. c. $21,400 decrease. d. $21,400 increase.

Reference: 1312 Aholt Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials ................. $11.30 Direct labor ..................... 22.70 Variable manufacturing overhead .. 1.20 Fixed manufacturing overhead ..... 24.70 Unit product cost .............. $59.90 An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. 73. A Easy Refer To: 1312

How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part? a. $38.00 b. $59.90 c. $35.20 d. $22.70


236


What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? a. $264,000 b. ($328,000) c. $548,000 d. ($64,000)


What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year? a. $6.60 b. $44.60 c. $59.90 d. $66.50

Reference: 1313 Brown Company makes four products in a single facility. These products have the following unit product costs: Product o A B C D Direct materials ................. $15.60 $19.50 $12.50 $15.20 Direct labor ..................... 17.60 21.00 15.40 9.40 Variable manufacturing overhead .. 4.40 5.60 8.10 5.10 Fixed manufacturing overhead ..... 27.50 14.40 14.50 16.50 Unit product cost ................ $65.10 $60.50 $50.50 $46.20 Additional data concerning these products are listed below. Product A B C D Grinding minutes per unit ........ 2.00 1.10 0.70 0.30 Selling price per unit ........... $78.70 $71.10 $67.90 $62.60 Variable selling cost per unit ... $2.60 $3.10 $2.80 $3.50 Monthly demand in units .......... 3,000 2,000 2,000 4,000 The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labor is a variable cost in this company. 76. D Easy Refer To: 1313

How many minutes of grinding machine time would be required to satisfy demand for all four products? a. 10,500 b. 10,700 c. 11,000 d. 10,800



Which product makes the LEAST profitable use of the grinding machines? a. Product A b. Product B c. Product C d. Product D


Which product makes the MOST profitable use of the grinding machines? a. Product A b. Product B c. Product C d. Product D


Up to how much should the company be willing to pay for one additional hour of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.) a. $10.60 b. $21.90 c. $0.00 d. $19.25

Reference: 1314 Crane Company makes four products in a single facility. Data concerning these products appear below: Product A B C D Selling price per unit ............ $35.30 $30.20 $20.80 $26.00 Variable manuf. cost per unit...... $16.50 $15.80 $7.90 $8.50 Variable selling cost per unit .... $3.80 $1.60 $1.90 $3.30 Milling machine minutes per unit .. 3.30 1.70 2.10 2.50 Monthly demand in units ........... 4,000 1,000 3,000 1,000 The milling machines are potentially the constraint in the production facility. A total of 22,600 minutes are available per month on these machines. 80. B Easy Refer To: 1314

How many minutes of milling machine time would be required to satisfy demand for all four products? a. 22,600 b. 23,700 c. 18,400 d. 9,000


238


Which product makes the LEAST profitable use of the milling machines? a. Product A b. Product B c. Product C d. Product D

82. B Medium Refer To: 1314

Which product makes the MOST profitable use of the milling machines? a. Product A b. Product B c. Product C d. Product D


Up to how much should the company be willing to pay for one additional hour of milling machine time if the company has made the best use of the existing milling machine capacity? (Round off to the nearest whole cent.) a. $11.00 b. $0.00 c. $4.55 d. $15.00

Reference: 1315 The Madison Company produces three products with the following costs and selling prices: A B C o Selling price per unit ............. $16 $21 $21 Variable cost per unit ............. 7 11 13 Contribution margin per unit ....... $ 9 $10 $ 8 Direct labor hours per unit ........ 1 1.5 2 Machine hours per unit ............. 4.5 2 2.5 84. A Medium Refer To: 1315

If direct laborhours is the company's production constraint, then the three products should be produced in the order: a. A, B, C. b. B, C, A. c. C, A. B. d. A, C, B.


If machinehours is Madison's production constraint, then the three products should be produced in the order: a. A, B, C. b. A, C, B. c. B, C, A. d. C, A, B.


Reference: 1316 Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows: Data for one spindle of yarn: Selling price .................................... $12 Variable production cost ......................... 8 Fixed production cost (based on 4,000 spindles of yarn produced) ............................. 2 Data for one afghan: Selling price .................................... $32 Production cost per spindle of yarn .............. 10 Variable production cost to process the yarn into an afghan ............................ 9 Avoidable fixed production cost to process the yarn into an afghan (based on 4,000 afghans produced) .............................. 5 Each month 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans. 86. B Medium Refer To: 1316

If Austin chooses to produce 4,000 afghans each month, the change in the monthly net operating income as compared to selling 4,000 spindles of yarn is: a. $24,000 decrease. b. $24,000 increase. c. $16,000 decrease. d. $16,000 increase.


What is the lowest price Austin should be willing to accept for one afghan as long as it can sell spindles of yarn to the outside market for $12 each? a. $32 b. $30 c. $28 d. $26


240

Reference: 1317 Dowchow Company makes two products from a common input. Joint processing costs up to the splitoff point total $38,400 a year. The company allocates these costs to the joint products on the basis of their total sales values at the splitoff point. Each product may be sold at the splitoff point or processed further. Data concerning these products appear below: Product X Product Y Total Allocated joint processing costs ...... $20,800 $17,600 $38,400 Sales value at splitoff point ........ $26,000 $22,000 $48,000 Costs of further processing ........... $22,600 $20,400 $43,000 Sales value after further processing .. $45,000 $45,900 $90,900 88. D Easy Refer To: 1317

What is the net monetary advantage (disadvantage) of processing Product X beyond the splitoff point? a. $1,600 b. $22,400 c. $27,600 d. ($3,600)


What is the net monetary advantage (disadvantage) of processing Product Y beyond the splitoff point? a. $3,500 b. $7,900 c. $29,900 d. $25,500


What is the minimum amount the company should accept for Product X if it is to be sold at the splitoff point? a. $22,400 b. $43,400 c. $20,800 d. $45,000


Essay 91. Hard

Foster Company makes 20,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials ................. $24.70 Direct labor ..................... 16.30 Variable manufacturing overhead .. 2.30 Fixed manufacturing overhead ..... 13.40 Unit product cost .............. $56.70 An outside supplier has offered to sell the company all of these parts it needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $44,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: a. How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part? b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year? Answer: a. Relevant cost per unit: Direct materials .................. $24.70 Direct labor ...................... 16.30 Variable manufacturing overhead ... 2.30 Fixed manufacturing overhead ...... 8.30 Relevant manufacturing cost ... $51.60 b. Net advantage (disadvantage): Manufacturing cost savings ........ $1,032,000 Additional contribution margin .... 44,000 Cost of purchasing the part ....... (1,036,000) Net advantage (disadvantage) .. $40,000


242

c. Maximum acceptable purchase price: Manufacturing cost savings ....... $1,032,000 Additional contribution margin ... $44,000 Total benefit .................... $1,076,000 Number of units .................. 20,000 Benefit per unit ................. $53.80 92. Medium

The Hyatt Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier. New equipment for producing the subassemblies can be purchased at a cost of $400,000. The equipment would have a fiveyear useful life (the company uses straightline depreciation) and a $50,000 salvage value. Alternatively, the subassemblies could be purchased from an outside supplier. The supplier has offered to provide the subassemblies for $9 each under a fiveyear contract. Hyatt Company's present costs per unit of producing the subassemblies internally (with the old equipment) are given below. The costs are based on a current activity level of 40,000 subassemblies per year: Direct materials ........................................ $ 3.00 Direct labor ............................................ 4.20 Variable overhead ....................................... 0.60 Fixed overhead ($0.80 supervision, $0.90 depreciation, and $2 general company overhead) .................... 3.70 Total cost per unit ..................................... $11.50 The new equipment would be more efficient and would reduce direct labor costs and variable overhead costs by 25%. Supervision cost ($30,000 per year) and direct materials cost per unit would not be affected by the new equipment. The company has no other use for the space now being used to produce the subassemblies. The company's total general company overhead would not be affected by this decision. Assume direct labor is a variable cost. Required: Assume that 40,000 subassemblies are needed each year. Prepare an analysis of the two alternatives and make a recommendation to the management of the company of the appropriate course of action.


Answer: The $2.00 per unit general overhead cost is not relevant to the decision. This cost will continue regardless of which alternative the company should select. The depreciation of $0.90 per unit is not a relevant cost since its represents a sunk cost (in addition to the fact that the old equipment is worn out and must be replaced). The cost of the new equipment is relevant since the new equipment will not be purchased if the company decides to accept the outside supplier's offer. The cost of supervision is relevant since this cost can be avoided by purchasing the subassemblies. Cost Per Unit Make Buy o Outside supplier's price..................... $9.00 Direct materials............................. $3.00 Direct labor ($4.20 x 0.75).................. 3.15 Variable overhead ($0.60 x 0.75)............. 0.45 Supervision.................................. 0.80 Depreciation................................. 1.75 o Total........................................ $9.15 $9.00 Difference in favor of buying................ $0.15 Depreciation: ($400,000 $50,000)/5 years = $70,000 per year. $70,000 per year/40,000 units = $1.75 per unit At the level of 40,000 subassemblies per year, the company should purchase the subassemblies from the outside supplier. 93. Medium

Benjamin Signal Company produces products R, J, and C from a joint production process. Each product may be sold at the split off point or be processed further. Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced. Data for Benjamin's operations for the current year are as follows: Units Allocated Joint Sales Value Product Produced Production Cost at Splitoff R 8,000 $32,000 $76,000 J 10,000 40,000 71,000 C 5,000 20,000 48,000 Product R can be processed beyond the splitoff point for an additional cost of $26,000 and can then be sold for $105,000. Product J can be processed beyond the splitoff point for an additional cost of $38,000 and can then be sold for $117,000. Product C can be processed beyond the splitoff point for an additional cost of $12,000 and can then be sold for $57,000.


244

Required: Which products should be processed beyond the splitoff point? Answer: R J C o Sales value after further processing..................... $105,000 $117,000 $57,000 Sales value at splitoff......... 76,000 71,000 48,000 Added sales value from processing 29,000 46,000 9,000 Added processing costs........... 26,000 38,000 12,000 Net gain (loss) from further processing..................... $ 3,000 $ 8,000 $(3,000) Products R and J should be processed beyond the splitoff point. Product C should be sold at splitoff. Joint production costs are not relevant to the decision to sell at splitoff or to process further. 94. Medium

Bowen Company produces products P, Q, and R from a joint production process. Each product may be sold at the splitoff point or be processed further. Joint production costs of $81,000 per year are allocated to the products based on the relative number of units produced. Data for Bowen's operations for the current year are as follows: Allocated Joint Sales Value Product Units Produced Production Cost at Splitoff P 4,000 $28,000 $38,000 Q 7,000 49,000 47,000 R 2,000 14,000 16,000 Product P can be processed beyond the splitoff point for an additional cost of $10,000 and can then be sold for $50,000. Product Q can be processed beyond the splitoff point for an additional cost of $35,000 and can then be sold for $65,000. Product R can be processed beyond the splitoff point for an additional cost of $6,000 and can then be sold for $25,000. Required: Which products should be processed beyond the splitoff point? Answer: P Q R o Sales value after further processing .................... $ 50,000 $ 65,000 $ 25,000 Sales value at splitoff......... 38,000 47,000 16,000 Added sales value from processing 12,000 18,000 9,000 Added processing costs........... 10,000 35,000 6,000 Net gain (loss) from further processing..................... $ 2,000 $(17,000) $ 3,000 Products P and R should be processed beyond the splitoff point. Product Q should be sold at splitoff. Joint production costs are not relevant to the decision to sell at splitoff or to process


further.

95.

(Ignore income taxes and the time value of money in this problem.) Madison optometry is considering the purchase of a new lens grinder to replace a machine that was purchased several years ago. Selected information on the two machines is given below: Old New Machine Machine Original cost when new ............ $80,000 $85,000 Accumulated depreciation to date .. 32,000 Current salvage value ............. 26,000 Annual operating cost ............. 4,000 3,000 Remaining useful life ............. 4 years 4 years Required: Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years. Answer: The analysis of the alternatives appears below: Old New Machine Machine Purchase cost .................... $(85,000) Salvage value of old machine ..... 26,000 Operating cost for 4 years ....... $(16,000) (12,000) Total cost ....................... $(16,000) $(71,000) Therefore, the net disadvantage to purchasing and using the new machine would be $55,000 since its total cost is $55,000 higher than the total cost of using the old machine.


246

96. Hard

Juett Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is as follows: Direct materials ........................ $29.60 Direct labor ............................ 5.80 Variable manufacturing overhead ......... 2.50 Fixed manufacturing overhead ............ 17.20 Variable selling & administrative expense 1.80 Fixed selling & administrative expense .. 6.70 The normal selling price of the product is $72.90 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.10 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Required: a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $66.10 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,300 units for regular customers. What would be the minimum acceptable price per unit for the special order? Answer: a. Variable cost per unit on normal sales: Direct materials ........................ $29.60 Direct labor ............................ 5.80 Variable manufacturing overhead ......... 2.50 Variable selling & administrative expense 1.80 Variable cost per unit on normal sales $39.70 Variable cost per unit on special order: Normal variable cost per unit ........... $39.70 Reduction in variable selling & admin. .. 1.10 Variable cost per unit on special order $38.60


Selling price for special order ........... $66.10 Variable cost per unit on special order ... 38.60 Unit contribution margin on special order 27.50 Number of units in special order .......... 2,000 Increase (decrease) in net operating income $55,000 b. The opportunity cost is just the contribution margin on normal sales: Normal selling price per unit ............. $72.90 Variable cost per unit on normal sales .... 39.70 Unit contribution margin on normal sales .. $33.20 c. Minimum acceptable price: Unit contribution margin on normal sales .. $33.20 Displaced normal sales .................... 1,300 Lost contribution margin displaced sales .. $43,160 Total variable cost on special order ...... $77,200 $120,360 Number of units in special order .......... 2,000 Minimum acceptable price on special order $60.18 97. Medium

When Mr. Ding L. Berry, president and chief executive of Berry, Inc., first saw the segmented income statement below, he flew into his usual rage: "When will we ever start showing a real profit? I'm starting immediate steps to eliminate those two unprofitable lines!" Product Lines o Total U V W Sales ................. $250,000 $100,000 $75,000 $75,000 Variable expenses ..... 119,000 37,500 35,000 47,000 Contribution margin ... 131,000 63,000 40,000 28,000 Traceable fixed expenses* ........... 98,000 31,000 37,000 30,000 Common expenses, allocated ........... 32,900 18,000 10,500 4,400 Operating income (loss) $ 100 $ 14,000 $(7,500) $(6,400) *These traceable expenses could be eliminated if the product lines to which they are traced were discontinued. Required: Recommend which segments, if any, should be eliminated. Prepare a report in good form to support your answer.


248

Answer: A segmented income report, without the allocation of common fixed expenses, will provide the basis for deciding which segments to drop. Product Lines o Total U V W Sales ................. $250,000 $100,000 $75,000 $75,000 Variable expenses ..... 119,000 37,500 35,000 47,000 Contribution margin ... 131,000 63,000 40,000 28,000 Traceable fixed expenses* ........... 98,000 31,000 37,000 30,000 Segment margin ........ 33,000 $ 32,000 $ 3,000 $(2,000) Common expenses, allocated ........... 32,900 Operating income (loss) $ 100 The only segment that possibly should be eliminated is segment W, which shows a negative segment margin of $2,000. 98. Medium

Northern Stores is a retailer in the upper midwest. The most recent monthly income statement for Northern Stores is given below: Total Store I Store II o Sales .................... $2,100,000 $1,300,000 $ 800,000 Less variable expenses ... 1,260,000 882,000 378,000 Contribution margin ...... 840,000 418,000 422,000 Less traceable fixed expenses .............. 420,000 231,000 189,000 Segment margin ........... 420,000 187,000 233,000 Less common fixed expenses 350,000 210,000 140,000 Net income ............... $ 70,000 $ (23,000) $ 93,000 Northern is considering closing Store I. If Store I is closed, onefourth of its traceable fixed expenses would continue to be incurred. Also, the closing of Store I would result in a 20% decrease in sales in Store II. Northern allocates common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were shut down. Required: Compute the overall increase or decrease in the net income of Northern Stores if Store I is closed. Answer: Loss in contribution is Store I is closed: Store I contribution margin lost............... $(418,000) Store II contribution margin lost (20% x 422,000)........................... (84,400) Total lost contribution........................ (502,400) Fixed costs avoided if Store I is closed (0.75 x 231,000).......................... 173,250_


Net decrease in income of closing Store I............ $(329,150)


250

99. Medium

The Anaconda Mining Company currently is operating at less than 50 percent of practical capacity. The management of the company expects sales to drop below the present level of 15,000 tons of ore per month very soon. The selling price per ton of ore is $2 and the variable cost per ton is $1. Fixed costs per month total $15,000. Management is concerned that a further drop in sales volume will generate a loss and, accordingly, is considering the temporary suspension of operations until demand in the metals markets returns to normal levels and prices rebound. Management has implemented a cost reduction program over the past year that has been successful in reducing costs. Nevertheless, suspension of operations appears to be the only viable alternative. Management estimates that suspension of operations would reduce fixed costs from $15,000 to $5,000 per month. Required: a. Why does management estimate that fixed costs will persist at $5,000 per month even though the mine is temporarily closed? b. At what sales volume should management suspend operations at the mine? Answer: a. Some fixed costs will continue to incurred despite the temporary closing of the mine. Key employees cannot be discharged since these employees will seek employment elsewhere and replacing them could prove to be quite costly. A skeleton staff would be needed to perform some administrative functions. Additionally, the maintenance of building and equipment would need to continue to prevent damage that would be costly to repair. Taxes and insurance would continue to be paid during the shutdown period. b. Suspension of operations would be desirable when sales volume drops below 10,000 tons as shown below: Fixed costs if mine continues to operate ........... $15,000 Fixed costs if mine is shut down ................... 5,000 Fixed costs to be recovered if mine is operated .... $10,000 Each ton extracted contributes $1.00 per ton towards fixed costs: Selling price per ton .............................. $2.00 Variable cost per ton .............................. 1.00 Contribution margin ................................ $1.00 Sales volume necessary to recover $10,000 of fixed costs: $10,000  $1.00 = 10,000 tons


100. Hard

Kramer Company makes 4,000 units per year of a part called an axial tap for use in one of its products. Data concerning the unit production costs of the axial tap follow: Direct materials ...................... $35 Direct labor .......................... 10 Variable manufacturing overhead ....... 8 Fixed manufacturing overhead .......... 20 Total manufacturing cost per unit ..... $73 An outside supplier has offered to sell Kramer Company all of the axial taps it requires. If Kramer Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost. Required: a. Assume Kramer Company has no alternative use for the facilities presently devoted to production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each, should Kramer Company accept the offer? Fully support your answer with appropriate calculations. b. Assume that Kramer Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Kramer Company should be willing to pay the outside supplier for axial taps? Answer: a. The analysis of the alternatives follows below: Make Buy Purchase cost .................... $65 Direct materials ................. $35 Direct labor ..................... 10 Variable manufacturing overhead .. 8 Fixed manufacturing overhead ..... 8* Total cost ....................... $61 $65 * 40% x $20 The company should make the part rather than buy it from the outside supplier since it costs $4 less under that alternative. b. The maximum acceptable price is $81 since that is the cost to the company of making the part itself when the opportunity cost is included: Total cost of making the part internally ..... $61 Opportunity cost per unit ($80,000 ÷ 4,000) .. 20 Total ........................................ $81


252

101. Medium

Glocker Company makes three products in a single facility. These products have the following unit product costs: Products o A B C Direct materials ................. $10.90 $15.80 $ 8.00 Direct labor ..................... 12.50 12.60 9.90 Variable manufacturing overhead .. 2.40 1.20 1.40 Fixed manufacturing overhead ..... 11.60 7.20 7.80 Unit product cost ................ $37.40 $36.80 $27.10 Additional data concerning these products are listed below. Products o A B C Mixing minutes per unit .......... 2.00 1.00 0.50 Selling price per unit ........... $55.80 $54.60 $43.10 Variable selling cost per unit ... $2.10 $1.40 $1.90 Monthly demand in units .......... 2,000 1,000 3,000 The mixing machines are potentially the constraint in the production facility. A total of 5,900 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a. How many minutes of mixing machine time would be required to satisfy demand for all four products? b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.) c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)


Answer: a. Demand on the mixing machine: Products o A B C Mixing minutes per unit .......... 2.00 1.00 0.50 Monthly demand in units .......... 2,000 1,000 3,000 Total minutes required ......... 4,000 1,000 1,500 Total time required for all products: 6,500 b. Optimal production plan: Products o A B C Selling price per unit ........... $55.80 $54.60 $43.10 Direct materials ................. $10.90 $15.80 $8.00 Direct labor ..................... 12.50 12.60 9.90 Variable manufacturing overhead .. 2.40 1.20 1.40 Variable selling cost per unit ... 2.10 1.40 1.90 Total variable cost per unit .. $27.90 $31.00 $21.20 Contribution margin per unit ..... $27.90 $23.60 $21.90 Mixing minutes per unit .......... 2.00 1.00 0.50 Contribution margin per minute ... $13.95 $23.60 $43.80 Rank in terms of profitability ... 3 2 1 Optimal production ............... 1,700 1,000 3,000 c. The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $13.95.


254

102. Medium

Holt Company makes three products in a single facility. Data concerning these products follow: Products o A B C Selling price per unit ........... $67.90 $57.70 $43.90 Direct materials ................. $12.10 $10.30 $8.60 Direct labor ..................... $14.10 $8.00 $6.80 Variable manufacturing overhead .. $2.60 $2.20 $1.80 Variable selling cost per unit ... $2.50 $2.20 $2.50 Mixing minutes per unit .......... 2.70 3.30 4.70 Monthly demand in units .......... 1,000 3,000 3,000 The mixing machines are potentially the constraint in the production facility. A total of 25,800 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a. How many minutes of mixing machine time would be required to satisfy demand for all four products? b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.) c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.) Answer: a. Demand on the mixing machine: Products o A B C Mixing minutes per unit .......... 2.70 3.30 4.70 Monthly demand in units .......... 1,000 3,000 3,000 Total minutes required ......... 2,700 9,900 14,100 Total time required for all products: 26,700


b. Optimal production plan: Products o A B C Selling price per unit ........... $67.90 $57.70 $43.90 Direct materials ................. $12.10 $10.30 $ 8.60 Direct labor ..................... 14.10 8.00 6.80 Variable manufacturing overhead .. 2.60 2.20 1.80 Variable selling cost per unit ... 2.50 2.20 2.50 Total variable cost per unit .. $31.30 $22.70 $19.70 Contribution margin per unit ..... $36.60 $35.00 $24.20 Mixing minutes per unit .......... 2.70 3.30 4.70 Contribution margin per minute ... $13.56 $10.61 $ 5.15 Rank in terms of profitability ... 1 2 3 Optimal production ............... 1,000 3,000 2,809 c. The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $5.15. 103. Hard

Redner, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below: Product J K L Selling price .......... $80 $60 $90 Variable costs ......... 50 40 55 Fixed costs ............ 25 8 22 Grinding machine time .. 10 min. 5 min. 7 min. Fixed costs are applied to the products on the basis of direct labor hours. Demand for the three products exceeds the company's productive capacity. The grinding machine is the constraint, with only 2,400 minutes of grinding machine time available this week. Required: a. Given the grinding machine constraint, which product should be emphasized? Support your answer with appropriate calculations. b. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of grinding machine time?


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Answer: a. The product to emphasize can be determined by computing the contribution margin per unit of the scarce resource, which in this case is grinding machine time. Product J K L Selling price .......... $80 $60 $90 Variable costs ......... 50 40 55 Contribution margin .... $30 $20 $35 Grinding machine time .. 10 min. 5 min. 7 min. Contribution margin per minute ........... $3.00 $4.00 $5.00 Product L should be emphasized because it has the greatest contribution margin per unit of the scarce resource. b. If additional grinding machine time would be used to produce more of Product L, the time would be worth 60 x $5 = $300 per hour. 104. hard

Iaci Company makes two products from a common input. Joint processing costs up to the splitoff point total $42,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the splitoff point. Each product may be sold at the splitoff point or processed further. Data concerning these products appear below: Product X Product Y Total Allocated joint processing costs .. $22,400 $19,600 $42,000 Sales value at splitoff point .... $32,000 $28,000 $60,000 Costs of further processing ....... $11,600 $25,300 $36,900 Sales value after further processing ...................... $40,800 $54,200 $95,000 Required: a. What is the net monetary advantage (disadvantage) of processing Product X beyond the splitoff point? b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the splitoff point? c. What is the minimum amount the company should accept for Product X if it is to be sold at the splitoff point? d. What is the minimum amount the company should accept for Product Y if it is to be sold at the splitoff point?


Answer: a. & b. Product X Product Y Sales value after further processing $40,800 $54,200 Costs of further processing ........ 11,600 25,300 Benefit of further processing ...... 29,200 28,900 Less: Sales value at splitoff point 32,000 28,000 Net advantage (disadvantage) ......... ($ 2,800) $ 900 c. & d. Minimum selling price at splitoff ... $29,200 $28,900 105. Medium

Harris Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the splitoff point total $200,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the splitoff point. Each product may be sold at the splitoff point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are: Sales Value Sales Value Further After Further Product at SplitOff Processing Costs Processing J $180,000 $ 60,000 $230,000 K $135,000 $105,000 $280,000 L $ 95,000 $ 85,000 $160,000 The "Further Processing Costs" consist of variable and avoidable fixed costs. Required: Which product or products should be sold at the splitoff point, and which product or products should be processed further? Show computations. Answer: Product J K L Sales value after further processing .. $230,000 $280,000 $160,000 Sales value at splitoff ........... 180,000 135,000 95,000 Incremental revenue .... 50,000 145,000 65,000 Further processing costs 60,000 105,000 85,000 Incremental income (loss) $(10,000) $ 40,000 $(20,000) Product K should be sold after further processing beyond the splitoff point. Products J and L should be sold at the split off point without any further processing.


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Test Bank - Chapter13 Relevant Costing

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