1. Fixed costs are sunk costs and are therefore irrelevant in decisions.

Level: Easy    LO:  1    Ans:  F

 

 

2. A complete income statement must be prepared as part of a differential cost analysis.

Level: Medium    LO:  1    Ans:  F

 

 

3. Future costs that do not differ between the alternatives in a decision are avoidable costs.

Level: Medium    LO:  1    Ans:  F

 

 

4. The book value of an old machine is always considered a sunk cost in a decision.

Level: Easy    LO:  1    Ans:  T

 

 

5. A product that does not cover its allocated share of general corporate administrative expenses should be dropped.

Level: Easy    LO:  2    Ans:  F

 

 

6. In a decision to drop a product, the product should be charged for rent in proportion to the space it occupies even if the space has no alternative use and the rental payment is unavoidable.

Level: Easy    LO:  2    Ans:  F

 

 

7. Making rather than buying a part that goes into one of the company’s products would increase the company’s degree of vertical integration.

Level: Easy    LO:  3    Ans:  T

 

 

8. In a special order situation that involves using existing idle capacity, opportunity costs are zero.

Level: Easy    LO:  4    Ans:  T

 

 

9. When a company has a production constraint, the product with the highest contribution margin per unit of the constrained resource should be given highest priority.

Level: Easy    LO:  5    Ans:  T

 

 

10. Payment of overtime to a worker in order to relax a production constraint could increase the profits of a company.

Level: Medium    LO:  5    Ans:  T

 

11. In a plant operating at capacity, every machine and person in the plant would be working at the maximum possible rate.

Level: Hard    LO:  5    Ans:  F

 

 

Multiple Choice

 

 

12. Hal Etoesus currently works as the fry guy at Burger Breath Drive Thru but is thinking of quitting his job to attend college full time next semester. Which of the following would be considered an opportunity cost in this decision?
13. A) the cost of the textbooks
14. B) the cost of the cola that Hal will consume during class
15. C) Hal’s lost wages at Burger Breath
16. D) both A and B above

Level: Easy    LO:  1    Ans:  C

 

 

13. Which of the following would be relevant in the decision to sell or throw out obsolete inventory?

 

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

Level: Medium    LO:  1    Ans:  D

 

 

14. Buff Corp. is considering replacing an old machine with a new machine. Which of the following items is relevant to Buff’s decision? (Ignore income tax considerations.)

 

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

Source: CPA, adapted

Level: Medium    LO:  1    Ans:  B

 

15. In a make-or-buy decision, relevant costs include:
16. A) unavoidable fixed costs
17. B) avoidable fixed costs
18. C) fixed factory overhead costs applied to products
19. D) fixed selling and administrative expenses

Source: CMA, adapted

Level: Easy    LO:  3    Ans:  B

 

 

16. In situations where management must decide between accepting or rejecting a one-time-only special order where there is sufficient idle capacity to fill the order, which one of the following is NOT relevant in making the decision?
17. A) absorption costing unit product costs
18. B) variable costs
19. C) incremental costs
20. D) differential costs

Source: CMA, adapted

Level: Easy    LO:  4    Ans:  A

 

 

17. When a multi-product factory operates at full capacity, decisions must be made about what products to emphasize. In making such decisions, products should be ranked based on:
18. A) selling price per unit
19. B) contribution margin per unit
20. C) contribution margin per unit of the constraining resource
21. D) unit sales volume

Source: CMA, adapted

Level: Easy    LO:  5    Ans:  C

 

 

18. Wenig Inc. has some material that originally cost $73,500. The material has a scrap value of $45,600 as is, but if reworked at a cost of $6,600, it could be sold for $58,100. What would be the incremental effect on the company’s overall profit of reworking and selling the material rather than selling it as is as scrap?
19. A) -$22,000
20. B) -$67,600
21. C) $51,500
22. D) $5,900

Source: CIMA, adapted

Level: Medium    LO:  1    Ans:  D

 

 

 

 

19. Bosques Corporation has in stock 35,800 kilograms of material L that it bought five years ago for $5.55 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material L can be sold as is for scrap for $1.67 per kilogram. An alternative would be to use material L in one of the company’s current products, Q08C, which currently requires 2 kilograms of a raw material that is available for $9.15 per kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it can be used as a substitute for this material in the production of product Q08C. However, after modification, 4 kilograms of material L is required for every unit of product Q08C that is produced. Bosques Corporation has now received a request from a company that could use material L in its production process. Assuming that Bosques Corporation could use all of its stock of material L to make product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67 per kilogram, what is the minimum acceptable selling price of material L to the company that could use material L in its own production process?
20. A) $5.36
21. B) $3.80
22. C) $2.13
23. D) $1.67

Source: CIMA, adapted

Level: Hard    LO:  1    Ans:  B

 

 

20. Mankus Inc. is considering using stocks of an old raw material in a special project. The special project would require all 120 kilograms of the raw material that are in stock and that originally cost the company $816 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.75 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $50.00 for all 120 kilograms. What is the relevant cost of the 120 kilograms of the raw material when deciding whether to proceed with the special project?
21. A) $810
22. B) $870
23. C) $760
24. D) $816

Source: CIMA, adapted

Level: Hard    LO:  1    Ans:  C

 

 

21. Narciso Corporation is preparing a bid for a special order that would require 880 liters of material R19S. The company already has 280 liters of this raw material in stock that originally cost $6.20 per liter. Material R19S is used in the company’s main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $5.45 per liter. New stocks of the material can be readily purchased for $6.20 per liter. What is the relevant cost of the 880 liters of the raw material when deciding how much to bid on the special order?
22. A) $5,006
23. B) $5,456
24. C) $4,796
25. D) $5,456

Source: CIMA, adapted

Level: Hard    LO:  1    Ans:  B

 

 

 

22. Yehle Inc. regularly uses material Y51B and currently has in stock 460 liters of the material for which it paid $2,530 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $4.55 per liter. New stocks of the material can be purchased on the open market for $5.45 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 720 liters of the material to be used in a job for a customer. The relevant cost of the 720 liters of material Y51B is:
23. A) $3,924
24. B) $5,450
25. C) $3,510
26. D) $3,276

Source: CIMA, adapted

Level: Hard    LO:  1    Ans:  A

 

 

23. Roddey Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 2,900 units of component GEE. Each unit of GEE requires 3 units of material R39 and 8 units of material I59. Data concerning these two materials follow:

 

Material R39 is in use in many of the company’s products and is routinely replenished. Material I59 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product GEE?

1. A) $224,605
2. B) $196,765
3. C) $228,204
4. D) $193,285

Source: CIMA, adapted

Level: Hard    LO:  1    Ans:  B

 

 

 

24. Moyer Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 2,300 units of component TIB. Each unit of TIB requires 9 units of material F58 and 7 units of material D66. Data concerning these two materials follow:

 

 

Material F58 is in use in many of the company’s products and is routinely replenished. Material D66 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product TIB?

1. A) $189,890
2. B) $174,215
3. C) $168,533
4. D) $200,905

Source: CIMA, adapted

Level: Hard    LO:  1    Ans:  B

 

 

25. Kahn Company produces and sells 8,000 units of Product X each year. Each unit of Product X sells for $10 and has a contribution margin of $6. It is estimated that if Product X is discontinued, $50,000 of the $60,000 in fixed costs charged to Product X could be eliminated. These data indicate that if Product X is discontinued, overall company net operating income should:
26. A) increase by $2,000 per year
27. B) decrease by $2,000 per year
28. C) increase by $38,000 per year
29. D) decrease by $38,000 per year

Level: Easy    LO:  2    Ans:  A

 

 

 

26. The Milham Company has two divisions – East and West. The divisions have the following revenues and expenses:

 

 

Management at Milham is pondering the elimination of the West Division since it has shown an operating loss for the past several years. If the West Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would result in an overall company net operating income of:

1. A) $100,000
2. B) $80,000
3. C) $120,000
4. D) $50,000

Level: Medium    LO:  2    Ans:  D

 

 

27. The following information relates to next year’s projected operating results of the Aluminum Division of Wroclaw Corporation:

 

 

If Aluminum Division is dropped, $1,000,000 of the above fixed costs would be eliminated. What will be the effect on Wroclaw’s profit next year if Aluminum Division is dropped instead of being kept?

1. A) $500,000 decrease
2. B) $800,000 increase
3. C) $1,000,000 increase
4. D) $1,200,000 increase

Level: Medium    LO:  2    Ans:  A

 

 

 

28. Teich Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 15,000 of the components each year. The unit product cost of the component according to the company’s absorption cost accounting system is given as follows:

 

 

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 10% is avoidable if the component were bought from the outside supplier; the remainder is not avoidable. In addition, making the component uses 3 minutes on the machine that is the company’s current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 6 minutes on the constraining machine and that has a contribution margin of $8.10 per unit.

When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?

15. A) $15.55
16. B) $11.50
17. C) $19.15
18. D) $15.10

Source: CIMA, adapted

Level: Hard    LO:  3    Ans:  A

 

 

29. Jordan Company budgeted sales of 400,000 calculators at $40 per unit last year. Variable manufacturing costs were budgeted at $16 per unit, and fixed manufacturing costs at $10 per unit. A special order for 40,000 calculators at $23 each was received by Jordan in March. Jordan has sufficient plant capacity to manufacture the additional quantity without incurring any additional fixed manufacturing costs; however, the production would have to be done on an overtime basis at an estimated additional cost of $3 per calculator. Acceptance of the special order would not affect Jordan’s normal sales and no selling expenses would be incurred. What would be the effect on net operating income if the special order were accepted?
30. A) $120,000 decrease
31. B) $160,000 increase
32. C) $240,000 decrease
33. D) $280,000 increase

Source: CPA, adapted

Level: Medium    LO:  4    Ans:  B

 

 

 

30. Marley Company makes three products (X, Y, & Z) with the following characteristics:

 

 

The company has a capacity of 2,000 machine hours, but there is virtually unlimited demand for each product. In order to maximize total contribution margin, how many units of each product should the company produce?

1. A) 2,000 units of X, 500 units of Y, and 200 units of Z
2. B) 0 units of X, 0 units of Y, and 200 units of Z
3. C) 0 units of X, 500 units of Y, and 0 units of Z
4. D) 1,000 units of X, 0 units of Y, and 0 units of Z

Level: Medium    LO:  5    Ans:  D

 

 

31. The management of Fannin Corporation is considering dropping product H58S. Data from the company’s accounting system appear below:

 

 

In the company’s accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $90,000 of the fixed manufacturing expenses and $42,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the company’s overall net operating income if product H58S were dropped?

1. A) Overall net operating income would decrease by $137,000.
2. B) Overall net operating income would increase by $137,000.
3. C) Overall net operating income would decrease by $19,000.
4. D) Overall net operating income would increase by $19,000.

Level: Easy    LO:  2    Ans:  A

 

 

 

32. Product Q77H has been considered a drag on profits at Zenke Corporation for some time and management is considering discontinuing the product altogether. Data from the company’s accounting system appear below:

 

 

In the company’s accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $71,000 of the fixed manufacturing expenses and $43,000 of the fixed selling and administrative expenses are avoidable if product Q77H is discontinued. What would be the effect on the company’s overall net operating income if product Q77H were dropped?

1. A) Overall net operating income would decrease by $95,000.
2. B) Overall net operating income would increase by $95,000.
3. C) Overall net operating income would increase by $4,000.
4. D) Overall net operating income would decrease by $4,000.

Level: Easy    LO:  2    Ans:  A

 

 

33. Part S00 is used in one of Morsey Corporation’s products. The company makes 6,000 units of this part each year. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

 

 

An outside supplier has offered to produce this part and sell it to the company for $16.10 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $6,000 of these allocated general overhead costs would be avoided.

If management decides to buy part S00 from the outside supplier rather than to continue making the part, what would be the annual impact on the company’s overall net operating income?

1. A) Net operating income would decline by $3,000 per year.
2. B) Net operating income would decline by $71,400 per year.
3. C) Net operating income would decline by $77,400 per year.
4. D) Net operating income would decline by $65,400 per year.

Level: Easy    LO:  3    Ans:  A

 

 

 

34. Ramon Corporation makes 18,000 units of part E44 each year. This part is used in one of the company’s products. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

 

An outside supplier has offered to make and sell the part to the company for $23.30 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $5,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part E44 would be used to make more of one of the company’s other products, generating an additional segment margin of $21,000 per year for that product.

What would be the impact on the company’s overall net operating income of buying part E44 from the outside supplier?

1. A) Net operating income would increase by $21,000 per year.
2. B) Net operating income would increase by $18,800 per year.
3. C) Net operating income would decline by $123,000 per year.
4. D) Net operating income would decline by $165,000 per year.

Level: Medium    LO:  3    Ans:  B

 

 

35. Kampmann Corporation is presently making part Z95 that is used in one of its products. A total of 5,000 units of this part are produced and used every year. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

 

An outside supplier has offered to make and sell the part to the company for $24.10 each. If this offer is accepted, the supervisor’s salary and all of the variable costs can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part Z95 from the outside supplier rather than to continue making the part, what would be the annual impact on the company’s overall net operating income?

1. A) Net operating income would decline by $36,000 per year.
2. B) Net operating income would decline by $34,000 per year.
3. C) Net operating income would increase by $34,000 per year.
4. D) Net operating income would increase by $36,000 per year.

Level: Easy    LO:  3    Ans:  A

 

36. Part A42 is used by Elgin Corporation to make one of its products. A total of 16,000 units of this part are produced and used every year. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

 

 

An outside supplier has offered to make the part and sell it to the company for $30.40 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part A42 could be used to make more of one of the company’s other products, generating an additional segment margin of $23,000 per year for that product. What would be the impact on the company’s overall net operating income of buying part A42 from the outside supplier?

1. A) Net operating income would decline by $23,400 per year.
2. B) Net operating income would decline by $143,400 per year.
3. C) Net operating income would increase by $23,000 per year.
4. D) Net operating income would decline by $189,400 per year.

Level: Medium    LO:  3    Ans:  A

 

 

37. Wiacek Corporation has received a request for a special order of 4,000 units of product F65 for $26.60 each. Product F65’s unit product cost is $25.80, determined as follows:

 

 

Direct labor is a variable cost. The special order would have no effect on the company’s total fixed manufacturing overhead costs. The customer would like modifications made to product F65 that would increase the variable costs by $3.00 per unit and that would require an investment of $23,000 in special molds that would have no salvage value.

This special order would have no effect on the company’s other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company’s overall net operating income would increase (decrease) by:

1. A) ($31,800)
2. B) $3,800
3. C) $3,200
4. D) ($48,400)

Level: Easy    LO:  4    Ans:  B

 

 

38. A customer has requested that Gamba Corporation fill a special order for 3,000 units of product Q41 for $25.00 a unit. While the product would be modified slightly for the special order, product Q41’s normal unit product cost is $21.40:

 

 

Direct labor is a variable cost. The special order would have no effect on the company’s total fixed manufacturing overhead costs. The customer would like modifications made to product Q41 that would increase the variable costs by $7.00 per unit and that would require an investment of $15,000 in special molds that would have no salvage value.

This special order would have no effect on the company’s other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company’s overall net operating income would increase (decrease) by:

1. A) ($5,700)
2. B) ($21,300)
3. C) ($25,200)
4. D) $10,800

Level: Easy    LO:  4    Ans:  A

 

 

39. Hoang Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:

 

 

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.

1. A) RP,KI,LH
2. B) RP,LH,KI
3. C) KI,RP,LH
4. D) LH,RP,KI

Level: Easy    LO:  5    Ans:  B

 

 

 

40. Fahringer Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:

 

 

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.

1. A) XS,BJ,QR
2. B) QR,BJ,XS
3. C) BJ,QR,XS
4. D) QR,XS,BJ

Level: Easy    LO:  5    Ans:  D

 

 

41. The constraint at Johngrass Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:

 

 

Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

11. A) $11.60 per minute
12. B) $14.10 per minute
13. C) $91.64 per unit
14. D) $22.24 per unit

Level: Medium    LO:  5    Ans:  A

 

 

 

Use the following information to answer 42-43

Jebb’s Lettuce Stand currently sells 60,000 heads of lettuce each year for $1.00 per head. Jebb is thinking of expanding operations and serving the customer better by purchasing a “slice and dice” machine that will cut up each head of lettuce into bite-size pieces that can be used for salads. Jebb expects he will then be able to sell his lettuce for $1.70 per head. Jebb has prepared the following analysis for each option based on sales of 60,000 heads of lettuce:

 

 

 

42. Based on the information above, what will be Jebb’s increase or decrease in profit for the year if he chooses to start slicing up the lettuce instead of selling it whole?
43. A) $3,000 increase
44. B) $3,000 decrease
45. C) $12,000 decrease
46. D) $30,000 increase

Level: Medium    LO:  1    Ans:  A

 

 

43. Assume that Jebb is currently selling only 50,000 heads of lettuce per year instead of 60,000. Under this scenario, what will be Jebb’s increase or decrease in profit for the year if he chooses to start slicing up the lettuce instead of selling it whole?
44. A) $2,000 increase
45. B) $2,500 decrease
46. C) $3,000 increase
47. D) $3,500 decrease

Level: Hard    LO:  1    Ans:  D

 

 

 

Use the following information to answer 44-45

Bayshore Company manufactures and sells Product K. Results for last year are as follows:

 

 

Bayshore is reexamining all of its product lines and is trying to decide whether to discontinue Product K. Dropping the product would have no effect on the total fixed manufacturing overhead incurred by the company.

 

 

44. Assume that dropping Product K will have no effect on the sale of other product lines. If the company drops Product K, the change in annual net operating income due to this decision will be a:
45. A) $10,000 decrease
46. B) $150,000 increase
47. C) $160,000 decrease
48. D) $310,000 decrease

Level: Medium    LO:  2    Ans:  A

 

 

45. Assume that dropping Product K would result in a $15,000 increase in the contribution margin of other product lines. If Bayshore chooses to drop Product K, then the change in net operating income next year due to this action will be a:
46. A) $150,000 increase
47. B) $150,000 decrease
48. C) $5,000 increase
49. D) $140,000 increase

Level: Medium    LO:  2    Ans:  C

 

 

 

Use the following information to answer 46-47

The Flint Fan Company is considering the addition of a new model fan, the F-27, to its current product lines. The expected cost and revenue data for the F-27 fan are as follows:

 

 

If the F-27 model is added as a new product line, it is expected that the contribution margin of other product lines at Flint will drop by $7,000 per year.

 

 

46. If the F-27 product line is added next year, the change in operating income should be:
47. A) $30,000 increase
48. B) $5,000 decrease
49. C) $23,000 increase
50. D) $15,000 increase

Level: Medium    LO:  2    Ans:  C

 

 

47. What is the lowest unit selling price that could be charged for the F-27 model and still make it economically desirable for Flint to add the new product line?
48. A) $52.25
49. B) $50.50
50. C) $55.75
51. D) $49.00

Level: Hard    LO:  2    Ans:  A

 

 

 

Use the following information to answer 48-49

Key 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:

 

 

If the new product is added, the combined contribution margin of the other, existing product lines is expected to drop $65,000 per year. Total common corporate costs would be unaffected by the decision of whether to add the new product.

 

 

48. If the new product line is added next year, the increase in net operating income resulting from this decision would be:
49. A) $325,000
50. B) $200,000
51. C) $145,000
52. D) $135,000

Level: Medium    LO:  2    Ans:  D

 

 

49. What is the lowest selling price per unit that could be charged for the new product line and still make it economically desirable to add the new product line?
50. A) $246
51. B) $250
52. C) $232
53. D) $282

Level: Hard    LO:  2    Ans:  B

 

 

Use the following information to answer 50-51

The Talbot Company makes wheels that it uses in the production of bicycles. Talbot’s costs to produce 100,000 wheels annually are:

 

 

An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45,000 per year.

 

50. If Talbot chooses to buy the wheel from the outside supplier, then the change in annual net operating income due to accepting the offer is a:
51. A) $35,000 increase
52. B) $10,000 decrease
53. C) $45,000 increase
54. D) $70,000 increase

Level: Medium    LO:  3    Ans:  A

 

 

51. What is the highest price that Talbot could pay the outside supplier for the wheel and still be economically indifferent between making or buying the wheels?
52. A) $1.70
53. B) $1.60
54. C) $1.55
55. D) $1.15

Level: Hard    LO:  3    Ans:  B

 

 

Use the following information to answer 52-53

Melbourne Company has traditionally made a subcomponent of its major product. Annual production of 30,000 subcomponents results in the following costs:

 

 

Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each year at a price of $28 per unit. Melbourne knows that the facilities now being used to manufacture the subcomponent could be rented to another company for $80,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, there would be no effect of this decision on the total fixed overhead of the company.

 

 

52. If Melbourne decides to purchase the subcomponent from the outside supplier, what would be the impact on the company’s net operating income for the year?
53. A) $120,000 higher
54. B) $20,000 higher
55. C) $120,000 lower
56. D) $20,000 lower

Level: Medium    LO:  3    Ans:  C

 

 

53. At what price per unit charged by the outside supplier would Melbourne be economically indifferent between making the subcomponent or buying it from outside?
54. A) $29
55. B) $25
56. C) $21
57. D) $24

Level: Hard    LO:  3    Ans:  D

 

Use the following information to answer 54-55

Regis Company makes the plugs it uses in one of its products at a cost of $36 per unit. This cost includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell them to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs.

 

 

54. If Regis Company purchases the plugs but does not rent the unused facility, the company would:
55. A) save $3.00 per unit.
56. B) lose $6.00 per unit.
57. C) save $6.00 per unit.
58. D) lose $3.00 per unit.

Source: CMA, adapted

Level: Medium    LO:  3    Ans:  D

 

 

55. If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in savings annually. To achieve this goal, the minimum annual rent on the facility must be:
56. A) $10,000
57. B) $40,000
58. C) $70,000
59. D) $190,000

Source: CMA, adapted

Level: Hard    LO:  3    Ans:  D

 

 

Use the following information to answer 56-58

Ahringer Company makes 50,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

 

An outside supplier has offered to sell the company all of these parts it needs for $50.10 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 $135,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $9.30 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.

 

 

 

56. How much of the unit product cost of $57.10 is relevant in the decision of whether to make or buy the part?
57. A) $57.10
58. B) $21.70
59. C) $47.80
60. D) $42.90

Level: Easy    LO:  3    Ans:  C

 

 

57. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
58. A) $350,000
59. B) $135,000
60. C) $(115,000)
61. D) $20,000

Level: Medium    LO:  3    Ans:  D

 

 

58. 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 50,000 units required each year?
59. A) $57.10
60. B) $50.50
61. C) $59.80
62. D) $2.70

Level: Hard    LO:  3    Ans:  B

 

 

Use the following information to answer 59-61

Dockwiller Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as D53. Data concerning this product are given below:

 

 

The above per unit data are based on annual production of 8,000 units of the component. Direct labor can be considered to be a variable cost.

 

 

 

59. The company has received a special, one-time-only order for 500 units of component D53. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Dockwiller has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go?
60. A) $67
61. B) $30
62. C) $150
63. D) $47

Source: CMA, adapted

Level: Medium    LO:  4    Ans:  B

 

 

60. The company has received a special, one-time-only order for 300 units of component D53. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Dockwiller has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $1,800. What is the minimum price per unit on the special order below which the company should not go?
61. A) $73
62. B) $36
63. C) $53
64. D) $6

Source: CMA, adapted

Level: Hard    LO:  4,5    Ans:  B

 

 

61. Refer to the original data in the problem. What is the current contribution margin per unit for component D53 based on its selling price of $150 and its annual production of 8,000 units?
62. A) $83
63. B) $118
64. C) $32
65. D) $120

Source: CMA, adapted

Level: Easy    LO:  4    Ans:  B

 

 

 

Use the following information to answer 62-63

The following are the Jensen Company’s unit costs of making and selling an item at a volume of 1,000 units per month (which represents the company’s capacity):

 

 

Present sales amount to 700 units per month. An order has been received from a customer in a foreign market for 100 units. The order would not affect current sales. Jensen’s total fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 700 units and 1,000 units. The variable selling and administrative expenses would have to be incurred on this special order as well as for all other sales.

 

 

62. How much will the company’s profits be increased or (decreased) if it prices the 100 units at $7 each?
63. A) $(30)
64. B) $150
65. C) $0
66. D) $310

Level: Medium    LO:  4    Ans:  B

 

 

63. Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company’s other sales. What cost is relevant as a guide for setting a minimum price?
64. A) $5.50
65. B) $5.90
66. C) $2.00
67. D) $3.50

Level: Hard    LO:  4    Ans:  C

 

 

 

Use the following information to answer 64-65

The Molis Company has the capacity to produce 15,000 haks each month. Current regular production and sales are 10,000 haks per month at a selling price of $15 each. Based on this level of activity, the following unit costs are incurred:

 

 

The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 10,000 to 15,000 haks per month.

The Molis Company has received a special order from a customer who wants to pay a reduced price of $10 per hak. There would be no selling expense in connection with this special order. And, this order would have no effect on the company’s other sales.

 

 

64. Suppose the special order is for 4,000 haks this month. If this offer is accepted by Molis, the company’s operating income for the month will:
65. A) increase by $6,000
66. B) decrease by $6,000
67. C) increase by $5,000
68. D) decrease by $5,000

Level: Medium    LO:  4    Ans:  C

 

 

65. Suppose the special order is for 6,000 haks this month and thus some regular sales would have to be given up. If this offer is accepted by Molis, the company’s operating income for the month will:
66. A) increase by $6,000
67. B) increase by $7,500
68. C) increase by $5,000
69. D) increase by $1,500

Level: Hard    LO:  4    Ans:  D

 

 

 

Use the following information to answer 66-68

Elferts 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:

 

The normal selling price of the product is $85.80 per unit.

An order has been received from an overseas customer for 4,000 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 $0.60 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

 

 

66. 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 $80.60 per unit. By how much would this special order increase (decrease) the company’s net operating income for the month?
67. A) $44,000
68. B) $(18,400)
69. C) $117,200
70. D) $17,200

Level: Medium    LO:  4    Ans:  C

 

 

67. 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?
68. A) $9.50
69. B) $10.10
70. C) $5.20
71. D) $33.90

Level: Hard    LO:  4    Ans:  D

 

 

68. 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 100 units for regular customers. The minimum acceptable price per unit for the special order is closest to:
69. A) $69.20
70. B) $76.30
71. C) $85.80
72. D) $52.15

Level: Hard    LO:  4    Ans:  D

 

 

 

Use the following information to answer 69-71

The Melrose Company produces a single product, Product C. Melrose has the capacity to produce 70,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows:

 

 

The regular selling price of one unit of Product C is $100. A special order has been received by Melrose from Moore Company to purchase 7,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost $10,500 and will have no use after the special order is filled.

 

 

69. Assume that Melrose expects to sell 60,000 units of Product C to regular customers next year. At what selling price for the 7,000 units would Melrose be economically indifferent between accepting and rejecting the special order from Moore?
70. A) $53.00
71. B) $54.50
72. C) $75.00
73. D) $76.50

Level: Hard    LO:  4    Ans:  B

 

 

70. Assume Melrose expects to sell 60,000 units of Product C to regular customers next year. If Moore company offers to buy the special units at $90 per unit, the effect of accepting the special order on Melrose’s net operating income for next year will be:
71. A) $42,000 increase
72. B) $54,000 decrease
73. C) $105,000 increase
74. D) $248,500 increase

Level: Hard    LO:  4    Ans:  D

 

 

71. Suppose Melrose can sell 68,000 units of Product C to regular customers next year. If Moore Company offers to buy the special order units at $95 per unit, the effect of accepting the special order for 7,000 units on Melrose’s net operating income for next year will be a:
72. A) $93,500 increase
73. B) $104,000 increase
74. C) $114,500 increase
75. D) $294,000 increase

Level: Hard    LO:  4    Ans:  A

 

 

 

Use the following information to answer 72-75

Broyles Company makes four products in a single facility. These products have the following unit product costs:

 

 

Additional data concerning these products are listed below.

 

 

The grinding machines are potentially the constraint in the production facility. A total of 14,400 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

 

 

72. How many minutes of grinding machine time would be required to satisfy demand for all four products?
73. A) 13,400
74. B) 15,900
75. C) 10,000
76. D) 14,400

Level: Easy    LO:  5    Ans:  B

 

 

73. Which product makes the LEAST profitable use of the grinding machines?
74. A) Product A
75. B) Product B
76. C) Product C
77. D) Product D

Level: Hard    LO:  5    Ans:  A

 

 

 

74. Which product makes the MOST profitable use of the grinding machines?
75. A) Product A
76. B) Product B
77. C) Product C
78. D) Product D

Level: Hard    LO:  5    Ans:  B

 

 

75. 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.)
76. A) $26.40
77. B) $12.00
78. C) $14.00
79. D) $0.00

Level: Hard    LO:  5    Ans:  C

 

 

Use the following information to answer 76-79

Craves Company makes four products in a single facility. Data concerning these products appear below:

 

 

The milling machines are potentially the constraint in the production facility. A total of 10,400 minutes are available per month on these machines.

 

 

76. How many minutes of milling machine time would be required to satisfy demand for all four products?
77. A) 9,000
78. B) 10,500
79. C) 10,400
80. D) 9,900

Level: Easy    LO:  5    Ans:  B

 

 

77. Which product makes the LEAST profitable use of the milling machines?
78. A) Product A
79. B) Product B
80. C) Product C
81. D) Product D

Level: Medium    LO:  5    Ans:  A

 

 

 

78. Which product makes the MOST profitable use of the milling machines?
79. A) Product A
80. B) Product B
81. C) Product C
82. D) Product D

Level: Medium    LO:  5    Ans:  C

 

 

79. 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.)
80. A) $10.60
81. B) $0.00
82. C) $5.15
83. D) $17.40

Level: Medium    LO:  5    Ans:  C

 

 

Use the following information to answer 80-81

The Madison Company produces three products with the following costs and selling prices:

 

 

 

80. If Madison has a limit of 10,000 direct labor hours but no limit on machine hours, then the three products should be produced in the order:
81. A) A, B, C
82. B) B, C, A
83. C) C, A, B
84. D) A, C, B

Level: Medium    LO:  5    Ans:  A

 

 

81. If Madison has a limit of 15,000 machine hours but no limit on direct labor hours, then the three products should be produced in the order:
82. A) A, B, C
83. B) B, C, A
84. C) A, C, B
85. D) C, A, B

Level: Medium    LO:  5    Ans:  B

 

 

 

Use the following information to answer 82-83

The Wester Company produces three products with the following costs and selling prices:

 

 

The company has insufficient capacity to fulfill all of the demand for these three products.

 

 

82. If direct labor hours are the constraint, then the three products should be produced in the order:
83. A) A, B, C
84. B) B, A, C
85. C) C, A, B
86. D) A, C, B

Level: Hard    LO:  5    Ans:  B

 

 

83. If machine hours are the constraint, then the three products should be produced in the order:
84. A) A, B, C
85. B) B, C, A
86. C) A, C, B
87. D) C, A, B

Level: Medium    LO:  5    Ans:  D

 

 

Use the following information to answer 84-85

Nesmith Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below:

 

 

 

84. Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question.)
85. A) Both materials costs and processing costs are relevant
86. B) Only materials costs are relevant
87. C) Neither materials costs nor processing costs are relevant
88. D) Only processing costs are relevant

Level: Easy    LO:  1    Ans:  A

 

 

85. What is the differential cost of Alternative B over Alternative A, including all of the relevant costs?
86. A) $150,000
87. B) $100,000
88. C) $125,000
89. D) $50,000

Level: Easy    LO:  1    Ans:  D

 

 

Use the following information to answer 86-87

Two alternatives, code-named X and Y, are under consideration at Brahler Corporation. Costs associated with the alternatives are listed below.

 

 

 

86. Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question.)
87. A) Only processing costs are relevant
88. B) Both materials costs and processing costs are relevant
89. C) Only materials costs are relevant
90. D) Neither materials costs nor processing costs are relevant

Level: Easy    LO:  1    Ans:  A

 

 

87. What is the differential cost of Alternative Y over Alternative X, including all of the relevant costs?
88. A) $122,000
89. B) $136,000
90. C) $108,000
91. D) $28,000

Level: Easy    LO:  1    Ans:  D

 

 

Use the following information to answer 88-89

The management of Kabanuck Corporation is considering dropping product V41B. Data from the company’s accounting system appear below:

 

 

All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $184,000 of the fixed manufacturing expenses and $200,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued.

 

 

88. According to the company’s accounting system, what is the net operating income earned by product V41B?
89. A) $71,000
90. B) $516,000
91. C) ($516,000)
92. D) ($71,000)

Level: Easy    LO:  2    Ans:  D

 

 

89. What would be the effect on the company’s overall net operating income if product V41B were dropped?
90. A) Overall net operating income would increase by $71,000.
91. B) Overall net operating income would increase by $132,000.
92. C) Overall net operating income would decrease by $132,000.
93. D) Overall net operating income would decrease by $71,000.

Level: Easy    LO:  2    Ans:  C

 

 

Use the following information to answer 90-91

The management of Cackowski Corporation has been concerned for some time with the financial performance of its product I11S and has considered discontinuing it on several occasions. Data from the company’s accounting system appear below:

 

 

In the company’s accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $185,000 of the fixed manufacturing expenses and $132,000 of the fixed selling and administrative expenses are avoidable if product I11S is discontinued.

 

 

90. According to the company’s accounting system, what is the net operating income earned by product I11S?
91. A) $410,000
92. B) $46,000
93. C) ($46,000)
94. D) ($410,000)

Level: Easy    LO:  2    Ans:  C

 

 

91. What would be the effect on the company’s overall net operating income if product I11S were dropped?
92. A) Overall net operating income would decrease by $46,000.
93. B) Overall net operating income would increase by $93,000.
94. C) Overall net operating income would increase by $46,000.
95. D) Overall net operating income would decrease by $93,000.

Level: Easy    LO:  2    Ans:  D

 

 

Use the following information to answer 92-93

Hermenegildo Corporation is presently making part P42 that is used in one of its products. A total of 10,000 units of this part are produced and used every year. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

 

 

An outside supplier has offered to produce and sell the part to the company for $23.90 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $4,000 of these allocated general overhead costs would be avoided.

 

 

92. If management decides to buy part P42 from the outside supplier rather than to continue making the part, what would be the annual impact on the company’s overall net operating income?
93. A) Net operating income would decline by $5,000 per year.
94. B) Net operating income would decline by $59,000 per year.
95. C) Net operating income would decline by $51,000 per year.
96. D) Net operating income would decline by $55,000 per year.

Level: Easy    LO:  3    Ans:  A

 

 

93. In addition to the facts given above, assume that the space used to produce part P42 could be used to make more of one of the company’s other products, generating an additional segment margin of $13,000 per year for that product. What would be the impact on the company’s overall net operating income of buying part P42 from the outside supplier and using the freed space to make more of the other product?
94. A) Net operating income would increase by $13,000 per year.
95. B) Net operating income would increase by $8,000 per year.
96. C) Net operating income would decline by $42,000 per year.
97. D) Net operating income would decline by $68,000 per year.

Level: Medium    LO:  3    Ans:  B

 

 

 

Use the following information to answer 94-95

Rama Corporation is presently making part J56 that is used in one of its products. A total of 4,000 units of this part are produced and used every year. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

 

 

An outside supplier has offered to produce and sell the part to the company for $30.80 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally.

 

 

94. If management decides to buy part J56 from the outside supplier rather than to continue making the part, what would be the annual impact on the company’s overall net operating income?
95. A) Net operating income would increase by $44,000 per year.
96. B) Net operating income would increase by $10,000 per year.
97. C) Net operating income would decline by $10,000 per year.
98. D) Net operating income would decline by $44,000 per year.

Level: Easy    LO:  3    Ans:  D

 

 

95. In addition to the facts given above, assume that the space used to produce part J56 could be used to make more of one of the company’s other products, generating an additional segment margin of $13,000 per year for that product. What would be the impact on the company’s overall net operating income of buying part J56 from the outside supplier and using the freed space to make more of the other product?
96. A) Net operating income would decline by $31,000 per year.
97. B) Net operating income would decline by $23,000 per year.
98. C) Net operating income would increase by $3,000 per year.
99. D) Net operating income would increase by $13,000 per year.

Level: Medium    LO:  3    Ans:  A

 

 

Use the following information to answer 96-97

Tillison Corporation makes three products that use the current constraint-a particular type of machine. Data concerning those products appear below:

 

 

 

96. Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.
97. A) TC,KA,PA
98. B) PA,TC,KA
99. C) TC,PA,KA
100. D) KA,TC,PA

Level: Easy    LO:  5    Ans:  D

 

 

97. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?
98. A) $10.80 per minute
99. B) $69.44 per unit
100. C) $16.40 per minute
101. D) $14.04 per unit

Level: Medium    LO:  5    Ans:  A

 

 

Use the following information to answer 98-99

The constraint at Bonavita Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:

 

 

 

98. Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.
99. A) PW,UN,ZG
100. B) UN,ZG,PW
101. C) ZG,PW,UN
102. D) UN,PW,ZG

Level: Easy    LO:  5    Ans:  B

 

 

99. Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of this constrained resource?
100. A) $15.30 per minute
101. B) $18.80 per minute
102. C) $77.08 per unit
103. D) $122.10 per unit

Level: Medium    LO:  5    Ans:  A

 

 

Essay

 

 

100. Lakeshore Tours Inc., operates a large number of tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours in order to improve the company’s overall operating performance. One such tour is a two-day Battlefields of the French and Indian Wars bus tour. An income statement from one of these tours is given below:

 

 

Dropping this tour would not affect the number of buses in the company’s fleet or the number of bus drivers on the company’s payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. The “Bus maintenance and preparation” cost above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company’s fleet of buses in good operating condition. There would be no change in the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance depends upon the number of buses in the company’s fleet and not upon how much they are used.

Required:

(a.) Prepare an analysis showing what the impact will be on company profits if this tour is discontinued.

(b.) The company’s tour director has been criticized because only about 50% of the seats on the company’s tours are being filled as compared to an average of 60% for the industry. The tour director has explained that the company’s average seat occupancy could be improved considerably by eliminating about 10% of the tours, but that doing so would reduce profits. Do you agree with the tour director’s conclusion? Explain your response.

Level: Hard    LO:  2

 

Ans:

 

 

(b.) The elimination of tours with occupancy rates lower than the industry average would improve the overall average seat occupancy for the company as a whole. This action could reduce company profits in two ways. First, the tours that are eliminated could have a contribution margin that is higher than the avoidable costs of the tour itself. This is the case with the tour described in part 1 above. Eliminating these tours would reduce the company’s total contribution margin more than it would reduce total costs resulting in a decline in profits. Second, these tours might be acting as “magnets’ in that they may be drawing tourists to other, more profitable tours being offered by the company.

 

 

101. Boa Mining Company currently is operating at less than 50% of practical capacity. The management of the company expects sales to drop below the present level of 10,000 tons of ore per month very soon. The sales price per ton is $3 and the variable cost per ton is $2. Fixed costs per month total $10,000.

Management is concerned that a further drop in sales volume will generate a loss and accordingly is considering temporarily suspending operations until demand in the metals markets rebounds and prices once again rise. Management has implemented a cost reduction program over the past year, but at this point suspension of operations appears to be the only viable alternative. Management estimates that suspension of operations would reduce fixed costs from $10,000 to $4,000 per month.

Required:

(a.) Why does management believe that the fixed costs will persist at $4,000 even though the mine is temporarily closed?

(b.) At what sales volume per month will the company be indifferent between continuing to operate the mine and closing it?

Level: Medium    LO:  2

Ans:

(a.) Some nonvariable costs will continue to be incurred despite the temporary closing of the mine. Management is probably reluctant to discharge key employees since these employees will seek employment elsewhere and replacing them could be quite costly. A skeleton staff would need to be maintained for certain administrative and maintenance functions. Taxes and insurance would continue to be paid during the shut down period.

(b.) Suspension of operations would be desirable when sales volume drops below 6,000 tons as shown below:

 

 

Each unit contributes $1.00 per unit towards fixed costs:

 

 

Sales volume necessary to recover $6,000 of fixed costs:

$6,000 ÷ $1.00 = 6,000 tons

 

 

102. Fothergill 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:

 

 

An outside supplier has offered to sell the company all of these parts it needs for $59.20 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 $352,000 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.

Required:

(a.) How much of the unit product cost of $71.70 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 40,000 units required each year?

Level: Hard    LO:  3

 

Ans:

 

 

 

103. Bulan Inc. makes a range of products. The company’s predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data:

 

 

Component T6 is used in one of the company’s products. The unit product cost of the component according to the company’s cost accounting system is determined as follows:

 

 

An outside supplier has offered to supply component T6 for $101 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Bulan chronically has idle capacity.

Required:

Is the offer from the outside supplier financially attractive? Why?

Source: CIMA, adapted

Level: Hard    LO:  3

 

Ans:

Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The variable portion of the manufacturing overhead rate is computed as follows:

 

 

The direct-labor hours per unit for the special order can be determined as follows:

 

 

Consequently, the variable manufacturing overhead for the special order would be:

 

 

Putting this all together:

 

 

Since the outside supplier has offered to sell the component for $101.00 each, but it only costs the company $85.00 to make the component internally, this is not a financially attractive offer.

 

 

104. Jiambalvo 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:

 

 

The normal selling price of the product is $81.10 per unit.

An order has been received from an overseas customer for 3,000 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 $0.20 less per unit on this order than on normal sales.

 

Direct labor is a variable cost in this company.

Required:

(a.) Suppose the company has ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $75.30 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 the company does not have 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 1,000 units for regular customers. What would be the minimum acceptable price per unit for the special order?

Level: Hard    LO:  4

Ans:

 

 

(b.) The opportunity cost is just the contribution margin on normal sales:

 

(c.) Minimum acceptable price:

 

 

 

105. Pilgrim Corporation makes a range of products. The company’s predetermined overhead rate is $23 per direct labor-hour, which was calculated using the following budgeted data:

 

 

Management is considering a special order for 800 units of product N89E at $69 each. The normal selling price of product N89E is $88 and the unit product cost is determined as follows:

 

 

If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order.

Required:

If the special order were accepted, what would be the impact on the company’s overall profit?

Source: CIMA, adapted

Level: Hard    LO:  4

Ans:

Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The variable portion of the manufacturing overhead rate is computed as follows:

 

 

The direct-labor hours per unit for the special order can be determined as follows:

 

 

Consequently, the variable manufacturing overhead for the special order would be:

 

 

 

Putting this all together:

 

 

 

106. Adamyan Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing plant has the capacity to produce 15,000 medals each month; current monthly production is 12,750 medals. The company normally charges $120 per medal. Cost data for the current level of production are shown below:

 

 

The company has just received a special one-time order for 700 medals at $83 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.

Required:

Should the company accept this special order? Why?

Source: CMA, adapted

Level: Medium    LO:  4

Ans:

Only the direct materials and direct labor costs are relevant in this decision. To make the decision, we must compute the average direct materials and direct labor cost per unit.

 

Since price on the special order is $83 per medal and the relevant cost is only $73, the company would earn a profit of $10 per medal. Therefore, the special order should be accepted.

 

 

 

107. Albertine Co. manufactures and sells trophies for winners of athletic and other events. Its manufacturing plant has the capacity to produce 16,000 trophies each month; current monthly production is 12,800 trophies. The company normally charges $113 per trophy. Cost data for the current level of production are shown below:

 

 

The company has just received a special one-time order for 1,200 trophies at $61 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.

Required:

Should the company accept this special order? Why?

Source: CMA, adapted

Level: Medium    LO:  4

Ans:

Only the direct materials and direct labor costs are relevant in this decision. To make the decision, we must compute the average direct materials and direct labor cost per unit.

 

 

Since price on the special order is $61 per trophy and the relevant cost is $68, the company would suffer a loss of $7 per trophy. Therefore, the special order should not be accepted.

 

 

108. Gluth Company makes three products in a single facility. These products have the following unit product costs:

 

 

 

Additional data concerning these products are listed below.

 

 

The mixing machines are potentially the constraint in the production facility. A total of 23,200 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.)

Level: Hard    LO:  5

Ans:

(a.) Demand on the mixing machine:

 

 

Total time required for all products: 23,800

 

 

(c.) The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $10.24.

 

109. Holtz Company makes three products in a single facility. Data concerning these products follow:

 

 

The mixing machines are potentially the constraint in the production facility. A total of 12,500 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.)

Level: Medium    LO:  5

Ans:

 

 

Total time required for all products: 12,700

 

 

(c.) The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $6.82.

 

 

110. Wright, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:

 

 

Fixed costs are applied to the products on the basis of direct labor hours.

Demand for the three products exceeds the company’s productive capacity. The tapping machine is the constraint, with only 2,400 minutes of tapping machine time available this week.

Required:

(a.) Given the tapping machine constraint, which product should be emphasized? Support your answer with appropriate calculations.

(b.) Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of tapping machine time?

Level: Hard    LO:  5

 

Ans:

(a.) The product to emphasize can be determined by computing the contribution margin per unit of the scarce resource, which in this case is tapping machine time.

 

 

Product E should be emphasized because it has the greatest contribution margin per unit of the scarce resource.

(b.) If additional tapping machine time would be used to produce more of Product E, the time would be worth 60 × $20 = $1,200 per hour.

 

 

111. Nicklin Corporation is considering two alternatives that are code-named M and N. Costs associated with the alternatives are listed below:

 

 

Required:

(a.) Which costs are relevant and which are not relevant in the choice between these two alternatives?

(b.) What is the differential cost between the two alternatives?

Level: Easy    LO:  1

Ans:

 

 

 

 

 

112. Costs associated with two alternatives, code-named Q and R, being considered by Hunnicutt Corporation are listed below:

 

Required:

(a.) Which costs are relevant and which are not relevant in the choice between these two alternatives?

(b.) What is the differential cost between the two alternatives?

Level: Easy    LO:  1

Ans:

 

 

 

 

113. The management of Bercegeay Corporation is considering dropping product Y25C. Data from the company’s accounting system appear below:

 

 

All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $117,000 of the fixed manufacturing expenses and $78,000 of the fixed selling and administrative expenses are avoidable if product Y25C is discontinued.

Required:

(a.) What is the net operating income earned by product Y25C according to the company’s accounting system? Show your work!

(b.) What would be the effect on the company’s overall net operating income of dropping product Y25C? Should the product be dropped? Show your work!

 

Ans:

 

 

(a.) According to the company’s accounting system, the product’s net operating loss is $31,000.

(b.) Net operating income would decline by $171,000 if product Y25C were dropped. Therefore, the product should not be dropped.

Level: Easy    LO:  2

 

 

114. Costabile Corporation is considering dropping product G41O. Data from the company’s accounting system appear below:

 

 

All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $117,000 of the fixed manufacturing expenses and $46,000 of the fixed selling and administrative expenses are avoidable if product G41O is discontinued.

Required:

(a.) According to the company’s accounting system, what is the net operating income earned by product G41O? Show your work!

(b.) What would be the effect on the company’s overall net operating income of dropping product G41O? Should the product be dropped? Show your work!

Level: Easy    LO:  2

 

Ans:

 

(a.) According to the company’s accounting system, the product’s net operating income is $3,000.

(b.) Net operating income would decline by $102,000 if product G41O were dropped. Therefore, the product should not be dropped.

 

 

115. The management of Leinberger Corporation is considering dropping product S48J. Data from the company’s accounting system appear below:

 

 

All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $28,000 of the fixed manufacturing expenses and $21,000 of the fixed selling and administrative expenses are avoidable if product S48J is discontinued.

Required:

What would be the effect on the company’s overall net operating income if product S48J were dropped? Should the product be dropped? Show your work!

Level: Easy    LO:  2

Ans:

Net operating income would decline by $7,000 if product S48J were dropped. Therefore, the product should not be dropped.

 

116. Kerbow Corporation uses part B76 in one of its products. The company’s Accounting Department reports the following costs of producing the 12,000 units of the part that are needed every year.

 

 

An outside supplier has offered to make the part and sell it to the company for $27.40 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $6,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part B76 could be used to make more of one of the company’s other products, generating an additional segment margin of $29,000 per year for that product.

Required:

(a.) Prepare a report that shows the effect on the company’s total net operating income of buying part B76 from the supplier rather than continuing to make it inside the company.

(b.) Which alternative should the company choose?

Level: Medium    LO:  3

Ans:

 

 

(b.) The total cost of the make alternative is lower by $23,800. Thus, net operating income would decline by $23,800 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself.

 

 

 

117. Part O43 is used in one of Scheetz Corporation’s products. The company’s Accounting Department reports the following costs of producing the 6,000 units of the part that are needed every year.

 

 

An outside supplier has offered to make the part and sell it to the company for $26.40 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $1,000 of these allocated general overhead costs would be avoided.

Required:

(a.) Prepare a report that shows the effect on the company’s total net operating income of buying part O43 from the supplier rather than continuing to make it inside the company.

(b.) Which alternative should the company choose?

Level: Easy    LO:  3

Ans:

 

 

(b.) The total cost of the make alternative is lower by $32,000. Thus, net operating income would decline by $32,000 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself.

 

 

118. Tullius Corporation has received a request for a special order of 8,000 units of product C64 for $50.00 each. The normal selling price of this product is $53.25 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product C64 is computed as follows:

 

 

Direct labor is a variable cost. The special order would have no effect on the company’s total fixed manufacturing overhead costs. The customer would like some modifications made to product C64 that would increase the variable costs by $5.00 per unit and that would require a one-time investment of $43,000 in special molds that would have no salvage value. This special order would have no effect on the company’s other sales. The company has ample spare capacity for producing the special order.

Required:

Determine the effect on the company’s total net operating income of accepting the special order. Show your work!

Level: Easy    LO:  4

Ans:

 

 

 

119. A customer has asked Goes Corporation to supply 6,000 units of product Y19, with some modifications, for $31.30 each. The normal selling price of this product is $46.50 each. The normal unit product cost of product Y19 is computed as follows:

 

 

Direct labor is a variable cost. The special order would have no effect on the company’s total fixed manufacturing overhead costs. The customer would like some modifications made to product Y19 that would increase the variable costs by $8.90 per unit and that would require a one-time investment of $20,000 in special molds that would have no salvage value. This special order would have no effect on the company’s other sales. The company has ample spare capacity for producing the special order.

Required:

Determine the effect on the company’s total net operating income of accepting the special order. Show your work!

Level: Easy    LO:  4

 

Ans:

 

 

 

120. Falsetta Corporation makes three products that use the current constraint, which is a particular type of machine. Data concerning those products appear below:

 

Required:

(a.) Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work!

(b.) Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

Level: Easy    LO:  5

Ans:

 

Resulting ranking of products: JK,DH,ZA

(b.) The company should be willing to pay up to $14.20 per minute to obtain more of the constrained resource since this is the value to the company of using this constrained resource to make more of product ZA. By assumption, the other products will already have been produced up to demand.

 

 

 

121. The constraint at Fulena Inc. is an expensive milling machine. The three products listed below use this constrained resource.

 

Required:

(a.) Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work!

(b.) Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

Level: Easy    LO:  5

Ans:

Resulting ranking of products: WP,LC,PG

(b.) The company should be willing to pay up to $11.40 per minute to obtain more of the constrained resource since this is the value to the company of using this constrained resource to make more of product PG. By assumption, enough of the other two products will already have been produced to fully satisfy demand.