Quiz 13: Relevant Costs for Decision Making

Managerial Accounting

Business
99
Questions
15
True/False
71
Choices
13
Essay
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Quiz Materials

Use the following to answer questions 38-39:
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:
Selling Unsliced Lettuce:
Per Head Total
Variable costs ................................ $0.25 $15,000
Fixed costs ..................................... 0.30 18,000
Total .............................................. $0.55 $33,000
Selling Sliced Lettuce:
Per Head Total
Variable costs ................................ $0.30 $18,000
Fixed costs ..................................... 0.90 54,000
Total .............................................. $1.20 $72,000


Use the following to answer questions 40-41:
Bayshore Company manufactures and sells Product K. Results for last year are as follows:
Sales (10,000 units at $150 each) .............. $1,500,000
Less expenses:
Variable production costs ....................... $900,000
Sales commissions (15% of sales) ......... 225,000
Salary of product line manager .............. 190,000
Traceable fixed advertising expense ...... 175,000
Fixed manufacturing overhead ............... 160,000
Total expenses ........................................... 1,650,000
Net operating loss ...................................... $ (150,000)
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.


Use the following to answer questions 42-43:
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:
Annual sales .............................................. 4,000 units
Unit selling price ....................................... $58
Unit variable costs:
Production .............................................. $34
Selling .................................................... $4
Avoidable fixed costs per year:
Production .............................................. $20,000
Selling .................................................... $30,000
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.


Use the following to answer questions 44-45:
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:
Annual sales .......................................................... 2,500 units
Selling price per unit .......................................... $304
Variable costs per unit:
Production .......................................................... $125
Selling ................................................................ $49
Avoidable fixed costs per year:
Production .......................................................... $50,000
Selling ................................................................ $75,000
Allocated common corporate costs per year ...... $55,000
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.


Use the following to answer questions 46-47:
The Talbot Company makes wheels that it uses in the production of bicycles. Talbot's costs to
produce 100,000 wheels annually are:
Direct materials ............................. $30,000
Direct labor .................................... $50,000
Variable overhead ......................... $20,000
Fixed overhead .............................. $70,000
An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the
wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be
avoided and the facilities now being used could be rented to another company for $45,000 per
year.


Use the following to answer questions 48-49:
Melbourne Company has traditionally made a subcomponent of its major product. Annual
production of 30,000 subcomponents results in the following costs:
Direct materials ................. $250,000
Direct labor ........................ $200,000
Variable overhead ............. $190,000
Fixed overhead .................. $120,000
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.


Use the following to answer questions 50-51:
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.


Use the following to answer questions 52-53:
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:
Direct materials ......................................... $19.10
Direct labor ................................................ 21.70
Variable manufacturing overhead ............. 2.10
Fixed manufacturing overhead .................. 14.20
Unit product cost ....................................... $57.10
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.


Use the following to answer questions 55-57:
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:
Per Unit Data
Selling price .................................................... $150
Direct materials ............................................... $26
Direct labor ...................................................... $3
Variable manufacturing overhead ................... $1
Fixed manufacturing overhead ........................ $17
Variable selling expense ................................. $2
Fixed selling and administrative expense ....... $18
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.


Use the following to answer questions 58-59:
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):
Manufacturing:
Direct materials ................................ $1.00
Direct labor ...................................... $2.00
Variable overhead ............................ $0.50
Fixed overhead ................................. $0.40
Selling and Administrative:
Variable ............................................ $2.00
Fixed ................................................. $0.80
Present sales amount to 700 units per month. An order has been received from a customer in a
foreign market for 100 units. The order would not affect current sales. 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.


Use the following to answer questions 60-61:
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:
Direct materials ......................................... $5.00
Direct labor ................................................ $3.00
Variable manufacturing overhead ............. $0.75
Fixed manufacturing overhead .................. $1.50
Variable selling expense ........................... $0.25
Fixed administrative expense .................... $1.00
The fixed costs, both manufacturing and administrative, are constant in total within the
relevant range of 10,000 to 15,000 haks per month.
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.


Use the following to answer questions 62-64:
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:
Direct materials ..................................................... $41.40
Direct labor ............................................................ $7.10
Variable manufacturing overhead ......................... $2.40
Fixed manufacturing overhead .............................. $18.30
Variable selling & administrative expense ........... $1.00
Fixed selling & administrative expense ................ $6.10
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.


Use the following to answer questions 65-67:
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:
Direct materials ......................................... $20
Direct labor ................................................ $17
Variable manufacturing overhead ............. $13
Fixed manufacturing overhead .................. $14
Variable selling expense ........................... $12
Fixed selling expense ................................ $8
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.


Use the following to answer questions 68-71:
Broyles Company makes four products in a single facility. These products have the following
unit product costs:
Product
A B C D
Direct materials ......................................... $10.70 $ 5.40 $ 5.10 $ 7.20
Direct labor ................................................ 19.10 21.40 29.00 34.40
Variable manufacturing overhead ............. 1.20 1.50 1.80 1.60
Fixed manufacturing overhead .................. 22.40 16.00 15.00 17.60
Unit product cost ....................................... $53.40 $44.30 $50.90 $60.80
Additional data concerning these products are listed below.
Product
A B C D
Grinding minutes per unit ......................... 2.20 1.20 1.70 1.80
Selling price per unit ................................. $65.40 $58.50 $70.70 $76.20
Variable selling cost per unit ..................... $3.60 $3.80 $2.00 $3.40
Monthly demand in units .......................... 1,000 4,000 1,000 4,000
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.


Use the following to answer questions 72-75:
Craves Company makes four products in a single facility. Data concerning these products
appear below:
Product
A B C D
Selling price per unit ................................. $28.20 $26.60 $20.40 $24.70
Variable manufacturing cost per unit ........ $11.40 $7.70 $6.30 $9.30
Variable selling cost per unit ..................... $3.40 $1.50 $3.50 $1.80
Milling machine minutes per unit ............. 2.60 1.40 0.70 0.90
Monthly demand in units .......................... 1,000 3,000 4,000 1,000
The milling machines are potentially the constraint in the production facility. A total of
10,400 minutes are available per month on these machines.


Use the following to answer questions 76-77:
The Madison Company produces three products with the following costs and selling prices:
Product
A B C
Selling price per unit ..................... $15 $20 $20
Variable cost per unit .................... $8 $10 $12
Direct labor hours per unit ............ 1 1.5 2
Machine hours per unit .................. 3.5 2 2.5


Use the following to answer questions 78-79:
The Wester Company produces three products with the following costs and selling prices:
Product
A B C
Selling price per unit ..................... $21 $12 $32
Variable cost per unit .................... $11 $7 $18
Fixed cost per unit ......................... $5 $3 $9
Direct labor hours per unit ............ 0.4 0.1 0.7
Machine hours per unit .................. 0.2 0.5 0.2
The company has insufficient capacity to fulfill all of the demand for these three products.


Use the following to answer questions 80-81:
The Carter Company makes products A and B in a joint process from a single input, R.
During a typical production run, 50,000 units of R yield 20,000 units of A and 30,000 units of
B at the split-off point. Joint production costs total $90,000 per production run. The unit
selling price for A is $4 and for B is $3.80 at the split-off point. However, B can be processed
further at a total cost of $60,000 and then sold for $7.00 per unit.


Use the following to answer questions 82-83:
Paulsen Company makes two products, W and P, in a joint process. At the split-off point,
50,000 units of W and 60,000 units of P are available each month. Monthly joint production
costs are $290,000. Product W can be sold at the split-off point for $5.60 per unit. Product P
either can be sold at the split-off point for $4.75 per unit or it can be further processed and
sold for $7.20 per unit. If P is processed further, additional processing costs of $3.10 per unit
will be incurred.


Use the following to answer questions 84-86:
Dockham Company makes two products from a common input. Joint processing costs up to
the split-off point total $33,600 a year. The company allocates these costs to the joint products
on the basis of their total sales values at the split-off point. Each product may be sold at the
split-off point or processed further. Data concerning these products appear below:
Product X Product Y Total
Allocated joint processing costs ................ $14,000 $19,600 $33,600
Sales value at split-off point ...................... $20,000 $28,000 $48,000
Costs of further processing ........................ $26,300 $24,500 $50,800
Sales value after further processing .......... $50,200 $48,600 $98,800


Questions

Q1
Free

Division B has asked Division A of the same company to supply it with 6,000 units of
part L763 this year to use in one of its products. Division B has received a bid from an
outside supplier for the parts at a price of $17.00 per unit. Division A has the capacity
to produce 30,000 units of part L763 per year. Division A expects to sell 27,000 units
of part L763 to outside customers this year at a price of $18.00 per unit. To fill the
order from Division B, Division A would have to cut back its sales to outside
customers. Division A produces part L763 at a variable cost of $9.00 per unit. The
cost of packing and shipping the parts for outside customers is $1.00 per unit. These
packing and shipping costs would not have to be incurred on sales of the parts to
Division B.
Required:
a. What is the range of transfer prices within which both the Divisions' profits would
increase as a result of agreeing to the transfer of 6,000 parts this year from
Division B to Division A?
b. Is it in the best interests of the overall company for this transfer to take place?
Explain.

Essay
expand_more
Answer:
a. From the perspective of Division B, profits would increase as a result of the transfer if and only if: Transfer price ≥ Variable cost + Opportunity cost The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred: Opportunity cost = [($18.00 - $9.00 - $1.00) × 3,000*]/6,000 = $4.00 * Demand from outside customers .................................... 27,000 Units required by Division B .......................................... 6,000 Total requirements .......................................................... 33,000 Capacity .......................................................................... 30,000 Required reduction in sales to outside customers ........... 3,000 Therefore, Transfer price ≥ $9.00 + $4.00 = $13.00. From the viewpoint of Division A, the transfer price must be less than the cost of buying the units from the outside supplier. Therefore, Transfer price ≤ $17.00. Combining the two requirements, we get the following range of transfer prices: $13.00 ≤ Transfer price ≤ $17.00. b. Yes, the transfer should take place. From the viewpoint of the entire company, the cost of transferring the units within the company is $13.00, but the cost of purchasing them from the outside supplier is $17.00. Therefore, the company’s profits increase on average by $4.00 for each of the special parts that is transferred within the company.
Q2
Free

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

True/False
expand_more
A) True.
B) False.
Answer:
False
Q3
Free

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

True/False
expand_more
A) True.
B) False.
Answer:
False
Q4

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

True/False
expand_more
A) True.
B) False.
Answer:

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Q5

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

True/False
expand_more
A) True.
B) False.
Answer:

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Q6

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

True/False
expand_more
A) True.
B) False.
Answer:

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Q7

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.

True/False
expand_more
A) True.
B) False.
Answer:

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Q8

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

True/False
expand_more
A) True.
B) False.
Answer:

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Q9

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

True/False
expand_more
A) True.
B) False.
Answer:

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Q10

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.

True/False
expand_more
A) True.
B) False.
Answer:

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Q11

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

True/False
expand_more
A) True.
B) False.
Answer:

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Q12

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

True/False
expand_more
A) True.
B) False.
Answer:

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Q13

Lumber produced in a lumber mill results in several different products being produced
from each log; such products are called joint products.

True/False
expand_more
A) True.
B) False.
Answer:

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Q14

In a sell or process further decision, an avoidable fixed production cost incurred after
the split-off point is relevant to the decision.

True/False
expand_more
A) True.
B) False.
Answer:

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Q15

Joint processing after the split-off point is profitable if the incremental revenue from
such processing exceeds the incremental processing costs.

True/False
expand_more
A) True.
B) False.
Answer:

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Q16

A cost that is traceable to a segment through activity-based costing is always an
avoidable cost for decision making.

True/False
expand_more
A) True.
B) False.
Answer:

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Q17

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?

Multiple Choice
expand_more
A) the cost of the textbooks
B) the cost of the cola that Hal will consume during class
C) Hal's lost wages at Burger Breath
D) both A and B above
Answer:

A) You need to subscribe to get the answer.

Q18

Which of the following would be relevant in the decision to sell or throw out obsolete
inventory?
Direct material Fixed overhead
cost assigned cost assigned
to the inventory to the inventory

Multiple Choice
expand_more
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Answer:

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Q19

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.)
Book value Disposal value
of old machine of new machine

Multiple Choice
expand_more
A) Yes No
B) No Yes
C) No No
D) Yes Yes
Answer:

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Q20

In a make-or-buy decision, relevant costs include:

Multiple Choice
expand_more
A) unavoidable fixed costs
B) avoidable fixed costs
C) fixed factory overhead costs applied to products
D) fixed selling and administrative expenses
Answer:

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Q21

In situations where management must decide between accepting or rejecting a onetime-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?

Multiple Choice
expand_more
A) absorption costing unit product costs
B) variable costs
C) incremental costs
D) differential costs
Answer:

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Q22

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:

Multiple Choice
expand_more
A) selling price per unit
B) contribution margin per unit
C) contribution margin per unit of the constraining resource
D) unit sales volume
Answer:

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Q23

Two or more products produced from a common input are called:

Multiple Choice
expand_more
A) common costs.
B) joint products.
C) joint costs.
D) sunk costs.
Answer:

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Q24

Product X-547 is one of the joint products in a joint manufacturing process.
Management is studying whether to sell X-547 at the split-off point or to process X-
547 further into Xylene. The following data have been gathered:
I. Selling price of X-547
II. Variable cost of processing X-547 into Xylene.
III. The avoidable fixed costs of processing X-547 into Xylene.
IV. The selling price of Xylene.
V. The joint cost of the process from which X-547 is produced.
Which of the above items are relevant in a decision of whether to sell the X-547 as is
or process it further into Xylene?

Multiple Choice
expand_more
A) I, II, and IV.
B) I, II, III, and IV.
C) II, III, and V.
D) I, II, III, and V.
Answer:

A) You need to subscribe to get the answer.

Q25

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?

Multiple Choice
expand_more
A) -$22,000
B) -$67,600
C) $51,500
D) $5,900
Answer:

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Q26

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?

Multiple Choice
expand_more
A) $5.36
B) $3.80
C) $2.13
D) $1.67
Answer:

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Q27

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?

Multiple Choice
expand_more
A) $810
B) $870
C) $760
D) $816
Answer:

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Q28

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?

Multiple Choice
expand_more
A) $5,006
B) $5,456
C) $4,796
D) $5,840
Answer:

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Q29

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:

Multiple Choice
expand_more
A) $3,924
B) $5,450
C) $3,510
D) $3,276
Answer:

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Q30

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
Units in
Stock
Original Cost Per
Unit
Current Market Price
Per Unit
Disposal Value Per
Unit
R39 340 $4.70 $4.35 $3.95
I59 23,700 $8.20 $8.05 $6.85
Material R39 is in use in many of the company's products and is routinely replenished.
Material I59 is no longer used by the company in any of its normal products and
existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining
a minimum acceptable price for the order for product GEE?

Multiple Choice
expand_more
A) $224,605
B) $196,765
C) $228,204
D) $193,285
Answer:

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Q31

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
Units in
Stock
Original Cost Per
Unit
Current Market Price
Per Unit
Disposal Value Per
Unit
F58 18,940 $4.40 $4.65 $4.35
D66 15,700 $6.10 $6.50 $4.80
Material F58 is in use in many of the company's products and is routinely replenished.
Material D66 is no longer used by the company in any of its normal products and
existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining
a minimum acceptable price for the order for product TIB?

Multiple Choice
expand_more
A) $189,890
B) $174,215
C) $168,533
D) $200,905
Answer:

A) You need to subscribe to get the answer.

Q32

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:

Multiple Choice
expand_more
A) increase by $2,000 per year
B) decrease by $2,000 per year
C) increase by $38,000 per year
D) decrease by $38,000 per year
Answer:

A) You need to subscribe to get the answer.

Q33

The Milham Company has two divisions - East and West. The divisions have the
following revenues and expenses:
East West
Sales .............................................................. $720,000 $350,000
Variable costs ............................................... 370,000 240,000
Traceable fixed costs .................................... 130,000 80,000
Allocated common corporate costs .............. 120,000 50,000
Net operating income (loss) ......................... $100,000 $ (20,000)
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:

Multiple Choice
expand_more
A) $100,000
B) $80,000
C) $120,000
D) $50,000
Answer:

A) You need to subscribe to get the answer.

Q34

The following information relates to next year's projected operating results of the
Aluminum Division of Wroclaw Corporation:
Contribution margin ...................... $1,500,000
Fixed expenses .............................. 1,700,000
Net operating loss .......................... $ (200,000)
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?

Multiple Choice
expand_more
A) $500,000 decrease
B) $800,000 increase
C) $1,000,000 increase
D) $1,200,000 increase
Answer:

A) You need to subscribe to get the answer.

Q35

Teich Inc. is considering whether to continue to make a component or to buy it from
an outside supplier. The company uses 15,000 of the components each year. The unit
product cost of the component according to the company's absorption cost accounting
system is given as follows:
Direct materials ......................................... $ 7.90
Direct labor ................................................ 2.10
Variable manufacturing overhead ............. 1.10
Fixed manufacturing overhead .................. 4.00
Unit product cost ....................................... $15.10
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 10%
is avoidable if the component were bought from the outside supplier; the remainder is
not avoidable. In addition, making the component uses 3 minutes on the machine that
is the company's current constraint. If the component were bought, 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?

Multiple Choice
expand_more
A) $15.55
B) $11.50
C) $19.15
D) $15.10
Answer:

A) You need to subscribe to get the answer.

Q36

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?

Multiple Choice
expand_more
A) $120,000 decrease
B) $160,000 increase
C) $240,000 decrease
D) $280,000 increase
Answer:

A) You need to subscribe to get the answer.

Q37

Marley Company makes three products (X, Y, & Z) with the following characteristics:
Product
X Y Z
Selling price per unit ..................... $10 $15 $20
Variable cost per unit .................... $6 $10 $10
Machine hours per unit .................. 2 4 10
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?

Multiple Choice
expand_more
A) 2,000 units of X, 500 units of Y, and 200 units of Z
B) 0 units of X, 0 units of Y, and 200 units of Z
C) 0 units of X, 500 units of Y, and 0 units of Z
D) 1,000 units of X, 0 units of Y, and 0 units of Z
Answer:

A) You need to subscribe to get the answer.

Q38

Two products, LB and NH, emerge from a joint process. Product LB has been
allocated $30,800 of the total joint costs of $44,000. A total of 2,000 units of product
LB are produced from the joint process. Product LB can be sold at the split-off point
for $13 per unit, or it can be processed further for an additional total cost of $14,000
and then sold for $15 per unit. If product LB is processed further and sold, what would
be the effect on the overall profit of the company compared with sale in its
unprocessed form directly after the split-off point?

Multiple Choice
expand_more
A) $16,000 more profit
B) $20,800 more profit
C) $40,800 less profit
D) $10,000 less profit
Answer:

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Q39

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?

Multiple Choice
expand_more
A) $3,000 increase
B) $3,000 decrease
C) $12,000 decrease
D) $30,000 increase
Answer:

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Q40

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?

Multiple Choice
expand_more
A) $2,000 increase
B) $2,500 decrease
C) $3,000 increase
D) $3,500 decrease
Answer:

A) You need to subscribe to get the answer.

Q41

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:

Multiple Choice
expand_more
A) $10,000 decrease
B) $150,000 increase
C) $160,000 decrease
D) $310,000 decrease
Answer:

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Q42

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:

Multiple Choice
expand_more
A) $150,000 increase
B) $150,000 decrease
C) $5,000 increase
D) $140,000 increase
Answer:

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Q43

If the F-27 product line is added next year, the change in operating income should be:

Multiple Choice
expand_more
A) $30,000 increase
B) $5,000 decrease
C) $23,000 increase
D) $15,000 increase
Answer:

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Q44

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?

Multiple Choice
expand_more
A) $52.25
B) $50.50
C) $55.75
D) $49.00
Answer:

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Q45

If the new product line is added next year, the increase in net operating income
resulting from this decision would be:

Multiple Choice
expand_more
A) $325,000
B) $200,000
C) $145,000
D) $135,000
Answer:

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Q46

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?

Multiple Choice
expand_more
A) $246
B) $250
C) $232
D) $282
Answer:

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Q47

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:

Multiple Choice
expand_more
A) $35,000 increase
B) $10,000 decrease
C) $45,000 increase
D) $70,000 increase
Answer:

A) You need to subscribe to get the answer.

Q48

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?

Multiple Choice
expand_more
A) $1.70
B) $1.60
C) $1.55
D) $1.15
Answer:

A) You need to subscribe to get the answer.

Q49

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?

Multiple Choice
expand_more
A) $120,000 higher
B) $20,000 higher
C) $120,000 lower
D) $20,000 lower
Answer:

A) You need to subscribe to get the answer.

Q50

At what price per unit charged by the outside supplier would Melbourne be
economically indifferent between making the subcomponent or buying it from
outside?

Multiple Choice
expand_more
A) $29
B) $25
C) $21
D) $24
Answer:

A) You need to subscribe to get the answer.

Q51

If Regis Company purchases the plugs but does not rent the unused facility, the
company would:

Multiple Choice
expand_more
A) save $3.00 per unit.
B) lose $6.00 per unit.
C) save $6.00 per unit.
D) lose $3.00 per unit.
Answer:

A) You need to subscribe to get the answer.

Q52

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:

Multiple Choice
expand_more
A) $10,000
B) $40,000
C) $70,000
D) $190,000
Answer:

A) You need to subscribe to get the answer.

Q53

How much of the unit product cost of $57.10 is relevant in the decision of whether to
make or buy the part?

Multiple Choice
expand_more
A) $57.10
B) $21.70
C) $47.80
D) $42.90
Answer:

A) You need to subscribe to get the answer.

Q54

What is the net total dollar advantage (disadvantage) of purchasing the part rather than
making it?

Multiple Choice
expand_more
A) $350,000
B) $135,000
C) $(115,000)
D) $20,000
Answer:

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Q55

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?

Multiple Choice
expand_more
A) $57.10
B) $50.50
C) $59.80
D) $2.70
Answer:

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Q56

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?

Multiple Choice
expand_more
A) $67
B) $30
C) $150
D) $47
Answer:

A) You need to subscribe to get the answer.

Q57

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?

Multiple Choice
expand_more
A) $73
B) $36
C) $53
D) $6
Answer:

A) You need to subscribe to get the answer.

Q58

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?

Multiple Choice
expand_more
A) $83
B) $118
C) $32
D) $120
Answer:

A) You need to subscribe to get the answer.

Q59

How much will the company's profits be increased or (decreased) if it prices the 100
units at $7 each?

Multiple Choice
expand_more
A) $(30)
B) $150
C) $0
D) $310
Answer:

A) You need to subscribe to get the answer.

Q60

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?

Multiple Choice
expand_more
A) $5.50
B) $5.90
C) $2.00
D) $3.50
Answer:

A) You need to subscribe to get the answer.

Q61

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:

Multiple Choice
expand_more
A) increase by $6,000
B) decrease by $6,000
C) increase by $5,000
D) decrease by $5,000
Answer:

A) You need to subscribe to get the answer.

Q62

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:

Multiple Choice
expand_more
A) increase by $6,000
B) increase by $7,500
C) increase by $5,000
D) increase by $1,500
Answer:

A) You need to subscribe to get the answer.

Q63

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?

Multiple Choice
expand_more
A) $44,000
B) $(18,400)
C) $117,200
D) $17,200
Answer:

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Q64

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?

Multiple Choice
expand_more
A) $9.50
B) $10.10
C) $5.20
D) $33.90
Answer:

A) You need to subscribe to get the answer.

Q65

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:

Multiple Choice
expand_more
A) $69.20
B) $76.30
C) $85.80
D) $52.15
Answer:

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Q66

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?

Multiple Choice
expand_more
A) $53.00
B) $54.50
C) $75.00
D) $76.50
Answer:

A) You need to subscribe to get the answer.

Q67

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:

Multiple Choice
expand_more
A) $42,000 increase
B) $54,000 decrease
C) $105,000 increase
D) $248,500 increase
Answer:

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Q68

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:

Multiple Choice
expand_more
A) $93,500 increase
B) $104,000 increase
C) $114,500 increase
D) $294,000 increase
Answer:

A) You need to subscribe to get the answer.

Q69

How many minutes of grinding machine time would be required to satisfy demand for
all four products?

Multiple Choice
expand_more
A) 13,400
B) 15,900
C) 10,000
D) 14,400
Answer:

A) You need to subscribe to get the answer.

Q70

Which product makes the LEAST profitable use of the grinding machines?

Multiple Choice
expand_more
A) Product A
B) Product B
C) Product C
D) Product D
Answer:

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Q71

Which product makes the MOST profitable use of the grinding machines?

Multiple Choice
expand_more
A) Product A
B) Product B
C) Product C
D) Product D
Answer:

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Q72

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.)

Multiple Choice
expand_more
A) $26.40
B) $12.00
C) $14.00
D) $0.00
Answer:

A) You need to subscribe to get the answer.

Q73

How many minutes of milling machine time would be required to satisfy demand for
all four products?

Multiple Choice
expand_more
A) 9,000
B) 10,500
C) 10,400
D) 9,900
Answer:

A) You need to subscribe to get the answer.

Q74

Which product makes the LEAST profitable use of the milling machines?

Multiple Choice
expand_more
A) Product A
B) Product B
C) Product C
D) Product D
Answer:

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Q75

Which product makes the MOST profitable use of the milling machines?

Multiple Choice
expand_more
A) Product A
B) Product B
C) Product C
D) Product D
Answer:

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Q76

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.)

Multiple Choice
expand_more
A) $10.60
B) $0.00
C) $5.15
D) $17.40
Answer:

A) You need to subscribe to get the answer.

Q77

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:

Multiple Choice
expand_more
A) A, B, C
B) B, C, A
C) C, A, B
D) A, C, B
Answer:

A) You need to subscribe to get the answer.

Q78

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:

Multiple Choice
expand_more
A) A, B, C
B) B, C, A
C) A, C, B
D) C, A, B
Answer:

A) You need to subscribe to get the answer.

Q79

If direct labor hours are the constraint, then the three products should be produced in
the order:

Multiple Choice
expand_more
A) A, B, C
B) B, A, C
C) C, A, B
D) A, C, B
Answer:

A) You need to subscribe to get the answer.

Q80

If machine hours are the constraint, then the three products should be produced in the
order:

Multiple Choice
expand_more
A) A, B, C
B) B, C, A
C) A, C, B
D) C, A, B
Answer:

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Q81

In a decision between selling B at the split-off point or processing B further, which of
the following items is not relevant:

Multiple Choice
expand_more
A) the $60,000 cost to process B beyond the split-off point
B) the $3.80 unit sales price of B at the split-off point
C) the portion of the $90,000 joint production cost allocated to B
D) the $7 unit selling price for B after further processing
Answer:

A) You need to subscribe to get the answer.

Q82

If product B is processed beyond the split-off point, the change in operating income
from a production run (as compared to selling B at the split-off point) would be:

Multiple Choice
expand_more
A) $36,000 increase
B) $96,000 increase
C) $42,000 decrease
D) $10,000 decrease
Answer:

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Q83

If P is processed further and then sold, rather than being sold at the split-off point, the
change in monthly net operating income would be a:

Multiple Choice
expand_more
A) $147,000 decrease
B) $147,000 increase
C) $39,000 increase
D) $39,000 decrease
Answer:

A) You need to subscribe to get the answer.

Q84

What would the selling price per unit of Product P need to be after processing in order
for Paulsen Company to be economically indifferent between selling P at the split-off
point or processing P further?

Multiple Choice
expand_more
A) $7.85
B) $8.58
C) $9.49
D) $11.68
Answer:

A) You need to subscribe to get the answer.

Q85

What is the net monetary advantage (disadvantage) of processing Product X beyond
the split-off point?

Multiple Choice
expand_more
A) $23,900
B) $29,900
C) $3,900
D) $9,900
Answer:

A) You need to subscribe to get the answer.

Q86

What is the net monetary advantage (disadvantage) of processing Product Y beyond
the split-off point?

Multiple Choice
expand_more
A) $(3,900)
B) $24,100
C) $32,500
D) $4,500
Answer:

A) You need to subscribe to get the answer.

Q87

What is the minimum amount the company should accept for Product X if it is to be
sold at the split-off point?

Multiple Choice
expand_more
A) $23,900
B) $40,300
C) $50,200
D) $14,000
Answer:

A) You need to subscribe to get the answer.

Q88

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:
Ticket revenue
(100 seats × 45% occupancy × $80 ticket price) ... $3,600 100%
Less variable expenses ($24 per person) .................. 1,080 30%
Contribution margin ................................................. 2,520 70%
Less fixed tour expenses:
Tour promotion ..................................................... $620
Salary of bus driver ............................................... 400
Fee, tour guide ....................................................... 825
Fuel for bus............................................................ 100
Depreciation of bus ............................................... 400
Liability insurance, bus ......................................... 250
Overnight parking fee, bus .................................... 50
Room and meals, bus driver and tour guide .......... 75
Bus maintenance and preparation ......................... 325
Total fixed tour expenses ......................................... 3,045
Net operating loss ..................................................... $ (525)
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.

Essay
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Answer:

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Q89

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?

Essay
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Answer:

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Q90

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:
Direct materials ......................................... $23.40
Direct labor ................................................ 22.30
Variable manufacturing overhead ............. 1.40
Fixed manufacturing overhead .................. 24.60
Unit product cost ....................................... $71.70
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?

Essay
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Answer:

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Q91

Bulan Inc. makes a range of products. The company's predetermined overhead rate is
$20 per direct labor-hour, which was calculated using the following budgeted data:
Variable manufacturing overhead ............. $140,000
Fixed manufacturing overhead .................. $560,000
Direct labor-hours ...................................... 35,000
Component T6 is used in one of the company’s products. The unit product cost of the
component according to the company’s cost accounting system is determined as
follows:
Direct materials ........................................... $ 45.00
Direct labor .................................................. 32.00
Manufacturing overhead applied ................. 40.00
Unit product cost ......................................... $117.00
An outside supplier has offered to supply component T6 for $101 each. The outside
supplier is known for quality and reliability. Assume that direct labor is a variable
cost, variable manufacturing overhead is really driven by direct labor-hours, and total
fixed manufacturing overhead would not be affected by this decision. Bulan
chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

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Q92

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:
Direct materials ............................................... $38.80
Direct labor ...................................................... $9.70
Variable manufacturing overhead ................... $2.30
Fixed manufacturing overhead ........................ $18.10
Variable selling & administrative expense ...... $1.70
Fixed selling & administrative expense .......... $8.80
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?

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Q93

Pilgrim Corporation makes a range of products. The company's predetermined
overhead rate is $23 per direct labor-hour, which was calculated using the following
budgeted data:
Variable manufacturing overhead ............. $200,000
Fixed manufacturing overhead .................. $375,000
Direct labor-hours ...................................... 25,000
Management is considering a special order for 800 units of product N89E at $69 each.
The normal selling price of product N89E is $88 and the unit product cost is
determined as follows:
Direct materials ........................................... $28.00
Direct labor .................................................. 22.50
Manufacturing overhead applied ................. 34.50
Unit product cost ......................................... $85.00
If the special order were accepted, normal sales of this and other products would not
be affected. The company has ample excess capacity to produce the additional units.
Assume that direct labor is a variable cost, variable manufacturing overhead is really
driven by direct labor-hours, and total fixed manufacturing overhead would not be
affected by the special order.
Required:
If the special order were accepted, what would be the impact on the company's overall
profit?

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Q94

Adamyan Co. manufactures and sells medals for winners of athletic and other events.
Its manufacturing plant has the capacity to produce 15,000 medals each month; current
monthly production is 12,750 medals. The company normally charges $120 per medal.
Cost data for the current level of production are shown below:
Variable costs:
Direct materials ...................................... $624,750
Direct labor ............................................. $306,000
Selling and administrative ...................... $15,300
Fixed costs:
Manufacturing ........................................ $506,175
Selling and administrative ...................... $123,675
The company has just received a special one-time order for 700 medals at $83 each.
For this particular order, no variable selling and administrative costs would be
incurred. This order would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?

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Q95

Albertine Co. manufactures and sells trophies for winners of athletic and other events.
Its manufacturing plant has the capacity to produce 16,000 trophies each month;
current monthly production is 12,800 trophies. The company normally charges $113
per trophy. Cost data for the current level of production are shown below:
Variable costs:
Direct materials .......................... $614,400
Direct labor ................................. $256,000
Selling and administrative .......... $35,840
Fixed costs:
Manufacturing ............................ $294,400
Selling and administrative .......... $94,720
The company has just received a special one-time order for 1,200 trophies at $61 each.
For this particular order, no variable selling and administrative costs would be
incurred. This order would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?

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Q96

Gluth Company makes three products in a single facility. These products have the
following unit product costs:
Products
A B C
Direct materials .......................................... $22.50 $22.40 $29.20
Direct labor ................................................ 13.60 11.40 12.50
Variable manufacturing overhead .............. 3.00 3.40 4.50
Fixed manufacturing overhead .................. 19.20 20.10 26.50
Unit product cost ........................................ $58.30 $57.30 $72.70
Additional data concerning these products are listed below.
Products
A B C
Mixing minutes per unit .............................. 3.30 1.70 1.80
Selling price per unit ................................... $74.70 $76.10 $87.50
Variable selling cost per unit ...................... $1.80 $2.40 $2.90
Monthly demand in units ............................ 4,000 2,000 4,000
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.)

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Q97

Holtz Company makes three products in a single facility. Data concerning these
products follow:
Product
A B C
Selling price per unit ................................. $75.90 $71.10 $73.40
Direct materials ......................................... $29.70 $30.20 $33.40
Direct labor ................................................ $21.20 $19.80 $19.60
Variable manufacturing overhead ............. $4.90 $5.60 $7.60
Variable selling cost per unit ..................... $1.30 $3.90 $1.80
Mixing minutes per unit ............................ 2.10 1.70 1.30
Monthly demand in units ........................... 4,000 1,000 2,000
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.)

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Q98

Wright, Inc. produces three products. Data concerning the selling prices and unit costs
of the three products appear below:
Product
C D E
Selling price ............................................... $90 $30 $60
Variable costs ............................................ $35 $10 $20
Fixed costs ................................................. $45 $15 $30
Tapping machine time (minutes) ............... 5 4 2
Fixed costs are applied to the products on the basis of direct labor hours.
Demand for the three products exceeds the company's productive capacity. The
tapping machine is the constraint, with only 2,400 minutes of tapping machine time
available this week.
Required:
a. Given the tapping machine constraint, which product should be emphasized?
Support your answer with appropriate calculations.
b. Assuming that there is still unfilled demand for the product that the company
should emphasize in part (a) above, up to how much should the company be
willing to pay for an additional hour of tapping machine time?

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Q99

Iden Company makes two products from a common input. Joint processing costs up to
the split-off point total $64,800 a year. The company allocates these costs to the joint
products on the basis of their total sales values at the split-off point. Each product may
be sold at the split-off point or processed further. Data concerning these products
appear below:
Product X Product Y Total
Allocated joint processing costs ............ $32,400 $32,400 $64,800
Sales value at split-off point .................. $36,000 $36,000 $72,000
Costs of further processing .................... $20,300 $14,300 $34,600
Sales value after further processing ....... $55,400 $53,000 $108,400
Required:
a. What is the net monetary advantage (disadvantage) of processing Product X
beyond the split-off point?
b. What is the net monetary advantage (disadvantage) of processing Product Y
beyond the split-off point?
c. What is the minimum amount the company should accept for Product X if it is to
be sold at the split-off point?
d. What is the minimum amount the company should accept for Product Y if it is to
be sold at the split-off point?

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