Managerial Accounting, 3e (Braun/Tietz) Chapter 8 …docshare01.docshare.tips/files/28811/288116577.pdf · 107) Green Pastures golf course is planning for the coming season. Investors

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Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Managerial Accounting, 3e (Braun/Tietz)

Chapter 8 Relevant Costs for Short-Term Decisions

1) Irrelevant costs are costs that do not affect short-term decisions.

Answer: TRUE

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective Thinking

Learning Outcome: Distinguish between relevant and irrelevant costs

2) Relevant information is future data that do not differ among alternatives.

Answer: FALSE

Diff: 1

LO: 8-1

EOC: S8-1



3) Management accountants gather and analyze relevant information to compare alternatives.

Answer: TRUE

Diff: 1

LO: 8-1

EOC: S8-1


Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant

and irrelevant costs.

4) One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits.

Answer: TRUE

Diff: 1

LO: 8-1

EOC: S8-1




5) One key to analyzing short-term business decisions is to use a contribution margin approach that

separates variable costs from fixed costs.

Answer: TRUE

Diff: 1

LO: 8-1

EOC: S8-1


Learning Outcome: Use incremental analysis to make short-term decisions

2


6) Relevant information is expected future data that will not differ among alternatives.

Answer: FALSE

Diff: 1

LO: 8-1

EOC: S8-1



7) Costs that differ between alternatives are irrelevant.

Answer: FALSE

Diff: 1

LO: 8-1

EOC: S8-1



8) One cost that is irrelevant in decision making is a sunk cost.

Answer: TRUE

Diff: 1

LO: 8-1

EOC: E8-15



9) Managers' decisions are based solely on quantitative factors.

Answer: FALSE

Diff: 1

LO: 8-1

EOC: E8-15




10) Which of the following best describes a "sunk cost"?

A) Costs that were incurred in the past and cannot be changed

B) Benefits foregone by choosing a particular alternative course of action

C) A factor that restricts the production or sale of a product

D) Expected future data that differ among alternatives

Answer: A

Diff: 2

LO: 8-1

EOC: S8-1



3


11) An "opportunity cost" is best described by which of the following?

A) Benefits foregone by choosing a particular alternative course of action

B) Costs that were incurred in the past and cannot be changed

C) The distribution of all products to be sold

D) Expected future costs that differ among alternatives

Answer: A

Diff: 2

LO: 8-1

EOC: S8-1



12) A "relevant cost" is best described by which of the following?

A) A factor that restricts production or sales of a product

B) Cost of developing, producing, and delivering a product or service

C) Costs that were incurred in the past and can not be changed


Answer: D

Diff: 2

LO: 8-1

EOC: S8-1



13) "Contribution margin per unit" is best described by which of the following?

A) Sales price per unit minus fixed cost per unit

B) Sales price per unit minus variable cost unit

C) Sales price per unit minus fixed and variable costs per unit

D) Units sold time contribution margin ratio

Answer: B

Diff: 2

LO: 8-1

EOC: S8-1



14) Expected future data that differs among alternative courses of action are referred to as

A) relevant information.

B) historical information.

C) predictable information.

D) irrelevant information.

Answer: A

Diff: 1

LO: 8-1

EOC: E8-15



4


15) Which of the following is irrelevant when making a decision?

A) Fixed overhead costs that differ among alternatives

B) The cost of an asset that the company is considering replacing

C) The cost of further processing a product that could be sold as is

D) The expected increase in contribution margin of one product line as a result of a decision to

discontinue a separate unprofitable product line

Answer: B

Diff: 1

LO: 8-1

EOC: E8-15



16) Fixed costs that do not differ between two alternatives are

A) irrelevant to the decision.

B) considered opportunity costs.

C) relevant to the decision.

D) important only if they represent a material dollar amount.

Answer: A

Diff: 1

LO: 8-1

EOC: E8-15



17) Which of the following is a sunk cost?

A) Operating costs for a new vehicle

B) Trade in value of old vehicle

C) Purchase price of vehicle to be traded in

D) Purchase price of new vehicle

Answer: C

Diff: 1

LO: 8-1

EOC: E8-15



18) Fixed costs that may be avoided in the future are referred to as

A) relevant costs.

B) opportunity costs.

C) replacement costs.

D) sunk costs.

Answer: A

Diff: 2

LO: 8-1

EOC: E8-15



5


19) A sunk cost is described as which of the following?

A) One that is relevant to a decision because it changes depending on the alternative course of action

selected

B) A historical cost that is always irrelevant

C) An outlay expected to be incurred in the future

D) A historical cost that may be relevant

Answer: B

Diff: 1

LO: 8-1

EOC: E8-15



20) The effect of a plant closing on employee morale is an example of which of the following?

A) A qualitative factor

B) A quantitative factor

C) A sunk cost

D) A variable cost

Answer: A

Diff: 1

LO: 8-1

EOC: E8-15



21) The format of the income statement most useful in decision-making is which of the following?

A) Absorption costing format

B) Traditional format

C) Contribution margin format

D) Single-step format

Answer: C

Diff: 2

LO: 8-1

EOC: E8-15



6


22) Ida Enterprises is considering replacing a machine that is presently used in its production process.

The following information is available:

Old Machine Replacement Machine

Original cost $60,000 $35,000

Remaining useful life in years 5 5

Current age in years 5 0

Book value $25,000

Current disposal value in cash $8,000

Future disposal value in cash (in 5 years) $0 $0

Annual cash operating costs $7,000 $4,000

Which of the information provided in the table is irrelevant to the replacement decision?

A) The annual operating cost of the old machine

B) The original cost of the old machine

C) The current disposal value of the old machine

D) Both A and C

Answer: B

Diff: 2

LO: 8-1

EOC: S8-1

AACSB: Analytical Thinking


23) All of the following are relevant to the decision to replace equipment except the

A) cost of old equipment.

B) selling price of old equipment.

C) future maintenance costs of old equipment.

D) cost of new equipment.

Answer: A

Diff: 2

LO: 8-1

EOC: S8-1



24) Which of the following is most important in making a short-term special decision?

A) Focus on total costs

B) Separate variable from fixed costs

C) Use a conventional absorption costing approach

D) Calculating the fixed cost per unit

Answer: B

Diff: 2

LO: 8-1

EOC: S8-1



7


25) Managers should consider ________ when making any sort of decision.

A) only fixed costs

B) sunk costs

C) only variable costs

D) revenues that differ among alternatives

Answer: D

Diff: 2

LO: 8-1

EOC: S8-1



26) Label each item below as relevant or irrelevant in making a decision.

a) Cost of roof repair made on rental property last year

b) The cost of insurance on a new vehicle when deciding to buy a new vehicle

c) Cost of new equipment under evaluation to replace used equipment

d) Original cost of old equipment that is being evaluated for replacement

e) Cost of previous year's insurance policy on old equipment being evaluated for replacement

f) Accumulated depreciation on old equipment being evaluated for replacement

Answer:

a) irrelevant

b) relevant

c) relevant

d) irrelevant

e) irrelevant

f) irrelevant

Diff: 1

LO: 8-1

EOC: S8-1



27) What is the difference between relevant and irrelevant information for making decisions. Provide

examples of each.

Answer: Relevant information affects a decision and irrelevant information does not. Relevant

information differs between alternatives and affects the future. For example, the cost of insurance for a

car will differ depending upon the make, model, year, etc of the car. Therefore, this information is

relevant when deciding upon which car to purchase. The cost of a parking sticker to park in the school lot

is not relevant, since it is the same regardless of the make, model, year, etc. of car.

Diff: 1

LO: 8-1

EOC: E8-15



8


28) A special order occurs when a customer requests a one-time order at an increased sales price.

Answer: FALSE

Diff: 1

LO: 8-2

EOC: S8-2



29) Special orders increase income if the revenue from the order does not exceed the incremental variable

and fixed costs incurred to fill the order.

Answer: FALSE

Diff: 1

LO: 8-2

EOC: S8-2



30) In deciding whether to accept a special sales order, any fixed costs that would remain unchanged are

considered relevant data.

Answer: FALSE

Diff: 1

LO: 8-2

EOC: S8-2




31) Variable costs are irrelevant to a special decision when those variable costs differ between

alternatives.

Answer: FALSE

Diff: 1

LO: 8-2

EOC: S8-2




32) Managers should consider the potential effect of a special order on long-run profits and operations.

Answer: TRUE

Diff: 1

LO: 8-2

EOC: S8-2



9


33) When deciding whether to accept a special order, managers need to consider whether they have

available excess capacity.

Answer: TRUE

Diff: 1

LO: 8-2

EOC: S8-2



34) If the expected increase in revenues from a special order is greater than the expected increase in

variable and fixed costs, then the special order should be accepted.

Answer: TRUE

Diff: 1

LO: 8-2

EOC: S8-2



35) In a special sales order decision, the special price must exceed the variable cost of filling the order. In

other words, the special order must have ________.

A) sunk costs

B) a positive contribution margin

C) opportunity costs

D) a negative contribution margin

Answer: B

Diff: 2

LO: 8-2

EOC: S8-2



36) In a special sales order decision, incremental fixed costs that will be incurred if the special order is

accepted are considered to be

A) opportunity costs.

B) irrelevant to the decision.

C) relevant to the decision.

D) sunk costs.

Answer: C

Diff: 2

LO: 8-2

EOC: S8-2




10


37) Managers should consider all of the following when deciding whether to accept a special order,

except

A) available excess capacity.

B) the variable costs associated with the special order.

C) the effect of the order on regular sales.

D) fixed costs that will not be affected by the order.

Answer: D

Diff: 2

LO: 8-1

EOC: S8-2




38) A manager should always reject a special order if

A) the special order price is less than the variable costs of the order.

B) there is available excess capacity.

C) the special order price is less than the regular sales price.

D) the special order will require variable nonmanufacturing expenses.

Answer: A

Diff: 2

LO: 8-1

EOC: S8-2



39) Which would be a consideration for making special orders?

A) Available capacity to fill the order

B) If price will cover incremental costs of filling the order

C) If the order will affect regular sales in the long run

D) All of the above

Answer: D

Diff: 2

LO: 8-2

EOC: S8-2



11


40) A company should ________ when making a short-term special decision.

A) focus on qualitative factors only

B) focus on quantitative factors only

C) separate variable costs from fixed costs

D) use a traditional direct costing approach

Answer: C

Diff: 2

LO: 8-2

EOC: S8-2



12


41) Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000

seats per year, but is currently producing and selling 75,000 seats per year. The following information

relates to current production:

Sale price per unit $400

Variable costs per unit:

Manufacturing $220

Marketing and administrative $50

Total fixed costs:

Manufacturing $750,000

Marketing and administrative $200,000

If a special sales order is accepted for 7,000 seats at a price of $350 per unit, and fixed costs remain

unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by

the special order.)

A) Increase by $560,000

B) Decrease by $560,000

C) Increase by $2,450,000

D) Increase by $8,000,000

Answer: A

Explanation: A)

Variable Mfg. Cost $ 220

Variable Marketing $ 50

Total Variable $ 270

NOW Sales Price $ 350

Less Total Variable Cost 270

= Contribution Margin $ 80

Times units sold × 7,000

= Additional Profit $ 560,000

Diff: 2

LO: 8-2

EOC: E8-18A




13







Manufacturing $220


Total fixed costs:



If a special sales order is accepted for 4,000 seats at a price of $325 per unit, fixed costs remain unchanged,

and no variable marketing and administrative costs will be incurred for this order, how would operating

income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $2,180,000

B) Increase by $420,000

C) Increase by $220,000

D) Decrease by $420,000

Answer: B

Explanation: B)

Sales Price $ 325





Diff: 2

LO: 8-2

EOC: E8-18A




14







Manufacturing $220


Total fixed costs:



If a special sales order is accepted for 3,000 seats at a price of $300 per unit, and fixed costs increase by

$10,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the

special order.)

A) Decrease by $80,000



D) Increase by $80,000

Answer: D

Explanation: D)

Special sales order volume 3,000

Special order price per unit

Additional revenue from order $ 900,000

Variable manufacturing costs per unit $ 220.00

Variable marketing and administrative costs per

unit

Total variable costs per unit $ 270.00


Total variable costs per unit

Additional variable expenses from order $ 810,000


Additional variable expenses from order $ (810,000)

Special order increase in fixed expense

Change in operating income

Diff: 2

LO: 8-2

EOC: E8-18A




15







Manufacturing $220


Total fixed costs:



If a special sales order is accepted for 2,500 seats at a price of $320 per unit, fixed costs increase by $5,000,

and variable marketing and administrative costs for that order are $25 per unit, how would operating






Answer: C

Explanation: C) Variable Mfg. Cost $ 220



Now

Sales Price $ 320




= Contribution Margin $ 187,500

Less: add'l fixed cost 5,000

= Add'l Profit $ 182,500

Diff: 2

LO: 8-2

EOC: E8-18A




16


45) Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000





Manufacturing $220


Total fixed costs:



If a special sales order is accepted for 6,500 seats at a price of $325 per unit, and fixed costs remain

unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by

the special order.)



C) Increase by $2,112,500

D) Increase by $5,500,000

Answer: B

Explanation: B)




NOW Sales Price $ 325





Diff: 2

LO: 8-2

EOC: E8-18A




17


46) Comfort Cloud manufactures seats for airplanes. The company has the capacity to prroduce 100,000





Manufacturing $220


Total fixed costs:



If a special sales order is accepted for 5,500 seats at a price of $325 per unit, fixed costs remain unchanged,

and no variable marketing and administrative costs will be incurred for this order, how would operating


A) Increase by $2,997,500




Answer: C

Explanation: C) Sales Price $ 325





Diff: 2

LO: 8-2

EOC: E8-18A




18







Manufacturing $220


Total fixed costs:



If a special sales order is accepted for 3,200 seats at a price of $350 per unit, and fixed costs increase by

$12,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the

special order.)





Answer: D

Explanation: D)



Additional revenue from order $ 1,120,000



unit





Additional revenue from order $ 1,120,000


Special order increase in fixed expenses


Diff: 2

LO: 8-2

EOC: E8-18A




19







Manufacturing $220


Total fixed costs:



If a special sales order is accepted for 2,500 seats at a price of $310 per unit, fixed costs increase by $6,500,

and variable marketing and administrative costs for that order are $25 per unit, how would operating






Answer: D

Explanation: D)




Now

Sales Price $ 310




= Contribution Margin $ 162,500

Less: add'l fixed cost 6,500

= Add'l Profit $ 156,000

Diff: 2

LO: 8-2

EOC: E8-18A




20


49) Samson Incorporated provided the following information regarding its only product:

Sale price per unit $50.00

Direct materials used $160,000

Direct labor incurred $185,000

Variable manufacturing overhead $120,000

Variable selling and administrative expenses $70,000

Fixed manufacturing overhead $65,000

Fixed selling and administrative expenses $12,000

Units produced and sold 20,000

Assume no beginning inventory

Assuming there is excess capacity, what would be the effect on operating income of accepting a special

order for 5,000 units at a sale price of $40 per product? (NOTE: Assume regular sales are not affected by

the special order.)





Answer: B

Explanation: B)

Direct Materials $ 160,000

Direct Labor 185,000

Variable Mfg. O/H 120,000

Variable Selling 70,000

Total Mfg. Cost $ 535,000 / units produced 20,000 = $ 26.75 Mfg. cost per unit

Then

Sales Price $ 40

Less Mfg cost per Unit 26.75

= Contribution Margin $ 13.25


Profit = $66,250

Diff: 2

LO: 8-2

EOC: E8-18A




21













order for 3,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead

costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.)





Answer: C

Explanation: C)






Then

Sales Price $ 45.00




Total Contribution Margin = $54,750

Less Add'l Fixed cost - 5,000

Add'l Profit 49,750

Diff: 3

LO: 8-2

EOC: E8-18A




22













order for 1,200 units at a sale price of $47 per product? The 1,200 units would not require any variable

selling and administrative expenses. (NOTE: Assume regular sales are not affected by the special order.)





Answer: D

Explanation: D)






Then

Sales Price $ 47




Profit = $28,500

Diff: 2

LO: 8-2

EOC: E8-18A




23


52) Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue

Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30

per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14

per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no

effect on regular sales.)

How much are the expected increase (decrease) in revenues and expenses from the special sales order?

A) Expected increase in revenues $220,000; expected increase in expenses $140,000

B) Expected increase in revenues $220,000; expected increase in expenses $40,000

C) Expected increase in revenues $300,000; expected increase in expenses $140,000

D) Expected increase in revenues $220,000; expected increase in expenses $120,000

Answer: A

Explanation: A) $ 22 × 10,000 = $ 220,000 Add'l Revenue

$ 14 × 10,000 = $ 140,000 Add'l Expense

Diff: 2

LO: 8-2

EOC: E8-18A




53) Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue

Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30

per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14

per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no

effect on regular sales.)

Should Blue Technologies accept or reject the special sales order?

A) Accept, because operating income would increase $360,000.

B) Reject, because operating income would decrease $80,000.

C) Accept, because operating income would increase $80,000.

D) Reject, because operating income would decrease $160,000.

Answer: C

Explanation: C) $ 22 × 10,000 = $ 220,000 Add'l Revenue

Less $ 14 × 10,000 = 140,000 Add'l Expense

= $ 80,000 Operating Income

Diff: 2

LO: 8-2

EOC: E8-18A




24


54) ABC Toys manufactures and sells wooden toys for $15 each. The company has the capacity to

produce 25,000 toys in a year, but is currently producing and selling 20,000 toys per year. The company

currently is incurring the following costs at its current production level of 20,000 toys:

Variable manufacturing costs $ 70,000

Fixed manufacturing costs $ 90,000

Variable selling and administrative costs $ 75,000

Fixed selling and administrative costs $ 50,000

A retailer is interested in purchasing the excess capacity of 5,000 toys if it can receive a special price. This

special order would not affect ABC Toys' regular sales or its cost structure. ABC Toys' profits would

increase from this special order if the special order price per toy is greater than

A) $8.00.

B) $5.80.

C) $7.25.

D) $14.25.

Answer: C

Explanation: C)

Variable Mfg Cost $ 70,000

Variable Selling Cost + 75,000

Total Cost $ 145,000/ 20,000 produced = $ 7.25 Contribution Margin

Diff: 2

LO: 8-2

EOC: E8-18A




25


55) Apex Company produces artificial Christmas trees. A local shopping mall recently made a special

order offer; the shopping mall would like to purchase 200 extra large white trees. Apex Company is

currently producing and selling 20,000 trees; the company has the excess capacity to handle this special

order. The shopping mall has offered to pay $120 for each tree. An accountant at Apex Company

provides an estimate of the unit product cost as follows:

Direct materials $ 50.00

Direct labor (variable) $ 3.50

Variable manufacturing overhead $ 1.00

Fixed manufacturing overhead $ 4.00

Total unit cost $ 14.50

This special order would require an investment of $10,000 for the molds required for the extra large trees.

These molds would have no other purpose and would have no salvage value. The special order trees

would also have an additional variable cost of $5.00 per unit associated with having a white tree. This

special order would not have any effect on the company's other sales. If the special order is accepted, the

company's operating income would increase (decrease) by

A) $2,300 decrease.

B) $13,100 decrease.

C) $2,100 increase.

D) $13,100 increase.

Answer: C

Explanation: C)


Direct Labor 3.50

Variable MOH 1.00

Add'l variable cost 5.00

Total Mfg cost $ 59.50

Now Selling Price $ 120.00

Mfg cost 59.50

Contribution Margin $ 60.50 × 200 units = 12,100 - 10,000 Add'l Fixed = $ 2,100

Diff: 2

LO: 8-2

EOC: E8-18A




26


56) The following information relates to current production of outdoor chaise lounges at Backyard Posh:


Total fixed manufacturing costs $ 525,000

Variable marketing and administrative costs per unit $ 30.00

Total fixed marketing and administrative costs $ 250,000

The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept

a special sales order for 1,200 chaise lounges at a price of $225.00 per unit. Fixed costs would remain

unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently

producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special

order. If the company were to accept this special order, how would operating income be affected?



C) Decrease by $111,600


Answer: B

Explanation: B)






unit




Additional expenses from order $ 158,400


Additional expenses from order


Diff: 2

LO: 8-2

EOC: E8-18A




27








a special sales order for 800 chaise lounge at a price of $250.00 per unit. Fixed costs would remain

unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently







Answer: D

Explanation: D)

Special sales order volume 800




Variable manufacturing costs per unit



Additional expenses from order


Diff: 2

LO: 8-2

EOC: E8-18A




28


58) The following information relates to current production of outdoor chaise lounges Backyard Posh:






a special sales order for 200 chaise lounges at a price of $200.00 per unit. Fixed costs would increase by

$20,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently







Answer: A

Explanation: A)






unit









Diff: 2

LO: 8-2

EOC: E8-18A




29








a special sales order for 500 chaise lounges at a price of $200.00 per unit. Variable marketing and

administrative costs would be $10 per unit lower than on regular sales. Fixed costs would increase by

$15,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently







Answer: D

Explanation: D)






unit









Diff: 2

LO: 8-2

EOC: E8-18A




30


60) Pluto Incorporated provided the following information regarding its single product:

Direct materials used $ 240,000

Direct labor incurred $ 420,000

Variable manufacturing overhead $ 160,000

Fixed manufacturing overhead $ 100,000

Variable selling and administrative expenses $ 60,000

Fixed selling and administrative expenses $ 20,000

The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000

units (the costs above relate to the 40,000 units production level). The company has excess capacity and

regular sales will not be affected by this special order. There was no beginning inventory.

What would be the effect on operating income of accepting a special order for 3,500 units at a sale price of

$55 per product?





Answer: A

Explanation: A)



Variable Overhead 160,000


Total $ 880,000

Total $880,000

Divided by production 40,000

Cost per unit $ 22.00

Selling Price $ 55.00

Less cost per unit 22.00

Contribution Margin $ 33.00

× units sold × 3,500

Operating Income $ 115,500

Diff: 2

LO: 8-2

EOC: E8-18A




31













$50 per product assuming additional fixed manufacturing overhead costs of $10,000 are incurred?





Answer: C

Explanation: C)



Variable Overhead 160,000


Total $ 880,000

Total $880,000

Divided by production 40,000

Cost per unit $ 22.00

Selling Price $ 50.00

Less cost per unit 22.00

Contribution Margin $ 28.00

× units sold × 1,500

Operating Income $ 42,000

Less Add’d Fixed Cost 10,000

Operating (loss) $32,000

Diff: 2

LO: 8-2

EOC: E8-18A




32













$40 per product? The special order units would not require any variable selling and administrative

expenses.





Answer: D

33


Explanation: D)


Divide by Divide by

Units produced and sold

Direct materials cost per unit $ 6.00


Divide by Divide by


Direct labor costs per unit $ 10.50


Divide by Divide by


Variable manufacturing overhead cost per unit $ 4.00

Direct materials cost per unit $ 6.00

Direct labor costs per unit $ 10.50

Variable manufacturing overhead per unit


Special order volume 1,000

Special order sales price per unit


Special order volume 1,000

Special order sales price per unit



Additional variable costs per unit


Diff: 2

LO: 8-2

EOC: E8-18A




34


63) Indicate whether each item below is a characteristic of a price-taker or a price-setter. Use PT for price-

taker and PS for price-setter.

a) Cost-plus pricing

b) Product lacks uniqueness

c) Less competition

d) Target pricing

e) Heavy competition

Answer:

a) PS

b) PT

c) PS

d) PT

e) PT

Diff: 1

LO: 8-2

EOC: E8-17A



35


64) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return

on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens

and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are

expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course has a favorable

reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus

approach, what price should Mountaintop charge for a round of golf?

Answer:

Variable costs per unit $ 8.00

Expected volume

Total variable costs $ 3,200,000

Investors' return (% of assets) 12%

Total assets

Desired profit $ 6,000,000

Total fixed costs $ 25,000,000

Total assets

Total costs $ 28,200,000

Desired profit

Target revenue $ 34,200,000

Divide by Divide by

Expected volume

Cost-plus price per round of

golf

Diff: 3

LO: 8-2

EOC: E8-17A



36


65) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return

on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens

and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are

expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course is a price-taker

and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will

it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit

level?

Answer: Market price per unit $ 75.00

Expected volume

Revenue at market price $ 30,000,000


Expected volume


Revenue at market price $ 30,000,000

Less: total fixed costs $ (25,000,000)

total variable costs

Operating income

Investors' return (% of

ssets) 12%

Total assets


Operating income

Profit expectation shortfall $ 4,200,000

Profit expectation shortfall $ 4,200,000

Divide by Divide by

Total assets

Percent of assets

No, investors will not be happy. They wanted 12% ROI.

Diff: 3

LO: 8-2

EOC: E8-17A



37


66) Extreme Sports received a special order for 1,000 units of its extreme motorbike at a selling price of

$250 per motorbike. Extreme Sports has enough extra capacity to accept the order. No additional selling

costs will be incurred.

Unit costs to make and sell this product are as follows: Direct materials, $100; direct labor, $50; variable

manufacturing overhead, $14; fixed manufacturing overhead, $10, and variable selling costs, $2.

A) List the relevant costs.

B) What will be the change in operating income if Extreme Sports accepts the special order?

C) Should Extreme Sports accept the special order?

Answer:

A)

Relevant costs:

Direct material $ 100.00

Direct labor $ 50.00


Total relevant costs $ 164.00

B)

Special offer volume 1,000

Special offer price $ 250.00


Relevant costs:








Additional expenses from order $ (164,000)

Change in operating income $ 86,000

C) Yes, Extreme Sports should accept the order.

Diff: 2

LO: 8-2

EOC: S8-2




38


67) Jeff's Widget Corporation produces and sells a part used in the production of bicycles. The unit costs

associated with this part are as follows:

Direct materials $.14

Direct labor .30

Variable manufacturing overhead .20

Fixed manufacturing overhead .05

Total cost $.69

Saturn Company has approached Jeff's Widget Corporation with an offer to purchase 20,000 units of this

part at a price of $.80. Accepting this special sales order will put idle manufacturing capacity to use and

will not affect regular sales. Total fixed costs will not change.

Determine whether or not the special order should be accepted. Justify your conclusion.

Answer:





Direct labor $ 0.30


Total costs $ 0.64





Change in operating income $ (3,200)

The company should accept the special order since total operating income would increase if the special

order were to be accepted.

Diff: 2

LO: 8-2

EOC: E8-18A




39


68) Revved Up Toys manufactures a computer chip used in the production of remote control cars. When

6,000 cars are produced, the costs per part are:

Direct materials $2.50

Direct labor 1.50

Variable manufacturing overhead 1.00

Fixed manufacturing overhead 1.75

Total $6.75

Sam's Associates has offered to sell Revved Up Toys 6,000 parts for $5.75 each. If Sarah accepts the offer,

$1.00 of the fixed manufacturing overhead costs can be eliminated.

a. What is the relevant per unit cost to manufacture the part?

b. Which alternative is best for Revved Up Toys and by how much?

Answer:

a. Relevant costs to manufacture the part include direct materials, direct labor, variable manufacturing

overhead, and fixed manufacturing overhead that can be eliminated, or:


Direct labor $1.50

Variable manufacturing overhead $1.00

Traceable fixed cost per unit $1.00

Relevant cost to produce each unit $6.00

b.


Direct labor $1.50


Traceable fixed cost per unit $1.00

Relevant cost to produce each unit $6.00

Offer price by supplier $(5.75)

Savings per unit if bought $0.25

Production level 6,000

Total increase in operating income if bought $1,500

Diff: 2

LO: 8-2

EOC: P8-43A




40


69) Elite Office Furniture received a special order for 1,200 units of its executive chair at a selling price of

$90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs

will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor

$19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling

Costs $5.

List the relevant costs (and amount) to Elite Office Furniture for this special order.

Answer:





Diff: 2

LO: 8-2

EOC: S8-2




41


70) Elite Office Furniture received a special order for 1,200 units of its executive chairs at a selling price of

$90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs

will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor

$19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling

Costs $5.

What will be Elite Office Furniture's change in operating income if they accept the special order? Should

Elite Office Furniture accept the order? Explain why or why not.

Answer:












Increase in operating income $ 24,000

Yes, they should accept the order as it results in additional operating income since the company has the

additional capacity.

Diff: 2

LO: 8-2

EOC: P8-43A




42


71) Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling

price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run

includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into

Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed

manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no

change in the number of units produced.

What would be the operating income for Item Q?

Answer:

Production volume 100,000

Product Q selling price $ 15.00

Product Q revenue $ 1,500,000


Product Q variable costs $ 12.00

Product Q total variable costs $ 1,200,000


Product Q total variable costs $ (1,200,000)

Fixed manufacturing overhead for product

Q $ (72,000)

Operating income for Q $ 228,000

Diff: 2

LO: 8-2

EOC: P8-43A




43








What would be the operating income for Item QR?

Answer:


Product QR selling price $ 24.00

Product QR revenue $ 2,400,000


Product QR additional costs $ 7.00

Product QR variable costs $ 19.00


Product QR total variable costs $ 1,900,000

Fixed manufacturing overhead for product Q $ 72,000

Additional fixed manufacturing overhead $ 4,500


QR $ 76,500


Product QR total variable costs $ (1,900,000)


QR $ (76,500)

Operating income for QR $ 423,500

Diff: 2

LO: 8-2

EOC: P8-43A










By what percent would Heinz Manufacturing's operating income improve if the change is made?

44


Answer:


Product Q selling price $ 15.00




Product Q total variable costs $ 1,200,000


Product Q total variable costs $(1,200,000)

Fixed manufacturing overhead for product Q $ (72000)


Product QR:


Product QR selling price $ 24.00



Product QR additional costs $ 7.00

Product QR variable costs $ 19.00


Product QR total variable costs $ 1,900,000

Fixed manufacturing overhead for product Q $ 72,000



QR $ 76,500


Product QR total variable costs $(1,900,000)


QR $ (76,500)



Divide by Divide by


1.857

Subtract (1)

Increase in income 85.75%

Diff: 2

LO: 8-2

EOC: P8-43A

45





74) Companies operating in highly competitive industries are generally price-setters.

Answer: FALSE

Diff: 1

LO: 8-3

EOC: S8-3



75) When setting prices, a company need not consider whether it is a price-taker or a price-setter for each

product that it sells.

Answer: FALSE

Diff: 1

LO: 8-3

EOC: S8-3



76) A price-setter company emphasizes a cost-plus approach to pricing.

Answer: TRUE

Diff: 1

LO: 8-3

EOC: S8-3



77) For a product, revenue at market price plus desired operating profit equals target total cost.

Answer: FALSE

Diff: 1

LO: 8-3

EOC: S8-4



78) When a company is a price-setter, it emphasizes a target costing approach to pricing.

Answer: FALSE

Diff: 1

LO: 8-3

EOC: S8-4



46


79) When making a pricing decision, it is not necessary to separate costs into fixed and variable.

Answer: FALSE

Diff: 1

LO: 8-3

EOC: S8-4



80) Cost-plus price minus desired profit equals total cost.

Answer: TRUE

Diff: 2

LO: 8-3

EOC: S8-4



81) When using a target costing approach, the company starts with revenue at market price, and then

subtracts its desired profit, to yield the target total cost.

Answer: TRUE

Diff: 2

LO: 8-3

EOC: S8-4



82) Companies often try to gain more control over pricing by attempting to differentiate their products.

Answer: TRUE

Diff: 2

LO: 8-3

EOC: S8-4



83) Product differentiation allows companies to become more of a price-setter, and less of a price-taker.

Answer: TRUE

Diff: 2

LO: 8-3

EOC: S8-4



84) When setting prices, managers need to consider all costs.

Answer: TRUE

Diff: 2

LO: 8-3

EOC: S8-4



47


85) Managers need to consider variable costs, fixed costs, inventoriable product costs and period costs

when setting prices.

Answer: TRUE

Diff: 2

LO: 8-3

EOC: S8-4



86) Cost-plus pricing is essentially the opposite of target-costing.

Answer: TRUE

Diff: 2

LO: 8-3

EOC: S8-4



87) Which of the following best describes "target costing"?

A) An approach to pricing that begins with revenue at market price and subtracts desired profit to arrive

at target total cost

B) A factor that restricts production or sales of a product

C) All costs incurred along the value chain in connection with the product or service

D) An approach to pricing that begins with the product's total cost and adds desired profit

Answer: A

Diff: 2

LO: 8-3

EOC: S8-3



88) "Total cost of product or service" is best described as which of the following?

A) Benefits foregone by choosing a particular alternative course of action


C) Costs that were incurred in the past and can not be changed

D) All costs incurred along the value chain in connection with the product or service

Answer: D

Diff: 2

LO: 8-3

EOC: S8-3



48


89) Which of the following describes the products and services of companies that are price-setters?

A) They tend to be unique.

B) They are priced by managers using a target-costing emphasis.

C) They tend to have a lot of competitors.

D) They tend to be commodities.

Answer: A

Diff: 2

LO: 8-3

EOC: S8-3



90) Stockholders' expectations of company profits are affected by which of the following?

A) Industry risk

B) Historical company earnings

C) General economic conditions

D) All of the above

Answer: D

Diff: 2

LO: 8-3

EOC: S8-3



91) The cost-plus price is described by which of the following?

A) Target total cost plus desired profit

B) Total cost plus desired profit

C) Revenue at market price plus desired profit

D) Variable cost plus desired profit

Answer: B

Diff: 2

LO: 8-3

EOC: S8-3



92) Target total cost is described by which of the following?

A) Total cost plus desired profit

B) Revenue at market price plus desired profit

C) Revenue at market price minus desired profit

D) Total cost minus actual cost

Answer: C

Diff: 2

LO: 8-3

EOC: S8-3



49


93) Managers must consider which of the following when pricing a product or service?

A) All costs

B) Only period costs

C) Only manufacturing costs

D) Only variable costs

Answer: A

Diff: 2

LO: 8-3

EOC: S8-3



94) Which of the following pairs are characteristics of price-takers?

A) Less competition and target pricing

B) Cost-plus pricing and less competition

C) Target costing and heavy competition

D) Cost-plus pricing and lack of product uniqueness

Answer: C

Diff: 2

LO: 8-3

EOC: S8-3



95) Which of the following pairs are characteristics of price-setters?

A) Less competition and target costing

B) Cost-plus pricing and less competition

C) Lack of product uniqueness and heavy competition

D) Less competition and lack of product uniqueness

Answer: B

Diff: 2

LO: 8-3

EOC: S8-3



96) Big-box retailers such as Lowe's are considered price-takers because

A) their products are not unique.

B) there is less competition in the home improvement retail sector.

C) their products are unique.

D) they emphasize cost-plus pricing.

Answer: A

Diff: 2

LO: 8-3

EOC: S8-3



50


97) Target total cost is defined as

A) cost of goods sold less desired profit.

B) revenue at market price less desired profit.

C) revenue at market price less variable costs.

D) revenue at market price less fixed costs.

Answer: B

Diff: 2

LO: 8-3

EOC: S8-3



98) Methods for a company to meet target total cost and the profit goals if the current cost of the product

is higher than the target cost include which of the following?

A) Accept a lower profit

B) Cut fixed costs, cut variable costs

C) Cut fixed costs

D) Any of the above

Answer: D

Diff: 2

LO: 8-3

EOC: S8-3



99) In pricing a product, managers should consider which of the following?

A) Only fixed costs

B) Only variable costs

C) Only period costs

D) None of the above

Answer: D

Diff: 2

LO: 8-3

EOC: S8-3




51


100) All of the following factors affect the amount a customer is willing to pay for a product, except

A) the selling company's costs.

B) the competition's price.

C) the product's uniqueness.

D) general economic conditions.

Answer: A

Diff: 2

LO: 8-3

EOC: S8-3



101) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12%

return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the

greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000

golfers are expected each year. Variable costs are about $15 per golfer. Mountaintop golf course has a

favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a

cost-plus approach, what price should Mountaintop charge for a round of golf?

A) $51.50

B) $71.00

C) $78.50

D) $ 0.21

Answer: C

Explanation: C)


Expected volume 400,000



Total assets $45,000,000


Total fixed costs $20,000,000


Total costs $26,000,000


Target revenue $31,400,000

Divide by Divide by


Cost-plus price per round of golf $ 78.50

Diff: 3

LO: 8-3

EOC: S8-4




52





golfers are expected each year. Variable costs are about $15 per golfer. The Mountaintop golf course is a

price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What

profit will it earn in terms of dollars?

A) $16,000,000

B) $(4,000,000)

C) $ 4,000,000

D) $(20,000,000)

Answer: C

Explanation: C)

Market price per unit $ 75.00

Expected volume

Revenue $ 30,000,000


Variable costs per unit



Total variable costs

Total product costs $ 26,000,000

Revenue $ 30,000,000

Total product costs

Expected profit

Diff: 3

LO: 8-3

EOC: E8-19A




53





golfers are expected each year. Variable costs are about $15 per golfer. Mountaintop golf course is a price-

taker and won't be able to charge more than its competitors who charge $75 per round of golf. What

profit will it earn as a percent of assets?

A) Loss of 8.89%

B) Profit of 35.56%

C) Profit of 8.89%

D) Loss of 57.67%

Answer: C

Explanation: C)


Expected volume

Revenue $ 30,000,000







Revenue $ 30,000,000

Total product costs

Expected profit $ 4,000,000


Divide by Divide by

Total assets

Expected profit as a percent of

assets

Diff: 3

LO: 8-3

EOC: E8-19A




54


104) Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return

on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the

swimming pool. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are

expected to swim each year. Variable costs are about $10 per swimmer. The Philadelphia Swim Club has

a favorable reputation in the area and therefore, has some control over the membership price. Using a

cost-plus approach, what price should Philadelphia Swim Club charge for a membership?

A) $41.00

B) $37.50

C) $29.00

D) $ 0.17

Answer: A

Explanation: A)





Total assets $30,000,000


Total fixed costs $12,500,000


Total costs $17,500,000


Target revenue $20,500,000

Divide by Divide by


Cost-plus price per round of golf $ 41.00

Diff: 3

LO: 8-3

EOC: E8-19A




55




swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are

expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club is a

price-taker and won't be able to charge more than its competitors who charge $37.00 for a membership.

What profit will it earn in terms of dollars?

A) $11,000,000

B) $(12,500,000)

C) $1,000,000

D) $(1,000,000)

Answer: C

Explanation: C)


Expected volume

Revenue $ 18,500,000







Revenue $ 18,500,000

Total product costs

Expected profit

Diff: 3

LO: 8-3

EOC: E8-19A




56




swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are

expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club is a

price-taker and won't be able to charge more than its competitors who charge $37.00 per hour of court

time. What profit will it earn as a percent of assets?

A) Profit of 3.33%

B) Loss of 3.33%

C) Loss of 58.17%

D) Profit of 36.67%

Answer: A

Explanation: A)


Expected volume

Revenue $ 18,500,000







Revenue $ 18,500,000

Total product costs



Divide by Divide by

Total assets

Expected profit as a percent of

assets

Diff: 3

LO: 8-3

EOC: E8-19A




57


107) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12%


greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000

golfers are expected each year. Variable costs are about $12 per golfer. The Green Pastures course has a

favorable reputation in the area and therefore, has some control over the price of a round of golf.

Based on these numbers, what are Green Pasture's total costs?

Answer: $20,000, 000 in fixed costs + (500,000 golfers × $12 variable cost/golfer) = $26,000,000

Diff: 2

LO: 8-3

EOC: S8-4; E8-19A






golfers are expected each year. Variable costs are about $12 per golfer. The Green Pastures course has a

favorable reputation in the area and therefore, has some control over the price of a round of golf.

Based on these numbers, what is Green Pasture's target revenue?

Answer: $20,000, 000 in fixed costs + (500,000 golfers × $12 variable cost/golfer) = $26,000,000

$26,000, 000 in total costs + ($40,000,000 × 12% return) = $30,800,000

Diff: 2

LO: 8-3

EOC: E8-19A






golfers are expected each year. Variable costs are about $12 per golfer. Green Pastures golf course is a

price-taker and won't be able to charge more than $60 per round because of local competition.

What will Green Pasture's revenue be at a market price of $60/round?

Answer: 500,000 golfers × $60/round = $30,000,000

Diff: 2

LO: 8-3

EOC: E8-19A



58





golfers are expected each year. Variable costs are about $12 per golfer. Green Pastures golf course is a

price-taker and won't be able to charge more than $60 per round because of local competition.

What will Green Pasture's expected profit shortfall be if it charges $60/round?

Answer: $20,000,000 in fixed costs + (500,000 golfers × $12 variable cost/golfer) = $26,000,000

$26,000,000 in total costs + ($40,000,000 × 12% return) = $30,800,000

$30,000,000 - 26,000,000 = 4,000,000

$4,800,000 desired operating income - $4,000,000 operating income at $60/round equals a shortfall of

$800,000

Diff: 2

LO: 8-3

EOC: E8-19A



111) If a product line has a negative contribution margin, the product is not covering its fixed costs and

should be discontinued.

Answer: TRUE

Diff: 1

LO: 8-4

EOC: S8-5



112) If the cost savings from discontinuing a product exceed the lost revenues from discontinuing the

product, it should be retained.

Answer: FALSE

Diff: 1

LO: 8-4

EOC: S8-5



113) From a purely financial standpoint, if a product line has a negative contribution margin, the product

line should be discontinued.

Answer: TRUE

Diff: 2

LO: 8-4

EOC: S8-5



59


114) Fixed costs that exist even after a product is discontinued are called unavoidable fixed costs.

Answer: TRUE

Diff: 2

LO: 8-4

EOC: S8-5




115) When deciding whether to discontinue a product, managers should only consider the costs that will

be saved.

Answer: FALSE

Diff: 2

LO: 8-4

EOC: S8-5




116) If a product has a negative contribution margin, it should not be discontinued.

Answer: FALSE

Diff: 2

LO: 8-4

EOC: S8-5



117) Fixed costs that will continue to exist if a product is discontinued are relevant.

Answer: FALSE

Diff: 2

LO: 8-4

EOC: S8-5




60


118) Unavoidable fixed costs are

A) irrelevant to the decision of whether to discontinue a product line because they will differ between

alternatives.

B) relevant to the decision of whether to discontinue the department.

C) irrelevant to the decision of whether to discontinue a product line because they will not differ between

alternatives.

D) none of the above.

Answer: C

Diff: 2

LO: 8-4

EOC: S8-5




119) Common fixed costs that are allocated between departments are generally

A) direct fixed costs of the department.

B) relevant to the decision of whether to discontinue the department.

C) irrelevant to the decision of whether to discontinue the department.

D) direct fixed costs of other departments.

Answer: C

Diff: 2

LO: 8-4

EOC: S8-5




120) Fixed costs that are allocated among all departments are known as

A) direct fixed costs.

B) relevant fixed costs.

C) general fixed costs.

D) common fixed costs.

Answer: D

Diff: 2

LO: 8-4

EOC: S8-5




61


121) A company's manager would consider which of the following in deciding whether to discontinue its

electronics product line?

A) The costs it could save by discontinuing the product line

B) The revenues it would lose from discontinuing the product line

C) How discontinuing the electronics product line would affect sales of its other products (like CDs)

D) All of the above

Answer: D

Diff: 2

LO: 8-4

EOC: S8-5




122) All of the following are considerations for discontinuing a product or product line, except

A) whether the product has a positive or negative contribution margin.

B) not having any free capacity.

C) if discontinuing the product or product line will affect sales of remaining products.

D) determining if direct fixed costs could be avoided if the product or product line is discontinued.

Answer: B

Diff: 2

LO: 8-4

EOC: S8-5




123) A drug store decides to discontinue its health and beauty section of products because it has been

unprofitable. This strategy could backfire because

A) the store can readily fill the available space.

B) the store's sales may suffer by not having this convenience category of products.

C) it has automatically saved that department's fixed costs.


Answer: B

Diff: 2

LO: 8-4

EOC: S8-5



62


124) Fixed costs that continue to exist even after a product line is discontinued are called

A) unavoidable fixed costs.

B) avoidable fixed costs.

C) variable fixed costs.

D) relevant fixed costs.

Answer: A

Diff: 2

LO: 8-4

EOC: S8-5




125) Each month, Burrel Incorporated produces 500 units of a product that has unit variable costs of

$17.00. Total fixed costs for the month are $4,375. A special sales order is received for 200 units of the

product at a price of $20 per unit. In deciding to accept or reject the special sales order, it is appropriate to

consider the

A) new fixed cost per unit of $6.25.

B) current fixed cost per unit of $8.75.

C) difference between the offered price and the variable cost per unit.

D) difference between the two fixed costs per unit, or $2.50.

Answer: C

Diff: 2

LO: 8-4

EOC: S8-5




63


126) Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the

most recent year follow:

Total Hiking Fashion

Sales revenue $480,000 $340,000 $140,000

Variable expenses 355,000 235,000 120,000

Contribution margin 125,000 105,000 20,000

Fixed expenses 76,000 38,000 38,000

Operating income (loss) $49,000 $67,000 $(18,000)

Assuming fixed costs remain unchanged, how would discontinuing the Fashion line affect operating

income?

A) Increase in total operating income of $29,000

B) Increase in total operating income of $132,000

C) Decrease in total operating income of $78,000

D) Decrease in total operating income of $20,000

Answer: D

Diff: 3

LO: 8-4

EOC: E8-20A




64





Sales revenue $480,000 $340,000 $140,000



Fixed expenses 76,000 38,000 38,000


If $25,000 of fixed costs will be eliminated by discontinuing the Fashion line, how will operating income

be affected?

A) Increase $5,000

B) Decrease $45,000

C) Increase $54,000

D) Increase $103,000

Answer: A

Explanation: A)

Contribution Margin $ 105,000

Less Fixed Expenses 51,000

New Net income 54,000

Less original OI 49,000

Increase in OI $ 5,000

Diff: 3

LO: 8-4

EOC: E8-20A




65





Sales revenue $480,000 $340,000 $140,000



Fixed expenses 76,000 38,000 38,000


Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly

used to produce the line is rented for $30,000 per year, how will operating income be affected?

A) Decrease $10,000

B) Increase $59,000

C) Increase $10,000


Answer: C

Explanation: C)

Sales Revenue 340,000

Plus Additional Revenue 30,000

Total Revenu 370,000

Less Variable Expenses (235,000)

Contribution Margin 135,000

Less Fixed Expenses (76,000)

New Net OI 59,000

Less original OI (49,000)


Diff: 3

LO: 8-4

EOC: E8-20A




66





Sales revenue $480,000 $340,000 $140,000



Fixed expenses 76,000 38,000 38,000


Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly

used to produce the Fashion line is used to increase the production of Hiking boots by 250%, how will

operating income be affected?

A) Increase $137,500

B) Increase $235,500

C) Increase $186,500

D) Decrease $137,500

Answer: A

Explanation: A)

Add'l Hiking Revenue$ 340,000 × 2.5 = $ 850,000

Less Hiking Variable Expenses $ 235,000 × 2.5 = (587,500)


Less: Fixed Expense (76,000)

Operating Income 186,500

Less old OI 49,000

Difference $ 137,500

Diff: 3

LO: 8-4

EOC: E8-20A




67


130) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data

for the most recent year follow:

Total Luxury Sporty

Sales revenue $490,000 $360,000 $130,000



Fixed expenses 76,000 38,000 38,000


Assuming fixed costs remain unchanged, how would discontinuing the Sporty line affect operating

income?





Answer: C

Diff: 3

LO: 8-4

EOC: E8-20A




68




Total Luxury Sporty

Sales revenue $490,000 $360,000 $130,000



Fixed expenses 76,000 38,000 38,000


If $20,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be

affected?

A) Decrease $30,000

B) Increase $10,000

C) Increase $69,000


Answer: B

Explanation: B)

Contribution Margin $ 125,000

Less Fixed Expenses 56,000

New Net income 69,000

Less original OI 59,000


Diff: 3

LO: 8-4

EOC: E8-20A




69




Total Luxury Sporty

Sales revenue $490,000 $360,000 $130,000



Fixed expenses 76,000 38,000 38,000


Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly

used to produce the line is rented for $32,000 per year, how will operating income be affected?

A) Increase $22,000


C) Decrease $22,000

D) Increase $81,000

Answer: A

Explanation: A)

Sales Revenue 360,000

Plus Additional Revenue 32,000

Total Revenue 392,000

Less Variable Expenses (235,000)


Less Fixed Expenses (76,000)

New Net OI 81,000

Less original OI (59,000)


Diff: 3

LO: 8-4

EOC: E8-20A




70




Total Luxury Sporty

Sales revenue $490,000 $360,000 $130,000



Fixed expenses 76,000 38,000 38,000


Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly

used to produce the Sporty line is used to increase the production of Luxury watches by 250%, how will

operating income be affected?




D) Decrease $177,500

Answer: B

Explanation: B)

Add'l Hiking Revenue $ 360,000 × 2.5 = $ 900,000

Less Hiking Variable Expenses $ 235,000 × 2.5 = (587,500)


Less: Fixed Expense (76,000)


Less old OI 59,000

Difference $ 177,500

Diff: 3

LO: 8-4

EOC: E8-20A




71


134) Jim Bean Company has three product lines: D, E, and F. The following information is available:

D E F

Sales revenue $ 80,000 $42,000 $20,000

Variable expenses $ 40,000 $21,000 $12,000

Contribution margin $ 40,000 $21,000 $ 8,000

Fixed expenses $ 12,000 $15,000 $17,000

Operating income (loss) $ 28,000 $46,000 $(9,000)

Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss.

All fixed expenses are unavoidable. Assuming Jim Bean Company discontinues product line F and does

not replace it, what affect will this have on operating income?

A) Increase $9,000

B) Increase $17,000

C) Increase $8,000

D) Decrease $8,000

Answer: D

72


Explanation: D)

Sales revenue, D $ 80,000

Sales revenue, E

Sales revenue from D and E $ 122,000

Variable expenses, D 40,000

Variable expenses, E

Variable expenses from D and E $ 61,000

Fixed expenses, D $ 12,000

Fixed expenses, E $ 15,000

Fixed expenses, F

Fixed expenses for all products $ 44,000


Variable expenses from D and E

Contribution margin from D and E $ 61,000

Fixed expenses for all products

Operating income (loss) from D and E $ 17,000

Operating income (loss), D $ 28,000

Operating income (loss), E $ 6,000

Operating income (loss), F

Operating income (loss) from all

products $ 25,000



products

Difference in operating income

Diff: 2

LO: 8-4

EOC: E8-34A




73



D E F

Sales revenue $ 80,000 $42,000 $20,000



Fixed expenses $ 12,000 $15,000 $17,000



All fixed costs are unavoidable. Jim Bean Company discontinues product line F and rents the space

formerly used to produce product F for $20,000 per year, what affect will this have on operating income?

A) Increase $29,000

B) Increase $12,000

C) Decrease $12,000

D) Increase $37,000

Answer: B

74


Explanation: B)


Sales revenue, E $ 42,000

Rental revenue from discontinuing F

Revenue from D and E only $ 142,000

Variable expenses, D 40,000

Variable expenses, E




Fixed expenses, F


Revenue from D and E only $ 142,000









products $ 25,000



products


Diff: 3

LO: 8-4

EOC: E8-34A




75



D E F

Sales revenue $ 80,000 $42,000 $20,000



Fixed expenses $ 12,000 $15,000 $17,000



All fixed costs are unavoidable. Assuming Jim Bean Company discontinues line F and is able to double

the production and sales of product line E without increasing fixed costs. What affect will this have on

operating income?

A) Decrease $13,000

B) Increase $13,000

C) Increase $30,000

D) Increase $34,000

Answer: B

76


Explanation: B)


Discontinue F, increase in production of

E

New sales revenue for E $ 84,000

Sales revenue, D


Variable expenses, E $ 21,000


E

New variable expenses for E $ 42,000

Variable expenses, D




Fixed expenses, F











products $ 25,000



products


Diff: 3

LO: 8-4

EOC: E8-34A




77



D E F

Sales revenue $ 80,000 $42,000 $20,000



Fixed expenses $ 12,000 $15,000 $17,000



All fixed costs are unavoidable. Assume Jim Bean Company is able to increase the sale price of product F

to $32,000 with no change in volume of units sold and no change in variable costs or fixed costs. What

affect will this have on operating income?

A) Increase $37,000

B) Increase $12,000

C) Decrease $12,000

D) Decrease $20,000

Answer: B

78


Explanation: B)



New revenue for F

Sales revenue for all products $ 154,000

Variable expenses, D $ 40,000


Variable expenses, F

Variable expenses for all products $ 73,000



Fixed expenses, F



Variable expenses for all products

Contribution margin for all products $ 81,000


New operating income (loss) for all products $ 37,000




Original operating income (loss) from all

products $ 25,000



products


Diff: 3

LO: 8-4

EOC: E8-34A




79


138) The income statement for Germain Appliances is divided by its two product lines, Toasters and

Microwaves, as follows:

Toaster Microwave Total

Sales revenue $600,000 $255,000 $855,000

Variable expenses $450,000 $210,000 $660,000

Contribution margin $150,000 $45,000 $195,000

Fixed expenses $75,000 $75,000 $150,000

Operating income (loss) $75,000 $(30,000) $45,000

If fixed costs remain unchanged and Germain Appliances discontinues the Microwave line, how will

operating income change?

A) Will decrease by $150,000

B) Will increase by $45,000

C) Will decrease by $45,000

D) Will increase by $150,000

Answer: C

Explanation: C)

Sales revenue, Toasters $ 600,000

Variable expenses, Toasters

Contribution margin for Toasters only $ 150,000

Total fixed expenses for both products

Operating income (loss) for Toasters only $ 0

Operating income (loss) for Toasters only $ 0

Operating income (loss) for both products


Diff: 3

LO: 8-4

EOC: P8-45A




80





Sales revenue $600,000 $255,000 $855,000



Fixed expenses $75,000 $75,000 $150,000


If Germain Appliances can eliminate fixed costs of $32,000 by discontinuing the Microwave line, then

discontinuing it should result in which of the following?





Answer: C

Explanation: C)

Total fixed expenses for both products $ 150,000

Avoided fixed costs

Unavoidable fixed costs $ 118,000

Sales revenue, Toasters $ 600,000



Unavoidable fixed costs

Operating income (loss) from Toasters

only $ 32,000

Operating income (loss) from Toasters

only $ 32,000



Diff: 3

LO: 8-4

EOC: P8-45A




81





Sales revenue $600,000 $255,000 $855,000



Fixed expenses $75,000 $75,000 $150,000


If Germain Appliances can eliminate fixed costs of $32,000 and increase the sale of Toasters by 6,000 units

at a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the

Microwaves should result in which of the following?





Answer: A

82


Explanation: A)

Increased volume of Toasters $ 6,000

Sale price per unit of new volume

Additional revenue $ 180,000

Sales revenue, Toasters

Total sales revenue fot Toasters $ 780,000

Sale price per unit of new volume $ 30.00

Contribution margin for each new volume

unit

Variable expense per unit for new volume $ 22.00

Increased volume of Toasters

Additional variable expenses $ 132,000


Total variable expenses for Toasters $ 582,000


Avoidable fixed costs


Total sales revenue for Toasters $ 780,000

Total variable expenses for Toasters


Uavoidable fixed costs

Operating income (loss) from Toasters only $ 80,000

Operating income (loss) from Toasters only $ 80,000



Diff: 3

LO: 8-4

EOC: P8-45A




83


141) The income statement for Lovely Locks is divided by its two product lines, Curling Irons and

Straighteners, as follows:

Curling Irons Straighteners Total

Sales revenue $600,000 $260,000 $860,000



Fixed expenses $75,000 $75,000 $150,000


If fixed costs remain unchanged and Lovely Locks discontinues the Straightener line, how will operating

income change?

A) Will decrease by $150,000

B) Will increase by $50,000

C) Will increase by $150,000

D) Will decrease by $50,000

Answer: D

Explanation: D)

Sales revenue, Curling Irons $ 600,000

Variable expenses, Curling Irons

Contribution margin for Curling Irons only $ 150,000

Total fixed expenses for both products

Operating income (loss) for Curling Irons

only $ 0


only $ 0



Diff: 3

LO: 8-4

EOC: P8-45A




84





Sales revenue $600,000 $260,000 $860,000



Fixed expenses $75,000 $75,000 $150,000


If Lovely Locks can eliminate fixed costs of $32,000 by discontinuing the Straightener line, then

discontinuing it should result in which of the following?


B) Decrease in total operating income of $18,000

C) Increase in total operating income of $18,000


Answer: B

Explanation: B)




Sales revenue, Curling Irons $ 600,000



Unavoidable fixes costs


only $ 32,000

Operating income (loss) for Curling

Irons only $ 32,000



Diff: 3

LO: 8-4

EOC: P8-45A




85





Sales revenue $600,000 $260,000 $860,000



Fixed expenses $75,000 $75,000 $150,000


If Lovely Locks can eliminate fixed costs of $32,000 and increase the sale of Curling Irons by 6,000 units at

a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the

Straighteners should result in which of the following?

A) Decrease in total operating income of $30,000




Answer: C

86


Explanation: C)

Increased volume of Curling Irons $ 6,000

Sale price per unit of new volume

Additional revenue $ 180,000

Sales revenue, Curling Irons

Total sales revenue for Curling Irons $ 780,000

Sale price per unit of new volume $ 30.00

Contribution margin for each new volume

unit

Variable expense per unit for new volume $ 22.00

Increased volume of Curling Irons

Additional variable expenses $ 132,000


Total variable expenses for Curling Irons $ 582,000




Total sales revenue for Curling Irons $ 780,000

Total variable expenses for Curling Irons


Uavoidable fixed costs

Operating income (loss) from Curling Irons

only $ 80,000

Operating income (loss) from Curling Irons

only $ 80,000



Diff: 3

LO: 8-4

EOC: P8-45A




87


144) The internal financial statements of Vera Incorporated show that their beaded purses incurred an

operating loss in the most recent year. There were 25,000 purses sold in that year. Selected financial

information about the purse line follows.

Total sales revenue $ 190,000

Variable costs $ 100,000

Contribution margin $ 90,000

Fixed costs $ 100,000

Net operating loss $ (10,000)

If the line of purses were to be discontinued, the company would avoid $16,000 in fixed costs per year.

If Vera Incorporated were to discontinue the line of purses, the change in annual operating income would

be a(n):

A) increase in total operating income of $74,000.

B) decrease in total operating income of $10,000.

C) increase in total operating income of $10,000.

D) decrease in total operating income of $74,000.

Answer: D

Explanation: D) Contribution Margin $ 90,000

Less Fixed exp. Avoided 16,000

Decrease in OI $ 74,000

Diff: 2

LO: 8-4

EOC: P8-45A




88


145) Simpson Corporation operates two divisions with the following operating results from last year:

Western Division Eastern Division Total

Sales $ 620,000 $ 290,000 $ 900,000

Variable costs $ 310,000 $ 200,000 $ 510,000

Contribution margin $ 310,000 $ 90,000 $ 390,000

Avoidable fixed costs $ 110,000 $ 70,000 $ 180,000

Allocated common fixed costs $ 90,000 $ 45,000 $ 135,000

Operating income (loss) $ 100,000 $ (25,000) $ 75,000

Management is considering whether the Eastern Division should be discontinued since it incurred an

operating loss last year. Allocated common fixed costs would continue for Simpson Corporation whether

the division is discontinued or not.

If the Eastern Division had been discontinued at the beginning of last year, what would the total

operating income for Simpson Corporation have been for the year?

A) $55,000

B) $20,000

C) $25,000

D) $110,000

Answer: A

Explanation: A)

SOLUTION

Eastern Division

Sales $ 290,000

Variable costs

Contribution margin $ 90,000

Less avoidable fixed costs

Segment margin for division

Original total operating income $ 75,000

Less segment margin for discontinued

division

Operating income if division discontinued

Diff: 2

LO: 8-4

EOC: P8-45A




89


146) Benace Parts and Supply makes a variety of car parts. The company produces 6,000 A90 parts each

year. Each A90 sells for $7 and has a contribution margin of $2. Currently, $16,000 of fixed manufacturing

overhead is allocated to the A90 product line. If Benace Parts and Supply discontinues the A90 product

line, $7,000 of fixed manufacturing overhead costs would be avoided. What would be the impact on total

operating income if the A90 product line were to be discontinued?


B) Decrease in total operating income of $5,000



Answer: B

Explanation: B)

Number of units produced 6,000

Unit contribution margin

Total contribution margin $ 12,000


Decrease (increase) in operating income if product discontinued

Diff: 2

LO: 8-4

EOC: P8-45A




147) Jerry Enterprises is considering whether to discontinue a division that generates a total contribution

margin of $65,000 per year. Fixed manufacturing overhead allocated to this division is $50,000, of which

18,000 is unavoidable. If Jerry Enterprises were to eliminate this division, the effect on the company's

operating income would be a(n):

A) increase in total operating income of $33,000.

B) decrease in total operating income of $33,000.

C) increase in total operating income of $47,000.

D) decrease in total operating income of $47,000.

Answer: B

Explanation: B) SOLUTION

Fixed manufacturing overhead of division $ 50,000

Portion of fixed MOH which is unavoidable

Avoidable fixed manufacturing overhead $ 32,000

Total contribution margin $ 65,000

Avoidable fixed manufacturing overhead

Division segment margin income (loss)

Diff: 2

LO: 8-4

EOC: P8-45A




90


148) All About Animals has two product lines: Cat food and Dog food. Contribution margin income

statement data for the most recent year follow:

Total Cat Food Dog Food

Sales revenue $385,000 $300,000 $85,000



Fixed expenses $102,000 $50,000 $52,000


Assuming total fixed costs remain unchanged, how would discontinuing the Dog food line affect

operating income?





Answer: C

Explanation: C) Sales revenue, Cat food $ 300,000

Variable expenses, Cat food

Contribution margin for Cat food $ 135,000

Total fixed expenses

Operating income (loss) from Cat food only $ 33,000

Operating income (loss) from Cat food only $ 33,000

Total operating income (loss)


Diff: 3

LO: 8-4

EOC: P8-45A




91


149) All About Animals has two product lines: Cat food and Dog food. Contribution margin income

statement data for the most recent year follow:


Sales revenue $385,000 $300,000 $85,000



Fixed expenses $102,000 $50,000 $52,000


If $12,000 of fixed costs will be eliminated by discontinuing the Dog food line, how will operating income

be affected?


B) Increase $45,000

C) Decrease $33,000

D) Decrease $57,000

Answer: C

Explanation: C) Sales revenue, Cat food $ 300,000



Fixed expenses $ 102,000





Operating income (loss) from Cat food

only $ 45,000


only $ 45,000



Diff: 3

LO: 8-4

EOC: P8-45A




92


150) Contribution margin income statement data for the most recent year follow:


Sales revenue $385,000 $300,000 $85,000



Fixed expenses $102,000 $50,000 $52,000


Assuming the Dog food is discontinued, total fixed costs remain unchanged, and the space formerly used

to produce the line is rented for $25,000 per year, how will operating income be affected?

A) Increase $58,000


C) Decrease $20,000

D) Increase $20,000

Answer: C

Explanation: C)

Sales revenue, Cat food $ 300,000

Additional revenue if Dog food

discontinued

Total sales revenue for Cat food only $ 325,000



Fixed expenses


only $ 58,000


only $ 58,000



Diff: 3

LO: 8-4

EOC: P8-45A




93


151) Contribution margin income statement data for the most recent year follow:


Sales revenue $385,000 $300,000 $85,000



Fixed expenses $102,000 $50,000 $52,000


Assuming the Dog food line is discontinued, total fixed costs remain unchanged, and the space formerly

used to produce the Dog food line is used to double the production of Cat food, how will operating

income be affected?

A) Increase $90,000



D) Decrease $90,000

Answer: A

Diff: 3

LO: 8-4

EOC: P8-45A




94


152) Black Productions has three models: D, E, and F. The following information is available:

Model D Model E Model F

Sales revenue $65,000 $33,000 $24,000



Fixed expenses $16,000 $16,000 $16,000


Black Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed

expenses are unavoidable. Assuming Black Productions discontinues model F and does not replace it,

what effect will this have on operating income?

A) Decrease $10,000

B) Increase $10,000

C) Increase $6,000

D) Decrease $6,000

Answer: A

Explanation: A)

Contribution Margin 33,000 + 20,000 $53,000

Fixed Exp 16,000 × 3 48,000


Prior operating income 15,000

Decrease 10,000

Diff: 2

LO: 8-4

EOC: P8-45A




95




Sales revenue $65,000 $33,000 $24,000



Fixed expenses $16,000 $16,000 $16,000



costs are unavoidable. Black Productions discontinues model F and rents the space formerly used to

produce product F for $15,000 per year, what effect will this have on operating income?

A) Increase $21,000

B) Increase $5,000

C) Decrease $21,000

D) Decrease $5,000

Answer: B

Explanation: B)

Contribution Margin 33,000 + 20,000 $53,000

Fixed Exp 16,000 × 3 48,000


Prior operating income -15,000

Rent income +15,000

Increase 5,000

Diff: 3

LO: 8-4

EOC: P8-45A




96




Sales revenue $65,000 $33,000 $24,000



Fixed expenses $16,000 $16,000 $16,000



costs are unavoidable. Assuming Black Productions discontinues line F and is able to double the

production and sales of model E without increasing fixed costs. What effect will this have on operating

income?

A) Increase $10,000

B) Decrease $10,000

C) Increase $26,000

D) Decrease $26,000

Answer: A

97


Explanation: A)



E


Sales revenue, D




E


Variable expenses for E




Fixed expenses, F











products $ 15,000



products


Diff: 3

LO: 8-4

EOC: P8-45A




98




Sales revenue $65,000 $33,000 $24,000



Fixed expenses $16,000 $16,000 $16,000



costs are unavoidable. Assume Black Productions is able to increase the sale price of product F to $35,000

with no change in volume of units sold and no change in variable costs or fixed costs. What effect will

this have on operating income?

A) Increase $11,000

B) Increase $24,000

C) Decrease $11,000

D) Decrease $24,000

Answer: A

99


Explanation: A)



New revenue for F


Variable expenses, D $ 32,000


Variable expenses, F

Variable expenses for all products $ 59,000



Fixed expenses, F



Variable expenses for all products

Contribution margin for all products $ 74,000







products $ 15,000



products


Diff: 3

LO: 8-4

EOC: P8-45A




100


156) Totally Technology manufactures Cameras and Video Recorders. The company's product line

income statement follows:

Camera Video Recorder Total

Sales revenue $300,000 $100,000 $400,000

Cost of goods sold

Variable $75,000 $49,000 $124,000

Fixed $82,000 $28,000 $110,000

Total cost of goods sold $157,000 $77,000 $234,000

Gross profit $143,000 $23,000 $166,000

Marketing and administrative expenses

Variable $25,000 $28,000 $53,000

Fixed $32,000 $19,000 $51,000

Total marketing and administrative expenses $57,000 $47,000 $104,000


Management is considering discontinuing the Video Recorder product line. Accountants for the company

estimate that discontinuing the Video Recorder line will decrease fixed cost of goods sold by $10,000 and

fixed marketing and administrative expenses by $4,000.

Prepare an analysis supporting your opinion about whether or not the Video Recorder product line

should be discontinued.

101


Answer: Contribution margin income statement for DVDs:

If Video Recorders discontinued:

Sales revenue from Cameras $ 300,000

Variable cost of goods sold from Cameras $ (75,000)

Variable marketing and administrative expenses from Cameras $ (25,000)

Contribution margin from Cameras only $ 200,000

Total fixed costs of goods sold $ 110,000

Decrease in fixed costs of goods sold if Video Recorders

discontinued $ (10,000)

Fixed costs of goods sold if Video Recorders discontinued $ 100,000

Total fixed marketing and administrative expenses $ 51,000

Decrease in fixed marketing and administrative if Video

Recorders discontinued $ (4,000)

Fixed marketing and administrative expenses if Video Recorders

discontinued $ 47,000

Contribution margin from Cameras only $ 200,000

Fixed costs of goods sold if Video Recorders discontinued $(100,000)

Fixed marketing and administrative expenses if Video Recorders

discontinued $ (47,000)

Operating income (loss) $ 53,000

Operating income (loss) from Cameras only $ 53,000

Operating income (loss) with both products $ 62,000

Decrease in operating income if Video Recorders discontinued $ 9,000

The company should keep producing and selling Video Recorders since operating income will decrease

by $9,000 if the product line is discontinued.

Diff: 3

LO: 8-4

EOC: P8-45A




102


157) Cornell Enterprises currently produces several products. Model L78 is showing a net operating loss

as indicated by the following condensed income statement prepared for the year ended December 31.

You have been hired by Cornell Enterprises to help analyze the decision as to whether to eliminate Model

L78. Upon investigation, you discover that if Model L78 is eliminated, $20,000 of the fixed costs shown on

the above condensed income statement can be eliminated. The rest of the fixed costs allocated to Model

L78 are common fixed costs that will be allocated to the remaining two products produced by Cornell

Enterprises.

Determine if Cornell Enterprises should discontinue Model L78.

Answer:

If product discontinued:

Lost sales $(480,000)

Savings in variable costs $ 360,000

Savings in avoidable fixed costs $ 20,000

Operating loss $ (100,000)

Cornell Enterprises should not discontinue L78, since discontinuing the product will result in a $100,000

loss.

Diff: 2

LO: 8-4

EOC: P8-45A




158) For some merchandisers, the primary constraint may be cubic feet of display space.

Answer: TRUE

Diff: 1

LO: 8-5

EOC: S8-8



103


159) A constraint is a factor that restricts production or sale of a product.

Answer: TRUE

Diff: 1

LO: 8-5

EOC: S8-8



160) Fixed costs affect product mix considerations.

Answer: TRUE

Diff: 1

LO: 8-5

EOC: S8-8



161) An example of an expansion constraint would be the size of the available labor pool.

Answer: TRUE

Diff: 1

LO: 8-5

EOC: S8-8



162) To maximize profits, produce the product with the lowest contribution margin per unit of the

constraint.

Answer: FALSE

Diff: 1

LO: 8-5

EOC: S8-8



163) When making product mix decisions, companies are most profitable when they maximize

production of the product with the greatest sales demand.

Answer: FALSE

Diff: 1

LO: 8-5

EOC: S8-8



104


164) When making product mix decisions, companies are most profitable when they maximize

production of the product with the greatest sales price.

Answer: FALSE

Diff: 1

LO: 8-5

EOC: S8-8



165) All of the following are product mix considerations except

A) What constraint(s) stops us from making (or displaying) all of the units we can sell?

B) Which products offer the highest contribution margin per unit of the constraint?

C) Would emphasizing one product over another affect fixed costs?

D) Which product has the most sunk costs?

Answer: D

Diff: 1

LO: 8-5

EOC: S8-8



166) The contribution margin per unit of constraint is calculated as

A) contribution margin per unit × constraint per unit.

B) contribution margin per unit × units per constraint.

C) contribution margin per unit ÷ units per constraint.

D) contribution margin per unit + constraint per unit.

Answer: B

Diff: 1

LO: 8-5

EOC: S8-8



167) Companies with production constraints and irrelevant fixed costs will be most profitable when they

maximize production of the product with the highest

A) sales price.

B) demand for the product.

C) contribution margin per unit of the constraint.

D) contribution margin per unit.

Answer: C

Diff: 1

LO: 8-5

EOC: S8-8



105


168) The factor that restricts production or sale of a product is which of the following?

A) Demanding factor

B) Constraint

C) Sunk factor

D) Relevant factor

Answer: B

Diff: 1

LO: 8-5

EOC: S8-8



169) A "constraint" is best described by which of the following?

A) The distribution of all products to be sold


C) Benefits foregone by choosing a particular alternative course of action


Answer: B

Diff: 1

LO: 8-5

EOC: S8-8



170) A "sales mix" is best described by which of the following?

A) A factor that restricts production or sales of a product

B) Costs that were incurred in the past and cannot be changed

C) Expected future costs that differ among alternatives

D) The relative number of all products to be sold

Answer: D

Diff: 1

LO: 8-5

EOC: S8-8



171) Which of the following could be a constraint for selling a product?

A) Store hours

B) Available labor hours for employees

C) Shelf space

D) All of the above could be constraints.

Answer: D

Diff: 1

LO: 8-5

EOC: S8-8



106


172) All of the following would be considered in evaluating product or sales mix allocations, except

A) deciding which product offers the lowest contribution margin per unit.

B) deciding whether fixed costs would change as a result of the product sales mix.

C) deciding upon any and all constraints associated with the product/sale mix.

D) deciding which products will contribute the highest contribution margin per unit.

Answer: A

Diff: 2

LO: 8-5

EOC: S8-8




173) Changing the product mix emphasis in the short run will usually not affect

A) total variable costs.

B) both total variable and total fixed costs.

C) total fixed costs.

D) total contribution margin.

Answer: C

Diff: 2

LO: 8-5

EOC: S8-8



107


174) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Makers. The

following data are available:

Food Processors Espresso Makers

Sales price $125 $225

Variable costs $50 $150

The company can manufacture two food processors per machine hour and three espresso machines per

machine hour. The company's production capacity is 1,200 machine hours per month.

What is the contribution margin ratio for food processors?

A) 60.00%

B) 150.00%

C) 140.00%

D) 33.33%

Answer: A

Explanation: A)

Sales price, food processors $ 125.00

Variable costs, food processors

Contribution margin per food processor $ 75.00

Divide by Divide by

Sales price, food processors

Contribution margin ratio for food

processors

Diff: 2

LO: 8-5

EOC: E8-22A



108


175) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Machines.

The following data are available:

Food Processors Espresso Machines





What is the contribution margin per machine hour for espresso machines?

A) $1,125

B) $225

C) $150

D) $75

Answer: B

Explanation: B) Sales price, espresso machines $ 225.00

Variable costs, espresso machines

Contribution margin per espresso machine $ 75.00

Espresso machines per hour

Contribution margin per hour for espresso

machines

Diff: 3

LO: 8-5

EOC: E8-22A



109









What is the contribution margin per machine hour for food processors?

A) $350

B) $225

C) $75

D) $150

Answer: D

Explanation: D) Sales price, food processors $ 125.00



Food processors per hour

Contribution margin per hour for food

processors

Diff: 3

LO: 8-5

EOC: E8-22A



110









To maximize profits, what product and how many units should the company produce in a month?

A) 2,400 Food Processors and 0 Espresso Machines

B) 300 Food Processors and 675 Espresso Machines

C) 2,400 Food Processors and 3,600 Espresso Machines

D) 3,600 Espresso Machines and 0 Food Processors

Answer: D

Explanation: D) Sales price, food processors $ 125.00



Food processors per hour

Contribution margin per hour for food processors $ 150.00

Sales price, espresso machines $ 225.00

Variable costs, espresso machines

Contribution margin per espresso machine $ 75.00

Espresso machiness per hour

Contribution margin per hour for espresso

machines $ 225.00

Product to emphasize Espresso Machines

Production capacity (hours) 1,200

Espresso machines per hour

Number to produce

Diff: 3

LO: 8-5

EOC: E8-22A



111


178) Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers. The


Waffle Makers Coffee Makers


Variable cost $45 $150

The company can manufacture two waffle makers per machine hour and three coffee makers per


What is the contribution margin ratio for waffle makers?

A) 30.23%B) 62.50%

C) 166.67%

D) 137.50%

Answer: B

Explanation: B)

Sales price, waffle makers $ 120.00

Variable costs, waffle maker

Contribution margin per waffle maker $ 75.00

Divide by Divide by

Sales price, waffle makers

Contribution margin ratio for waffle

makers

Diff: 2

LO: 8-5

EOC: E8-22A



112









What is the contribution margin per machine hour for coffee makers?

A) $195

B) $1,095

C) $130

D) $65

Answer: A

Explanation: A) Sales price, coffee makers $ 215.00

Variable costs, coffee makers

Contribution margin per coffee maker $ 65.00

Coffee makers per hour

Contribution margin per hour for coffee makers

Diff: 3

LO: 8-5

EOC: E8-22A



113









What is the contribution margin per machine hour for waffle makers?

A) $75

B) $225

C) $150

D) $330

Answer: C

Explanation: C) Sales price, waffle makers $ 120.00

Variable costs, waffle makers


Waffle makers per hour

Contribution margin per hour for waffle

makers

Diff: 3

LO: 8-5

EOC: E8-22A



114










A) 3,600 Coffee Makers and 0 Waffle Makers

B) 300 Waffle Makers and 675 Coffee Makers

C) 2,400 Waffle Makers and 3,600 Coffee Makers

D) 2,400 Waffle Makers and 0 Coffee Makers

Answer: A

Explanation: A)

Sales price, waffle makers $ 120.00

Variable costs, waffle makers


Waffle makers per hour

Contribution margin per hour for waffle makers $ 150.00

Sales price, coffee makers $ 215.00

Variable costs, coffee makers

Contribution margin per coffee maker $ 65.00


Contribution margin per hour for coffee makers $ 195.00

Product to emphasize Coffee Makers

Production capacity (hours) $ 1,200


Number to produce

Diff: 3

LO: 8-5

EOC: E8-22A



115


182) Silvio Enterprises produces three products, with costs and selling prices as follows:

Each product requires a certain number of minutes on the drill press. There is only one drill press

available so it is the constraint for this product. Model D7 requires 2 minutes of drill press time, Model B3

requires 1 minute of drill press time, and Model F5 requires 7 minutes of drill press time. In what order

should Silvio Enterprises emphasize its products to maximize its contribution margin? (Rank the

products in order from most profitable to least profitable.)

A) Model B3, Model D7, Model F5

B) Model B3, Model F5, Model D7

C) Model D7, Model B3, Model F5

D) Model F5, Model D7, Model B3

Answer: A

Explanation: A)

Product B3 Product D7 Product F5

Selling Price $42 $34 $50

Variable Cost 18 12 36

Contribution Margin 24 22 14

Divided by Minutes to Produce 1 2 7

Contribution Margin per

minute $24.00 $11.00 $2.00

Diff: 3

LO: 8-5

EOC: E8-22A



116


183) Alamo Corporation processes all of its products through a lathe machine. The lathe is only available

for 60 hours per week and is the constraint for all of the products. Data regarding Alamo Corporation's

three products follows:

Product A Product B Product C

Selling price per unit $75.00 $60.00 $90.00

Variable cost per unit $45.00 $35.00 $80.00

Minutes of lathe time required per unit 15 20 10

In what order should Alamo Corporation emphasize its products to maximize its contribution margin?

(Rank the products in order from most profitable to least profitable.)

A) Product B, Product A, Product C

B) Product A, Product C, Product B

C) Product A, Product B, Product C

D) Product B, Product C, Product A

Answer: C

Explanation: C)

Diff: 3

LO: 8-5

EOC: E8-22A



117


184) Brittany Furniture manufactures two products: Couches and Beds. The following data are available:

Couches Beds

Sales price $500.00 $700.00

Variable costs $350.00 $375.00

The company can manufacture two couches per machine hour and one bed per machine hour. The

company's production capacity is 900 machine hours per month.

What is the contribution margin ratio for Couches?

A) 30.0%

B) 42.86%

C) 170.00%

D) 23.08%

Answer: A

Explanation: A) Sales price, Couches $ 500.00

Variable costs, Couches

Contribution margin per Couch $ 150.00

Divide by Divide by

Sales price, Couches

Contribution margin ratio for Couches

Diff: 1

LO: 8-5

EOC: E8-22A



118



Couches Beds

Sales price $500.00 $700.00




What is the contribution margin per machine hour for beds?

A) $325

B) $1,075

C) $650

D) $975

Answer: A

Explanation: A) Sales price, Beds $ 700.00

Variable costs, Beds

Contribution margin per Bed $ 325.00

Beds per hour

Contribution margin per hour for Beds

Diff: 3

LO: 8-5

EOC: E8-22A



119



Couches Beds

Sales price $500.00 $700.00




What is the contribution margin per machine hour for couches?

A) $1,700

B) $300

C) $150

D) $250

Answer: B

Explanation: B) Sales price, Couches $ 500.00


Contribution margin per Couche $ 150.00

Couches per hour

Contribution margin per hour for Couches

Diff: 2

LO: 8-5

EOC: E8-22A



120



Couch Bed

Sales price $500.00 $700.00





A) 1,800 couches and 900 beds

B) 900 beds

C) 1,800 couches

D) 600 couches and 325 beds

Answer: B

Explanation: B)

Sales price, Couches $ 500.00


Contribution margin per Couch $ 150.00

Couches per hour

Contribution margin per hour for Couches $ 300.00

Sales price, Beds $ 700.00

Variable costs, Beds

Contribution margin per Bed $ 325.00

Beds per hour

Contribution margin per hour for Beds $ 325.00

Product to emphasize Beds

Production capacity (hours) $ 900

Beds per hour

Number to produce

Diff: 3

LO: 8-5

EOC: E8-22A



121


188) Brittany Furniture manufactures two products: Futons and Recliners. The following data are

available:

Futons Recliners

Sales price $500.00 $480.00


The company can manufacture two futons per machine hour and one recliner per machine hour. The


What is the contribution margin ratio for futons?

A) 53.85%

B) 37.50%

C) 165.00%

D) 35.00%

Answer: D

Explanation: D)

Sales price, Futons $ 500.00

Variable costs, Futons

Contribution margin per Futons $ 175.00

Divide by Divide by

Sales price, Futons

Contribution margin ratio for Futons

Diff: 1

LO: 8-5

EOC: E8-22A



122



available:

Futons Recliners

Sales price $500.00 $480.00




What is the contribution margin per machine hour for recliners?

A) $1,080

B) $720

C) $600

D) $360

Answer: D

Explanation: D)

Sales price, Recliners $ 480.00

Variable costs, Recliners

Contribution margin per Recliner $ 360.00

Recliners per hour

Contribution margin per hour for Recliners

Diff: 3

LO: 8-5

EOC: E8-22A



123



available:

Futons Recliners

Sales price $500.00 $480.00




What is the contribution margin per machine hour for futons?

A) $350

B) $1,650

C) $175

D) $180

Answer: A

Explanation: A)



Contribution margin per Futon $ 175.00

Futons per hour

Contribution margin per hour for Futons

Diff: 2

LO: 8-5

EOC: E8-22A



124



available:

Futons Recliners

Sales price $500.00 $480.00





A) 900 recliners

B) 1,800 futons and 900 recliners

C) 1,800 futons

D) 700 futons and 360 recliners

Answer: A

Explanation: A)



Contribution margin per Futon $ 175.00

Futons per hour

Contribution margin per hour for Futons $ 350.00

Sales price, Recliners $ 480.00

Variable costs, Recliners

Contribution margin per Recliner $ 360.00

Recliners per hour

Contribution margin per hour for Recliners $ 360.00

Product to emphasize Beds

Production capacity (hours) $ 900

Recliners per hour

Number to produce

Diff: 3

LO: 8-5

EOC: E8-22A



125


192) Rose Incorporated manufactures two types of vases, small and large. The following per unit data are

available:

Small Vase Large Vase

Sale price $60 $100


Machine hours required for 1 vase 1 2

Total fixed costs are $600,000 and Rose Incorporated can sell a maximum of 25,000 units of each type of

vase annually. Machine hour capacity is 50,000 hours per year.

A. Determine the contribution margin per unit for each type of vase.

B. Determine the contribution margin per machine hour for each type of vase.

C. Determine the number of units of each style of vase that Rose Incorporated should produce to

maximize operating income.

D. What is the dollar amount of the maximum operating income as calculated in C above?

Answer:

A.

B.

C.

126


D.

Diff: 2

LO: 8-5

EOC: P8-46A



127


193) Becky's Bakery produces two products, cake and pie. Becky's Bakery sells each cake for $15.00 and

each pie for $10.00. Variable costs for cakes and pies are respectively, $7.00 and $6.00. There are 3,200

direct labor hours per month available for producing one of the two products. Fixed manufacturing

overhead cost is allocated at $1,000 per month. Each cake and pie require 2 direct labor hours.

Compute the following:

A. Contribution margin per unit for each product.

B. Contribution margin per direct labor hour for each product.

C. The total number of products produced if only that product is produced each month.

D. Income for a month if only one product is produced and total production is sold.

Answer:

A.

Cakes Pies

Selling price each $ 15.00 $ 10.00

Variable costs $ (7.00) $ (6.00)

Contribution margin per unit $ 8.00 $ 4.00

B.

Cakes Pies

Selling price each $ 15.00 $ 10.00

Variable costs $ (7.00) $ (6.00)


Divide by Divide by Divide by

Hours taken for each 2 2

Contribution margin per hour $ 4.00 $ 2.00

C.

Cakes Pies

Production capacity (hours) 3,200 3,200



Maximum to produce 1,600 1,600

D.

Cakes Pies

Production capacity (hours) 3,200 3,200






$ 12,800 $ 6,400

Total fixed costs $ (1,000) $ (1,000)

Income $ 11,800 $ 5,400

128


Diff: 3

LO: 8-5

EOC: P8-46A



194) When making outsourcing (make-or-buy) decisions, the focus is on how best to use available

resources.

Answer: TRUE

Diff: 1

LO: 8-6

EOC: S8-10



195) Make or buy decisions are often referred to as outsourcing decisions.

Answer: TRUE

Diff: 1

LO: 8-6

EOC: S8-10



196) All other things being equal, if the incremental costs of outsourcing a product exceed the incremental

costs of making a product, it should be outsourced.

Answer: FALSE

Diff: 1

LO: 8-6

EOC: S8-10



197) In most circumstances, all fixed costs can be eliminated by outsourcing a product.

Answer: FALSE

Diff: 1

LO: 8-6

EOC: S8-10



198) An opportunity cost is a past cost.

Answer: FALSE

Diff: 1

LO: 8-6

EOC: S8-11



129


199) Qualitative factors play an important part in make or buy decisions.

Answer: TRUE

Diff: 1

LO: 8-6

EOC: S8-10



200) Outsourcing decisions are best made by comparing the total manufacturing costs, both fixed and

variable, allocated to the product versus the total unit cost charged by the outsourcing company.

Answer: FALSE

Diff: 1

LO: 8-6

EOC: S8-10



201) The maximum outsourcing price a company is willing to pay can be found by solving for the

company's indifference point.

Answer: TRUE

Diff: 1

LO: 8-6

EOC: S8-10



202) Opportunity costs should be factored into outsourcing decisions.

Answer: TRUE

Diff: 1

LO: 8-6

EOC: S8-10




203) Companies often consider outsourcing so they can focus on their core competencies.

Answer: TRUE

Diff: 1

LO: 8-6

EOC: S8-10



130


204) In deciding whether to outsource, managers must consider

A) relevant fixed and variable components.

B) sunk costs.

C) only variable costs.


Answer: A

Diff: 1

LO: 8-6

EOC: S8-10



205) Outsourcing decisions are sometimes referred to as

A) make-or-buy decisions.

B) make decisions.

C) buy decisions.


Answer: A

Diff: 1

LO: 8-6

EOC: S8-10



206) All of the following are outsourcing considerations, except

A) Are any fixed costs avoidable if we outsource?

B) How do our fixed costs compare to the outsourcing cost?

C) What could we do with the freed capacity?

D) How do our variable costs compare to the outsourcing cost?

Answer: B

Diff: 1

LO: 8-6

EOC: S8-10



131


207) If a company decides to outsource and then has freed capacity, the decision on what to do with that

freed capacity would be based upon

A) avoidable fixed costs.

B) opportunity costs.

C) unavoidable fixed costs.


Answer: B

Diff: 2

LO: 8-6

EOC: S8-10




208) Managers should consider which of the following when deciding whether to outsource a product or

service?

A) Quality of the product or service

B) Delivery schedule of the product or service

C) Cost charged for the product or service

D) All of the above

Answer: D

Diff: 2

LO: 8-6

EOC: S8-10



132


209) Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of

producing 40,000 parts is $120,000, which includes fixed costs of $60,000 and variable costs of $60,000.

The company can buy the part from an outside supplier for $3.00 per unit, and avoid 30% of the fixed

costs.

If Harvey Automobiles makes the part, how much will its operating income be?

A) $42,000 greater than if the company bought the part

B) $42,000 less than if the company bought the part

C) $78,000 greater than if the company bought the part

D) $78,000 less than if the company bought the part

Answer: A

Explanation: A)

Outside supplier price $ 3.00

Parts produced

Purchase price $ 120,000


Avoidable percentage of fixed costs

Avoidable fixed costs $ 18,000






Cost if bought $ 162,000

Total cost to produce

Income difference if produced

Diff: 2

LO: 8-6

EOC: E8-25A




133



producing 40,000 parts is $120,000, which includes fixed costs of $60,000 and variable costs of $60,000. By

outsourcing the part, the company can avoid 30% of the fixed costs.

If Harvey Automobiles buys the part, what is the most Harvey Automobiles can spend per unit so that

operating income equals the operating income from making the part?

A) $1.30

B) $1.95

C) $4.05

D) $2.33

Answer: B

Explanation: B)

Cost to Build

Variable Costs $60,000

Fixed Costs 60,000

Total $ 120,000

Less Unavoidable Fixed Cost 42,000

Adjusted Cost of part 78,000 Divided by 40,000 = $ 1.95

Diff: 2

LO: 8-6

EOC: E8-25A




134





costs.

Assume that factory space freed up by purchasing the part from an outside source can be used to

manufacture another product that can be sold for $12,000 profit. If Harvey Automobiles makes the part,

what will its operating income be?




D) $150,000 greater than if the company bought the part

Answer: C

Explanation: C)


Parts produced










Profit from free space if part is

bought





Diff: 2

LO: 8-6

EOC: E8-25A




135


212) Cuyahoga Valley Bicycles uses a standard part in the manufacture of several of its bikes. The cost of



costs.

If Cuyahoga Valley Bicycles makes the part, how much will its operating income be?

A) $90,400 less than if the company bought the part




Answer: D

Explanation: D)


Parts produced













Diff: 2

LO: 8-6

EOC: E8-25A




136



producing 40,000 parts is $138,000, which includes fixed costs of $68,000 and variable costs of $70,000. By

outsourcing the part, the company can avoid 30% of the fixed costs.

If Cuyahoga Valley Bicycles buys the part, what is the most Cuyahoga Valley Bicycles can spend per unit

so that operating income equals the operating income from making the part?

A) $1.33

B) $2.26

C) $4.64

D) $2.33

Answer: B

Explanation: B)

Cost to Build

Variable Costs $70,000

Fixed Costs 68,000

Total $ 138,000

Less Unavoidable Fixed Cost 47,600

Adjusted Cost of part 90,400 Divided by 40,000 = $ 2.26

Diff: 2

LO: 8-6

EOC: E8-25A




137





costs.

Assume that factory space freed up by purchasing the part from an outside source can be used to

manufacture another product that can be sold for $12,000 profit. If Cuyahoga Valley Bicycles makes the

part, what will its operating income be?





Answer: A

Explanation: A)


Parts produced










Profit from free space if part is

bought





Diff: 2

LO: 8-6

EOC: E8-25A




138


215) Cruise Company produces a part that is used in the manufacture of one of its products. The unit

manufacturing costs of this part, assuming a production level of 6,000 units, are as follows:


Direct labor $4.00


Fixed manufacturing overhead $1.00

Total cost $12.00

The fixed overhead costs are unavoidable.

Suri Company has offered to sell 6,000 units of the same part to Cruise Company for $14 per unit.

Assuming the company has no other use for its facilities, what should Cruise Company do?

A) Make the part and save $3 per unit.

B) Make the part and save $6 per unit.

C) Buy from Suri and save $2 per unit.

D) Make the part and save $10 per unit.

Answer: A

Explanation: A)

Cost to produce: Direct Materials $4.00

Direct Labor 4.00

Var. mfg 3.00

Total Cost to build 11.00

Cost to Purchase 14.00

Savings to build $ 3.00

Diff: 2

LO: 8-6

EOC: E8-25A




139





Direct labor $4.00



Total cost $12.00


Assuming no other use for its facilities, what is the highest price per unit that Cruise Company should be

willing to pay for the part?

A) $12

B) $11

C) $8

D) $5

Answer: B

Explanation: B)

Cost to produce: Direct Materials $4.00

Direct Labor 4.00

Var. mfg 3.00

Total Cost to build 11.00

Diff: 2

LO: 8-6

EOC: E8-25A




140





Direct labor $4.00



Total cost $12.00


Assuming Cruise Company can purchase 6,000 units of the part from Suri Company for $14 each, and the

facilities currently used to make the part could be rented out to another manufacturer for $24,000 a year,

what should Cruise Company do?

A) Make the part and save $6.00 per unit.

B) Make the part and save $2.00 per unit.

C) Buy the part and save $2.00 per unit.

D) Buy the part and save $1.00 per unit.

Answer: D

Explanation: D)


Direct labor $ 4.00

Variable manufacturing overhead

Cost to produce $ 11.00

Rental revenue from unused

space $ 24,000

Divide by Divide by

Production level

Additional rental revenue per unit $ 4.00

Price to buy from supplier $ 14.00

Additional rental revenue per unit

Cost per unit if bought $ 10.00


Cost per unit if bought

Savings if buy from supplier

Diff: 2

LO: 8-6

EOC: E8-26A




141





Direct labor 4.00

Variable manufacturing overhead 3.00

Fixed manufacturing overhead 1.00

Total cost $12.00


Assume Cruise Company can purchase 6,000 units of the part from Suri Company for $14.00 each, and

the facilities currently used to make the part could be used to manufacture 6,000 units of another product

that would have an $8 per unit contribution margin. If no additional fixed costs would be incurred, what

should Cruise Company do?

A) Make the new product and buy the part to earn an extra $5.00 per unit contribution to profit.

B) Make the new product and buy the part to earn an extra $6.00 per unit contribution to profit.

C) Continue to make the part to earn an extra $2.00 per unit contribution to profit.

D) Continue to make the part to earn an extra $4.00 per unit contribution to profit.

Answer: A

Explanation: A)


Direct labor $ 4.00

Variable manufacturing overhead


Price to buy from supplier $ 14.00

Contribution margin per unit of new product

Net cost to buy $ 6.00


Net cost to buy

Savings if new product made and part

bought

Diff: 2

LO: 8-6

EOC: E8-26A




142


219) Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following

costs and data relate to the production of Part P40:

Number of parts produced annually 22,000



Total cost to produce $ 106,000

Jackson Corporation can purchase the part from an outside supplier for $4.25 per unit. If they purchase

from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation makes the

part, how much will its operating income be?


B) $20,000 greater than if the company bought the part


D) $32,500 less than if the company bought the part

Answer: C

Explanation: C)

Purchase cost 22,000 × $ 4.25 = $ 93,500

Plus unavoidable fixed cost 40,000 × 50% 20,000

Total Cost to purchase 113,500

Less Cost to build 106,000

Add'l cost to buy the part 7,500

Diff: 2

LO: 8-6

EOC: E8-26A




143









from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation buys the part,

what is the most Jackson Corporation can spend per unit so that operating income is equal to $97,000?

A) $5.32

B) $3.50

C) $1.93

D) $1.00

Answer: B

Explanation: B)

Desired Income $ 97,000

Less Unavoidable Fixed Cost 50% × $40,000 20,000

Equals Maximum cost of part 77,000 / 22,000 units = $ 3.50

Diff: 2

LO: 8-6

EOC: E8-25A




144









from the outside supplier, 50% of the fixed costs would be avoided. Assume that factory space freed up

by purchasing the part from an outside source can be used to manufacture another product that can be

sold for $2,000 profit. If Jackson Corporation makes the part, what will its operating income be?

A) $5,500 less than if the company bought the part

B) $5,500 greater than if the company bought the part

C) 9,500 greater than if the company bought the part


Answer: B

Explanation: B)

Purchase price $ 4.25 × 22,000 = $ 93,500

Unavoidable Fixed Cost 50% × $40,000 20,000

Less lost profit from new product (2,000)

Cost to buy $ 111,500

Current cost to produce 106,000

Difference 5,500

Diff: 2

LO: 8-6

EOC: E8-25A




145


222) Moon Appliance manufactures a variety of appliances which all use Part B89. Currently, Moon

Appliance manufactures Part B89 itself. It has been producing 9,000 units of Part B89 annually. The

annual costs of producing Part B89 at the level of 9,000 units include:


Direct labor $ 8.00



Total cost $ 18.00

All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or

purchased from an outside supplier. Moon Appliance has no alternative use for the manufacturing

facilities. Nadal Parts Company has offered to sell 9,000 units of Part B89 to Moon Appliance for $20.00

per unit. What should Moon Appliance do?

A) Make the part and save $9 per unit.

B) Make the part and save $5 per unit.

C) Buy from Nadal Parts Company and lose $2 per unit.

D) Make the part and save $13 per unit.

Answer: B

Explanation: B)

Purchase part $ 20.00

Add fixed cost 3.00

Total cost 23.00

Less build cost 18.00

Savings $ 5.00

Diff: 2

LO: 8-6

EOC: E8-25A




146






Direct labor $ 8.00



Total cost $ 18.00


purchased from an outside supplier. Moon Appliance has no alternative use for the manufacturing

facilities. Nadal Parts Company has offered to sell 9,000 units of Part B89 to Moon Appliance for $20.00

per unit. What is the highest price per unit that Moon Appliance should be willing to pay for the part?

A) $7

B) $15

C) $11

D) $18

Answer: B

Explanation: B)

Direct Materials $ 3.00

Direct Labor 8.00

Variable MOH 4.00

Total Variable Cost $15.00

Diff: 2

LO: 8-6

EOC: E8-25A




147






Direct labor $ 8.00



Total cost $ 18.00


purchased from an outside supplier. Assuming Moon Appliance can purchase 9,000 units of the part

from the Nadal Parts Company for $20.00 each, and the facilities currently used to make the part could be

rented out to another manufacturer for $18,000 a year, what should Moon Appliance do?

A) Make the part and save $7.00 per unit.

B) Make the part and save $3.00 per unit.

C) Buy the part and save $7.00 per unit.

D) Buy the part and save $3.00 per unit.

Answer: B

Explanation: B)

Direct Materials 3.00

Direct Labor 8.00

Variable Expenses 4.00

Cost to Produce 15.00

Potential income $ 18,000 / 9,000 units = $ 2.00 additional revenue per unit

Price to buy from Supplier 20.00

Less Rental Revenue (2.00)

Net Cost to Buy 18.00

Cost to Produce 15.00

Less Cost to Buy (18.00)

Savings if Buy (3.00)

Diff: 2

LO: 8-6

EOC: E8-25A




148






Direct labor $ 8.00



Total cost $ 18.00


purchased from an outside supplier. Assume Moon Appliance can purchase 9,000 units of the part from

the Nadal Parts Company for $20.00 each, and the facilities currently used to make the part could be used

to manufacture 7,000 units of another product that would have a $6 per unit contribution margin. If no

additional fixed costs would be incurred, what should Moon Appliance do?

A) Make the new product and buy the part to earn an extra $1.00 per unit contribution to profit.

B) Make the new product and buy the part to earn an extra $4.00 per unit contribution to profit.

C) Continue to make the part to earn an extra $3.00 per unit contribution to profit.

D) Continue to make the part to earn an extra $8.00 per unit contribution to profit.

Answer: A

Explanation: A)

Direct Materials $ 3.00

Direct Labor 8.00

Variable MOH 4.00

Total Variable Cost $15.00

Less cost to buy 20.00

Savings (5.00)

Plus CM from new product 6.00

Total add'l contribution to profit $ 1.00

Diff: 3

LO: 8-6

EOC: E8-25A




149


226) Victoria Technologies makes a part used in the manufacture of digital cameras. Management is

considering whether to continue manufacturing the part, or to buy the part from an outside source at a

cost of $24.00 per part. Victoria Technologies needs 60,000 parts per year. The cost of manufacturing

60,000 parts is computed as follows:

Direct materials $ 750,000

Direct labor 600,000

Variable manufacturing overhead 525,000

Fixed manufacturing overhead 750,000

Total manufacturing costs $2,525,0000

If Victoria Technologies buys the part, it would pay $.60 per unit to transport the parts to its

manufacturing plant. Purchasing the part from an outside source would enable the company to avoid

50% of fixed manufacturing overhead costs. Victoria Technologies' factory space freed up by purchasing

the part from an outside supplier could be used to manufacture another product with a contribution

margin of $70,000.

Prepare an analysis to show which alternative makes the best use of Victoria Technologies' factory space:

1) Make the part

2) Buy the part and leave facilities idle

3) Buy the part and use facilities to make another product

150


Answer:

Transport cost per unit (if bought) $ 0.60

Number of parts needed

Total variable transportation $ 36,000



Avoidable fixed manufacturing overhead $ 375,000


Avoidable fixed manufacturing overhead

Unavoidable fixed manufacturing overhead $ 375,000



Total purchase price

Total cost to buy parts and leave facilities idle



Total purchase price $ 1,440,000

Contribution margin provided by alternate use

of space

Total cost to buy parts and use facilities to make

another product

Total manufacturing costs to make parts

#3: Victoria Technologies should buy the part and use facilities to make another product since their total

costs will be $1,781,000 under this option versus total costs of $2,625,000 to make the part.

Diff: 3

LO: 8-6

EOC: P8-47A




151


227) Define the term constraints and give an example. What product should be made first when resource

constraints exist?

Answer: Constraints are the limited resources that restrict production or sale of a product, and they vary

from company to company. For a manufacturer, production may be constrained by labor hours, machine

hours, or available materials. For a merchandiser, the primary constraint is cubic feet of display space.

When resource constraints exist, the company should focus on selling the products with the highest

contribution margin per unit of the constraint.

Diff: 2

LO: 8-6

EOC: P8-47A



228) Patty's Mailbox Company produces a standard mailbox with variable manufacturing costs of $18 per

unit. The selling price of the standard mailbox is $25 per unit. The fixed manufacturing overhead cost is

$67,000. A normal production run includes 100,000 units. Patty's Mailbox Company has discovered an

additional process to change the standard mailbox into a deluxe mailbox. Additional costs are estimated

at $4 per unit. The deluxe mailbox would sell for $35. Additional fixed manufacturing overhead cost of

$23,000 would be incurred if the deluxe mailbox is produced. There would be no change in the number of

units produced.

Make an analysis to determine if Patty's Mailbox Company should continue producing and selling the

standard mailbox or change the standard mailbox into a deluxe mailbox.

152


Answer:

Standard mailbox:

Standard mailbox selling price $ 25.00


Revenue $ 2,500,000

Standard mailbox variable costs $ 18.00


Variable costs $ 1,800,000

Revenue $ 2,500,000

Variable costs $(1,800,000)

Fixed manufacturing overhead $ (67,000)

Operating income for Standard mailbox $ 633,000

Deluxe mailbox:

Deluxe mailbox selling price $ 35.00


Revenue $ 3,500,000

Standard mailbox variable costs $ 18.00

Deluxe mailbox additional costs $ 4.00

Total costs $ 22.00


Variable costs $ 2,200,000




Revenue $ 3,500,000

Variable costs $(2,200,000)

Fixed costs $ (90,000)

Operating income for Deluxe mailbox $ 1,210,000

Operating income for Deluxe mailbox $ 1,210,000

Operating income for Standard mailbox $ (633,000)

Increase in income $ 577,000

Change the standard mailbox into the deluxe mailbox for $577,000 increase in operating income.

Diff: 2

LO: 8-6

EOC: P8-47A



153


229) Sunk costs should be considered when deciding whether to sell a product as is or process it further.

Answer: FALSE

Diff: 2

LO: 8-7

EOC: S8-13




230) A decision must be made at the point in a process where a product can either be sold as is or

processed further.

Answer: TRUE

Diff: 2

LO: 8-7

EOC: S8-13



231) A sunk cost is a past cost that can be changed regardless of which future action is taken.

Answer: FALSE

Diff: 1

LO: 8-7

EOC: S8-13




232) When the extra revenue from processing further is less than the extra cost of processing further, the

best decision would be to

A) process further.

B) develop a new product.

C) not process further.

D) start over.

Answer: C

Diff: 1

LO: 8-7

EOC: E8-28A



154


233) The benefit foregone by choosing a particular alternative course of action is referred to as a(n)

A) sunk cost.

B) opportunity cost.

C) variable cost.

D) incremental cost.

Answer: B

Diff: 1

LO: 8-7

EOC: E8-28A




234) In making the decision whether to sell a product as is or process the product further, the expected

income from selling the product as is may be defined as which of the following?

A) The opportunity cost of processing the product further

B) A sunk cost of processing the product further

C) The opportunity cost of selling the product as is

D) A limiting factor in processing the product further

Answer: A

Diff: 2

LO: 8-7

EOC: E8-28A



235) In a sell or process further decision, the company should process further if

A) the extra cost of processing further is the same as the extra revenue.

B) the extra revenue from processing further is less than the extra cost.

C) the extra cost of processing further is greater than the extra revenue.

D) the extra cost of processing further is less than the extra revenue.

Answer: D

Diff: 2

LO: 8-7

EOC: E8-28A



155


236) Which of the following would be a consideration for "sell as is or process further" decisions?

A) Revenue generated if sold "as is"

B) Revenue generated if "further processed"

C) Costs involved in further processing

D) All of the above

Answer: D

Diff: 2

LO: 8-7

EOC: S8-13




237) Bear Country Granola is considering selling premium granola. It already sells regular for

$6.75/pound and would sell premium granola for $9.50/pound. The cost for organic grains for the

premium granola would be $1.15/pound. A cost that would not be considered in this decision would be

A) the extra revenue generated by selling premium.

B) the cost of refining the regular granola.

C) the cost of further processing the regular granola into premium granola.

D) any of the above would be considered.

Answer: B

Diff: 2

LO: 8-7

EOC: S8-13




238) Four Guys Company has in its inventory 5,000 damaged televisions that cost $50,000. The televisions

can be sold in their present condition for $32,000, or repaired at a cost of $43,000 and sold for $76,000.

What is the opportunity cost of selling the televisions in their present condition?

A) $82,000

B) $119,000

C) $33,000

D) $75,000

Answer: C

Explanation: C)

Selling price after repair $ 76,000

Cost to repair

Opportunity cost to sell in current condition

Diff: 2

LO: 8-7

EOC: P8-48A




156


239) Paula has the following information to evaluate–her current salary of $55,000 versus total revenues

of $120,000 and expenses of $75,000 from starting a new business. How much is the opportunity cost

associated with starting the new business?

A) $55,000

B) $120,000

C) $45,000

D) $75,000

Answer: A

Diff: 2

LO: 8-7

EOC: P8-48A



240) Zach has the following information to evaluate–his current salary of $75,000 versus total revenues of

$100,000 and expenses of $67,000 from starting a new business. How much is the opportunity cost

associated with staying at his current job?

A) $75,000

B) $(8,000)

C) $33,000

D) $167,000

Answer: C

Explanation: C)

Revenues $ 100,000

Expenses 67,000

Potential income $ 33,000

Diff: 2

LO: 8-7

EOC: P8-48A



157


241) Brittany Furniture manufactures two products, pillows and cushions, from a joint process. Pillows

are allocated $7,000 of the total joint costs of $25,000. There are 2,500 pillows produced and 2,500 cushions

produced each year. Pillows can be sold at the split-off point for $12 per unit, or they can be processed

further into a deluxe pillow for additional processing costs of $8,000 and sold for $16 for each deluxe

pillow. If the pillows are processed further and made into deluxe pillows, the effect on operating income

would be:

A) $30,000 net increase in operating income.

B) $2,000 net decrease in operating income.

C) $2,000 net increase in operating income.

D) $30,000 net decrease in operating income.

Answer: C

Explanation: C)

Selling Price × Units $ 16.00 × 2,500 = $40,000

less Additional cost 8,000

Profit 32,000

Less split-off point sales $ 12 × 2,500 = 30,000

Net increase $2,000

Diff: 3

LO: 8-7

EOC: P8-48A




242) Upscale Dishwear manufactures two products, salad plates and platters, from a joint process. Salad

plates are allocated $7,500 of the total joint costs of $25,000. There are 3,000 salad plates produced and

3,000 platters produced each year. Salad plates can be sold at the split-off point for $12 per unit, or they

can be hand painted for additional processing costs of $8,400 and sold for $16 for each deluxe salad plate.

If the salad plates are processed further and made into deluxe plates, the effect on operating income

would be:

A) $36,000 net increase in operating income.

B) $3,600 net decrease in operating income.

C) $36,000 net decrease in operating income.

D) $3,600 net increase in operating income.

Answer: D

Explanation: D)

Selling Price × Units $ 16.00 × 3000 = $48,000

less Additional cost 8,400

Profit 39,600

Less split-off point sales $ 12 × 3,000 = 36,000

Net increase $3,600

Diff: 3

LO: 8-7

EOC: P8-48A



158


243) A joint production process at Happy Days Farms results in two products, blackberry syrup and

blackberry jam. The following cost and activity data relate to these two products:

Blackberry syrup Blackberry jam

Joint costs allocated $ 10,000 $ 12,000

Number of units produced from joint process 1,500 1,500

Selling price at split-off point $ 2.50 $ 1.75

Selling price after processing further $ 5.00 $ 2.00

Cost of processing further $ 2,000 $ 2,000

Blackberry syrup can be sold as-is (at the split-off point) for $2.50 per unit, or it can be processed further

into a specialty blackberry juice and then sold for $5.00 per unit. If blackberry syrup is processed further

into the specialty blackberry juice, what would be the overall effect on operating income?

A) $1,750 net increase in operating income

B) $1,750 net decrease in operating income

C) $3,750 net increase in operating income

D) $3,750 net decrease in operating income

Answer: A

Explanation: A)

Selling Price after further processing 1500 × $ 5.00 = $ 7,500

Additional Processing cost 2,000

Net Income 5,500

Less Income if sold at split-off point 1,500 × $ 2.50 3,750

Equals increase in Operating Income $ 1,750

Diff: 3

LO: 8-7

EOC: P8-48A



159


244) A joint production process at Sunny Brooks Dairy results in two products, cherry jelly and cherry

jam. The following cost and activity data relate to these two products:

Cherry jelly Cherry jam

Joint costs allocated $ 10,000 $ 12,000

Number of units produced from joint process 2,000 2,000

Selling price at split-off point $ 2.50 $ 1.75

Selling price after processing further $ 5.00 $ 2.00

Cost of processing further $ 2,200 $ 2,000

Cherry jelly can be sold as-is (at the split-off point) for $2.50 per unit, or it can be processed further into a

specialty cherry smoothie and then sold for $5.00 per unit. If cherry jelly is processed further into the

specialty cherry smoothie, what would be the overall effect on operating income?

A) $2,800 net decrease in operating income

B) $5,000 net decrease in operating income

C) $5,000 net increase in operating income

D) $2,800 net increase in operating income

Answer: D

Explanation: D)

Selling Price after further processing 2000 × $ 5.00 = $ 10,000

Additional Processing cost 2,200

Net Income 7,800

Less Income if sold at split-off point 2,000 × $ 2.50 5,000

Equals increase in Operating Income $ 2,800

Diff: 3

LO: 8-7

EOC: P8-48A



160


245) Stoog Enterprises manufactures ceiling fans that normally sell for $90 each. There are 300 defective

fans in inventory, which cost $55 each to manufacture. These defective units can be sold as is for $20 each,

or they can be processed further for a cost of $40 each and then sold for the normal selling price. Stoog

Enterprises would be better off by a

A) $21,000 net increase in operating income if the ceiling fans are repaired.

B) $9,000 net increase in operating income if the ceiling fans are sold as is.

C) $9,000 net increase in operating income if the ceiling fans are repaired.

D) $21,000 net increase in operating income if the ceiling fans are sold as is.

Answer: C

Explanation: C)

Normal selling price $ 90.00

Sold "as is" price per unit

Incremental revenue per unit $ 70.00

Cost to repair each unit

Incremental income per unit from further processing $ 30.00

Number of defective units

Total incremental income from further processing

Diff: 3

LO: 8-7

EOC: P8-48A



246) Longview Baskets has in its inventory 2,000 damaged baskets that cost $20,000. The baskets can be

sold in their present condition for $12,000, or repaired at a cost of $13,000 and sold for $35,000. What is

the opportunity cost of selling the baskets in their present condition?

A) $32,000

B) $25,000

C) $48,000

D) $22,000

Answer: D

Explanation: D)

Selling price after repair $ 35,000

Cost to repair

Opportunity cost to sell in current

condition

Diff: 2

LO: 8-7

EOC: P8-48A



161


247) Molly has the following information to evaluate–her current salary of $57,000 versus total revenues


associated with starting the new business?

A) $62,000

B) $15,000

C) $57,000

D) $47,000

Answer: C

Diff: 2

LO: 8-7

EOC: P8-48A




248) Jackie has the following information to evaluate–her current salary of $74,000 versus total revenues


associated with staying at her current job?

A) $35,000

B) $165,000

C) $74,000

D) $(9,000)

Answer: A

Explanation: A)

Revenues from the new business $ 100,000

Costs to start a business

Opportunity cost of staying at current job

Diff: 2

LO: 8-7

EOC: P8-48A




162


249) On the line in front of each statement, enter the letter corresponding to the term that best fits that

statement. An item may be used more than once or not at all.

A. relevant costs E. opportunity costs

B. sunk costs F. full cost of product or service

C. constraint G. sales mix

D. contribution margin H. variable costing

____ Costs that were incurred in the past and cannot be changed

____ Benefits foregone by choosing a particular alternative course of action

____ Expected future costs that differs among alternatives

____ Costs of developing, producing and delivering a product or service

____ A factor that restricts production or sales of a product

Answer: B, E, A, F, C

Diff: 2

LO: 8-7

EOC: E8-28A




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