10: (182) Marginal Analysis

1: (16) Short-Run Profit Maximization

2: (49) Decision Making -- Applying Marginal Analysis
3: (40) Decision Making -- Special Orders
4: (35) Decision Making -- Make or Buy
5: (19) Decision Making -- Sell As Is or Process Further
6: (23) Decision Making -- Keep or Drop

1: (16) Short-Run Profit Maximization

Question: 1 Daily costs for a manufacturer include $1,000 of fixed costs; total variable costs are
shown below.

Unit Output 10 11 12 13 14 15

Cost $125 $250 $400 $525 $700 $825

The average total cost at an output level of 11 units is

A. $215.91

B. $113.64

C. $125.00

D. $250.00

Fact Pattern: A company produced the following data (rounded) on its product:
Unit Cost

Number of Marginal Marginal

Units Produced Fixed Variable Total Cost Revenue

1 $100 $85 $185 $ 85 $90

2 50 70 120 55 90
 3 33 65 98 55 90

4 25 67 92 73 90

5 20 75 95 107 90

Question: 2 If two units of product were produced and sold, the total contribution margin would be

A. $40

B. $50

C. $70

D. $25

Question: 3 If a firm currently producing 500 units of output incurs total fixed costs of $10,000 and
total variable costs of $15,000, the average total cost per unit is

A. $20

B. $50

C. $25

D. $30

Question: 4 Regardless of output, a firm has $4,000 a year in total fixed costs. This same firm has
an average variable cost of $3 while producing 1,000 units of output. If the firm decides
to produce 1,000 units, what will be its average total cost?

A. $3.00

B. $4.00

C. $7.00

D. $1.00
Fact Pattern:
Total Units Average Average Average
of Product Fixed Cost Variable Cost Total Cost
6 $15.00 $25.00 $40.00
7 12.86 24.00 36.86
8 11.25 23.50 34.75
9 10.00 23.75 33.75

Question: 5 The marginal cost of producing the ninth unit is

A. $23.75

B. $23.50

C. $25.75

D. $33.75

Question: 6 The sum of the average fixed costs and the average variable costs for a given output is
known as

A. Total cost.

B. Long-run average cost.

C. Average total cost.

D. Average product.

Question: 7 The change in total product resulting from the use of one unit more of the variable
factor is known as

A. Marginal product.

B. Marginal cost.

C. The point of diminishing marginal productivity.

D. The point of diminishing average productivity.

Question: 8 A small delivery company received an order that requires nine deliveries lasting two
hours each on the same day. The company owns two vans that together can make
eight trips per day. The company can rent a van on a daily eight-hour basis for $72,
and the fuel cost is $20 per trip. The company has several van drivers, each of whom
earns $30,000 annually and is expected to make 1,000 deliveries each year. The
marginal cost of the ninth delivery is

A. $38

B. $122

C. $92

D. $28

Question: 9 A firm produces only 5 units of output. If total variable cost is $400 and total fixed cost
is $200, then

A. Marginal cost is $120.

B. Average fixed cost is $200.

C. Average total cost is $600.

D. Average variable cost is $80.

Question: 10 An organization’s sales revenue is expected to be $72,600, a 10% increase over last
year. For the same period, total fixed costs of $22,000 are expected to be the same as
last year. If the number of units sold is expected to increase by 1,100, the marginal
revenue per unit will be

A. $20

B. $46

C. $6

D. $4
Question: 11 A fuel company can sell 8 units of product at a selling price of $450. However, at a
selling price of $445 the company can sell 9 units. What is the marginal revenue that is
derived from selling the 9th unit?

A. $445

B. $405

C. $(5)

D. $4,005

Fact Pattern:
Total Units Average Average Average
of Product Fixed Cost Variable Cost Total Cost
6 $15.00 $25.00 $40.00
7 12.86 24.00 36.86
8 11.25 23.50 34.75
9 10.00 23.75 33.75

Question: 12 The total cost of producing seven units is

A. $258.02

B. $90.02

C. $168.00

D. $280.00

Question: 13 At the current output level the price is $10, the average variable cost is $6, the average
total cost is $10, and marginal cost is $8. To maximize profits, a consultant would
recommend that the firm should

A. Not change production.

B. Shut down.

C. Decrease production.

D. Increase production.
Question: 14When a firm produces 10,000 units of output, its total variable cost is equal to $50,000. Also, it
experiences average fixed costs of $3 per unit. What are the total costs for producing 10,000 units?

A. $80,000

B. $50,003

C. $50,000

D. $30,000

Fact Pattern: A company produced the following data (rounded) on its product:
Unit Cost

Number of Marginal Marginal

Units Produced Fixed Variable Total Cost Revenue

1 $100 $85 $185 $ 85 $90

2 50 70 120 55 90

3 33 65 98 55 90

4 25 67 92 73 90

5 20 75 95 107 90

Question: 15 How many units should be produced?

A. 3 units.

B. 4 units.

C. 2 units.

D. 5 units.

Question: 16The output and cost information for a firm is presented below.
 Output Total Variable Cost Total Cost

0 $ 0 $100

1 150 250

2 260 360

3 350 450
The marginal cost of the second unit of output is

A. $150

B. $110

C. $100

D. $180
2: (49) Decision Making -- Applying Marginal Analysis

Question: 1 A company plans to add a new product that would affect its indirect labor costs in two
ways. First, the production manager from an existing product would serve as manager
of the new product. Her current assistant manager would be promoted and assume her
previous position. Second, the existing maintenance staff would provide facility and
machine maintenance that would require 30 hours of labor each month, but no
increase in their total weekly hours worked. The company’s production managers earn
$60,000 annually, assistant production managers are paid $50,000 each year, and
maintenance employees earn $20 per hour. No additional hiring is planned. The annual
relevant indirect labor costs for adding the new product would total

A. $10,000

B. $67,200

C. $7,200

D. $60,600

Question: 2 A company manufactures classroom desk chairs and tables. In the present market, the
company can sell as many units of product as it can manufacture, but it is constrained
by its availability of machine-hour capacity. Sales price and cost information for each
unit of product are shown below.

Desk Chairs Tables

Sales price $75 $180

Variable costs 60 155

Contribution margin $15 $ 25

Producing a desk chair requires 1 1/2 machine hours; producing a table requires
2 1/2 machine hours. Which product, if any, is most profitable given the machine-hour
constraints?

A. There is not enough data to identify the most profitable product.

B. Tables.

C. Both products are equally profitable.

D. Desk chairs.
Fact Pattern: Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000. The
plant will provide the company’s power needs for the next 20 years. Hermo will use only 60% of the
power output annually. At this level of capacity, Hermo’s annual operating costs will amount to
$1,800,000, of which 80% are fixed. Quigley Company currently purchases its power from MP Electric at
an annual cost of $1,200,000. Hermo could supply this power, thus increasing output of the plant to 90%
of capacity. This would reduce the estimated life of the plant to 14 years.

Question: 3 The maximum amount Quigley would be willing to pay Hermo annually for the power is

A. $600,000

B. $1,050,000

C. Some amount other than those given.

D. $1,200,000

Fact Pattern: Lazar Industries produces two products, crates and trunks. Per unit selling prices, costs,
and resource utilization for these products are as follows.
Crates Trunks

Selling price $20 $30

Direct material costs 5 5

Direct labor costs 8 10

Variable overhead costs 3 5

Variable selling costs 1 2

Machine hours per unit 2 4
Production of crates and trunks involves joint processes and use of the same facilities. The total fixed
factory overhead cost is $2,000,000, and total fixed selling and administrative costs are $840,000.
Production and sales are scheduled for 500,000 crates and 700,000 trunks. Lazar has a normal capacity
to produce a total of 2,000,000 units in any combination of crates and trunks, and it maintains no direct
materials, work-in-process, or finished goods inventory.

Question: 4 Due to plant renovations, Lazar will be limited to 1,000,000 machine hours. What is the
maximum amount of contribution margin Lazar can generate during the renovation
period?

A. $1,500,000

B. $3,000,000
 C. $2,000,000

D. $7,000,000

Question: 5 An auto dealer employs 45 sales personnel to market its line of luxury automobiles.
The average car sells for $23,000, and a 6% commission is paid to the salesperson.
The auto dealer is considering a change to a commission arrangement that would pay
each salesperson a salary of $2,000 per month plus a commission of 2% of the sales
made by that salesperson. The amount of total monthly car sales at which the auto
dealer would be indifferent as to which plan to select is

A. $2,250,000

B. $1,500,000

C. $3,000,000

D. $1,250,000

Question: 6 The explicit cost of debt financing is the interest expense. The implicit cost(s) of debt
financing is (are) the

A. Increases in the cost of debt and equity as the debt-to-equity ratio increases.

B. Decrease in the weighted-average cost of capital as the debt-to-equity ratio increases.

C. Increase in the cost of equity as the debt-to-equity ratio decreases.

D. Increase in the cost of debt as the debt-to-equity ratio increases.

Question: 7 A company has decided to discontinue a product produced on a machine purchased 4

years ago at a cost of $70,000. The machine has a current book value of $30,000. Due
to technologically improved machinery now available in the marketplace the existing
machine has no current salvage value. The company is reviewing the various aspects
involved in the production of a new product. The engineering staff advised that the
existing machine can be used to produce the new product. Other costs involved in the
production of the new product will be materials of $20,000 and labor priced at $5,000.

Ignoring income taxes, the costs relevant to the decision to produce or not to produce
the new product would be
 A. $30,000

B. $55,000

C. $95,000

D. $25,000

Question: 8 Following are the operating results of Segment A and Segment B.

Segment A Segment B Total

Sales $10,000 $15,000 $25,000

Variable costs of goods sold (4,000) (8,500) (12,500)

Fixed costs of goods sold (1,500) (2,500) (4,000)

Gross margin $ 4,500 $ 4,000 $ 8,500

Variable selling and administrative (2,000) (3,000) (5,000)

Fixed selling and administrative (1,500) (1,500) (3,000)

Operating income (loss) $ 1,000 $ (500) $ 500

Fixed costs of goods sold are allocated to each segment based on the number of
employees. Fixed selling and administrative expenses are allocated equally. If
Segment B is eliminated, $1,500 of fixed costs of goods sold would be eliminated.
Assuming Segment B is closed, the effect on operating income would be a(n)

A. Increase of $2,000.

B. Increase of $500.

C. Decrease of $2,500.

D. Decrease of $2,000.

Fact Pattern: Jennilyn Jasper, whose annual salary as a flight instructor is $40,000, has just inherited
$100,000 after taxes. She is considering quitting her job and opening a day-care center. Certificates of
deposit at the local bank are currently paying 6%. Jennilyn estimates that she will have to pay $120,000
in salaries to employees per year, $20,000 to rent a building, $9,000 each for furniture and supplies,
$80,000 for insurance, and $7,000 for utilities.
Question: 9 The two most important cost figures Jennilyn must consider in projecting profitability for
her day-care center are, respectively, the explicit and implicit costs of

A. $100,000 and $40,000.

B. $100,000 and $46,000.

C. $245,000 and $46,000.

D. $245,000 and $140,000.

Fact Pattern: Cervine Corporation makes two types of motors for use in various products. Operating
data and unit cost information for its products are presented below.
Product A Product B

Annual unit capacity 10,000 20,000

Annual unit demand 10,000 20,000

Selling price $100 $80
Variable manufacturing cost (53) (45)
Fixed manufacturing cost (10) (10)
Variable selling & administrative (10) (11)
Fixed selling & administrative (5) (4)
Fixed other administrative (2) (0)

Unit operating profit $ 20 $10

Machine hours per unit 2.0 1.5

Cervine has 40,000 productive machine hours available.

Question: 10What is the maximum total contribution margin that Cervine can generate in the coming year?

A. $665,000

B. $980,000

C. $690,000

D. $850,000
Question: 11A car rental company uses a significant number of vehicles in its operations. The management has to
decide if it would be more advantageous to acquire new vehicles utilizing a financial lease as opposed to ownership.
Which one of the following factors would not be relevant to the decision?

A. The operating cost of the vehicles.

B. The tax depreciation schedule related to the vehicles.

C. The residual value of the vehicles.

D. The availability of credit to the company.

Question: 12 In differential cost analysis, which one of the following best fits the description of a
sunk cost?

A. Purchasing department costs incurred in acquiring material.

B. Direct materials required in the manufacture of a table.

C. Cost of the forklift driver to move the material to the manufacturing floor.

D. Cost of a large crane used to move materials.

Question: 13 A company produces a component that is popular in many refrigeration systems. Data
on three of the five different models of this component are as follows:

Model

A B C

Units of production 5,000 6,000 3,000

Manufacturing costs:

Variable direct costs $10 $24 $20

Variable overhead 5 10 15

Fixed overhead 11 20 17

Total manufacturing costs $26 $54 $52

Cost if purchased $21 $42 $39

The company applies variable overhead on the basis of machine hours at the rate of
$2.50 per hour. Models A and B are manufactured in the Freezer Department, which
 has a capacity of 28,000 machine processing hours. Which one of the following options
should be recommended to the company’s management?

A. The Freezer Department’s manufacturing plan should include 2,000 units of Model
A and 6,000 units of Model B.

B. The Freezer Department’s manufacturing plan should include 5,000 units of Model
A and 4,500 units of Model B.

C. Manufacture all three products in the quantities required.

D. Purchase all three products in the quantities required.

Fact Pattern: Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready
for introduction. However, plant capacity is limited, and only one product can be introduced at present.
Therefore, Gleason has conducted a market study at a cost of $26,000, to determine which product will
be more profitable. The results of the study follow.
Sales of Desserts at Sales of Rolls at
$1.80/unit $1.20/unit

Volume Probability Volume Probability

250,000 .30 200,000 .20

300,000 .40 250,000 .50

350,000 .20 300,000 .20

400,000 .10 350,000 .10

The costs associated with the two products have been estimated by Gleason’s cost accounting
department and are as follows:
Dessert Rolls

Ingredients per unit $ .40 $ .25

Direct labor per unit .35 .30

Variable overhead per unit .40 .20

Production tooling* 48,000 25,000

Advertising 30,000 20,000

*Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed
asset.
Question: 14The cost incurred by Gleason for the market study is a(n)

A. Prime cost.

B. Opportunity cost.

C. Sunk cost.

D. Incremental cost.

Question: 15 A manufacturer occasionally has capacity problems in its metal shaping division, where
the chief cost driver is machine hours. In evaluating the attractiveness of its individual
products for decision-making purposes, which measurement tool should the firm
select?
If machine hours do not If machine hours
constrain the number constrain the number
of units to be produced of units to be produced

A. Contribution margin Contribution margin ratio

B. Contribution margin Contribution margin per machine hour

C. Gross profit Contribution margin

D. Contribution margin per machine hour Contribution margin

Fact Pattern: Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000. The
plant will provide the company’s power needs for the next 20 years. Hermo will use only 60% of the
power output annually. At this level of capacity, Hermo’s annual operating costs will amount to
$1,800,000, of which 80% are fixed. Quigley Company currently purchases its power from MP Electric at
an annual cost of $1,200,000. Hermo could supply this power, thus increasing output of the plant to 90%
of capacity. This would reduce the estimated life of the plant to 14 years.

Question: 16If Hermo decides to supply power to Quigley, it wants to be compensated for the decrease in the life
of the plant and the appropriate variable costs. Hermo has decided that the charge for the decreased life should be
based on the original cost of the plant calculated on a straight-line basis. The minimum annual amount that Hermo
would charge Quigley would be

A. $450,000

B. $630,000

C. Some amount other than those given.

 D. $990,000

Question: 17 When a multiproduct plant operates at full capacity, quite often decisions must be
made as to which products to emphasize. These decisions are frequently made with a
short-run focus. In making such decisions, managers should select products with the
highest

A. Sales price per unit.

B. Individual unit contribution margin.

C. Sales volume potential.

D. Contribution margin per unit of the constraining resource.

Question: 18 The definition of economic cost is

A. The sum of all explicit and implicit costs of the business firm.

B. All the dollar costs employers pay for all inputs purchased.

C. The difference between all implicit and explicit costs of the business firm.

D. The opportunity cost of all inputs minus the dollar cost of those inputs.

Fact Pattern: Lazar Industries produces two products, crates and trunks. Per unit selling prices, costs,
and resource utilization for these products are as follows.
Crates Trunks

Selling price $20 $30

Direct material costs 5 5

Direct labor costs 8 10

Variable overhead costs 3 5

Variable selling costs 1 2

Machine hours per unit 2 4
Production of crates and trunks involves joint processes and use of the same facilities. The total fixed
factory overhead cost is $2,000,000, and total fixed selling and administrative costs are $840,000.
Production and sales are scheduled for 500,000 crates and 700,000 trunks. Lazar has a normal capacity
to produce a total of 2,000,000 units in any combination of crates and trunks, and it maintains no direct
materials, work-in-process, or finished goods inventory.

Question: 19Lazar can reduce direct material costs for crates by 50% per unit, with no change in direct labor
costs. However, it would increase machine-hour production time by 1.5 hours per unit. For crates, variable overhead
costs are allocated based on machine hours. What would be the effect on the total contribution margin if this change
was implemented?

A. $300,000 increase.

B. $1,250,000 increase.

C. $250,000 decrease.

D. $125,000 increase.

Fact Pattern: Jennilyn Jasper, whose annual salary as a flight instructor is $40,000, has just inherited
$100,000 after taxes. She is considering quitting her job and opening a day-care center. Certificates of
deposit at the local bank are currently paying 6%. Jennilyn estimates that she will have to pay $120,000
in salaries to employees per year, $20,000 to rent a building, $9,000 each for furniture and supplies,
$80,000 for insurance, and $7,000 for utilities.

Question: 20 If Jennilyn’s projections are accurate and she earns $250,000 in revenue from the
business, she will have incurred

A. Both an accounting profit and an economic profit.

B. Neither an accounting nor an economic profit.

C. An accounting profit but not an economic profit.

D. An economic profit but not an accounting profit.

Question: 21 A major difference between economic profit and accounting profit is that economic
profit

A. Reduces profits by associated cost of capital.

B. Adjusts accounting profit by depreciation.

C. Allows for more accurate expense accruals.

 D. Minimizes the impact of accounting estimates.

‘
Fact Pattern: A company wants to open a new store in one of three nearby shopping malls. In Mall A,
the rent will be $300,000 per year. In Mall B, the rent will be 4% of gross revenues. In Mall C, the rent will
be $150,000 per year plus 3% of gross revenues. Assume that revenues and all other elements under
consideration are the same for all three malls.

Question: 22 Which mall should the company choose if revenues are expected to be $6,000,000 per
year?

A. Mall C.

B. The company will be indifferent between two of the choices.

C. Mall A.

D. Mall B.

Question: 23 A company makes fine glassware that is sold in high-end retail stores. Sales tend to be
seasonal, with peaks occurring during winter holidays and the spring wedding season.
The company’s output is constrained by the scarcity of skilled labor to create designs
on the bowls and vases. The company is preparing the annual budget and has
gathered the following data:

Bowls Vases

Average selling price $300 $ 250

Labor hours per unit 3.5 2.8

Cost per unit less labor $183 $150.40

Annual sales forecast in units 800 1,000

Available labor hours = 3,600
Labor rate per hour = $22
The most profitable allocation of the scarce resource next year would be to
manufacture

A. 400 bowls and 500 vases.

B. 228 bowls and 1,000 vases.

 C. 800 bowls and 285 vases.

D. 800 bowls and 1,000 vases.

Fact Pattern: Geary Manufacturing has assembled the data appearing in the next column pertaining to
two products. Past experience has shown that the unavoidable fixed manufacturing overhead included in
the cost per machine hour averages $10. Geary has a policy of filling all sales orders, even if it means
purchasing units from outside suppliers. Total machine capacity is 50,000 hours.
Electric
Blender Mixer

Direct materials $6 $11

Direct labor 4 9
Manufacturing overhead
at $16 per hour 16 32
Cost if purchased from an
outside supplier 20 38
Annual demand (units) 20,000 28,000

Question: 24With all other things constant, if Geary Manufacturing is able to reduce the direct materials for an
electric mixer to $6 per unit, the company should

A. Produce 25,000 electric mixers and purchase all other units as needed.

B. Produce 20,000 blenders and purchase all other units as needed.

C. Produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed.

D. Purchase all units as needed.

Question: 25 In a management decision process, the cost measurement of the benefits sacrificed
due to selecting an alternative use of resources is most often referred to as a(n)

A. Sunk cost.

B. Differential cost.

C. Relevant cost.
 D. Opportunity cost.

Fact Pattern: A company wants to open a new store in one of three nearby shopping malls. In Mall A,
the rent will be $300,000 per year. In Mall B, the rent will be 4% of gross revenues. In Mall C, the rent will
be $150,000 per year plus 3% of gross revenues. Assume that revenues and all other elements under
consideration are the same for all three malls.

Question: 26 What is the maximum level of revenues at which Mall C will be the most desirable of
the three options?

A. $149,999

B. Mall C will never be the most desirable choice.

C. $5,000,000

D. $15,000,000

Question: 27 A corporation’s net income as presented on its income statement is usually

A. More than its economic profits because opportunity costs are not considered in
calculating net income.

B. Equal to its economic profits.

C. Less than its economic profits because accountants include labor costs, while
economists exclude labor costs.

D. More than its economic profits because economists do not consider interest payments
to be costs.

Question: 28 Companies A, B, and C had the following results for last year as reported on financial
statements prepared in conformity with accounting principles generally accepted in the
United States:

A B C

Sales $100,000 $200,000 $400,000

Cost of goods sold 60,000 120,000 200,000

 Gross profit $ 40,000 $ 80,000 $200,000

Other expenses 10,000 20,000 80,000

Net income $ 30,000 $ 60,000 $120,000

Equity $500,000 $300,000 $900,000

Assets are equal to equity. The company has no long-term debt outstanding. The cost
of internally-generated equity capital is 12%. Which company had the highest
economic profit?

A. Company C.

B. Company A.

C. Cannot be determined from information given.

D. Company B.

Fact Pattern: Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready
for introduction. However, plant capacity is limited, and only one product can be introduced at present.
Therefore, Gleason has conducted a market study at a cost of $26,000, to determine which product will
be more profitable. The results of the study follow.
Sales of Desserts at Sales of Rolls at
$1.80/unit $1.20/unit

Volume Probability Volume Probability

250,000 .30 200,000 .20

300,000 .40 250,000 .50

350,000 .20 300,000 .20

400,000 .10 350,000 .10

The costs associated with the two products have been estimated by Gleason’s cost accounting
department and are as follows:
Dessert Rolls

Ingredients per unit $ .40 $ .25

Direct labor per unit .35 .30

Variable overhead per unit .40 .20

Production tooling* 48,000 25,000

 Advertising 30,000 20,000
*Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed
asset

Question: 29 Assuming that Gleason elects to produce the frozen dessert, the profit that would have
been earned on the breakfast rolls is a(n)

A. Opportunity cost.

B. Deferrable cost.

C. Sunk cost.

D. Avoidable cost.

Question: 30During the previous year, a firm produced 200,000 pogo sticks and sold them all for $10 each. The
explicit costs of production were $700,000, and the implicit costs of production were $200,000. The firm had

A. An accounting profit of $1.3 million and an economic profit of $1.5 million.

B. An accounting profit of $1.3 million and an economic profit of $1.1 million.

C. An accounting profit of $1.3 million and an economic profit of $1.3 million.

D. An accounting profit of $1.1 million and an economic profit of $0.

Question: 31 A company produces valves for the plumbing industry. The company’s per-unit sales
price and variable costs are as follows.

Sales price $12

Variable costs 8
The company’s practical plant capacity is 40,000 units. The company’s total fixed costs
aggregate $48,000, and it has a 40% effective tax rate. The maximum net profit that
the company can earn is

A. $112,000

B. $96,000

C. $67,200
 D. $48,000

Question: 32 A firm is analyzing the market potential for its specialty turbines. The firm developed
pricing and cost structures for its specialty turbines over various relevant ranges. The
pricing and cost data for each relevant range are presented below.

Units produced and sold 1 – 5 6 – 10 11 – 15 16 – 20

Total fixed costs $200,000 $400,000 $600,000 $800,000

Unit variable cost 50,000 50,000 45,000 45,000

Unit selling price 100,000 100,000 100,000 100,000

Which one of the following production/sales levels would produce the highest operating
income?

A. 17 units.

B. 14 units.

C. 10 units.

D. 8 units.

Fact Pattern: Geary Manufacturing has assembled the data appearing in the next column pertaining to
two products. Past experience has shown that the unavoidable fixed manufacturing overhead included in
the cost per machine hour averages $10. Geary has a policy of filling all sales orders, even if it means
purchasing units from outside suppliers. Total machine capacity is 50,000 hours.
Electric
Blender Mixer

Direct materials $6 $11

Direct labor 4 9
Manufacturing overhead
at $16 per hour 16 32
Cost if purchased from an
outside supplier 20 38
Annual demand (units) 20,000 28,000

Question: 33 If Geary Manufacturing desires to follow an optimal strategy, it should produce

 A. 25,000 electric mixers and purchase all other units as needed.

B. 20,000 blenders and purchase all other units as needed.

C. 28,000 electric mixers and purchase all other units as needed.

D. 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed.

Question: 34 A very profitable company plans to introduce a new type of doll to its product line. The
sales price and costs for the new dolls are as follows.

Selling price per doll $ 100

Variable cost per doll 60

Incremental annual fixed costs 456,000

Income tax rate 30%

If 10,000 new dolls are produced and sold, the effect on profit (loss) would be

A. $280,000

B. $(56,000)

C. $(176,000)

D. $(39,200)

Question: 35 A company wants to open a new store in one of two nearby shopping malls. In Mall A,
the rent will be $250,000 per year. In Mall B, the rent will be 4% of gross revenues.
Assuming that revenues and all other elements under consideration are the same for
both malls, at what level of revenues will the company be indifferent between the two
malls?

A. $12,500,000

B. $4,000,000

C. $1,000,000

D. $6,250,000
Question: 36A corporation is considering the purchase of a new machine for $800,000. The machine is capable of
producing 1.6 million units of product over its useful life. The manufacturer’s engineering specifications state that
the machine-related cost of producing each unit of product should be $.50. The corporation’s total anticipated
demand over the asset’s useful life is 1.2 million units. The average cost of materials and labor for each unit is $.40.
In considering whether to buy the new machine, would you recommend that the corporation use the manufacturer’s
engineering specification of machine-related unit production cost?

A. Yes, the machine-related cost of producing each unit is $.50.

B. No, the machine-related cost of producing each unit is $.90.

C. No, the machine-related cost of producing each unit is $.67.

D. No, the machine-related cost of producing each unit is $2.00.

Question: 37 The opportunity cost of making a component part in a factory with no excess capacity
is the

A. Variable manufacturing cost of the component.

B. Fixed manufacturing cost of the component.

C. Net benefit given up from the best alternative use of the capacity.

D. Cost of the production given up in order to manufacture the component.

Question: 38 A retailer planned to purchase 55,000 units and sell 50,000 units, yielding the following
operating income:

Sales $50,000,000

Cost of goods sold 33,000,000

Variable selling costs 5,000,000

Fixed selling and administrative costs 7,000,000

Operating income $ 5,000,000

The company expects to receive an additional order that would allow it to sell all
55,000 units it purchased. If the company accepts this order, its operating income will
be

A. $6,700,000
 B. $6,200,000

C. $9,500,000

D. $5,500,000

Question: 39 What is the opportunity cost of making a component part in a factory given no
alternative use of the capacity?

A. The variable manufacturing cost of the component.

B. The total manufacturing cost of the component.

C. The total variable cost of the component.

D. Zero.

Question: 40 Two months ago, a corporation purchased 4,500 pounds of Kaylene at a cost of
$15,300. The market for this product has become very strong, with the price jumping to
$4.05 per pound. Because of the demand, the corporation can buy or sell Kaylene at
this price. The corporation recently received a special order inquiry that would require
the use of 4,200 pounds of Kaylene. In deciding whether to accept the order,
management must evaluate a number of decision factors. Without regard to income
taxes, which one of the following combinations of factors correctly depicts relevant and
irrelevant decision factors, respectively?
Relevant Decision Factor Irrelevant Decision Factor

A. Remaining 300 pounds of Kaylene Market price of $4.05 per lb.

B. Market price of $4.05 per lb. Purchase price of $3.40 per lb.

C. 4,500 pounds of Kaylene Remaining 300 pounds of Kaylene

D. Purchase price of $3.40 per lb. Market price of $4.05 per lb.

Fact Pattern: Cervine Corporation makes two types of motors for use in various products. Operating
data and unit cost information for its products are presented below.
Product A Product B

Annual unit capacity 10,000 20,000

Annual unit demand 10,000 20,000
Selling price $100 $80
Variable manufacturing cost (53) (45)
Fixed manufacturing cost (10) (10)
Variable selling & administrative (10) (11)
Fixed selling & administrative (5) (4)
Fixed other administrative (2) (0)

Unit operating profit $ 20 $10

Machine hours per unit 2.0 1.5

Cervine has 40,000 productive machine hours available.

Question: 41 Cervine’s relevant contribution margins, per machine hour for each product, to be
utilized in making a decision on product priorities for the coming year are
Product A Product B

A. $37.00 $24.00

B. $18.50 $16.00

C. $20.00 $10.00

D. $17.00 $14.00

Question: 42 Which of the following costs, when subtracted from total revenue, yields economic
profit?

A. Opportunity costs of all inputs.

B. Variable costs.

C. Fixed and variable costs.

D. Recurring operating costs.

Question: 43 Sunk costs are not relevant in the decision-making process because they are

A. Fixed costs.
 B. Historical costs.

C. Indirect costs.

D. Period costs.

Question: 44From the following information, calculate economic profit:

Total sales revenue $600,000

Total cost of sales 200,000

Selling expenses 50,000

General and administrative expenses 25,000

Forgone interest earned 20,000

Forgone entrepreneurial income 15,000

A. $290,000

B. $305,000

C. $400,000

D. $325,000

Question: 45 In order to avoid pitfalls in relevant-cost analysis, management should focus on

A. Variable cost items that differ for each alternative.

B. Anticipated fixed costs and variable costs of all alternatives.

C. Long-run fixed costs of each alternative.

D. Anticipated revenues and costs that differ for each alternative.

Fact Pattern: A company wants to open a new store in one of three nearby shopping malls. In Mall A,
the rent will be $300,000 per year. In Mall B, the rent will be 4% of gross revenues. In Mall C, the rent will
be $150,000 per year plus 3% of gross revenues. Assume that revenues and all other elements under
consideration are the same for all three malls.

Question: 46 If the company expects revenues to be $10,000,000 per year, which mall should be chosen?

A. Mall B.

B. The company will be indifferent between two of the choices.

C. Mall C.

D. Mall A.

Fact Pattern: Raymund, Inc., a bearings manufacturer, has the capacity to produce 7,000 bearings per
month. Raymund’s income statement for an average month is as follows:
Sales (5,000 units at $20 per unit) $100,000

Variable manufacturing costs $50,000

Variable selling costs 15,000 (65,000)

Contribution margin $ 35,000

Fixed manufacturing costs $16,000

Fixed selling costs 4,000 (20,000)

Operating income $ 15,000

Raymund has an effective income tax rate of 40%. The company is considering two mutually exclusive
options, replacing a portion of its labor intensive production process with a highly automated process, or
filling a one-time special order.

Question: 47 If Raymund retools its production process, the company’s fixed manufacturing costs
would be increased by $30,000 per month and its variable costs would be reduced by
$5 per unit. If Raymund selects this option, the company’s monthly operating income
would be

A. $10,000

B. $5,000
 C. $30,000

D. $40,000

Question: 48 An entrepreneur wants to rent store space in a new shopping mall for the 3-month
holiday shopping season. The entrepreneur believes he has a new product available
that has the potential for good sales. The product can be obtained on consignment at
the cost of $20 per unit, and he expects to sell the item for $100 per unit. Due to other
business ventures, the entrepreneur’s risk tolerance is low. He recognizes that, as the
product is entirely new, there is an element of risk. The mall management has offered
the entrepreneur three rental options: (1) a fixed fee of $8,000 per month, (2) a fixed
fee of $3,990 per month plus 10% of the entrepreneur’s revenue, or (3) 30% of the
entrepreneur’s revenues. Which one of the following actions would you recommend to
the entrepreneur?

A. Choose the second option no matter what the entrepreneur expects the revenues to
be.

B. Choose the first option no matter what the entrepreneur expects the revenues to be.

C. Choose the second option only if the entrepreneur expects revenues to exceed
$5,700.

D. Choose the third option no matter what the entrepreneur expects the revenues to be.

Question: 49 Profits that are lost by moving an input from one use to another are referred to as

A. Cannibalization charges.

B. Replacement costs.

C. Opportunity costs.

D. Out-of-pocket costs.
3: (40) Decision Making -- Special Orders

Fact Pattern: Pontotoc Industries manufactures a product that is used as a subcomponent by

other manufacturers. It has the following price and cost structure:
Selling price $300
Costs
Direct materials $40
Direct labor 30
Variable manufacturing overhead 24
Fixed manufacturing overhead 60
Variable shipping 6
Fixed selling and administrative 20 (180)

Operating margin $120

Question: 1 Pontotoc received a special, one-time order for 1,000 units of its product. However,
Pontotoc has an alternative use for this capacity that will result in a contribution of
$20,000. The minimum unit price for this special, one-time order is in excess of

A. $120

B. $140

C. $180

D. $200

Question: 2 A company manufactures a product that has the following unit price and costs.

Selling price $300

Costs

Direct materials $40

Direct labor 30

Variable manufacturing overhead 24

Fixed manufacturing overhead 60

 Variable selling 6

Fixed selling and administrative 20

Total costs (180)

Operating margin $120

The company received a special order for 1,000 units of the product. The company
currently has excess capacity but has an alternative use for this capacity that will result
in a contribution margin of $20,000. What is the minimum price that the company
should charge for this special order?

A. $200, because operating margin will increase by $20,000.

B. $140, because operating margin will increase by $20,000.

C. $180, because it covers the costs of manufacturing the product and allows the
company to break even.

D. $120, because it covers the costs of manufacturing the product and allows the
company to break even.

Question: 3 In April, a company with idle capacity has been contacted by a new customer to supply
100,000 units of its products for a special order at a price that is 25% below the
company’s regular sales price. If accepted, the order will be completed and delivered in
April. The order is identical to a committed order that will be produced in May. Which
one of the following costs is relevant for the company’s decision whether to accept the
special order?

A. The insurance on the machinery that will be used to produce the units.

B. The direct materials that were purchased earlier for a production order that was
canceled.

C. The machine setup costs for the order.

D. The electricity to operate the machinery in April to produce the units.

Question: 4Normal unit pricing for a company’s product is determined as follows:

Direct materials and labor $12.00

Manufacturing overhead (60% fixed) 8.00

Variable selling 1.00

Fixed selling and administrative 11.00

Total cost $32.00

10% desired mark-up 3.20

Selling price $35.20

If the company receives a special order for which capacity exists, the lowest selling price per unit the company can
accept is

A. $17.20

B. $16.20

C. $32.00

D. $13.00

Question: 5A company manufactures a variety of shoes and has received a special one-time-only order directly
from a wholesaler. The company has sufficient idle capacity to accept the special order to manufacture 15,000 pairs
of sneakers at a price of $7.50 per pair. The company’s normal selling price is $11.50 per pair of sneakers. Variable
manufacturing costs are $5.00 per pair and fixed manufacturing costs are $3.00 a pair. The company’s variable
selling expense for its normal line of sneakers is $1.00 per pair. What would the effect on the company’s operating
income be if the company accepted the special order?

A. Increase by $37,500.

B. Decrease by $60,000.

C. Increase by $22,500.

D. Increase by $52,500.

Question: 6 A company currently is using its full capacity of 25,000 machine hours to manufacture
product XR-2000. A customer placed an order for the manufacture of 1,000 units of
KT-6500. The customer would normally manufacture this component. However, due to
a fire at its plant, the customer needs to purchase these units to continue
manufacturing other products. This is a one-time special order. The following reflects
unit cost data and selling prices.

KT-6500 XR-2000

Material $27 $24

 Direct labor 12 10

Variable overhead 6 5

Fixed overhead 48 40

Variable selling & administrative 5 4

Fixed selling & administrative 12 10

Normal selling price $125 $105

Machine hours required 3 4

What is the minimum unit price that the company should charge the customer to
manufacture 1,000 units of KT-6500?

A. $93.00

B. $125.00

C. $110.00

D. $96.50

Fact Pattern: Pontotoc Industries manufactures a product that is used as a subcomponent by other
manufacturers. It has the following price and cost structure:
Selling price $300
Costs
Direct materials $40
Direct labor 30
Variable manufacturing overhead 24
Fixed manufacturing overhead 60
Variable shipping 6
Fixed selling and administrative 20 (180)

Operating margin $120

Question: 7 Pontotoc received a special, one-time order for 1,000 of the above parts. Assuming
Pontotoc has excess capacity, the minimum unit price for this special, one-time order is
in excess of

A. $180
 B. $100

C. $120

D. $160

Question: 8 A company has considerable excess manufacturing capacity. A special job order’s cost
sheet includes the following applied manufacturing overhead costs:

Fixed costs $21,000

Variable costs 33,000

The fixed costs include a normal $3,700 allocation for in-house design costs, although
no in-house design will be done. Instead, the job will require the use of external
designers costing $7,750. What is the total amount to be included in the calculation to
determine the minimum acceptable price for the job?

A. $58,050

B. $36,700

C. $40,750

D. $54,000

Fact Pattern: The Sommers Company manufactures a variety of industrial valves. Currently, the
company is operating at about 70% capacity and is earning a satisfactory return on investment.
Management has been approached by Glascow Industries Ltd. of Scotland with an offer to buy 120,000
units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers’ pressure
valve; however, a fire in Glascow Industries’ valve plant has shut down its manufacturing operations.
Glascow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers;
the company is prepared to pay $19 each for the valves, FOB shipping point. Sommers’ product cost,
based on current attainable standards, for the pressure valve is as follows:
Direct materials $ 5.00

Direct labor 6.00

Manufacturing overhead 9.00

Total cost $20.00

Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour. This
overhead rate is made up of the following components:
Variable factory overhead $ 6.00
 Fixed factory overhead-direct 8.00

Fixed factory overhead-allocated 4.00

Applied manufacturing overhead rate $18.00

In determining selling prices, Sommers adds a 40% markup to product cost. This provides a $28
suggested selling price for the pressure valve. The Marketing Department, however, has set the current
selling price at $27 to maintain market share. Production management believes that it can handle the
Glascow Industries order without disrupting its scheduled production. The order would, however, require
additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If
management accepts the order, 30,000 pressure valves will be manufactured and shipped to Glascow
Industries each month for the next 4 months. Shipments will be made in weekly consignments, FOB
shipping point.

Question: 9 How many additional direct labor hours would be required each month to fill the
Glascow order?

A. 15,000

B. 10,000

C. 120,000

D. 30,000

Fact Pattern: Panyer Co. is a producer of a tank component. This product, J-5, has the following selling
price and costs per unit:
Selling price $300
Direct materials 125
Direct labor 25
Variable manufacturing overhead 50
Shipping and handling 5
Fixed manufacturing overhead 15
Fixed selling and administrative 10
Total costs $230

Question: 10 Panyer has recently received a special, one-time order for 2,000 units of J-5. Panyer
currently has enough excess capacity for this order. What should be the minimum price
charged by Panyer?

A. $155

B. $205
 C. $230

D. $300

Question: 11 A company has a plant capacity of 200,000 units per month. Unit costs at capacity are
shown below:

Direct materials $4.00

Direct labor 6.00

Variable overhead 3.00

Fixed overhead 1.00

Fixed marketing 7.00

Variable distribution costs 3.60

Monthly sales are 190,000 units at $30 each. A customer has contacted the company
about purchasing 2,000 units at $24 each. Current sales would not be affected by the
one-time-only special order. How much will the company’s operating profit increase if
the one-time-only special order is accepted?

A. $10,800

B. $14,800

C. $32,000

D. $22,000

Fact Pattern: Panyer Co. is a producer of a tank component. This product, J-5, has the
following selling price and costs per unit:
Selling price $300
Direct materials 125
Direct labor 25
Variable manufacturing overhead 50
Shipping and handling 5
Fixed manufacturing overhead 15
Fixed selling and administrative 10
Total costs $230
Question: 12 Panyer has again received a special, one-time offer for 2,000 units of J-5. Panyer is
now operating at full capacity, 10,000 units, at a total cost of $2,300,000. To produce
this order would cause a 20% increase in fixed costs. What is the minimum price that is
acceptable for this one-time, special order?

A. $300

B. $205

C. $230

D. $260

Question: 13 When only differential manufacturing costs are taken into account for special-order
pricing, an essential assumption is that

A. Selling and administrative fixed and variable costs are linear.

B. Manufacturing fixed and variable costs are linear.

C. Acceptance of the order will not affect regular sales.

D. Acceptance of the order will not cause unit selling and administrative variable costs
to increase.

Question: 14 A company’s budget indicated the following cost per unit for the company’s most popular
product.

Variable manufacturing costs $64

Fixed manufacturing overhead 45

Sales commissions 3

Fixed selling and administrative costs 32

Although this product normally sells for $160 per unit, the company received a special order
from a new customer. If the company has idle capacity, its income would increase by accepting
the order if the selling price per unit for the order was greater than

A. $67

B. $64

C. $109
 D. $144

Fact Pattern: Raymund, Inc., a bearings manufacturer, has the capacity to produce 7,000 bearings per
month. Raymund’s income statement for an average month is as follows:
Sales (5,000 units at $20 per unit) $100,000

Variable manufacturing costs $50,000

Variable selling costs 15,000 (65,000)

Contribution margin $ 35,000

Fixed manufacturing costs $16,000

Fixed selling costs 4,000 (20,000)

Operating income $ 15,000

Raymund has an effective income tax rate of 40%. The company is considering two mutually exclusive
options, replacing a portion of its labor intensive production process with a highly automated process, or
filling a one-time special order.

Question: 15 Raymund currently sells its only product to a single customer. Raymund has received a
one-time-only order for 2,000 units from another buyer. Sale of the special order items
will not require any additional selling effort. In negotiating a price for the special order,
Raymund should set the minimum per unit selling price at

A. $10

B. $13

C. $17

D. $18

Question: 16 A corporation manufactures integrated computer components. Its unit cost structure,
based upon a volume of 300,000 units, is as follows.

Variable Cost Fixed Costs Total Costs

 Direct material $ 3.50 $ 3.50

Direct labor 9.00 9.00

Packaging 2.00 2.00

Manufacturing O/H 3.00 $ 6.50 9.50

Marketing costs 2.50 8.00 10.50

Administrative costs 4.00 4.50 8.50

Total costs $24.00 $19.00 $43.00

A foreign company recently approached the corporation with an order of 50,000 units
of a specially designed component at $35 per unit. The order will require specialized
procurement costs of $150,000, and only one-half of the variable costs associated with
the administrative area will be needed. Otherwise, cost behavior will remain the same.
Adequate capacity is available to handle this request. What is the relevant unit cost to
be considered by the corporation in making a decision on this offer?

A. $22.00

B. $25.00

C. $24.00

D. $43.00

Fact Pattern: Kator Co. is a manufacturer of industrial components. One of its products that is
used as a subcomponent in auto manufacturing is KB-96. This product has
the following financial structure per unit:
Selling price $150

Direct materials $ 20

Direct labor 15

Variable manufacturing overhead 12

Fixed manufacturing overhead 30

Shipping and handling 3

Fixed selling and administrative 10

Total costs $ 90
Question: 17 Kator Co. has received a special, one-time order for 1,000 KB-96 parts. Assuming
Kator has excess capacity, the minimum price that is acceptable for this one-time
special order is in excess of

A. $77

B. $47

C. $50

D. $60

Question: 18 Which of the following cost allocation methods is used to determine the lowest price
that can be quoted for a special order that will use idle capacity within a production
area?

A. Variable.

B. Process.

C. Job order.

D. Standard.

Fact Pattern: The Sommers Company manufactures a variety of industrial valves. Currently, the
company is operating at about 70% capacity and is earning a satisfactory return on investment.
Management has been approached by Glascow Industries Ltd. of Scotland with an offer to buy 120,000
units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers’ pressure
valve; however, a fire in Glascow Industries’ valve plant has shut down its manufacturing operations.
Glascow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers;
the company is prepared to pay $19 each for the valves, FOB shipping point. Sommers’ product cost,
based on current attainable standards, for the pressure valve is as follows:
Direct materials $ 5.00

Direct labor 6.00

Manufacturing overhead 9.00

Total cost $20.00

Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour. This
overhead rate is made up of the following components:
Variable factory overhead $ 6.00
 Fixed factory overhead-direct 8.00

Fixed factory overhead-allocated 4.00

Applied manufacturing overhead rate $18.00

In determining selling prices, Sommers adds a 40% markup to product cost. This provides a $28
suggested selling price for the pressure valve. The Marketing Department, however, has set the current
selling price at $27 to maintain market share. Production management believes that it can handle the
Glascow Industries order without disrupting its scheduled production. The order would, however, require
additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If
management accepts the order, 30,000 pressure valves will be manufactured and shipped to Glascow
Industries each month for the next 4 months. Shipments will be made in weekly consignments, FOB
shipping point.

Question: 19 What is the minimum unit price that Sommers could accept without reducing net
income?

A. $14.40

B. $20.40

C. $14

D. $20

Question: 20 A manufacturer has been approached by a new customer who wants to place a one-
time order for a component similar to one that the manufacturer makes for another
customer. Existing sales will not be affected by acceptance of this order. The
manufacturer has a policy of setting its targeted selling price at 60% over full
manufacturing cost. The manufacturing costs and the targeted selling price for the
existing product are presented as follows.

Direct materials $ 2.30

Direct labor 3.60

Variable manufacturing overhead

(applied at 75% of direct labor cost) 2.70

Fixed manufacturing overhead

(applied at 150% of direct labor cost) 5.40

Total manufacturing cost $14.00

Markup (60% of full manufacturing cost) 8.40

Targeted selling price $22.40

 The manufacturer has excess capacity to produce the quantity of the component
desired by the new customer. The direct materials used in the component for the new
customer would cost the manufacturer $0.25 less than the component currently being
made. The variable selling expenses (packaging and shipping) would be the same, or
$0.90 per unit. Under these circumstances, the minimum unit price at which the
manufacturer would accept the special order is one exceeding

A. $9.25

B. $14.00

C. $14.80

D. $8.35

Question: 21 A company has received a request to produce a special order of 10,000 units at a
sales price of $30 per unit. The following information relates to production of the
product:

Direct materials $8.00 per unit

Direct labor 3.00 per unit

Variable overhead 2.00 per unit

Fixed overhead 1.50 per unit

Assuming there is idle physical plant capacity to accept this special order and it will not
affect existing sales, by what amount would the company’s income increase if the
special order were to be accepted?

A. $300,000

B. $190,000

C. $155,000

D. $170,000

Question: 22 A company currently sells 6,000 units per month and has received a special order from
an international customer. The international customer would like to purchase 1,500
units for a price of $80 per unit. The company currently sells the product to regular
customers for $95 per unit. The company has excess capacity to produce the special
order. The product unit cost is shown below:

Direct materials $49.50

 Direct labor 16.50

Variable overhead 9.50

Fixed overhead 3.50

Fixed manufacturing overhead totals $35,000 per month. Management has determined
that the additional shipping costs for the international delivery would be $4 per unit.
Should the company accept the special order?

A. Yes, because operating income will increase by $6,750.

B. No, because operating income will decrease by $4,500.

C. No, because operating income will decrease by $21,000.

D. Yes, because operating income will increase by $750.

Fact Pattern: The Sommers Company manufactures a variety of industrial valves. Currently, the
company is operating at about 70% capacity and is earning a satisfactory return on investment.
Management has been approached by Glascow Industries Ltd. of Scotland with an offer to buy 120,000
units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers’ pressure
valve; however, a fire in Glascow Industries’ valve plant has shut down its manufacturing operations.
Glascow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers;
the company is prepared to pay $19 each for the valves, FOB shipping point. Sommers’ product cost,
based on current attainable standards, for the pressure valve is as follows:
Direct materials $ 5.00

Direct labor 6.00

Manufacturing overhead 9.00

Total cost $20.00

Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour. This
overhead rate is made up of the following components:
Variable factory overhead $ 6.00

Fixed factory overhead-direct 8.00

Fixed factory overhead-allocated 4.00

Applied manufacturing overhead rate $18.00

In determining selling prices, Sommers adds a 40% markup to product cost. This provides a $28
suggested selling price for the pressure valve. The Marketing Department, however, has set the current
selling price at $27 to maintain market share. Production management believes that it can handle the
Glascow Industries order without disrupting its scheduled production. The order would, however, require
additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If
management accepts the order, 30,000 pressure valves will be manufactured and shipped to Glascow
Industries each month for the next 4 months. Shipments will be made in weekly consignments, FOB
shipping point.

Question: 23 What is the incremental profit (loss) before tax associated with the Glascow order?

A. $552,000

B. ($120,000)

C. ($168,000)

D. $600,000

Question: 24 A company manufactures a product that is sold for $37.95. It uses an absorption-cost
system. Plant capacity is 750,000 units annually, but normal volume is 500,000 units.
Costs at normal volume are given below.

Unit Cost
Direct materials $ 9.80
Direct labor 4.50
Manufacturing overhead 12.00
Selling and administrative:
Variable 2.50
Fixed 4.20
Total cost $33.00
Fixed manufacturing overhead is budgeted at $4.5 million. A customer has offered to
purchase 100,000 units at $25 each to be packaged in large cartons, not the normal
individual containers. It will pick up the units in its own trucks. Thus, variable selling
and administrative expenses will decrease by 60%. Which of the following
is not included in the calculation of relevant costs?

A. $2,250,000.

B. $4,900,000.

C. $6,600,000.

D. $1,250,000.

Question: 25A company sells two products: Sparta and Volta. Volta is manufactured by a third party supplier,
which charges the company a contractual price for each unit of Volta manufactured. A summary of revenue and
costs assumptions for each product is as follows:
 Sparta Volta

Planned sales units prior to promotion 100,000 20,000

Unit selling price $10 $20

Unit variable cost $3 $10

Fixed costs $500,000 $0

The company has the opportunity to spend an additional $10,000 in promotional expenditures on either Sparta or
Volta, anticipating a 10% increase in unit sales volume as a result. Both product lines have idle capacity and can
support the increase in unit volume. The company should spend the additional promotional expenditure on

A. Sparta, because it would generate an additional $60,000 in operating profit.

B. Volta, because it would generate an additional $10,000 in operating profit.

C. Volta, because it would generate an additional $20,000 in operating profit.

D. Sparta, because it would generate an additional $10,000 in operating profit.

Fact Pattern: The statement of income for Dimmell Co. presented below represents the
operating results for the fiscal year just ended. Dimmell had sales of 1,800 tons of product during
the current year. The manufacturing capacity of Dimmell’s facilities is 3,000 tons of product.
Dimmell Co.
Statement of Income
For the Year Ended December 31, Year 2

Sales $ 900,000
Variable costs:
Manufacturing $315,000
Selling costs 180,000 (495,000)
Contribution margin $ 405,000
Fixed costs:
Manufacturing $ 90,000
Selling 112,500
Administration 45,000 (247,500)
Operating income $ 157,500
Income taxes (40%) (63,000)
Net income $ 94,500

Question: 26 Dimmell has a potential foreign customer that has offered to buy 1,500 tons at $450
per ton. Assume that all of Dimmell’s costs would be at the same levels and rates as in
 Year 2. What net income would Dimmell make if it took this order and rejected some
business from regular customers so as not to exceed capacity?

A. $211,500

B. $252,000

C. $256,500

D. $297,500

Question: 27A company can manufacture one of two special orders with their existing capacity. Special Order A
is for 100,000 units and Special Order B is for 200,000 units. Cost and revenue data per unit are as follows:

Per Unit

Special order A B

Sales price $.7000 $.4500

Direct materials .4550 .2775

Direct labor:

Variable .1100 .0993

Fixed .0300 .0089

Manufacturing overhead:

Variable .0430 .0330

Fixed .0370 .0523

Variable marketing costs, already

incurred to obtain the order .0900 .0912

Fixed marketing and administrative costs .0950 .0878

Based on the above information, which one of the following statements correctly identifies the effect on pretax
profit if the optimal decision is made?

A. $200 increase if Special Order A is taken.

B. $8,040 increase if Special Order B is taken.

C. $9,200 increase if Special Order A is taken.

 D. $13,430 increase if Special Order A is taken.

Question: 28 The Robo Division, which is part of a large company, has been approached to submit a
bid for a potential project for a customer. Robo Division has been informed by the
customer that they will not consider bids over $8,000,000. Robo Division purchases its
materials internally from the Cross Division. There would be no additional fixed costs
for either the Robo or Cross Divisions. Information regarding this project is as follows:

Cross Division Robo Division

Variable costs $1,500,000 $4,800,000

Transfer price 3,700,000 --

If Robo Division submits a bid for $8,000,000, the amount of contribution margin
recognized by the Robo Division and the company, respectively, is

A. $3,200,000 and $(500,000).

B. $3,200,000 and $1,700.000.

C. $(500,000) and $1,700,000.

D. $(500,000) and $(2,000,000).

Question: 29 A company builds custom-designed machinery. A review of selected data and the
company’s pricing policies revealed the following.

• A 10% commission is paid on all sales orders.

• Variable and fixed factory overheads total 40% and 20%, respectively, of direct
labor.
• Corporate administrative costs amount to 10% of direct labor.
• When bidding on jobs, the company adds a 25% markup to the total of all
factory and administrative costs to cover income taxes and produce a profit.
• The firm’s income tax rate is 40%.
The company expects to operate at a maximum of 80% of practical capacity.

The company recently received an invitation to bid on the manufacture of some custom
machinery for a customer. For this project, the company’s production accountants
estimate the material and labor costs will be $66,000 and $120,000, respectively.
Accordingly, the company submitted a bid to the customer in the amount of $375,000.
Feeling the company’s bid was too high, the customer countered with a price of
 $280,000. Which one of the following options should be recommended to the
company’s management?

A. Accept the counteroffer even though the order will decrease operating income.

B. Reject the counteroffer even though the order will increase operating income.

C. Accept the counteroffer because the order will increase operating income.

D. Reject the counteroffer because the order will decrease operating income.

Question: 30 Production of a special order will increase gross profit when the additional revenue
from the special order is greater than

A. The direct materials and labor costs in producing the order.

B. The indirect costs of producing the order.

C. The marginal cost of producing the order.

D. The fixed costs incurred in producing the order.

Fact Pattern: A mail-order confectioner sells fine candy in one-pound boxes. It has the capacity to
produce 600,000 boxes annually, but forecasts that it will produce and sell only 500,000 boxes in the
coming year. The costs to manufacture and distribute the candy are detailed below. The organization has
invested capital of $6,750,000.
Variable costs per pound:

Manufacturing $4.85

Packaging .35

Distribution 1.80

Total $7.00

Annual fixed costs:

Manufacturing overhead $810,000

Marketing and distribution 270,000

Question: 31 The selling price per pound that the confectioner should charge for a one-pound box of
candy to obtain a 20% rate of return on invested capital is

A. $9.70

B. $11.50

C. $11.86

D. $11.05

Fact Pattern: A mail-order confectioner sells fine candy in one-pound boxes. It has the capacity to
produce 600,000 boxes annually, but forecasts that it will produce and sell only 500,000 boxes in the
coming year. The costs to manufacture and distribute the candy are detailed below. The organization has
invested capital of $6,750,000.
Variable costs per pound:

Manufacturing $4.85

Packaging .35

Distribution 1.80

Total $7.00

Annual fixed costs:

Manufacturing overhead $810,000

Marketing and distribution 270,000

Question: 32 The confectioner has been asked by a retailer to submit a bid for a special order of
40,000 one-pound boxes of candy; this is a one-time order that will not be repeated.
While the candy would be almost identical, the candy ingredients would be $0.45 less.
The total distribution costs for the entire order would be $32,000. Special setup costs
required by this order would amount to $60,000. There would be no other changes in
costs, rates, or amounts. The minimum selling price per one-pound box that the
confectioner would bid on this special order would be

A. $9.55

B. $8.85

C. $9.05
 D. $7.05

Fact Pattern: Kator Co. is a manufacturer of industrial components. One of its products that is
used as a subcomponent in auto manufacturing is KB-96. This product has
the following financial structure per unit:
Selling price $150

Direct materials $ 20

Direct labor 15

Variable manufacturing overhead 12

Fixed manufacturing overhead 30

Shipping and handling 3

Fixed selling and administrative 10

Total costs $ 90

Question: 33 Kator Co. has received a special, one-time order for 1,000 KB-96 parts. Assume that
Kator is operating at full capacity and that the contribution margin of the output that
would be displaced by the special order is $10,000. Using the original data, the
minimum price that is acceptable for this one-time special order is in excess of

A. $70

B. $60

C. $100

D. $87

Fact Pattern:

Basic Computer Company (BCC) sells its micro-computers using bid pricing. It develops bids on a full
cost basis. Full cost includes estimated material, labor, variable overheads, fixed manufacturing
overheads, and reasonable incremental computer assembly administrative costs, plus a 10% return on
full cost.
BCC’s current cost structure, based on its normal production levels, is $500 for materials per computer
and $20 per labor hour. BCC’s variable manufacturing overhead is $2 per labor hour, fixed manufacturing
overhead is $3 per labor hour, and incremental administrative costs are $8 per computer assembled.

Question: 34 BCC has received a request from the School Board for 500 computers. Assembly and
testing of each computer requires 12 labor hours. The company’s management
expects heavy competition in bidding for this job. BCC believes bids in excess of $925
per computer are not likely to be considered. As this is a very large order for BCC, and
could lead to other educational institution orders, management is extremely interested
in submitting a bid that would win the job, but at a price high enough so that current net
income will not be unfavorably impacted. Management believes this order can be
absorbed within its current manufacturing facility. Which one of the following bid prices
should be recommended to BCC’s management?

A. $888.80

B. $764.00

C. $849.20

D. $772.00

Question: 35 When considering a special order that will enable a company to make use of currently
idle capacity, which of the following costs is irrelevant?

A. Variable overhead.

B. Depreciation.

C. Materials.

D. Direct labor.

Question: 36 Rodder, Inc., manufactures a component in a router assembly. The selling price and
unit cost data for the component are as follows:

Selling price $15

Direct materials cost 3

Direct labor cost 3

 Variable overhead cost 3

Fixed manufacturing overhead cost 2

Fixed selling and administration cost 1

The company received a special one-time order for 1,000 components. Rodder has an
alternative use for production capacity for the 1,000 components that would produce a
contribution margin of $5,000. What amount is the lowest unit price Rodder should
accept for the component?

A. $14

B. $24

C. $12

D. $9

Question: 37A company manufactures jet engines on a cost-plus basis. The cost of a particular jet engine the
company manufactures is shown as follows:

Direct materials $200,000

Direct labor 150,000

Overhead:

Supervisor’s salary 20,000

Fringe benefits on direct labor 15,000

Depreciation 12,000

Rent 11,000

Total cost $408,000

If production of this engine were discontinued, the production capacity would be idle, and the supervisor would be
laid off. When asked to bid on the next contract for this engine, the minimum unit price that the company should bid
is

A. $365,000

B. $385,000

C. $408,000
 D. $397,000

Fact Pattern:

Basic Computer Company (BCC) sells its micro-computers using bid pricing. It develops bids on a full
cost basis. Full cost includes estimated material, labor, variable overheads, fixed manufacturing
overheads, and reasonable incremental computer assembly administrative costs, plus a 10% return on
full cost.

BCC’s current cost structure, based on its normal production levels, is $500 for materials per computer
and $20 per labor hour. BCC’s variable manufacturing overhead is $2 per labor hour, fixed manufacturing
overhead is $3 per labor hour, and incremental administrative costs are $8 per computer assembled.

Question: 38 BCC has received a request from a research lab for 200 computers. Assembly and
testing of each computer will require 17 labor hours. BCC believes bids in excess of
$1,050 per computer are not likely to be considered. Using the full-cost criteria and
desired level of return, which one of the following prices should be recommended to
BCC’s management for bidding purposes?

A. $882.00

B. $961.40

C. $1,026.30

D. $874.00

Question: 39Foot Apparel manufactures socks. The Athletic Division sells its socks for $6 a pair to external
customers. Socks have variable manufacturing costs of $2.50 per pair and fixed manufacturing costs of $1.50 per
pair. The division’s total fixed manufacturing costs are $105,000 at the normal volume of 70,000 pairs. The
operating range is 50,000 pairs to 100,000 pairs. The European Division has offered to buy 15,000 pairs at the full
cost of $4. The Athletic Division has excess capacity and the 15,000 pairs can be produced without interfering with
the current outside sales of 70,000 pairs. Should the Athletic Division accept the offer?

A. No, because the Athletic Division’s operating income will decrease by $30,000.

B. Yes, because the order is within the operating range of the company.

C. No, because the price offered does not exceed the market price usually charged.

D. Yes, because the Athletic Division’s operating income will increase by $22,500.
Question: 40 The loss of a key customer has temporarily caused Bedford Machining to have some
excess manufacturing capacity. Bedford is considering the acceptance of a special
order, one that involves Bedford’s most popular product. Consider the following types
of costs.

I. Variable costs of the product

II. Fixed costs of the product
III. Direct fixed costs associated with the order
IV. Opportunity cost of the temporarily idle capacity

Which one of the following combinations of cost types should be considered in the
special order acceptance decision?

A. I and II.

B. I, III, and IV.

C. I and IV.

D. II and III.
4: (35) Decision Making -- Make or Buy

Question: 1 A manufacturer produces hacksaw blades. Recently, the manufacturer has decided to
enhance its product line and offer band blades. Two alternatives are being analyzed:
purchase band blades overseas or produce them in-house. If the band blades are
made in-house, the manufacturer will not be able to produce hacksaw blades, forgoing
a $30,000 profit contribution.

Revenue from sale of band blades $180,000

Outside purchase 170,000

Direct material and labor 100,000

Variable manufacturing overhead 50,000

Avoidable fixed manufacturing overhead 10,000

Calculate the incremental cost of making and purchasing band blades, respectively.
Making Purchasing

A. $20,000 $10,000

B. $160,000 $170,000

C. $190,000 $170,000

D. $20,000 $40,000

Question: 2 A company accepted a contract to provide 30,000 units of Product A and 20,000 units
of Product B. The company’s staff developed the following information with regard to
meeting this contract.

Product Product
A B Total

Selling price $75 $125

Variable costs $30 $ 48

Fixed overhead $1,600,000

Machine hours required 3 5

Machine hours available 160,000

Cost if outsourced $45 $ 60

 The operations manager has identified the following alternatives. Which alternative
should be recommended to management?

A. Make 30,000 units of Product A, utilize the remaining capacity to make Product B,
and outsource the remainder.

B. Make 20,000 units of Product A, utilize the remaining capacity to make Product B,
and outsource the remainder.

C. Make 25,000 units of Product A, utilize the remaining capacity to make Product B,
and outsource the remainder.

D. Rent additional capacity of 30,000 machine hours, which will increase fixed costs by
$150,000.

Question: 3A manufacturing company is considering a new product for the coming year, which requires the
production of an electric motor. The company can purchase the motor from a reliable vendor for $21 per unit, or
manufacture it internally. The company has excess capacity to manufacture the 30,000 motors needed in the coming
year except for manufacturing space and special machinery. The machinery can be leased for $45,000 annually. The
company has finished goods warehouse space that it currently leases for $39,000, which can be converted and used
to manufacture the motors. To replace the finished goods warehouse, additional off-site space can be leased at an
annual cost of $54,000. The estimated unit costs for manufacturing the motors internally, exclusive of the leasing
costs itemized above, are shown below.

Direct material $8.00

Direct labor 4.00

Variable manufacturing overhead 3.00

Allocated fixed manufacturing overhead 5.00

Should the company make or buy the electric motors, and why?

A. Buy, because purchasing from the outside vendor would save $69,000.

B. Buy, because purchasing from the outside vendor would save $54,000.

C. Make, because manufacturing the motors internally would save $96,000.

D. Make, because manufacturing the motors internally would save $81,000.

Fact Pattern: Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of
radar equipment. The unit cost to manufacture 1 unit of KJ37 is presented below.
Direct materials $ 1,000
Materials handling (20% of direct materials cost) 200

Direct labor 8,000

Manufacturing overhead (150% of direct labor) 12,000

Total manufacturing cost $21,200

Materials handling represents the direct variable costs of the Receiving Department that are applied to
direct materials and purchased components on the basis of their cost. This is a separate charge in
addition to manufacturing overhead. Leland’s annual manufacturing overhead budget is one-third variable
and two-thirds fixed. Scott Supply, one of Leland’s reliable vendors, has offered to supply Part Number
KJ37 at a unit price of $15,000.

Question: 4 Assume that Leland Manufacturing does not wish to commit to a rental agreement but
could use idle capacity to manufacture another product that would contribute $52,000
per month. If Leland elects to manufacture KJ37 in order to maintain quality control,
Leland’s opportunity cost is

A. $4,000

B. Some amount other than those given

C. $(20,000)

D. $18,000

Question: 5Costs relevant to an insourcing vs. outsourcing decision include variable manufacturing costs as well
as

A. Factory depreciation.

B. Factory management costs.

C. Property taxes.

D. Avoidable fixed costs.

Question: 6 A company currently manufactures all component parts used in the manufacture of
various hand tools. A handle is used in three different tools. The unit cost budget for
20,000 handles is

Direct material $ .60

 Direct labor .40

Variable overhead .10

Fixed overhead .20

Total unit cost $1.30

A parts manufacturer has offered to supply 20,000 handles to the company for $1.25
each, delivered. If the company currently has idle capacity that cannot be used,
accepting the offer will

A. Decrease the handle unit cost by $.05.

B. Increase the handle unit cost by $.05.

C. Increase the handle unit cost by $.15.

D. Decrease the handle unit cost by $.15.

Question: 7 Listed below are a company’s monthly unit costs to manufacture and market a
particular product.

Manufacturing costs:

Direct materials $2.00

Direct labor 2.40

Variable indirect 1.60

Fixed indirect 1.00

Marketing costs:

Variable 2.50

Fixed 1.50
The company must decide to continue making the product or buy it from an outside
supplier. The supplier has offered to make the product at the same level of quality that
the company can make it. Fixed marketing costs would be unaffected, but variable
marketing costs would be reduced by 30% if the company were to accept the proposal.
What is the maximum amount per unit that the company can pay the supplier without
decreasing operating income?

A. $7.75

B. $5.25
 C. $6.75

D. $8.50

Question: 8 A company’s approach to an insourcing vs. outsourcing decision

A. Depends on whether the company is operating at or below normal volume.

B. Involves an analysis of avoidable costs.

C. Should use activity-based costing.

D. Should use absorption (full) costing.

Fact Pattern: Richardson Motors uses 10 units of Part No. T305 each month in the production of large
diesel engines. The cost to manufacture one unit of T305 is presented as follows:
Direct materials $ 2,000

Materials handling (20% of direct materials cost) 400

Direct labor 16,000

Manufacturing overhead (150% of direct labor) 24,000

Total manufacturing cost $42,400

Materials handling, which is not included in manufacturing overhead, represents the direct variable costs
of the receiving department that are applied to direct materials and purchased components on the basis
of their cost. Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds
fixed. Simpson Castings, one of Richardson’s reliable vendors, has offered to supply T305 at a unit price
of $30,000.

Question: 9 Assume the rental opportunity does not exist and Richardson Motors could use the idle
capacity to manufacture another product that would contribute $104,000 per month. If
Richardson chooses to manufacture the ten T305 units in order to maintain quality
control, Richardson’s opportunity cost is

A. $88,000

B. $(96,000)

C. $8,000
 D. $68,000

Question: 10A table manufacturing company has the following cost structure for producing table tops.

Unit Costs

Direct materials $23.00

Direct labor 12.00

Variable manufacturing overhead 10.00

Fixed manufacturing overhead 17.00

Variable administrative costs 2.00

Fixed administrative costs 3.00

Total unit costs $67.00

Recently, the table manufacturer received an offer from a corporation to supply the table tops to the table
manufacturer. The table manufacturer is considering buying the table tops instead of manufacturing them internally.
Which one of the following statements is correct?

A. The table manufacturer should reject the offer if it is $50.00 or more.

B. The table manufacturer should accept the offer if it is less than $47.00 and the table manufacturer has
excess manufacturing capacity.

C. The table manufacturer should reject the offer if it is less than $47.00 and the table manufacturer has
excess manufacturing capacity.

D. The table manufacturer should accept the offer if it is $50.00 or more and the table manufacturer has
excess manufacturing capacity.

Question: 11In an insourcing vs. outsourcing decision, the decision process favors the use of total costs rather
than unit costs. The reason is that

A. Irrelevant costs may be included in the unit amounts.

B. Unit cost may be calculated based on different volumes.

C. Allocated costs may be included in the unit amounts.

D. All of the answers are correct.

Question: 12 A multiproduct company currently manufactures 30,000 units of Part 730 each month
for use in production. The facilities now being used to produce Part 730 have fixed
monthly overhead costs of $150,000 and a theoretical capacity to produce 60,000 units
per month. If the company were to buy Part 730 from an outside supplier, the facilities
would be idle and 40% of fixed costs would continue to be incurred. There are no
alternative uses for the facilities. The variable production costs of Part 730 are $11 per
unit. Fixed overhead is allocated based on planned production levels. If the company
continues to use 30,000 units of Part 730 each month, it would realize a net benefit by
purchasing Part 730 from an outside supplier only if the supplier’s unit price is less than

A. $12.00

B. $14.00

C. $12.50

D. $13.00

Question: 13S Corp. produces premium office chairs. Due to a recent change in market share, S must decide
whether to make or buy an order of 1,000 chairs. The materials cost of producing a chair is $20 per pound, the cost
of direct labor is $40 per direct labor hour, and manufacturing overhead (100% variable) is allocated at a rate of $10
per chair. Fixed costs for the year are $5 per chair, of which 20% are avoidable. Each chair requires 2 pounds of
materials and 1 hour of direct labor to complete. Assuming that S has excess capacity, the total cost per chair
relevant to the make-or-buy decision is

A. $91

B. $71

C. $90

D. $95

Fact Pattern: Stewart Industries has been producing two bearings, components B12 and B18, for use in
production.
B12 B18

Machine hours required per unit 2.5 3.0

Standard cost per unit:
Direct material $ 2.25 $ 3.75
Direct labor 4.00 4.50
 Manufacturing overhead:
Variable (See Note 1) 2.00 2.25
Fixed (See Note 2) 3.75 4.50

$12.00 $15.00

Stewart’s annual requirement for these components is 8,000 units of B12 and 11,000 units of B18.
Recently, Stewart’s management decided to devote additional machine time to other product lines
resulting in only 41,000 machine hours per year that can be dedicated to the production of the bearings.
An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for
B12 and $13.50 for B18. Stewart wants to schedule the otherwise idle 41,000 machine hours to produce
bearings so that the company can minimize its costs (maximize its net benefits).

Note 1: Variable manufacturing overhead is applied on the basis of direct labor hours.
Note 2: Fixed manufacturing overhead is applied on the basis of machine hours.

Question: 14 Stewart will maximize its net benefits by

A. Purchasing 11,000 units of B18 and manufacturing 8,000 units of B12.

B. Purchasing 8,000 units of B12 and manufacturing 11,000 units of B18.

C. Purchasing 4,000 units of B18 and manufacturing the remaining bearings.

D. Purchasing 4,800 units of B12 and manufacturing the remaining bearings.

Question: 15 A tailor estimates that 60,000 special zippers will be used in the manufacture of men’s
jackets during the next year. A zipper supplier has quoted a price of $.60 per zipper.
The tailor would prefer to purchase 5,000 units per month, but the supplier is unable to
guarantee this delivery schedule. To ensure availability of these zippers, the tailor is
considering the purchase of all 60,000 units at the beginning of the year. Assuming the
tailor can invest cash at 8%, the tailor’s opportunity cost of purchasing the 60,000 units
at the beginning of the year is

A. $1,440

B. $1,320

C. $2,640

D. $36,000

Question: 16In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as
 A. Avoidable fixed costs.

B. Depreciation costs.

C. General office costs.

D. Factory management costs.

Fact Pattern: Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of
radar equipment. The unit cost to manufacture 1 unit of KJ37 is presented below.
Direct materials $ 1,000

Materials handling (20% of direct materials cost) 200

Direct labor 8,000

Manufacturing overhead (150% of direct labor) 12,000

Total manufacturing cost $21,200

Materials handling represents the direct variable costs of the Receiving Department that are applied to
direct materials and purchased components on the basis of their cost. This is a separate charge in
addition to manufacturing overhead. Leland’s annual manufacturing overhead budget is one-third variable
and two-thirds fixed. Scott Supply, one of Leland’s reliable vendors, has offered to supply Part Number
KJ37 at a unit price of $15,000.

Question: 17 Assume Leland Manufacturing is able to rent all idle capacity for $25,000 per month. If
Leland decides to purchase the 10 units from Scott Supply, Leland’s monthly cost for
KJ37 would

A. Increase $48,000.

B. Change by some amount other than those given.

C. Decrease $7,000.

D. Increase $23,000.

Question: 18A company has received an offer from a supplier to produce units that the company currently
produces and sells. The unit price quoted by the supplier is higher than the company’s variable production cost per
unit but lower than the price at which the company can market the units. Under which circumstance would the
company’s profits increase by purchasing units from the supplier?
 A. The company’s administrative costs are zero.

B. The company’s fixed overhead would remain the same if the company purchased units from the supplier.

C. The company has significant sunk costs.

D. Market demand for the product exceeds the company’s capacity.

Fact Pattern: Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per
unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company
has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of
the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility
previously used for manufacturing the plugs.

Question: 19 If the plugs are purchased and the facility rented, Regis Company wishes to realize
$100,000 in savings annually. To achieve this goal, the minimum annual rent on the
facility must be

A. $10,000

B. $190,000

C. $40,000

D. $70,000

Question: 20 A company plans to sell 12,000 units of product XT and 8,000 units of product RP. The
company has a capacity of 12,000 productive machine hours. The unit cost structure
and machine hours required for each product are as follows:

Unit costs: XT RP

Materials $37 $24

Direct labor 12 13

Variable overhead 6 3

Fixed overhead 37 38
Machine hours required 1.0 1.5
 The company can purchase 12,000 units of XT at $60 and/or 8,000 units of RP at $45.
Based on the above, which one of the following actions should be recommended to the
company’s management?

A. Produce XT internally and purchase RP.

B. Produce RP internally and purchase XT.

C. Purchase both XT and RP.

D. Produce both XT and RP.

Question: 21 H Corp. produces premium office chairs. Due to a recent change in market share, H
must decide whether to make or buy an order of 1,000 chairs. The materials cost of
producing a chair is $20 per pound, the cost of direct labor is $40 per direct labor hour,
and manufacturing overhead (100% variable) is allocated at a rate of $10 per chair.
Fixed costs for the year are $5 per chair, of which 20% are avoidable. Each chair
requires 2 pounds of materials and 1 hour of direct labor to complete. Assuming that H
has no excess capacity, what are the relevant costs per chair?

A. $95

B. $71

C. $90

D. $91

Fact Pattern: Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs
per unit, for 20,000 units of ice-makers, are as follows.
Direct materials $ 7

Direct labor 12

Variable overhead 5

Fixed overhead 10

Total costs $34

Cool Compartments, Inc., has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit.
If Refrigerator accepts Cool Compartments' offer, two alternatives are available for the ice-maker
manufacturing plant: the plant can be idled or it can be retooled to produce water filtration units.
Question: 22If Refrigerator idles its existing plant, fixed overhead amounting to $6 per unit could be eliminated.
The total relevant costs associated with the manufacture of ice-makers amount to

A. $600,000

B. $480,000

C. $560,000

D. $680,000

Question: 23 A company manufactures components for use in producing one of its finished products.
When 12,000 units are produced, the full cost per unit is $35, separated as follows:

Direct materials $ 5

Direct labor 15

Variable overhead 10

Fixed overhead 5
A supplier has offered to sell 12,000 components to the company for $37 each. If the
company accepts the offer, some of the facilities currently being used to manufacture
the components can be rented as warehouse space for $40,000. However, $3 of the
fixed overhead currently applied to each component would have to be covered by the
company’s other products. What is the differential cost to the company of purchasing
the components from the supplier?

A. $8,000

B. $44,000

C. $20,000

D. $24,000

Question: 24 One of the items served at a restaurant is pizza that is prepared and baked in the
restaurant’s kitchen. Each pizza requires $3 of ingredients, $2 of labor to prepare the
ingredients, $1 of labor to bake the pizza, and $4 of allocated occupancy costs. The
restaurant’s supplier has offered to sell the restaurant pre-made pizzas, ready for
baking, for $8 each. If the restaurant accepts the supplier’s offer, the existing pizza
preparation space will be converted into two additional dining tables that will increase
profits by $42,000 per year by selling drinks, side dishes, and desserts. The restaurant
expects to sell 15,000 pizzas annually with or without the additional dining tables.
Should the restaurant accept the supplier’s offer?
 A. No, because the restaurant’s profits will decrease by $3,000.

B. Yes, because the restaurant’s profits will increase by $57,000.

C. No, because the restaurant’s profits will decrease by $27,000.

D. Yes, because the restaurant’s profits will increase by $12,000.

Fact Pattern: Richardson Motors uses 10 units of Part No. T305 each month in the production of large
diesel engines. The cost to manufacture one unit of T305 is presented as follows:
Direct materials $ 2,000

Materials handling (20% of direct materials cost) 400

Direct labor 16,000

Manufacturing overhead (150% of direct labor) 24,000

Total manufacturing cost $42,400

Materials handling, which is not included in manufacturing overhead, represents the direct variable costs
of the receiving department that are applied to direct materials and purchased components on the basis
of their cost. Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds
fixed. Simpson Castings, one of Richardson’s reliable vendors, has offered to supply T305 at a unit price
of $30,000.

Question: 25 If Richardson Motors purchases the ten T305 units from Simpson Castings, the
capacity Richardson used to manufacture these parts would be idle. Should
Richardson decide to purchase the parts from Simpson, the out-of-pocket cost per unit
of T305 would

A. Increase $9,600.

B. Decrease $12,400.

C. Increase $3,600.

D. Decrease $6,400.

Question: 26 A corporation has its own cafeteria with the following annual costs:

Food $100,000
 Labor 75,000

Overhead 110,000

Total $285,000

The overhead is 40% fixed. Of the fixed overhead, $25,000 is the salary of the
cafeteria supervisor. The remainder of the fixed overhead has been allocated from total
company overhead. Assuming the cafeteria supervisor will remain and the corporation
will continue to pay his/her salary, the maximum cost the corporation will be willing to
pay an outside firm to service the cafeteria is

A. $175,000

B. $219,000

C. $241,000

D. $285,000

Question: 27 In an insourcing vs. outsourcing situation, which of the following qualitative factors is
usually considered?

A. Special materials requirements.

B. Skilled labor.

C. Special technology.

D. All of the answers are correct.

Fact Pattern: Stewart Industries has been producing two bearings, components B12 and B18, for use in
production.
B12 B18

Machine hours required per unit 2.5 3.0

Standard cost per unit:
Direct material $ 2.25 $ 3.75
Direct labor 4.00 4.50
Manufacturing overhead:
Variable (See Note 1) 2.00 2.25
Fixed (See Note 2) 3.75 4.50
 $12.00 $15.00

Stewart’s annual requirement for these components is 8,000 units of B12 and 11,000 units of B18.
Recently, Stewart’s management decided to devote additional machine time to other product lines
resulting in only 41,000 machine hours per year that can be dedicated to the production of the bearings.
An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for
B12 and $13.50 for B18. Stewart wants to schedule the otherwise idle 41,000 machine hours to produce
bearings so that the company can minimize its costs (maximize its net benefits).

Note 1: Variable manufacturing overhead is applied on the basis of direct labor hours.
Note 2: Fixed manufacturing overhead is applied on the basis of machine hours.

Question: 28 The net benefit (loss) per machine hour that would result if Stewart accepts the
supplier’s offer of $13.50 per unit for Component B18 is

A. $(1.75).

B. $(1.00).

C. Some amount other than those given.

D. $.50.

Fact Pattern: Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of
radar equipment. The unit cost to manufacture 1 unit of KJ37 is presented below.
Direct materials $ 1,000

Materials handling (20% of direct materials cost) 200

Direct labor 8,000

Manufacturing overhead (150% of direct labor) 12,000

Total manufacturing cost $21,200

Materials handling represents the direct variable costs of the Receiving Department that are applied to
direct materials and purchased components on the basis of their cost. This is a separate charge in
addition to manufacturing overhead. Leland’s annual manufacturing overhead budget is one-third variable
and two-thirds fixed. Scott Supply, one of Leland’s reliable vendors, has offered to supply Part Number
KJ37 at a unit price of $15,000.

Question: 29 If Leland purchases the KJ37 units from Scott, the capacity Leland used to
manufacture these parts would be idle. Should Leland decide to purchase the parts
from Scott, the unit cost of KJ37 would
 A. Increase by $4,800.

B. Change by some amount other than those given.

C. Decrease by $3,200.

D. Decrease by $6,200.

Question: 30 A company currently manufactures subcomponent XT9, a part in the company’s main
product ZL10. Management has found an outside supplier that could sell the company
100,000 XT9 subcomponents next year for $45 each. The company’s production of
XT9 costs per unit are shown below.

Direct materials $17.00

Direct labor 16.00

Variable manufacturing overhead 4.50

Fixed manufacturing overhead 6.00

Total cost per unit $43.50

If the subcomponent is purchased from the outside supplier, all variable production
costs would be eliminated and 70% of the fixed production costs would be eliminated.
Management has found that the space used for the XT9 subcomponent could be used
to produce a new product that would generate $300,000 in net operating income each
year. If the company purchases XT9 from the outside supplier, operating income would
decrease by

A. $270,000

B. $630,000

C. $30,000

D. $330,000

Fact Pattern: Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per
unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company
has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of
the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility
previously used for manufacturing the plugs.
Question: 31 If Regis Company purchases the plugs but does not rent the unused facility, the company would

A. Save $3.00 per unit.

B. Lose $3.00 per unit.

C. Save $2.00 per unit.

D. Lose $6.00 per unit.

Fact Pattern: Richardson Motors uses 10 units of Part No. T305 each month in the production of large
diesel engines. The cost to manufacture one unit of T305 is presented as follows:
Direct materials $ 2,000

Materials handling (20% of direct materials cost) 400

Direct labor 16,000

Manufacturing overhead (150% of direct labor) 24,000

Total manufacturing cost $42,400

Materials handling, which is not included in manufacturing overhead, represents the direct variable costs
of the receiving department that are applied to direct materials and purchased components on the basis
of their cost. Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds
fixed. Simpson Castings, one of Richardson’s reliable vendors, has offered to supply T305 at a unit price
of $30,000.

Question: 32 Assume Richardson Motors is able to rent all idle capacity for $50,000 per month. If
Richardson decides to purchase the 10 units from Simpson Castings, Richardson’s
monthly cost for T305 would

A. Decrease $14,000.

B. Increase $46,000.

C. Increase $96,000.

D. Decrease $64,000.
Question: 33 Which of the following qualitative factors favors the buy choice in an insourcing
vs. outsourcing decision?

A. Quality control is critical.

B. Maintaining a long-run relationship with suppliers is desirable.

C. Idle capacity is available.

D. All of the answers are correct.

Question: 34 When applying the cost-benefit approach to a make-or-buy decision, the primary
criterion is how well management goals will be achieved in relation to costs. Costs
include all expected

A. Incremental out-of-pocket costs as well as all expected continuing costs that are
common to all the alternative courses of action.

B. Historical and future costs relative to the courses of action including all qualitative
factors that cannot be measured in numerical terms.

C. Future costs that differ among the alternative courses of action plus all qualitative
factors that cannot be measured in numerical terms.

D. Variable costs for the courses of action but not expected fixed costs because only the
expected variable costs are relevant.

Fact Pattern: Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs
per unit, for 20,000 units of ice-makers, are as follows.
Direct materials $ 7

Direct labor 12

Variable overhead 5

Fixed overhead 10

Total costs $34

Cool Compartments, Inc., has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit.
If Refrigerator accepts Cool Compartments' offer, two alternatives are available for the ice-maker
manufacturing plant: the plant can be idled or it can be retooled to produce water filtration units.
Question: 35 If Refrigerator retools its existing plant, revenues from the sale of water filtration units
are estimated at $80,000, with variable costs amounting to 60% of sales. In addition,
$6 per unit of the fixed overhead associated with the manufacture of ice-makers could
be eliminated. For Refrigerator Company to determine the most appropriate action to
take in this situation, the total relevant costs of make vs. buy, respectively, are

A. $600,000 vs. $528,000.

B. $680,000 vs. $440,000.

C. $648,000 vs. $528,000.

D. $600,000 vs. $560,000.

5: (19) Decision Making -- Sell As Is or Process Further

Question: 1 A circuit board company conducts a joint manufacturing process to produce 10,000
units of Board A and 10,000 units of Board B. The total joint variable manufacturing
cost to produce these two products is $2,000,000. The company can sell all 10,000
units of Board B at the splitoff point for $300 per unit, or process Board B further and
sell all 10,000 units at $375 per unit. The total additional cost to process Board B
further would be $500,000, and all additional costs would be variable. If the company
decides to process Board B further, what effect would the decision have on operating
income?

A. $2,250,000 increase in operating income.

B. $750,000 decrease in operating income.

C. $250,000 increase in operating income.

D. $3,250,000 increase in operating income.

Question: 2 In a joint manufacturing process, joint costs incurred prior to a decision as to whether
to process the products after the split-off point should be viewed as

A. Sunk costs.

B. Differential costs.

C. Relevant costs.

D. Standard costs.

Question: 3 A lumber company produces several products that can be sold at the split-off point or
processed further and then sold. The following results are from a recent period:

Sales Value Additional Sales Value after

Product at Split-off Variable Costs Further Processing

Green lumber $159,600 $24,000 $178,000

Rough lumber 124,000 28,200 173,600

Sawdust 102,000 19,600 130,000

 Which products should be processed further?

A. Rough lumber and sawdust only.

B. All three products.

C. Green lumber and rough lumber only.

D. Green lumber and sawdust only.

Question: 4 A firm produces two joint products (A and B) from one unit of raw material, which costs
$1,000. Product A can be sold for $700 and product B can be sold for $500 at the split-
off point. Alternatively, both A and/or B can be processed further and sold for $900 and
$1,200, respectively. The additional processing costs are $100 for A and $750 for B.
Should the firm process products A and B beyond the split-off point?

A. Only B should be processed further.

B. Neither product should be processed further.

C. Only A should be processed further.

D. Both A and B should be processed further.

Fact Pattern: Whitehall Corporation produces chemicals used in the cleaning industry. During the
previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000
units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is
sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the
production of AM-12 after further processing. The further processing will cost Whitehall $90,000.

Question: 5Concerning AM-12, which one of the following alternatives is most advantageous?

A. Whitehall should process further and sell to Flank if the total selling price per unit after further processing
is greater than $3.00, which covers the joint costs.

B. Whitehall should process further and sell to Flank if the total selling price per unit after further processing
is greater than $5.00.

C. Whitehall should process further and sell to Flank if the total selling price per unit after further processing
is greater than $5.25, which maintains the same gross profit percentage.

D. Whitehall should continue to sell at split-off unless Flank offers at least $4.50 per unit after further
processing, which covers Whitehall’s total costs.
Question: 6 A company uses a joint process that yields two products, X and Y. Each product can
be sold at its split-off point or processed further. All the additional processing costs are
variable and can be traced to each product. Joint production costs are $35,000. Other
sales and cost data are as follows.

Product X Product Y

Sales value at split-off point $60,000 $35,000

Final sales value if processed further 80,000 50,000

Additional costs beyond split-off 14,000 18,000

Management wants to know whether to sell each product at the split-off point or to
process the products further. Which one of the following options should be
recommended to management?

A. Sell both products at the split-off point.

B. Process Product X further and sell Product Y at split-off.

C. Process both products further.

D. Sell Product X at split-off and process Product Y further.

Question: 7 A firm manufactured 40,000 gallons of Mononate and 60,000 gallons of Beracyl in a
joint production process, incurring $250,000 of joint costs. The firm allocates joint costs
based on the physical volume of each product produced. Mononate and Beracyl can
each be sold at the split-off point in a semifinished state or, alternatively, processed
further. Additional data about the two products are as follows:

Mononate Beracyl

Sales price per gallon at split-off $ 7 $ 15

Sales price per gallon if processed further $ 10 $ 18

Variable production costs if processed further $125,000 $115,000

An assistant in the firm’s cost accounting department was overheard saying “....that
when both joint and separable costs are considered, the firm has no business
processing either product beyond the split-off point. The extra revenue is simply not
worth the effort.” Which of the following strategies should be recommended for the
firm?
Mononate Beracyl

A. Process further Sell at split-off

B. Process further Process further

 C. Sell at split-off Sell at split-off

D. Sell at split-off Process further

Question: 8A firm manufactures several different products, including a premium lawn fertilizer and weed killer
that is popular in hot, dry climates. The firm is currently operating at less than full capacity because of market
saturation for lawn fertilizer. Sales and cost data for a 40-pound bag of lawn fertilizer is as follows.

Selling price $18.50

Production cost:

Materials and labor $12.25

Variable overhead 3.75

Allocated fixed overhead 4.00 20.00

Income (loss) per bag $ (1.50)

On the basis of this information, which one of the following alternatives should be recommended to management?

A. Continue to produce and market this product.

B. Increase output and spread fixed overhead over a larger volume base.

C. Select a different cost driver to allocate its overhead.

D. Drop this product from its product line.

Question: 9A company uses a joint process to produce three products: A, B and C, all derived from one input. The
company can sell these products at the point of split-off or process them further. The joint production costs during
October were $10,000. The company allocates joint costs to the products in proportion to the relative physical
volume of output. Additional information is presented below:

If Processed Further

Units Unit Sales Unit Sales Unit Additional

Product Produced Price at Split-off Price Cost

A 1,000 $4.00 $5.00 $0.75

B 2,000 2.25 4.00 1.20

 C 1,500 3.00 3.75 0.90
Assuming sufficient demand exists, to maximize profits, the company should sell

A. Products A, B, and C at split-off.

B. Product A at split-off and perform additional processing on products B and C.

C. Product B at split-off and perform additional processing on products C and A.

D. Product C at split-off and perform additional processing on products A and B.

Question: 10A corporation manufactures two products that are considered joint products. Common costs of
$350,000, allocated using the physical measures method, yield 15,000 units of Product A and 20,000 units of
Product B. Product B incurs $50,000 of direct costs and sells for $15 per unit. The corporation has the option of
processing Product B further. This action would increase the product’s direct costs by $35,000 and would increase
the unit selling price to $17. If the corporation further processes Product B, its income will

A. Decrease by $45,000.

B. Increase by $105,000.

C. Increase by $5,000.

D. Increase by $55,000.

Question: 11 There is a market for both product X and product Y. Which of the following costs and
revenues would be most relevant in deciding whether to sell product X or process it
further to make product Y?

A. Total cost of making Y and the revenue from sale of Y.

B. Additional cost of making X, given the cost of making Y, and additional revenue
from Y.

C. Total cost of making X and the revenue from sale of X and Y.

D. Additional cost of making Y, given the cost of making X, and additional revenue
from Y.

Question: 12 In joint-product costing and analysis, which one of the following costs is relevant when
deciding the point at which a product should be sold to maximize profits?
 A. Separable costs after the split-off point.

B. Joint costs to the split-off point.

C. Purchase costs of the materials required for the joint products.

D. Sales salaries for the period when the units were produced.

Fact Pattern:
N-Air Corporation uses a joint process to If Processed Further
produce three products: A, B, and C, all Unit Sales Unit Unit
derived from one input. The company can sell Units Price at Sales Additional
these products at the point of split-off (end of Product Produced Split-off Price Cost
the joint process) or process them further. A 1,000 $4.00 $5.00 $ .75
The joint production costs during October B 2,000 2.25 4.00 1.20
were $10,000. N-Air allocates joint costs to C 1,500 3.00 3.75 .90
the products in proportion to the relative
physical volume of output. Additional
information is presented in the opposite
column.

Question: 13 Assuming sufficient demand exists, N-Air could sell all the products at the prices
previously mentioned at either the split-off point or after further processing. To
maximize its profits, N-Air Corporation should

A. Sell products A, B, and C at split-off.

B. Sell product A at split-off and perform additional processing on products B and C.

C. Sell product C at split-off and perform additional processing on products A and B.

D. Sell product B at split-off and perform additional processing on products C and A.

Question: 14 A company produces X-547 in a joint manufacturing process. The company is studying
whether to sell X-547 at the split-off point or upgrade the product to become Xylene.
The following information has been gathered:

I. Selling price per pound of X-547

II. Variable manufacturing costs of upgrade process
III. Avoidable fixed costs of upgrade process
IV. Selling price per pound of Xylene
 V. Joint manufacturing costs to produce X-547

Which items should be reviewed when making the upgrade decision?

A. I, II, and IV only.

B. I, II, III, and IV only.

C. I, II, IV, and V only.

D. II and III only.

Question: 15A corporation produces two joint products, JP-1 and JP-2, and a single by-product, BP-1, in
Department 2 of its manufacturing plant. JP-1 is subsequently transferred to Department 3, where it is refined into a
more expensive, higher-priced product, JP-1R, and a by-product known as BP-2. Recently, a competitor introduced
a product that would compete directly with JP-1R, and as a result, the corporation must re-evaluate its decision to
process JP-1 further. The market for JP-1 will not be affected by the competitor’s product, and the corporation plans
to continue production of JP-1, even if further processing is terminated. Should this latter action be necessary,
Department 3 will be dismantled. Which of the following items should the corporation consider in its decision to
continue or terminate Department 3 operations?

1. The selling price per pound of JP-1.

2. The total hourly direct labor cost in Department 3.
3. Unit marketing and packaging costs for BP-2.
4. Supervisory salaries of Department 3 personnel who will be transferred elsewhere in the plant, if
processing is terminated.
5. Department 2 joint cost allocated to JP-1 and transferred to Department 3.
6. The cost of existing JP-1R inventory.

A. 2, 3, 5 ,6.

B. 1, 2, 3.

C. 1, 2, 3, 4, 5.

D. 2, 3, 4.

Question: 16 A company produces ready-to-bake pie crusts. In deciding whether to process this
product further into complete ready-to-bake pies by adding filling, relevant dollar
amounts to consider would include all of the following except the
 A. Selling price of the crusts.

B. Cost to add the filling.

C. Selling price of the complete pies.

D. Cost to manufacture the crusts.

Question: 17 A corporation manufactures two products in a joint process incurring $150,000 of joint
costs per batch that are allocated using the physical-measure method. Each batch
yields 1,000 units of Product A and 4,000 units of Product B. Separable costs are
$20,000 for Product A and $20,000 for Product B. Both products sell for $50 per unit.
The corporation has the option of processing Product B further to produce 4,000 units
of Product C, incurring additional costs of $8,000. The corporation should produce
Product C if the selling price per unit is greater than

A. $32.00

B. $57.00

C. $52.00

D. $37.00

Question: 18 A firm manufactures three products: A, B, and C. During the month of May, the firm’s
production, costs, and sales data were as follows:

Products

A B C

Units of production 30,000 20,000 70,000

Further processing costs $ -- $60,000 $140,000

Unit sales price:

At split-off 3.75 5.50 10.25

After further processing -- 8.00 12.50

Joint production costs to the split-off point will total $480,000. Based on the above
information, which one of the following alternatives should be recommended to the
firm’s management?
 A. Sell both Product B and Product C at the split-off point.

B. Process Product C further but sell Product B at the split-off point.

C. Process both Products B and C further.

D. Process Product B further but sell Product C at the split-off point.

Fact Pattern: Whitehall Corporation produces chemicals used in the cleaning industry. During the
previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000
units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is
sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the
production of AM-12 after further processing. The further processing will cost Whitehall $90,000.

Question: 19 Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation for $5.50
per unit after further processing. During the first month of production, Whitehall sold
50,000 units with 10,000 units remaining in inventory at the end of the month. With
respect to AM-12, which one of the following statements is true?

A. The operating profit last month was $125,000, and the inventory value is $30,000.

B. The operating profit last month was $50,000, and the inventory value is $15,000.

C. The operating profit last month was $200,000, and the inventory value is $30,000.

D. The operating profit last month was $50,000, and the inventory value is $45,000.
6: (23) Decision Making -- Keep or Drop

Question: 1 A retail company has three segments with total operating income of $500,000.
Selected financial information for Segment 1 is presented below:

Segment 1

Unit sales 28,000

Sales revenue $700,000

Cost of sales 420,000

Administrative expenses 144,000

Commissions 14,000

Rent 140,000

Salaries 32,000

• Administrative expenses are allocated to the three segments equally.

• Commissions are paid to the salespersons in each segment based on 2% of
gross sales.
• The company rents the entire building and allocates the rent to the three
segments based on the square footage occupied by each.
• Salaries represent payments to the employees in the segment.

The controller has expressed concern about the operating loss for Segment 1 and has
suggested that it be closed. If the segment is closed, none of the employees would be
retained. Should the company drop Segment 1?

A. No, because total operating income would decrease by $126,000.

B. Yes, because total operating income would increase by $50,000.

C. No, because total operating income would decrease by $234,000.

D. No, because total operating income would decrease by $94,000.

Question: 2 A camera manufacturing company is considering eliminating Model XP5 from its
camera line because of losses over the past quarter. The past quarter’s financial
information for Model XP5 is shown below.
 Sales (1,000 units) $600,000

Manufacturing costs:

Direct materials 300,000

Direct labor ($15 per hour) 120,000

Overhead 200,000

Operating loss $ (20,000)

Overhead costs are 70% variable and the remaining 30% is depreciation of special
equipment for Model XP5 that has no resale value. If Model XP5 is dropped from the
product line, operating income will

A. Increase by $20,000.

B. Increase by $60,000.

C. Decrease by $20,000.

D. Decrease by $40,000.

Question: 3A furniture manufacturer currently has three divisions: Maple, Oak, and Cherry. The oak furniture line
does not seem to be doing well, and the president of the manufacturer is considering dropping this line. If it is
dropped, the revenues associated with the Oak Division will be lost and the related variable costs saved. Also, 50%
of the fixed costs allocated to the oak furniture line would be eliminated. The income statements, by divisions, are as
follows:

Maple Oak Cherry

Sales $55,000 $85,000 $100,000

Variable costs 40,000 72,000 82,000

Contribution margin $15,000 $13,000 $ 18,000

Fixed costs 10,000 14,000 10,200

Operating profit (loss) $ 5,000 $ (1,000) $ 7,800

Which one of the following options should be recommended to the president of the manufacturer?

A. Discontinue the Oak Division which would result in a $7,000 increase in operating profits.

B. Discontinue the Oak Division which would result in a $1,000 increase in operating profits.
 C. Continue operating the Oak Division as discontinuance would result in a total operating loss of $1,200.

D. Continue operating the Oak Division as discontinuance would result in a $6,000 decline in operating
profits.

Fact Pattern: Condensed monthly operating income data for Korbin, Inc., for May follows:
Urban Suburban

Store Store Total

Sales $80,000 $120,000 $200,000

Variable costs 32,000 84,000 116,000

Contribution margin $48,000 $ 36,000 $ 84,000

Direct fixed costs 20,000 40,000 60,000

Store segment margin $28,000 $ (4,000) $ 24,000

Common fixed cost 4,000 6,000 10,000

Operating income $24,000 $ (10,000) $ 14,000

Additional information regarding Korbin’s operations follows:

• One-fourth of each store’s direct fixed costs would continue if either store is closed.

• Korbin allocates common fixed costs to each store on the basis of sales dollars.

• Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban
Store’s sales, while closing the Urban Store would not affect the Suburban Store’s sales.

• The operating results for May are representative of all months.

Question: 4 A decision by Korbin to close the Suburban Store would result in a monthly increase
(decrease) in Korbin’s operating income of

A. $(1,200)

B. $4,000

C. $(6,000)

D. $(10,800)
Question: 5 A company recently reviewed the profitability of each of its segments. The company’s
Western Unit projected a loss for the coming period and was shut down. In which one
of the following situations would the total company profits decrease after shutting down
the Western Unit?

A. Western Unit’s inventory was transferred to other divisions.

B. Western Unit’s projected fixed costs were eliminated.

C. Western Unit’s projected loss was less than the allocated home office cost.

D. Western Unit’s projected contribution margin was negative.

Fact Pattern: Current business segment operations for Whitman, a mass retailer, are presented below.
Merchandise Automotive Restaurant Total

Sales $500,000 $400,000 $100,000 $1,000,000

Variable costs 300,000 200,000 70,000 570,000

Fixed costs 100,000 100,000 50,000 250,000

Operating income (loss) $100,000 $100,000 $(20,000) $ 180,000

Management is contemplating the discontinuance of the Restaurant segment since “it is losing money.” If
this segment is discontinued, $30,000 of its fixed costs will be eliminated. In addition, Merchandise and
Automotive sales will decrease 5% from their current levels.

Question: 6 What will Whitman’s total contribution margin be if the Restaurant segment is
discontinued?

A. $160,000

B. $380,000

C. $220,000

D. $367,650

Question: 7 An ice cream truck that drives through residential neighborhoods sells five different
treats to the area’s children. On average, the driver sells 100 of each type of treat per
 day for the 120 days per year when the weather is warm enough to generate sales.
Four of his products are profitable, but the other, Creamy Delight, indicates a loss as
follows:

Selling price/unit $1.75

Cost of each treat 0.80

Truck operating costs/unit 0.37

Joe’s salary/unit 0.60

Administrative costs/unit 0.08

Loss/unit $(0.10)

If the driver cannot raise his selling price, he should

A. Continue to sell Creamy Delight to avoid a decrease in profit of $11,400.

B. Discontinue the sales of Creamy Delight to increase his profits by $240.

C. Discontinue the sales of Creamy Delight to increase his profits by $1,200.

D. Continue to sell Creamy Delight to avoid a decrease in profit of $6,960.

Question: 8A company operates numerous vending machines in a variety of locations. The company is expanding,
needs more machines, and is deciding whether to move machines from unprofitable segments to meet this need.
Abbreviated income statements of the two possible unprofitable segments are shown below. The other segments, not
shown, are profitable with income over $200,000.

Non-Chain Motels Local Parks

Sales $250,000 $100,000

Cost of goods sold 130,000 50,000

Travel to service/refill machines 125,000 45,000

Allocated corporate costs 70,000 30,000

Income (loss) $(75,000) $(25,000)

Which segment(s) should be discontinued?

A. Both non-chain motels and local parks.

B. Non-chain motels only.

 C. Neither non-chain motels nor local parks.

D. Local parks only.

Question: 9 When a company decides to divest a segment, the underlying reason for this decision
could be any one of the following except

A. As a result of a change in the company’s long-range strategy, what was once a good
fit is no longer a good fit.

B. Another company is willing to pay a higher price for the segment than its present
value to the current owner.

C. The realization of economies of scale where average cost declines as volume

increases.

D. The segment is a chronic loser and the company is unwilling to commit the resources
to make it profitable.

Question: 10A company sells two products that are manufactured in the same production department on two
different machines. The contribution margin per unit of the two products is $120 and $80, respectively. When
deciding if the second product should be discontinued, which one of the following pieces of information is needed to
make the correct decision?

A. Alternative use of the second product’s space.

B. Production department manager’s salary.

C. Commissions paid on the second product’s sales.

D. Depreciation expense of the second product’s machinery.

Question: 11 Sudden economic changes have forced a company to alter its business strategy. The
company is considering eliminating product lines, laying off production workers,
reducing advertising, and closing one of its factories. In taking these actions, which one
of the following costs should be considered sunk costs?

A. The costs of selling or demolishing the factory.

B. Utility costs at the closed factory and real estate taxes.

 C. Production workers’ wages, severance, and advertising.

D. Research and development costs of eliminated product lines.

Question: 12 A company has a portfolio of four products and incurs $175,000 of allocated fixed costs
per year. Financial data for the four products are shown below:

Product A Product B Product C Product D

Units sold 25,000 18,750 3,750 2,500

Revenue $750,000 $600,000 $150,000 $100,000

Unit variable costs 24 24 37 41

Which product should the company discontinue?

A. Product D.

B. Product A.

C. Product B.

D. Product C.

Question: 13 A company manufactures three products, T1, T2, and T3. Their financial information is
shown below.

T1 T2 T3

Sales $60,000 $90,000 $24,000

Variable costs 36,000 48,000 15,000

Contribution margin 24,000 42,000 9,000

Fixed costs:

Avoidable 9,000 18,000 6,000

Unavoidable 6,000 9,000 5,400

Operating income $ 9,000 $15,000 $ (2,400)

 Management is concerned about the financial performance of T3. If the company drops
the T3 product line, the operating income will

A. Increase by $3,000.

B. Decrease by $9,000.

C. Increase by $2,400.

D. Decrease by $3,000.

Question: 14 A retail furniture company currently sells products in four categories: recliners, sofas,
dining sets, and patio. Due to recent poor performance, the company is considering
eliminating the patio furniture line.

Recliners Sofas Dining Patio

Sales $500,000 $700,000 $900,000 $400,000

Variable expenses 200,000 375,000 405,000 330,000

Allocated fixed expenses 200,000 280,000 360,000 160,000

Operating income $100,000 $ 45,000 $135,000 $ (90,000)

If patio furniture is eliminated, 80% of the fixed costs assigned to the product line could
be avoided. The company does experience cross-sales opportunities and estimates
eliminating the patio furniture will lead to a 5% decrease in unit sales of each of the
other three product lines. The company should

A. Keep the patio furniture line because eliminating it will decrease the company’s
operating income by $67,000.

B. Keep the patio furniture line because eliminating it will decrease the company’s
operating income by $94,000.

C. Eliminate the patio furniture line, which will increase the company’s operating
income by $38,000.

D. Eliminate the patio furniture line, which will increase the company’s operating
income by $2,000.

Fact Pattern: Condensed monthly operating income data for Korbin, Inc., for May follows:
Urban Suburban
 Store Store Total

Sales $80,000 $120,000 $200,000

Variable costs 32,000 84,000 116,000

Contribution margin $48,000 $ 36,000 $ 84,000

Direct fixed costs 20,000 40,000 60,000

Store segment margin $28,000 $ (4,000) $ 24,000

Common fixed cost 4,000 6,000 10,000

Operating income $24,000 $ (10,000) $ 14,000

Additional information regarding Korbin’s operations follows:

• One-fourth of each store’s direct fixed costs would continue if either store is closed.

• Korbin allocates common fixed costs to each store on the basis of sales dollars.

• Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban
Store’s sales, while closing the Urban Store would not affect the Suburban Store’s sales.

• The operating results for May are representative of all months.

Question: 15 Korbin is considering a promotional campaign at the Suburban Store that would not
affect the Urban Store. Increasing annual promotional expense at the Suburban Store
by $60,000 in order to increase this store’s sales by 10% would result in a monthly
increase (decrease) in Korbin’s operating income during the year (rounded) of

A. $487

B. $(1,400)

C. $7,000

D. $(5,000)

Question: 16 A company has three product lines: basic, deluxe, and limited. Total fixed costs are
allocated based on direct labor hours and remain unchanged in the short term.

Basic Deluxe Limited

Units sold 10,000 7,000 2,500

 Price per unit $10 $13 $21

Total variable costs $80,000 $70,000 $37,500

Total fixed costs $22,000 $13,000 $6,000

Based on the information above, which product lines, if any, should be discontinued
due to lack of profitability?

A. None of the product lines should be discontinued.

B. Only the deluxe and limited lines should be discontinued.

C. Only the basic line should be discontinued.

D. Only the limited line should be discontinued.

Question: 17 A tennis equipment company produces two lines of tennis shoes, Professional and
Amateur. Income statement data for the tennis shoes is shown below:

Professional Amateur Total

Sales $550,000 $750,000 $1,300,000

Variable costs 275,000 400,000 675,000

Direct fixed costs 100,000 300,000 400,000

Allocated fixed costs 37,500 112,500 150,000

Operating income $137,500 $ (62,500) $ 75,000

Since the Amateur line shows a loss, the company is considering eliminating this line of
tennis shoes. Based on the data provided, should the company drop the Amateur
tennis shoe line?

A. No, operating income will decrease by $50,000.

B. Yes, operating income will increase by $25,000.

C. No, operating income will decrease by $350,000.

D. Yes, operating income will increase by $62,500.

Question: 18 A firm is at a critical decision point and must decide whether to go out of business or
continue to operate for 5 more years. The firm has a labor contract with 5 years
remaining that calls for $1.5 million in severance pay if the firm’s plant shuts down. The
firm also has a contract to supply 150,000 units per year, at a price of $100 each, to
the firm’s only remaining customer for the next 5 years. The firm must pay the
customer $500,000 immediately if it defaults on the contract. The plant has a net book
value of $600,000, and appraisers estimate the facility would sell for $750,000 today
but would have no market value if operated for another 5 years. The firm’s fixed costs
are $4 million per year, and variable costs are $75 per unit. The firm’s appropriate
discount rate is 12%. Ignoring taxes, the optimal decision is to

A. Keep operating since the incremental net present value is approximately $350,000.

B. Shut down because the annual cash flow is negative $250,000 per year.

C. Keep operating to avoid the severance pay of $1,500,000.

D. Shut down since the breakeven point is 160,000 units, while annual sales are
150,000 units.

Question: 19 The management accountant for a bookstore has prepared the following income
statement for the most current year:

Cook Book Travel Books Classics Total

Sales $60,000 $100,000 $40,000 $200,000

Cost of goods sold 36,000 65,000 20,000 121,000

Contribution margin $24,000 $ 35,000 $20,000 $ 79,000

Order and delivery processing 18,000 21,000 8,000 47,000
Rent (per sq. ft. used) 2,000 1,000 3,000 6,000
Allocated corporate costs 7,000 7,000 7,000 21,000

Operating profit $ (3,000) $ 6,000 $ 2,000 $ 5,000

If the company drops Cook Book, the square footage used will return to the landlord.
Dropping Cook Book will cause the company’s operating profit to be

A. $4,000 lower.

B. $7,000 higher.

C. $4,000 higher.

D. $6,000 lower.
Question: 20 The following information is available on Crain Co.’s two product lines:

Chairs Tables

Sales $180,000 $ 48,000

Variable costs (96,000) (30,000)

Contribution margin $ 84,000 $ 18,000

Fixed costs:

Avoidable (36,000) (12,000)

Unavoidable (18,000) (10,800)

Operating income (loss) $ 30,000 $ (4,800)

Assuming the tables line is discontinued and the factory space previously used to
make tables is rented for $24,000 per year, operating income will increase by what
amount?

A. $24,000

B. $18,000

C. $28,800

D. $13,200

Fact Pattern: Condensed monthly operating income data for Korbin, Inc., for May follows:
Urban Suburban

Store Store Total

Sales $80,000 $120,000 $200,000

Variable costs 32,000 84,000 116,000

Contribution margin $48,000 $ 36,000 $ 84,000

Direct fixed costs 20,000 40,000 60,000

Store segment margin $28,000 $ (4,000) $ 24,000

Common fixed cost 4,000 6,000 10,000

Operating income $24,000 $ (10,000) $ 14,000

Additional information regarding Korbin’s operations follows:
• One-fourth of each store’s direct fixed costs would continue if either store is closed.

• Korbin allocates common fixed costs to each store on the basis of sales dollars.

• Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban
Store’s sales, while closing the Urban Store would not affect the Suburban Store’s sales.

• The operating results for May are representative of all months.

Question: 21 One-half of the Suburban Store’s dollar sales are from items sold at variable cost to
attract customers to the store. Korbin is considering the deletion of these items, a move
that would reduce the Suburban Store’s direct fixed expenses by 15% and result in a
20% loss of Suburban Store’s remaining sales volume. This change would not affect
the Urban Store. A decision by Korbin to eliminate the items sold at cost would result in
a monthly increase (decrease) in Korbin’s operating income of

A. $(7,200)

B. $2,000

C. $(5,200)

D. $(1,200)

Fact Pattern: Current business segment operations for Whitman, a mass retailer, are presented below.
Merchandise Automotive Restaurant Total

Sales $500,000 $400,000 $100,000 $1,000,000

Variable costs 300,000 200,000 70,000 570,000

Fixed costs 100,000 100,000 50,000 250,000

Operating income (loss) $100,000 $100,000 $(20,000) $ 180,000

Management is contemplating the discontinuance of the Restaurant segment since “it is losing money.” If
this segment is discontinued, $30,000 of its fixed costs will be eliminated. In addition, Merchandise and
Automotive sales will decrease 5% from their current level

Question: 22 When considering the decision, Whitman’s controller advised that one of the financial
aspects Whitman should review is contribution margin. Which one of the following
options reflects the current contribution margin ratios for each of Whitman’s business
segments?
Merchandise Automotive Restaurant
 A. 60% 50% 30%

B. 40% 50% 30%

C. 40% 50% 70%

D. 60% 50% 70%

Question: 23 A company has two business units (Division 1 and Division 2) that are currently
operating as profit centers. Management is evaluating the possibility of discontinuing
Division 2 because of the operating losses it has experienced over the last few years.
Select information from the operating budget for the upcoming fiscal year is shown
below.

Division 1 Division 2

Sales $800,000 $400,000

Cost of goods sold 300,000 250,000

Gross margin $500,000 $150,000

Variable selling and administrative expenses 100,000 80,000

Fixed selling and administrative expenses 75,000 75,000

Operating income (loss) $325,000 $ (5,000)

Fixed selling and administrative expenses are allocated equally between the two units.
If Division 2 is discontinued, fixed selling and administrative expenses are expected to
decrease by 20% from the current level, and Division 1’s sales are expected to
increase by 15%. Based on the budget information above, should the company
discontinue Division 2, and why?

A. No, because operating income will decrease by $10,000.

B. No, because operating income will decrease by $40,000.

C. Yes, because operating income will increase by $80,000.

D. Yes, because operating income will increase by $20,000.