26) Macaulay Company has three product lines—D, E, and F. The following information is available:
Sales
Variable costs
Contribution margin
Fixed expenses
Operating income (loss)
Macaulay Company is thinking of dropping product line F because it is reporting an operating loss. Assume that
$15,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on
operating income?
A) Operating income will increase by $25,000.
B) Operating income will increase by $20,000.
C) Operating income will decrease by $5,000.
D) Operating income will decrease by $15,000.
27) Macaulay Company has three product lines—D, E, and F. The following information is available:
Sales
Variable costs
Contribution margin
Fixed expenses
Operating income (loss)
Macaulay Company is thinking of dropping product line F because it is reporting an operating loss. Assume that
$25,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on
operating income?
A) Operating income will increase by $25,000.
B) Operating income will increase by $5,000.
C) Operating income will decrease by $25,000.
D) Operating income will decrease by $5,000.
28) The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows,
as follows:
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Operating income (loss)
Sweet Dreams is considering eliminating the pillows product line. If they do so, they will be able to eliminate
$76,000 of total fixed costs. How would that business decision impact operating income?
A) increase $76,000 in operating income
B) decrease $60,000 in operating income
C) increase $42,000 in operating income
D) increase of $16,000 in operating income
29) Which of the following statements describes a scenario when management should consider dropping a
business division?
A) The division has been reporting an operating loss consistently.
B) The division's avoidable fixed costs are less than its contribution margin.
C) The division's avoidable fixed costs are greater than its contribution margin.
D) The division's unavoidable fixed costs are greater than its operating loss.
30) Clay Corporation manufactures two styles of lamps—a Bedford Lamp and a Lowell Lamp. The following per
unit data are available:
Sale price
Variable costs
Machine hours required for 1 lamp
Total fixed costs are $30,000, and Clay can sell a maximum of 10,000 units of each style of lamp annually.
Machine hour capacity is 25,000 hours per year. What is the contribution margin per machine hour for the
Bedford lamp?
A) $4 per machine hour
B) $2 per machine hour
C) $6 per machine hour
D) $8 per machine hour
31) Clay Corporation manufactures two styles of lamps—a Bedford Lamp and a Lowell Lamp. The following per
unit data are available:
Sale price
Variable costs
Machine hours required for 1 lamp
Total fixed costs are $30,000, and Clay can sell a maximum of 10,000 units of each style of lamp annually.
Machine hour capacity is 25,000 hours per year. What is the contribution margin per machine hour for the
Lowell lamp?
A) $4 per machine hour
B) $2 per machine hour
C) $3 per machine hour
D) $12 per machine hour
32) Clay Corporation manufactures two styles of lamps—a Bedford Lamp and a Lowell Lamp. The following per
unit data are available:
Sale price
Variable costs
Machine hours required for 1 lamp
Total fixed costs are $30,000. Machine hour capacity is 25,000 hours per year. Assuming that the company can
sell as many products as it can make, which product mix would deliver the highest operating income?
A) 10,000 Bedford lamps, 1,250 Lowell lamps
B) Zero Bedford lamps, 6,250 Lowell lamps
C) 12,500 Bedford lamps, zero Lowell lamps
D) 12,500 Bedford lamps, 12,500 Lowell lamps
33) Clay Corporation manufactures two styles of lamps—a Bedford Lamp and a Lowell Lamp. The following per
unit data are available:
Sale price
Variable costs
Machine hours required for 1 lamp
Total fixed costs are $30,000. Marketing data indicate that the company can sell up to 8,000 units of the
Bedford lamp and up to 4,000 units of the Lowell lamp. Machine hour capacity is 25,000 hours per year. What
product mix will deliver the optimum operating income?
A) 4,500 Bedford lamps, 4,000 Lowell lamps
B) 12,500 Bedford lamps, zero Lowell lamps
C) 8,000 Bedford lamps, 2,250 Lowell lamps
D) 7,500 Bedford lamps, 3,000 Lowell lamps
34) Todd Corporation produces two products, P and Q. P sells for $5 per unit; Q sells for $6.50 per unit.
Variable costs for P and Q are respectively, $3 and $4.50. There are 4,300 direct labor hours per month
available for producing the two products. Product P requires 4 direct labor hours per unit and Product Q
requires 5 direct labor hours per unit. The company can sell as many of either product as it can produce. What
is the maximum monthly contribution margin that Todd can generate under the circumstances? Round to
nearest whole dollar.
A) $2,150
B) $1,505
C) $1,500
D) $2,250
35) Todd Corporation produces two products, P and Q. P sells for $5 per unit; Q sells for $6.50 per unit.
Variable costs for P and Q are respectively, $3 and $4.50. There are 4,300 direct labor hours per month
available for producing the two products. Product P requires 4 direct labor hours per unit and Product Q
requires 5 direct labor hours per unit. The company can sell up to 900 units of each kind per month. What is the
maximum monthly contribution margin that Todd can generate under the circumstances? Round to nearest
whole dollar.
A) $2,150
B) $1,505
C) $2,080
D
D
$70,000
E
F
$40,000
$30,000
-40,000
-20,000
-10,000
30,000
20,000
20,000
-15,000
-15,000
-25,000
$15,000
$5,000
($5,000)
D
$70,000
E
F
$40,000
$30,000
-40,000
-20,000
-10,000
30,000
20,000
20,000
-15,000
-15,000
-25,000
$15,000
$5,000
($5,000)
Blankets
$620,000
-465,000
Pillows
$300,000
-240,000
$155,000
Total
$920,000
-705,000
$60,000
$215,000
-76,000
-76,000 -152,000
$79,000
$(16,000)
$63,000
20000
12000
15000
Bedford Lamp
$25
$17
Lowell Lamp
$35
$23
2
Bedford Lamp
$25
$17
4
Lowell Lamp
$35
$23
2
Bedford Lamp
$25
$17
4
Lowell Lamp
$35
$23
2
Bedford Lamp
$25
4
Lowell Lamp
$35
$17
$23
2
4
Remaining machine hours = 700(4,300 less 3,600)
Number of units which can be made
multiply by Contribution Margin per unit
Total Contribution Margin
Answer 26
C) Operating income will decrease by $5,000.
Fixed Costs of $ 15,000 will be saved but Contribution Margin of $ 20,000 of Product F will be forgone.
Overall decrease in Operating Income $ 5,000($ 15,000 less $ 20,000)
Answer 27
B) Operating income will increase by $5,000.
Fixed Costs of $ 25,000 will be saved but Contribution Margin of $ 20,000 of Product F will be forgone.
Overall increase in Operating Income $ 5,000($ 25,000 less $ 20,000)
Answer 28
D) increase of $16,000 in operating income
Fixed Costs of $ 76,000 will be saved but Contribution Margin of $ 60,000 of Product F will be forgone.
Overall increase in Operating Income $ 16,000($ 76,000 less $ 60,000)
Answer 29
C) The division's avoidable fixed costs are greater than its contribution margin.
Dropping a business division will result in avoidance of fixed costs of the division and also loss of the
contribution margin. So, a product should be product only if the avoidable fixed cost is greater than the
contribution margin as only in this situation, there will be overall saving.
Answer 30
A) $4 per machine hour
Sale price
less: Variable costs
Contribution Margin
divide by machine hours used
Contribution Margin per machine hour
Answer 31
C) $3 per machine hour
Sale price
less: Variable costs
Contribution Margin
divide by machine hours used
Contribution Margin per machine hour
Answer 32
C) 12,500 Bedford lamps, zero Lowell lamps
Contribution Margin per machine hour
Ranking on the basis of contribution per machine hour
As bedford lamp is having the higher contribution per machine hour and the company can sell as many
products as it can make, it is beneficial to make only bedford lamp and no lowell lamp as it will highest
operating income.
Available machine hours
divide by machine hours per lamp
Product Mix
Answer 33
C) 8,000 Bedford lamps, 2,250 Lowell lamps
Contribution Margin per machine hour
Ranking on the basis of contribution per machine hour
First, 8000 units of Bedford lamp will be made as it has the highest contribution per machine hour.
Production of 8000 units of Bedford lamp will consume 16000 machine hours(8000 units * 2 machine hour
per unit).
Remaining machine hours = 9,000(25,000 less 16,000)
2,250 units of lowell lamp will be made in remaining 9000 machine hours(9,000 hours /4 machine hour per
lamp)
Answer 34
A) $2,150
Selling price
Variable costs
Contribution Margin
divide by direct labor hour per unit
Contribution Margin per direct labor hour
Ranking on the basis of Contribution margin per direct labor hour
As Product P is having the higher contribution per direct labor hour and the company can sell as many
products as it can make, it is beneficial to make only Product P and no Product Q as it will highest operating
income.
Direct labor hours available
divide by direct labor hour per unit
Number of units which can be made
Number of units which can be made
multiply by Contribution Margin per unit
Total Contribution Margin
Answer 35
C) $2,080
Contribution Margin per direct labor hour
Ranking on the basis of Contribution margin per direct labor hour
First, 900 units of Product P will be made as it has the highest contribution per direct labor hour. Production
of 900 units of Product P will consume 3600 direct labor hours(900 units * 4 direct labor hour per unit).
Remaining machine hours = 700(4,300 less 3,600)
140 units of Product Q will be made in remaining 700 Direct labor hours(700 hours /5 direct labor hour per
unit)
Number of units which can be made
multiply by Contribution Margin per unit
Total Contribution Margin
70000
-40000
30000
-15000
15000
40000
-20000
20000
-15000
5000
30000
-10000
20000
-25000
-5000
Total
140000
-70000
70000
-55000
15000
70000
-40000
30000
-15000
15000
$
$
25
17
$
$
8
2
4
$
$
35
23
$
12
4
3
$
Bedford Lamp Lowell Lamp
$
4 $
3
1st
2nd
25000
2
12500
Bedford Lamp Lowell Lamp
$
4 $
3
1st
2nd
P
$
Q
5.00 $
$
$
3.00 $
2.00 $
4
0.5
2nd
1st
6.50
4.50
2.00
5
0.4
4300
4
1075
$
$
1075
2.00
2,150.00
P
Q
0.5
1st
0.4
2nd
P
Q
$
$
900
2.00 $
1,800.00 $
Total
140
2.00
280.00 $ 2,080.00
40000
-20000
20000
20000
Total
110000
-60000
50000
40000
10000