SUBJECT: MANAGEMENT ADVISORY SERVICES
TOPIC: Relevant Costing / Differential Analysis
LECTURER NAME: JMAN LOPO
MODULE # 16
PROBLEMS:
Special (Custom) Order
1. Howard Robinson builds custom homes in Cincinnati. Robinson was approached not
too long ago by a client about a potential project, and he submitted a bid of $483,800,
derived as follows:
Land
Construction materials
Subcontractor labor costs
Construction overhead: 25% of direct costs
Allocated corporate overhead
Total cost
$ 80,000
100,000
120,000
$300,000
75,000
35,000
$410,000
Robinson adds an 18% profit margin to all jobs, computed on the basis of total cost. In
this client's case the profit margin amounted to $73,800 ($410,000 x 18%), producing a
bid price of $483,800. Assume that 70% of construction overhead is fixed.
Required:
A. Suppose that business is presently very slow, and the client countered with an offer
on this home of $390,000. Should Robinson accept the client's offer? Why?
B. If Robinson has more business than he can handle, how much should he be willing
to accept for the home? Why?
Outsourcing
2. St. Joseph Hospital has been hit with a number of complaints about its food service from
patients, employees, and cafeteria customers. These complaints, coupled with a very
tight local labor market, have prompted the organization to contact Nationwide
Institutional Food Service (NIFS) about the possibility of an outsourcing arrangement.
The hospital's business office has provided the following information for food service for
the year just ended: food costs, $890,000; labor, $85,000; variable overhead, $35,000;
allocated fixed overhead, $60,000; and cafeteria food sales, $80,000.
Conversations with NIFS personnel revealed the following information:
 NIFS will charge St. Joseph Hospital $14 per day for each patient served. Note: This
figure has been "marked up" by NIFS to reflect the firm's cost of operating the
hospital cafeteria.
 St. Joseph's 250-bed facility operates throughout the year and typically has an
average occupancy rate of 70%.
 Labor is the primary driver for variable overhead. If an outsourcing agreement is
reached, hospital labor costs will drop by 90%. NIFS plans to use St. Joseph
facilities for meal preparation.
 Cafeteria food sales are expected to increase by 15% because NIFS will offer an
improved menu selection.
Required:
A. What is meant by the term "outsourcing"?
B. Should St. Joseph outsource its food-service operation to NIFS?
C. What factors, other than dollars, should St. Joseph consider before making the final
decision?
Make or Buy, Capacity Constraint
3. Fowler Industries produces two bearings: C15 and C19. Data regarding these two
bearings follow.
Machine hours required per unit
Standard cost per unit:
Direct material
Direct labor
Manufacturing overhead:
Variable*
Fixed**
Total
C15
2.00
C19
2.50
$ 2.50
5.00
$ 4.00
4.00
3.00
4.00
$14.50
2.50
5.00
$15.50
*Applied on the basis of direct labor
hours
**Applied on the basis of machine hours
The company requires 8,000 units of C15 and 11,000 units of C19. Recently,
management decided to devote additional machine time to other product lines, resulting
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in only 31,000 machine hours per year that can be dedicated to production of the
bearings. An outside company has offered to sell Fowler the bearings at prices of
$13.50 for C15 and $13.50 for C19.
Required:
A. Assume that Fowler decided to produce all C15s and purchase C19s only as
needed. Determine the number of C19s to be purchased.
B. Compute the net benefit to the firm of manufacturing (rather than purchasing) a unit
of C15. Repeat the calculation for a unit of C19.
C. Fowler lacks sufficient machine time to produce all of the C15s and C19s needed.
Which component (C15 or C19) should Fowler manufacture first with the limited
machine hours available? Why? Be sure to show all supporting computations.
Use of Excess Production Capacity
4. Lee Company has met all production requirements for the current month and has an
opportunity to manufacture additional units with its excess capacity. Unit selling prices
and unit costs for three product lines follow.
Selling price
Direct material
Direct labor (at $20 per hour)
Variable overhead
Fixed overhead
Plain
$40
12
10
8
6
Regular
$55
16
15
12
7
Super
$65
22
20
16
8
Variable overhead is applied on the basis of direct labor dollars, whereas fixed overhead
is applied on the basis of machine hours. There is sufficient demand for the additional
manufacture of all products.
Required:
A. If Lee Company has excess machine capacity and can add more labor as needed
(i.e., neither machine capacity nor labor is a constraint), which product is the most
attractive to produce?
B. If Lee Company has excess machine capacity but a limited amount of labor time
available, which product or products should be manufactured in the excess capacity?
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Joint Costs: Allocation and Decision Making
5. Riverside Company manufactures G and H in a joint process. The joint costs amount to
$80,000 per batch of finished goods. Each batch yields 20,000 liters, of which 40% are
G and 60% are H. The selling price of G is $8.75 per liter, and the selling price of H is
$15.00 per liter.
Required:
A. If the joint costs are allocated on the basis of the products' sales value at the split-off
point, what amount of joint cost will be charged to each product?
B. Riverside has discovered a new process by which G can be refined into Product GG,
which has a sales price of $12 per liter. This additional processing would increase
costs by $2.10 per liter. Assuming there are no other changes in costs, should the
company use the new process? Show calculations.
Store Closure
6. Papa Fred's Pizza store no. 16 has fallen on hard times and is about to be closed. The
following figures are available for the period just ended:
Sales
Cost of sales
Building occupancy costs:
Rent
Utilities
Supplies used
Wages
Miscellaneous
Allocated corporate
overhead
$205,000
67,900
36,500
15,000
5,600
77,700
2,400
16,800
All employees except the store manager would be discharged. The manager, who earns
$27,000 annually, would be transferred to store no. 19 in a neighboring suburb. Also,
no. 16's furnishings and equipment are fully depreciated and would be removed and
transported to Papa Fred's warehouse at a cost of $2,800.
Required:
A. What is store no. 16's reported loss for the period just ended?
B. Should the store be closed? Why?
C. Would Papa Fred's likely lose all $205,000 of sales revenue if store no. 16 were
Page |4
closed? Explain.
Relevant Costing and Incremental Analysis
1) For decision making, a listing of the relevant costs:
A) will help the decision maker concentrate on the pertinent data
B) will only include future costs
C) will only include costs that differ among alternatives
D) All of these answers are correct.
2) Sunk costs:
A) are historical costs
B) cannot be changed
C) are never relevant
D) all of the above
3. Sunk costs:
A) are relevant
B) are differential
C) have future implications
D) are ignored when evaluating alternatives
4. A car purchased last year is an example of a(n):
A) sunk cost
B) relevant cost
C) differential cost
D) avoidable cost
5. Costs that CANNOT be changed by any decision made now or in the future are:
A) fixed costs
B) indirect costs
C) avoidable costs
D) sunk costs
6. In evaluating different alternatives, it is useful to concentrate on:
A) variable costs
B) fixed costs
C) total costs
D) relevant costs
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7. Which of the following costs always differ among future alternatives?
A) fixed costs
B) historical costs
C) relevant costs
D) variable costs
8. Which of the following costs are NEVER relevant in the decision-making process?
A) fixed costs
B) historical costs
C) relevant costs
D) variable costs
Answer the following questions using the information below:
John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at Php6,000 to make it
roadworthy again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep
Grand Cherokee instead for Php6,000 cash. Sherry estimated the following costs for the
two cars:
Trail Blazer
Grand Cherokee
Acquisition cost
Php25,000
Php6,000
Repairs
Php6,000
Annual operating costs
(Gas, maintenance, insurance)
Php2,280
Php2,100
9) The cost NOT relevant for this decision is the:
A) acquisition cost of the Trail Blazer
B) acquisition cost of the Grand Cherokee
C) repairs to the Trail Blazer
D) annual operating costs of the Grand Cherokee
10) What should John do? What are his savings in the first year?
A) Buy the Grand Cherokee; Php8,100
B) Fix the Trail Blazer; Php3,180
C) Buy the Grand Cherokee; Php180
D) Fix the Trail Blazer; Php6,280
11. A relevant revenue is a revenue that is a(n):
A) past revenue
B) future revenue
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C) in-hand revenue
D) earned revenue
12) A relevant cost is a cost that is a (n):
A) future cost
B) past cost
C) sunk cost
D) non-cash expense
13) Relevant information has all of these characteristics EXCEPT:
A) past costs are irrelevant
B) all future revenues and expenses are relevant – Fixed Cost
C) different alternatives can be compared by examining differences in total revenue and expenses
D) qualitative factors should be considered
14) Quantitative factors:
A) include financial information, but not nonfinancial information
B) can be expressed in monetary terms
C) are always relevant when making decisions
D) include employee morale
15) Qualitative factors:
A) generally are easily measured in quantitative terms
B) are generally irrelevant for decision making
C) may include either financial or nonfinancial information
D) include customer satisfaction
16) Historical costs are helpful:
A) for making future predictions
B) for decision making
C) because they are quantitative
D) None of these answers is correct.
17) When making decisions:
A) quantitative factors are the most important
B) qualitative factors are the most important
C) appropriate weight must be given to both quantitative and qualitative factors
D) both quantitative and qualitative factors are unimportant
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18) Employee morale at Dos Santos, Inc., is very high. This type of information is known as
a:
A) qualitative factor
B) quantitative factor
C) nonmeasurable factor
D) financial factor
19) Roberto owns a small body shop. His major costs include labor, parts, and rent. In the
decision making process, these costs are considered to be:
A) fixed
B) qualitative factors
C) quantitative factors
D) variable
20) One-time-only special orders should only be accepted if:
A) incremental revenues exceed incremental costs
B) differential revenues exceed variable costs
C) incremental revenues exceed fixed costs
D) total revenues exceed total costs
21) When deciding to accept a one-time-only special order from a wholesaler, management
should do all of the following EXCEPT:
A) analyze product costs
B) consider the special order's impact on future prices of their products
C) determine whether excess capacity is available
D) verify past design costs for the product
22) When there is excess capacity, it makes sense to accept a one-time-only special order
for less than the current selling price when:
A) incremental revenues exceed incremental costs
B) additional fixed costs must be incurred to accommodate the order
C) the company placing the order is in the same market segment as your current customers
D) it never makes sense
23) Full cost of the product is:
A) the sum of fixed costs in all the business functions of the value chain
B) the sum of variable costs in all the business functions of the value chain
C) the sum of all variable and fixed costs in all the business functions of the value chain
D) the sum of all costs in the value chain minus marketing costs
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Answer the following questions using the information below:
Kolar Manufacturing is approached by a European customer to fulfill a one-time-only special
order for a product similar to one offered to domestic customers. Kolar Manufacturing
has excess capacity. The following per unit data apply for sales to regular customers:
Variable costs:
Direct materials
Php80
Direct labor
40
Manufacturing support
70
Marketing costs
30
Fixed costs:
Manufacturing support
90
Marketing costs
30
Total costs
340
Markup (50%)
170
Targeted selling price
Php510
24) What is the full cost of the product per unit?
A) Php220
B) Php340
C) Php510
D) Php170
25) What is the contribution margin per unit?
A) $170
B) $220
C) $290
D) $510
26) For Kolar Manufacturing, what is the minimum acceptable price of this special order?
A) $220
B) $290
C) $340
D) $510
27) What is the change in operating profits if the one-time-only special order for 1,000 units is
accepted for $360 a unit by Kolar?
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A) $140,000 increase in operating profits
B) $20,000 increase in operating profits
C) $20,000 decrease in operating profits
D) $150,000 decrease in operating profits
28) Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at
this level are:
Direct materials
Php0.25
Direct labor
0.40
Variable overhead
0.15
Fixed overhead
0.20
Marketing - fixed
0.20
Marketing/distribution - variable 0.40
Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company
about purchasing 1,500 units at Php2.00 each. Current sales would NOT be affected by
the one-time-only special order, and variable marketing/distribution costs would NOT be
incurred on the special order.
What is Ratzlaff Company's change in operating profits if the special order is accepted?
A) Php400 increase in operating profits
B) Php400 decrease in operating profits
C) Php1,800 increase in operating profits
D) Php1,800 decrease in operating profits
29) Snapper Tool Company has a production capacity of 3,000 units per month, but current
production is only 2,500 units. Total manufacturing costs are Php60 per unit and marketing
costs are Php16 per unit. Doug Levy offers to purchase 500 units at Php76 each for the
next five months. Should Snapper accept the one-time-only special order if only
absorption-costing data are available?
A) Yes, good customer relations are essential.
B) No, the company will only break even.
C) No, since only the employees will benefit.
D) Yes, since operating profits will most likely increase.
Answer the following questions using the information below:
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Heck's Kitchens is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-timeonly special order for a product similar to one offered to regular customers. The following
per unit data apply for sales to regular customers:
Direct materials
Php455
Direct labor
300
Variable manufacturing support
45
Fixed manufacturing support
100
Total manufacturing costs
900
Markup (60%)
540
Targeted selling price
Php1,440
Heck's Kitchens has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so
direct material costs will increase by Php50 per unit.
30) For Heck's Kitchens, what is the minimum acceptable price of this one-time-only special
order?
A) Php850
B) Php950
C) Php805
D) Php1,460
31) Other than price, what other items should Heck's Kitchens consider before accepting this
one-time only special order?
A) reaction of shareholders
B) reaction of existing customers to the lower price offered to Mr. Louis Cifer
C) demand for cherry cabinets
D) price is the only consideration
32) If Louis Cifer wanted a long-term commitment for supplying this product, this analysis:
A) would definitely be different
B) may be different
C) would not be different
D) does not contain enough information to determine if there would be a difference
33) An example of a quantitative factor for the decision-making process is:
A) customer satisfaction
B) employee morale
C) product quality
D) manufacturing overhead
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Answer the following questions using the information below:
Black Forrest manufactures rustic furniture. The cost accounting system estimates
manufacturing costs to be Php180 per table, consisting of 80% variable costs and 20% fixed
costs. The company has surplus capacity available. It is Back Forrest's policy to add a 50%
markup to full costs.
34) Black Forrest is invited to bid on a one-time-only special order to supply 100 rustic tables.
What is the lowest price Black Forrest should bid on this special order?
A) Php12,600
B) Php14,400
C) Php18,000
D) Php23,000
180 x 80% = 144 x 100 tables = 14,400
35) A large hotel chain is currently expanding and has decided to decorate all new hotels using
the rustic style. Black Forrest Incorporated is invited to submit a bid to the hotel chain. What is
the lowest price per unit Black Forrest should bid on this long-term order?
A) Php126
B) Php144
C) Php180
D) Php270
180 + (180 x 50%) = 270
36) Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are:
Direct materials
Php4.00
Direct labor
6.00
Variable overhead
3.00
Fixed overhead
1.00
Marketing_fixed
7.00
Marketing/distribution_variable
3.60
Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation
about purchasing 2,000 units at Php24.00 each. Current sales would not be affected by the one-timeonly special order. What is Zephram's change in operating profits if the one-time-only special order
is accepted?
A) Php14,800 increase
B) Php17,200 increase
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C) Php22,000 increase
D) Php33,200 increase
37) The sum of all the costs incurred in a particular business function (for example, marketing) is
called the:
A) business function cost
B) full product cost
C) gross product cost
D) multiproduct cost
38) The sum of all costs incurred in all business functions in the value chain (product design,
manufacturing, marketing, and customer service, for example) is known as the:
A) business cost
B) full product cost
C) gross product cost
D) multiproduct cost
39) An example of a qualitative factor for the decision-making process is:
A) customer satisfaction
B) units sold
C) material cost
D) labor hours incurred
40) Outsourcing is:
A) purchasing goods and services internally
B) never a viable option
C) more desirable than insourcing
D) purchasing goods and services from outside vendors
41) Insourcing is:
A) purchasing goods and services internally
B) purchasing goods and services from outside vendors
C) more expensive than outsourcing
D) less expensive than outsourcing
42) Problems that should be avoided when identifying relevant costs include all of the following
EXCEPT:
A) assuming all variable costs are relevant
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B) assuming all fixed costs are irrelevant
C) using unit costs that do not separate variable and fixed components
D) using total costs that separate variable and fixed components
43) The best way to avoid misidentification of relevant costs is to focus on:
A) expected future costs that differ among the alternatives
B) historical costs
C) unit fixed costs
D) total unit costs
44) Factors used to decide whether to outsource a part include:
A) the supplier's cost of direct materials
B) if the supplier is reliable
C) the original cost of equipment currently used for production of that part
D) past design costs used to develop the current composition of the part
45) Relevant costs of a make-or-buy decision include all of the following EXCEPT:
A) fixed salaries that will not be incurred if the part is outsourced
B) current direct material costs of the part
C) special machinery for the part that has no resale value
D) material-handling costs that can be eliminated
46) Which of following are risks of outsourcing the production of a part?
A) unpredictable quality
B) unreliable delivery
C) unscheduled price increases
D) All of these answers are correct.
47) Which of the following minimize the risks of outsourcing?
A) the use of short-term contracts that specify price
B) the responsibility for on-time delivery is now the responsibility of the supplier
C) building close relationships with the supplier
D) All of these answers are correct.
48) The cost to produce Part A was $20 per unit in 2013 and in 2014 it has increased to $22 per unit.
In 2014, Supplier ABC has offered to supply Part A for $18 per unit. For the make-or-buy decision:
A) incremental revenues are $4 per unit
B) incremental costs are $2 per unit
C) net relevant costs are $2 per unit
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D) differential costs are $4 per unit
49) When evaluating a make-or-buy decision, which of the following does NOT need to be
considered?
A) alternative uses of the production capacity
B) the original cost of the production equipment
C) the quality of the supplier's product
D) the reliability of the supplier's delivery schedule
50) For make-or-buy decisions, a supplier's ability to deliver the item on a timely basis is considered
a(n):
A) qualitative factor
B) relevant cost
C) differential factor
D) opportunity cost
51) The incremental costs of producing one more unit of product include all of the following
EXCEPT:
A) direct materials
B) direct labor
C) variable overhead costs
D) fixed overhead costs
52) Direct materials are Php20, direct labor is Php5, variable overhead costs are Php15, and fixed
overhead costs are Php10. In the short term, the incremental cost of one unit is:
A) Php15
B) Php25
C) Php40
D)Php50
53) Unit cost data can most mislead decisions by:
A) not computing fixed overhead costs
B) computing labor and materials costs only
C) computing administrative costs
D) not computing unit costs at the same output level
54) Schmidt Sewing Company incorporates the services of Deb's Sewing. Schmidt purchases pre-cut
dresses from Deb's. This is primarily known as:
P a g e | 15
A) insourcing
B) outsourcing
C) relevant costing
D) sunk costing
55) Smiley Face Company manufactures signs from direct materials to the finished product. This is
considered:
A) insourcing
B) outsourcing
C) relevant costing
D) sunk costing
56) Which of the following would NOT be considered in a make-or-buy decision?
A) fixed costs that will no longer be incurred
B) variable costs of production
C) potential rental income from space occupied by the production area
D) unchanged supervisory costs
Answer the following questions using the information below:
Donald's Engine Company manufactures part TE456 used in several of its engine models. Monthly
production costs for 1,000 units are as follows:
Direct materials
$ 20,000
Direct labor
5,000
Variable overhead costs 15,000
Fixed overhead costs
10,000
Total costs
$50,000
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if
the company purchases TE456 from the outside supplier. Donald's Engine Company has the option
of purchasing the part from an outside supplier at $42.50 per unit.
57) If Donald's Engine Company accepts the offer from the outside supplier, the monthly avoidable
costs (costs that will no longer be incurred) total:
A) $ 41,000
B) $ 49,000
C) $ 25,000
D) $50,000
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58. If Donald's Engine Company purchases 1,000 TE456 parts from the outside supplier per month,
then
its monthly operating income will:
A) increase by $1,000
B) increase by $40,000
C) decrease by $1,500
D) decrease by $42,500
59) The maximum price that Donald's Engine Company should be willing to pay the outside supplier
is:
A) $40 per TE456 part
B) $41 per TE456 part
C) $49 per TE456 part
D) $50 per TE456 part
60. Relevant costs in a make-or-buy decision of a part include:
A) setup overhead for the manufacture of the product using the outsourced part
B) currently used manufacturing capacity that has alternative uses
C) annual plant insurance costs that will remain the same
D) corporate office costs that will be allocated differently
MULTIPLE CHOICE
1. The amount of increase or decrease in revenue that is expected from a particular course of
action as compared with an alternative is termed:
a. manufacturing margin
b. contribution margin
c. differential cost
d. differential revenue
ANS: D
DIF:
1
OBJ:
01
2. The amount of increase or decrease in cost that is expected from a particular course of action
as compared with an alternative is termed:
a. period cost
b. product cost
c. differential cost
d. discretionary cost
P a g e | 17
ANS: C
DIF:
1
OBJ:
01
3. A cost that will not be affected by later decisions is termed a(n):
a. historical cost
b. differential cost
c. sunk cost
d. replacement cost
ANS: C
DIF:
1
OBJ:
01
4. The condensed income statement for a business for the past year is presented as follows:
Sales
Less variable
costs
Contribution
margin
Less fixed
costs
Income (loss)
from oper.
F
$300,000
Product
G
$220,000
H
$340,000
Total
$860,000
180,000
190,000
220,000
590,000
$120,000
$ 30,000
$120,000
$270,000
50,000
50,000
40,000
140,000
$ 70,000
========
$(20,000)
========
$ 80,000
========
$130,000
========
Management is considering the discontinuance of the manufacture and sale of Product G at the
beginning of the current year. The discontinuance would have no effect on the total fixed costs
and expenses or on the sales of Products F and H. What is the amount of change in net
income for the current year that will result from the discontinuance of Product G?
a.
b.
c.
d.
$20,000 increase
$30,000 increase
$20,000 decrease
$30,000 decrease
ANS: D
DIF:
3
OBJ:
01
5. The condensed income statement for a business for the past year is as follows:
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Product
T
$600,000
540,000
$ 60,000
145,000
$(85,000)
========
Sales
Less variable costs
Contribution margin
Less fixed costs
Income (loss) from operations
U
$320,000
220,000
$100,000
40,000
$ 60,000
========
Management is considering the discontinuance of the manufacture and sale of Product T at the
beginning of the current year. The discontinuance would have no effect on the total fixed costs
and expenses or on the sales of Product U. What is the amount of change in net income for the
current year that will result from the discontinuance of Product T?
a. $60,000 increase
b. $85,000 increase
c. $85,000 decrease
d. $60,000 decrease
ANS: D
DIF:
3
OBJ:
01
6. A business is operating at 90% of capacity and is currently purchasing a part used in its
manufacturing operations for $15 per unit. The unit cost for the business to make the part is
$20, including fixed costs, and $12, not including fixed costs. If 30,000 units of the part are
normally purchased during the year but could be manufactured using unused capacity, what
would be the amount of differential cost increase or decrease from making the part rather than
purchasing it?
a. $150,000 cost increase
b. $ 90,000 cost decrease
c. $150,000 cost increase
d. $ 90,000 cost increase
ANS: B
DIF:
3
OBJ:
01
7. A business is operating at 70% of capacity and is currently purchasing a part used in its
manufacturing operations for $24 per unit. The unit cost for the business to make the part is
$36, including fixed costs, and $28, not including fixed costs. If 15,000 units of the part are
normally purchased during the year but could be manufactured using unused capacity, what
would be the amount of differential cost increase or decrease from making the part rather than
purchasing it?
P a g e | 19
a.
b.
c.
d.
$60,000 cost decrease
$180,000 cost increase
$60,000 cost increase
$180,000 cost decrease
ANS: C
DIF:
3
OBJ:
01
8. The amount of income that would result from an alternative use of cash is called:
a. differential income
b. sunk cost
c. differential revenue
d. opportunity cost
ANS: D
DIF:
1
OBJ:
01
9. Jones Co. can further process Product B to produce Product C. Product B is currently selling
for $30 per pound and costs $28 per pound to produce. Product C would sell for $60 per pound
and would require an additional cost of $24 per pound to produce. What is the differential cost
of producing Product C?
a. $30 per pound
b. $24 per pound
c. $28 per pound
d. $60 per pound
ANS: B
DIF:
5
OBJ:
01
10. Neter Co. can further process Product J to produce Product D. Product J is currently selling for
$21 per pound and costs $15.75 per pound to produce. Product D would sell for $35 per pound
and would require an additional cost of $8.75 per pound to produce. What is the differential cost
of producing Product D?
a. $7 per pound
b. $8.75 per pound
c. $15 per pound
d. $5.25 per pound
ANS: B
DIF:
5
OBJ:
01
11. Neter Co. can further process Product J to produce Product D. Product J is currently selling for
$21 per pound and costs $15.75 per pound to produce. Product D would sell for $35 per pound
and would require an additional cost of $8.75 per pound to produce. What is the differential
revenue of producing Product D?
a. $7 per pound
P a g e | 20
b. $8.75 per pound
c. $14 per pound
d. $5.25 per pound
ANS: C
DIF:
5
OBJ:
01
12. Jones Co. can further process Product B to produce Product C. Product B is currently selling
for $60 per pound and costs $42 per pound to produce. Product C would sell for $82 per pound
and would require an additional cost of $13 per pound to produce. What is the differential
revenue of producing and selling Product C?
a. $22 per pound
b. $42 per pound
c. $45 per pound
d. $18 per pound
ANS: A
DIF:
5
OBJ:
01
13. Wilson Company is considering replacing equipment which originally cost $500,000 and which
has $460,000 accumulated depreciation to date. A new machine will cost $790,000. What is
the sunk cost in this situation?
a. $330,000
b. $500,000
c. $40,000
d. $290,000
ANS: C
DIF:
5
OBJ:
01
14. Mathews Company is considering replacing equipment which originally cost $500,000 and
which has $460,000 accumulated depreciation to date. A new machine will cost $790,000 and
the old equipment can be sold for $8,000. What is the sunk cost in this situation?
a. $53,000
b. $40,000
c. $37,000
d. $290,000
ANS: B
DIF:
5
OBJ:
01
P a g e | 21
15. A business is considering a cash outlay of $200,000 for the purchase of land, which it could
lease for $35,000 per year. If alternative investments are available which yield an 18% return,
the opportunity cost of the purchase of the land is:
a. $35,000
b. $36,000
c. $ 1,000
d. $37,000
ANS: B
DIF:
3
OBJ:
01
16. A business is considering a cash outlay of $250,000 for the purchase of land, which it could
lease for $36,000 per year. If alternative investments are available which yield an 18% return,
the opportunity cost of the purchase of the land is:
a. $45,000
b. $36,000
c. $ 9,000
d. $54,000
ANS: A
DIF:
3
OBJ:
01
17. A business is considering a cash outlay of $500,000 for the purchase of land, which it could
lease for $40,000 per year. If alternative investments are available which yield a 21% return,
the opportunity cost of the purchase of the land is:
a. $105,000
b. $ 40,000
c. $ 65,000
d. $ 8,400
ANS: A
DIF:
3
OBJ:
01
18. A business received an offer from an exporter for 20,000 units of product at $15 per unit. The
acceptance of the offer will not affect normal production or domestic sales prices. The following
data are available:
Domestic unit sales price
Unit manufacturing costs:
Variable
Fixed
$21
12
5
What is the differential revenue from the acceptance of the offer?
a. $300,000
P a g e | 22
b. $420,000
c. $120,000
d. $240,000
ANS: A
DIF:
3
OBJ:
01
19. A business received an offer from an exporter for 10,000 units of product at $16 per unit. The
acceptance of the offer will not affect normal production or domestic sales prices. The following
data are available:
Domestic unit sales price
Unit manufacturing costs:
Variable
Fixed
$20
13
1
What is the differential revenue from the acceptance of the offer?
a. $200,000
b. $160,000
c. $130,000
d. $140,000
ANS: B
DIF:
3
OBJ:
01
20. A business received an offer from an exporter for 10,000 units of product at $16 per unit. The
acceptance of the offer will not affect normal production or domestic sales prices. The following
data are available:
Domestic unit sales price
Unit manufacturing costs:
Variable
Fixed
$20
13
1
What is the differential cost from the acceptance of the offer?
a. $200,000
b. $160,000
c. $140,000
d. $130,000
ANS: D
DIF:
3
OBJ:
01
P a g e | 23
21. A business received an offer from an exporter for 10,000 units of product at $16 per unit. The
acceptance of the offer will not affect normal production or domestic sales prices. The following
data are available:
Domestic unit sales price
Unit manufacturing costs:
Variable
Fixed
$20
13
1
What is the amount of gain or loss from acceptance of the offer?
a. $30,000 gain
b. $40,000 loss
c. $30,000 loss
d. $20,000 loss
ANS: A
DIF:
3
OBJ:
01
22. A business received an offer from an exporter for 20,000 units of product at $15 per unit. The
acceptance of the offer will not affect normal production or domestic sales prices. The following
data are available:
Domestic unit sales price
Unit manufacturing costs:
Variable
Fixed
$21
12
5
What is the differential cost from the acceptance of the offer?
a. $120,000
b. $240,000
c. $300,000
d. $420,000
ANS: B
DIF:
3
OBJ:
01
23. A business received an offer from an exporter for 20,000 units of product at $15 per unit. The
acceptance of the offer will not affect normal production or domestic sales prices. The following
data are available:
P a g e | 24
Domestic unit sales price
Unit manufacturing costs:
Variable
Fixed
$21
12
5
What is the amount of the gain or loss from acceptance of the offer?
a. $35,000 loss
b. $40,000 gain
c. $60,000 gain
d. $50,000 gain
ANS: C
DIF:
3
OBJ:
01
24. Relevant revenues and costs focus on:
a. activities that occurred in the past
b. monies already earned and/or spent
c. last year's net income
d. differences between the alternatives being considered
ANS: D
DIF:
1
OBJ:
01
25. Assume that Darrow Co. is considering disposing of equipment that cost $50,000 and has
$40,000 of accumulated depreciation to date. Darrow Co. can sell the equipment through a
broker for $25,000 less 5% commission. Alternatively, Minton Co. has offered to lease the
equipment for five years for a total of $48,750. Darrow will incur repair, insurance, and property
tax expenses estimated at $10,000. At lease-end, the equipment is expected to have no
residual value. The net differential income from the lease alternative is:
a. $15,000
b. $ 5,000
c. $25,000
d. $12,500
ANS: A
DIF:
3
OBJ:
01
26. Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its
manufacturing operations for $5 a unit. The unit cost for Frank Co. to make the part is $6, which
includes $.40 of fixed costs. If 4,000 units of the part are normally purchased each year but
could be manufactured using unused capacity, what would be the amount of differential cost
increase or decrease for making the part rather than purchasing it?
a. $12,000 cost decrease
b. $20,000 cost increase
P a g e | 25
c. $20,000 cost decrease
d. $2,400 cost increase
ANS: D
DIF:
3
OBJ:
01
27. Franklin and Johnson, CPAs, currently work a five-day week. They estimate that net income for
the firm would increase by $45,000 annually if they worked an additional day each month. The
cost associated with the decision to continue the practice of a five-day work week is an example
of:
a. differential revenue
b. sunk cost
c. differential income
d. opportunity cost
ANS: D
DIF:
5
OBJ:
01
28. Benson Co. is considering disposing of a machine with a book value of $12,500 and estimated
remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine
can be purchased at a cost of $25,000. It will have a useful life of five years and no residual
value. It is estimated that variable manufacturing costs will be reduced from $26,000 to $23,500
if the new machine is purchased. The total net differential increase or decrease in cost for the
new equipment for the entire five years is:
a. decrease of $11,000
b. decrease of $15,000
c. increase of $11,000
d. increase of $15,000
ANS: C
DIF:
3
OBJ:
01
29. Sorrentino Inc. is considering disposing of a machine with a book value of $22,500 and an
estimated remaining life of three years. The old machine can be sold for $6,250. A new machine
with a purchase price of $68,750 is being considered as a replacement. It will have a useful life
of three years and no residual value. It is estimated that variable manufacturing costs will be
reduced from $43,750 to $20,000 if the new machine is purchased. The net differential increase
or decrease in cost for the entire three years for the new equipment is:
a. $8,750 increase
b. $31,250 decrease
c. $8,750 decrease
d. $2,925 decrease
ANS: C
DIF:
3
OBJ:
01
P a g e | 26
30. Dary Co. Produces a single product. It's normal selling price is $28 per unit. The variable costs
are $18 per unit. Fixed costs are $20,000 for a normal production run of 5,000 units per month.
Dary received a request for a special order that would not interfere with normal sales. The order
was for 1,500 units and a special price of $17.50 per unit. Dary Co. has the capacity to handle
the special order, and for this order a variable selling cost of $2 per unit would be eliminated. If
the order is accepted, what would be the impact on net income?
a. decrease of $750
b. decrease of $6,750
c. increase of $2,250
d. increase of $1,500
ANS: C
DIF:
3
OBJ:
01
31. Dary Co. Produces a single product. It's normal selling price is $28 per unit. The variable costs
are $18 per unit. Fixed costs are $20,000 for a normal production run of 5,000 units per month.
Dary received a request for a special order that would not interfere with normal sales. The order
was for 1,500 units and a special price of $17.50 per unit. Dary Co. has the capacity to handle
the special order, and for this order a variable selling cost of $2 per unit would be eliminated.
Should the special order be accepted?
a. Cannot determine from the data given
b. Yes
c. No
d. There would be no difference in accepting or rejecting the special order
ANS: B
DIF:
3
OBJ:
01
32. A practical approach which is frequently used by managers when setting normal long-run prices
is the:
a. cost-plus approach
b. economic theory approach
c. price graph approach
d. market price approach
ANS: A
DIF:
1
OBJ:
02
33. Which of the following is NOT a cost concept commonly used in applying the cost-plus
approach to product pricing?
a. Total cost concept
b. Product cost concept
c. Variable cost concept
d. Fixed cost concept
P a g e | 27
ANS: D
DIF:
1
OBJ:
02
34. In using the total cost concept of applying the cost-plus approach to product pricing, what is
included in the markup?
a. Total selling and administrative expenses plus desired profit
b. Total fixed manufacturing costs, total fixed selling and administrative expenses,
and desired profit
c. Total costs plus desired profit
d. Desired profit
ANS: D
DIF:
1
OBJ:
02
35. In using the product cost concept of applying the cost-plus approach to product pricing, what is
included in the markup?
a. Desired profit
b. Total fixed manufacturing costs, total fixed selling and administrative expenses,
and desired profit
c. Total costs plus desired profit
d. Total selling and administrative expenses plus desired profit
ANS: D
DIF:
1
OBJ:
02
36. In using the variable cost concept of applying the cost-plus approach to product pricing, what is
included in the markup?
a. Total costs plus desired profit
b. Desired profit
c. Total selling and administrative expenses plus desired profit
d. Total fixed manufacturing costs, total fixed selling and administrative expenses,
and desired profit
ANS: D
DIF:
1
OBJ:
02
37. What cost concept used in applying the cost-plus approach to product pricing covers selling
expenses, administrative expenses, and desired profit in the "markup"?
P a g e | 28
a.
b.
c.
d.
Total cost concept
Product cost concept
Variable cost concept
Sunk cost concept
ANS: B
DIF:
5
OBJ:
02
38. What cost concept used in applying the cost-plus approach to product pricing includes only
desired profit in the "markup"?
a. Product cost concept
b. Variable cost concept
c. Sunk cost concept
d. Total cost concept
ANS: D
DIF:
5
OBJ:
02
39. What cost concept used in applying the cost-plus approach to product pricing includes only total
manufacturing costs in the "cost" amount to which the markup is added?
a. Variable cost concept
b. Total cost concept
c. Product cost concept
d. Opportunity cost concept
ANS: C
DIF:
5
OBJ:
02
40. Managers who often make special pricing decisions are more likely to use which of the following
cost concepts in their work?
a. Total cost
b. Product cost
c. Variable cost
d. Fixed cost
ANS: C
DIF:
1
OBJ:
02
41. Defense contractors would be more likely to use which of the following cost concepts in pricing
their product?
a. Variable cost
b. Product cost
P a g e | 29
c. Total cost
d. Fixed cost
ANS: C
DIF:
1
OBJ:
02
42. In contrast to the total product and variable cost concepts used in setting seller's prices, the
target cost approach assumes that:
a. a markup is added to total cost
b. selling price is set by the marketplace
c. a markup is added to variable cost
d. a markup is added to product cost
ANS: B
DIF:
1
OBJ:
02
43. McClelland Corporation uses the total cost concept of product pricing. Below is cost information
for the production and sale of 60,000 units of its sole product. McClelland desires a profit equal
to a 21% rate of return on invested assets of $600,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
$37,500
7,500
4.50
1.88
1.13
4.50
The dollar amount of desired profit from the production and sale of the company's product is:
a. $126,000
b. $67,200
c. $73,500
d. $96,000
ANS: A
DIF:
3
OBJ:
02
44. McClelland Corporation uses the total cost concept of product pricing. Below is cost information
for the production and sale of 60,000 units of its sole product. McClelland desires a profit equal
to a 21% rate of return on invested assets of $600,000.
P a g e | 30
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
$37,500
7,500
4.50
1.88
1.13
4.50
The cost per unit for the production and sale of the company's product is:
a. $ 12
b. $ 12.76
c. $ 15
d. $ 13.50
ANS: B
DIF:
3
OBJ:
02
45. McClelland Corporation uses the total cost concept of product pricing. Below is cost information
for the production and sale of 60,000 units of its sole product. McClelland desires a profit equal
to a 21% rate of return on invested assets of $600,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
$37,500
7,500
4.50
1.88
1.13
4.50
The markup percentage for the company's product is:
a. 21.0%
b. 16.5%
c. 15.7%
d. 24.0%
ANS: B
DIF:
3
OBJ:
02
46. McClelland Corporation uses the total cost concept of product pricing. Below is cost information
for the production and sale of 60,000 units of its sole product. McClelland desires a profit equal
to a 21% rate of return on invested assets of $600,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
$37,500
7,500
4.50
P a g e | 31
Variable direct labor cost per unit
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
1.88
1.13
4.50
The unit selling price for the company's product is:
a. $15.00
b. $13.82
c. $14.86
d. $14.76
ANS: C
DIF:
3
OBJ:
02
47. Mendoza Corporation uses the product cost concept of product pricing. Below is cost
information for the production and sale of 45,000 units of its sole product. Mendoza desires a
profit equal to a 10.8% rate of return on invested assets of $900,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
$72,000.00
45,000.00
4.50
7.65
2.25
.90
The dollar amount of desired profit from the production and sale of the company's product is:
a. $105,840
b. $225,000
c. $97,200
d. $220,500
ANS: C
DIF:
3
OBJ:
02
48. Mendoza Corporation uses the product cost concept of product pricing. Below is cost
information for the production and sale of 45,000 units of its sole product. Mendoza desires a
profit equal to a 10.8% rate of return on invested assets of $900,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
$72,000.00
45,000.00
4.50
7.65
2.25
P a g e | 32
Variable selling and administrative cost per unit
.90
The cost per unit for the production of the company's product is:
a. $14.40
b. $16.00
c. $15.30
d. $15.75
ANS: B
DIF:
3
OBJ:
02
49. Mendoza Corporation uses the product cost concept of product pricing. Below is cost
information for the production and sale of 45,000 units of its sole product. Mendoza desires a
profit equal to a 10.8% rate of return on invested assets of $900,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
$72,000.00
45,000.00
4.50
7.65
2.25
.90
The markup percentage for the company's product is:
a. 25.38%
b. 10.98%
c. 26.1%
d. 18%
ANS: A
DIF:
3
OBJ:
02
50. Mendoza Corporation uses the product cost concept of product pricing. Below is cost
information for the production and sale of 45,000 units of its sole product. Mendoza desires a
profit equal to a 10.8% rate of return on invested assets of $900,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
$72,000.00
45,000.00
4.50
7.65
P a g e | 33
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
2.25
.90
The unit selling price for the company's product is:
a. $17.73
b. $15.75
c. $22.05
d. $20.06
ANS: D
DIF:
3
OBJ:
02
51. Elfrink Corporation uses the variable cost concept of product pricing. Below is cost information
for the production and sale of 35,000 units of its sole product. Elfrink desires a profit equal to a
11.2% rate of return on invested assets of $350,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
$105,000
35,000
4.34
5.18
.98
.70
The dollar amount of desired profit from the production and sale of the company's product is:
a. $89,600
b. $39,200
c. $70,000
d. $84,000
ANS: B
DIF:
3
OBJ:
02
52. Elfrink Corporation uses the variable cost concept of product pricing. Below is cost information
for the production and sale of 35,000 units of its sole product. Elfrink desires a profit equal to a
11.2% rate of return on invested assets of $350,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
$105,000
35,000
4.34
5.18
.98
.70
P a g e | 34
The variable cost per unit for the production and sale of the company's product is:
a. $14.00
b. $12.60
c. $ 9.80
d. $11.20
ANS: D
DIF:
3
OBJ:
02
53. Elfrink Corporation uses the variable cost concept of product pricing. Below is cost information
for the production and sale of 35,000 units of its sole product. Elfrink desires a profit equal to a
11.2% rate of return on invested assets of $350,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
Variable selling and administrative cost per unit
$105,000
35,000
4.34
5.18
.98
.70
The markup percentage for the sale of the company's product is:
a. 14%
b. 5.6%
c. 45.71%
d. 11.2%
ANS: C
DIF:
3
OBJ:
02
54. Elfrink Corporation uses the variable cost concept of product pricing. Below is cost information
for the production and sale of 35,000 units of its sole product. Elfrink desires a profit equal to a
11.2% rate of return on invested assets of $350,000.
Fixed factory overhead cost
Fixed selling and administrative costs
Variable direct materials cost per unit
Variable direct labor cost per unit
Variable factory overhead cost per unit
$105,000
35,000
4.34
5.18
.98
P a g e | 35
Variable selling and administrative cost per unit
.70
The unit selling price for the company's product is:
a. $16.32
b. $13.44
c. $12.10
d. $13.72
ANS: A
DIF:
3
OBJ:
02
55. Soap Company manufactures Soap X and Soap Y and can sell all it can make of either. Based
on the following data, which statement is true?
Sales Price
Variable Cost
Hours needed to process
a.
b.
c.
d.
X
$32
22
Y
$40
24
5
8
X is more profitable than Y
Y is more profitable than X
Neither X nor Y have a positive contribution margin.
X and Y are equally profitable.
ANS: B
DIF:
2
OBJ:
03
56. Niva Co. Manufactures three products: Bales; Tales and Wales. The selling prices are: 55; 78;
and 32 respectively. The variable costs for each product are: 20; 50; and 15, respectively. Each
product must go through the same processing in a machine that is limited to 2,000 hours per
month. Bales take 7 hours to process, Tales take 4 hours, and Wales take 1 hour. Which
product has the highest contribution margin per machine hour?
a. Bales
b. Tales
c. Wales
d. Bales and Tales have the same
ANS: C
DIF:
3
OBJ:
03
P a g e | 36
57. Niva Co. Manufactures three products: Bales; Tales and Wales. The selling prices are: 55; 78;
and 32 respectively. The variable costs for each product are: 20; 50; and 15, respectively. Each
product must go through the same processing in a machine that is limited to 2,000 hours per
month. Bales take 7 hours to process, Tales take 4 hours, and Wales take 1 hour.
What is the contribution margin per machine hour for Bales?
a. $7
b. $5
c. $35
d. $28
ANS: B
DIF:
3
OBJ:
03
58. Niva Co. Manufactures three products: Bales; Tales and Wales. The selling prices are: 55; 78;
and 32 respectively. The variable costs for each product are: 20; 50; and 15, respectively. Each
product must go through the same processing in a machine that is limited to 2,000 hours per
month. Bales take 7 hours to process, Tales take 4 hours, and Wales take 1 hour.
What is the contribution margin per machine hour for Tales?
a. $7
b. $5
c. $28
d. $35
ANS: A
DIF:
3
OBJ:
03
59. Niva Co. Manufactures three products: Bales; Tales and Wales. The selling prices are: 55; 78;
and 32 respectively. The variable costs for each product are: 20; 50; and 15, respectively. Each
product must go through the same processing in a machine that is limited to 2,000 hours per
month. Bales take 7 hours to process, Tales take 4 hours, and Wales take 1 hour.
What is the contribution per machine hour for Wales?
a. $35
b. $28
c. $17
d. $8.50
ANS: C
DIF:
3
OBJ:
03
60. Niva Co. Manufactures three products: Bales; Tales and Wales. The selling prices are: 55; 78;
and 32 respectively. The variable costs for each product are: 20; 50; and 15, respectively. Each
product must go through the same processing in a machine that is limited to 2,000 hours per
month. Bales take 7 hours to process, Tales take 4 hours, and Wales take 1 hour.
Assuming that Niva Co. can sell all of the products they can make, what is the maximum
contribution margin they can earn per month?
P a g e | 37
a.
b.
c.
d.
$64,000
$70,000
$56,000
$34,000
ANS: D
DIF:
3
OBJ:
03
61. Niva Co. Manufactures three products: Bales; Tales and Wales. The selling prices are: 55; 78;
and 32 respectively. The variable costs for each product are: 20; 50; and 15, respectively. Each
product must go through the same processing in a machine that is limited to 2,000 hours per
month. Bales take 7 hours to process, Tales take 4 hours, and Wales take 1 hour. Assuming
that Niva produced enough product with the highest contribution margin per unit to use 1,000
hours of machine time. Product demand does not warrant any more production of that product.
What is the maximum additional contribution margin that can be realized by utilizing the
remaining 1,000 hours on the product with the second highest contribution margin per hour?
a. $5,000
b. $7,000
c. $4,000
d. $28,000
ANS: B
DIF:
3
OBJ:
03
P a g e | 38