Chapter 17--Activity Resource Usage Model and
Tactical Decision Making
Student: ___________________________________________________________________________
1. The steps in the tactical decision making process are:
I.
II.
III.
IV.
V.
Comparing relevant costs and relating to strategic goals
Identifying feasible alternatives
Identifying costs and benefits and eliminating irrelevant costs
Selecting best alternative
Defining the problem
What is the proper sequence of steps?
A. I, II, V, III, IV
B. II, I, V, III, IV
C. V, II, III, I, IV
D. V, III, II, IV, I
2. Which of the following is NOT a step in the tactical decision-making process?
A. Compare full costs and benefits for alternatives.
B. Identify feasible alternatives.
C. Select the best alternative.
D. Recognize and define the problem.
3. Which of the following statement is true concerning the nature of tactical decisions?
A. Tactical decisions are often small-scale actions.
B. Tactical decisions often have an immediate or limited end in view.
C. Tactical decisions should support alternatives that result in long-term competitive
advantage.
D. All of these statements are true.
4. Sound tactical decision making
A. only concerns the short run.
B. consists of large scale actions that serve a broad purpose.
C. consists of supporting the strategic objectives of the firm.
D. only concerns the long run.
5. Tactical decision making relies
A. only on relevant cost information.
B. only on qualitative factors.
C. on relevant costs as well as other qualitative factors.
D. on neither relevant costs nor qualitative decisions.
6. _______________ consists of choosing among alternatives with an immediate or limited
end in view.
A. Long-run decision making
B. Tactical decision making
C. Universal decision making
D. All of these
7. The use of relevant cost data to identify the alternative that provides the greatest
benefit to the organization describes
A. target cost analysis.
B. functional cost analysis.
C. activity cost analysis.
D. tactical cost analysis.
8. An important qualitative factor to consider regarding a special order is the
A. variable costs associated with the special order.
B. avoidable fixed costs associated with the special order.
C. effect the sale of special-order units will have on the sale of regularly priced units.
D. incremental revenue from the special order.
9. Qualitative factors that should be considered when evaluating a make-or-buy decision
are
A. the quality of the outside supplier's product.
B. whether the outside supplier can provide the needed quantities.
C. whether the outside supplier can provide the product when it is needed.
D. all of these.
10. Future costs that differ across alternatives describe
A. relevant costs.
B. target cost.
C. full costs.
D. activity-based costs.
11. Relevant costs are
A. past costs.
B. future costs.
C. full costs.
D. cost drivers.
12. ______________ are future costs that differ across alternatives.
A. Relevant costs
B. Irrelevant costs
C. Sunk costs
D. Past costs
13. In order for costs or benefits to be relevant, what must be true?
A. All decisions must relate to future.
B. Identifying relevant costs and benefits is an easy process.
C. Relevancy will relate both to the future and the past.
D. All of these are true statements.
14. Sunk costs are
A. future costs that have no benefit.
B. relevant costs that have only short-run benefits.
C. target costs.
D. always irrelevant.
15. Which item is NOT an example of a sunk cost?
A. materials needed for production
B. purchase cost of machinery
C. depreciation
D. all are sunk costs
16. The Titanic hit an iceberg and sank. In deciding whether or not to salvage the ship,
its book value is a(n)
A. relevant cost.
B. sunk cost.
C. opportunity cost.
D. discretionary cost.
17. A purchasing agent has two potential firms from which to buy materials for
production. If both firms charge the same price, the material cost is a(n)
A. irrelevant cost.
B. relevant cost.
C. sunk cost.
D. opportunity cost.
18. Which of the following statements is TRUE when making a decision between two
alternatives?
A. Variable costs may not be relevant when the decision alternatives have the same
activity levels.
B. Variable costs are not relevant when the decision alternatives have different activity
levels.
C. Sunk costs are always relevant.
D. Fixed costs are never relevant.
19. Which of the following costs is NOT relevant to a special-order decision?
A. the direct labor costs to manufacture the special-order units
B. the variable manufacturing overhead incurred to manufacture the special-order units
C. the portion of the cost of leasing the factory that is allocated to the special order
D. all of these costs are relevant
20. Which of the following costs is NOT relevant to a make-or-buy decision?
A. $10,000 of direct labor used to manufacture the parts
B. $30,000 of depreciation on the plant used to manufacture the parts
C. the supervisor's salary of $25,000 that will be avoided if the part is purchased from an
outside supplier
D. $15,000 in rent from leasing the production space to another company if the part is
purchased from an outside supplier
21. Which of the following costs is NOT relevant to a decision to sell a product at split-off
or process the product further and then sell the product?
A. joint costs allocated to the product
B. the selling price of the product at split-off
C. the additional processing costs after split-off
D. the selling price of the product after further processing
22. Which of the following costs is NOT relevant for special decisions?
A. incremental costs
B. sunk costs
C. avoidable costs
D. all of the above costs are relevant for special decisions
23. Which of the following costs is relevant to a make-or-buy decision?
A. original cost of the production equipment
B. annual depreciation of the equipment
C. the amount that would be received if the production equipment were sold
D. the cost of direct materials purchased last month and used to manufacture the
component
24. Which of the following is NOT a way that companies might reduce tariffs?
A. Alter materials to increase the domestic content.
B. Restrict the amount of imported materials.
C. Increase the amount of imported materials.
D. Utilize foreign trade zones.
25. The U.S. government has set up foreign trade zones (FTZ) that
A. are located on U.S. soil but are considered to be outside of U.S. commerce for tariff
purposes.
B. are located in foreign countries and designed to export to the United States.
C. are located in foreign countries and are designed to import from the United States.
D. are located in the United States and are considered part of the United States for tariff
purposes.
26. Abbott Company is considering purchasing a new machine to replace a machine
purchased one year ago that is not achieving the expected results. The following
information is available:
Expected maintenance costs of new machine
Purchase price of existing machine
Expected cost savings of new machine
Expected maintenance costs of existing machine
Resale value of existing machine
Which of these items is IRRELEVANT?
A. Expected maintenance costs of new machine
B. Purchase cost of existing machine
C. Expected maintenance costs of existing machine
D. Expected resale value of existing machine
$ 12,000 per year
$150,000
$ 20,000 per year
$ 8,000 per year
$ 35,000
27. Which of the following would be TRUE?
Category
of Cost
A. Flexible
B. Flexible
C. Committed
D. Committed
Relationships
Relevancy
Demand changes
Demand constant
Demand increase > Unused capacity
Demand increase < Unused capacity
Irrelevant
Irrelevant
Not relevant
Relevant
28. _______________ is(are) the cost of acquiring activity capacity.
A. Joint costs
B. Resource spending
C. Absorption costing
D. Variable costing
29. For flexible resources, which of the following statements is true?
A. A change in resource spending will only occur if the demand for a resource drops
permanently and exceeds demand enough so the activity capacity will be reduced.
B. Often, resources are acquired in advance for multiple periods and are therefore
irrelevant.
C. Decisions often affect multi-period capabilities.
D. If the demand for an activity changes across alternatives, then resource spending will
change and the cost of the activity will be relevant to the decision.
30. Salda Industries employs 500 workers in the factory. These workers produced 85,000
units in 2009. Due to a special order, the units produced in 2010 increased to 95,000
units. However, Salda produced these units without adding workers. How is that
possible?
A. The plant had some unused activity capacity.
B. The employees were a flexible resource in this situation.
C. The labor cost associated with the additional units sold will be a relevant cost.
D. None of these
31. Upfront resource spending
A. is always relevant because it relates to the future.
B. is always relevant because it could reduce future costs.
C. is a sunk cost and therefore never relevant.
D. is always relevant because upfront resource spending will generate future revenues or
benefits.
32. Which of the following items would be classified as flexible resources?
A. salaried employees
B. depreciation on building
C. fuel to generate electricity internally
D. lease on machinery
33. Which of the following items would be classified as committed resources (shortterm)?
A. salaried employees
B. depreciation on building
C. fuel to generate electricity internally
D. lease on machinery
34. Which of the following items would be classified as committed resources (longterm)?
A. salaried employees
B. depreciation on building
C. lease on machinery
D. both b and c
35. In the activity resource model, flexible resources are
A. resources acquired in advance of usage.
B. resources acquired as used and needed.
C. usually acquired in lumpy amounts.
D. are normally fixed or mixed costs.
36. A decision to make a component internally versus through a supplier is a
A. special-order decision.
B. keep-or-drop a product-line decision.
C. make-or-buy decision.
D. both a and c.
37. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$150,000
240,000
90,000
120,000
$600,000
An outside supplier has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?
A. $30,000 decrease
B. $30,000 increase
C. $90,000 decrease
D. $90,000 increase
38. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
Direct materials
Direct labor
Inspecting products
Providing power
Providing supervision
Setting up equipment
Moving materials
Total
$150,000
240,000
60,000
30,000
40,000
60,000
20,000
$600,000
If the component is not produced by Foster, inspection of products and provision of power costs will only be 10 percent
of the production costs; moving materials costs and setting up equipment costs will only be 50 percent of the
production costs; and supervision costs will amount to only 40 percent of the production amount. An outside supplier
has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?
A. $25,000 increase
B. $45,000 increase
C. $90,000 decrease
D. $90,000 increase
39. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$150,000
240,000
90,000
120,000
$600,000
An outside supplier has offered to sell the component for $25.50.
Foster Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the
outside supplier.
What is the effect on income if Foster purchases the component from the outside supplier?
A. $45,000 increase
B. $15,000 increase
C. $75,000 decrease
D. $105,000 increase
40. Vest Industries manufactures 40,000 components per year. The manufacturing cost
of the components was determined as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$ 75,000
120,000
45,000
60,000
$300,000
An outside supplier has offered to sell the component for $12.75.
What is the effect on income if Vest Industries purchases the component from the outside supplier?
A. $270,000 decrease
B. $270,000 increase
C. $30,000 decrease
D. $30,000 increase
41. Vest Industries manufactures 40,000 components per year. The manufacturing cost
of the components was determined as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$ 75,000
120,000
45,000
60,000
$300,000
An outside supplier has offered to sell the component for $12.75.
Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside
supplier.
What is the effect on income if Vest purchases the component from the outside supplier?
A. $225,000 decrease
B. $195,000 increase
C. $165,000 decrease
D. $135,000 increase
42. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total
$ 9.00
4.50
3.00
1.50
$18.00
Fixed costs per month:
Factory overhead
Selling and admin.
Total
$120,000
60,000
$180,000
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $6.00 per unit. If
Miller Company accepts the offer, it will be able to reduce variable costs by 30 percent and rent unused space to an
outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on
profits if Miller Company buys from the Tennessee firm?
A. decrease of $19,000
B. increase of $19,000
C. increase of $13,000
D. increase of $6,000
43. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total
$ 9.00
4.50
3.00
1.50
$18.00
Fixed costs per month:
Factory overhead
Selling and admin.
Total
$120,000
60,000
$180,000
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $16.00 per unit. If
Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other
information remains the same as the original data. What is the effect on profits if Miller Company buys from the
Tennessee firm?
A. decrease of $19,000
B. increase of $19,000
C. increase of $38,000
D. decrease of $6,000
44. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
$ 9.00
4.50
3.00
1.50
Fixed costs per month:
Factory overhead
Selling and admin.
Total
$120,000
60,000
$180,000
Total
$18.00
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
The speakers are currently unpackaged. Packaging them individually would increase costs by $1.20 per unit. However,
the units could then be sold for $33.00. All other information remains the same as the original data. What is the effect
on profits if Miller Company packages the speakers?
A. decrease of $36,000
B. decrease of $24,000
C. increase of $36,000
D. no change
45. Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing
one unit of part AA1 at this volume is as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
$10.00
14.00
6.00
4.00
$34.00
An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of $31.00. If
Harris Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part AA1. Furthermore, the
space devoted to the manufacture of part AA1 would be rented to another company for $24,000 per year. If Harris
Company accepts the offer of the outside supplier, annual profits will
A. increase by $29,000.
B. increase by $14,500.
C. increase by $22,000.
D. increase by $2,500.
46. Figure 17-1
The following information pertains to the EWIN Company's three products:
Unit sales per month
Selling price per unit
Variable costs per unit
Unit contribution margin
Batches
Setups
Direct fixed costs
Advertising
Supervision
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
M
9,000
N
14,000
O
8,000
$6.00
3.00
$3.00
5
6
$11.25
9.00
$ 2.25
10
3
$ 7.50
7.00
$ 0.50
5
1
$3,000
5,000
$2,000
5,000
$1,000
5,000
Refer to Figure 17-1. When EWIN converted over to ABC it discovered the following:
inspecting products
—
20 percent of the inspection activity was unused. The
inspections used were based on the number of batches
produced.
materials handling
—
10 percent of the materials handling activity was unused.
The materials handling activity used was based on the
number of production runs.
customer service
—
50 percent of the customer service activity was unused.
The usage was given as follows: M 1,000, N 1,000, O 500
plant depreciation
—
facility level cost
general administration
—
facility level cost
The operating income for EWIN would be
A. $9,000.
B. $8,500.
C. $19,000.
D. $27,000.
47. Figure 17-1
The following information pertains to the EWIN Company's three products:
Unit sales per month
Selling price per unit
Variable costs per unit
Unit contribution margin
Batches
Setups
Direct fixed costs
Advertising
Supervision
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
M
9,000
N
14,000
O
8,000
$6.00
3.00
$3.00
5
6
$11.25
9.00
$ 2.25
10
3
$ 7.50
7.00
$ 0.50
5
1
$3,000
5,000
$2,000
5,000
$1,000
5,000
Refer to Figure 17-1. When EWIN converted over to ABC it discovered the following:
Inspecting products
—
Materials
handling
—
Customer
service
—
Plant depreciation
General administration
—
—
20% of the inspection activity was unused. The inspections
used were based on the number of batches produced.
10% of the materials handling activity was unused. The
materials handling activity used was based on the number of
production runs.
50% of the customer service activity was unused. The usage
was given as follows: M 1,000, N 1000, O 500
facility level cost
facility level cost
The product margin for product M using ABC would be
A. $9,000.
B. $13,840.
C. $19,000.
D. $27,000.
48. Figure 17-1
The following information pertains to the EWIN Company's three products:
Unit sales per month
Selling price per unit
Variable costs per unit
Unit contribution margin
Batches
Setups
Direct fixed costs
Advertising
Supervision
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
M
9,000
N
14,000
O
8,000
$6.00
3.00
$3.00
5
6
$11.25
9.00
$ 2.25
10
3
$ 7.50
7.00
$ 0.50
5
1
$3,000
5,000
$2,000
5,000
$1,000
5,000
Refer to Figure 17-1. When EWIN converted over to ABC it discovered the following:
Inspecting products
—
20% of the inspection activity was unused. The inspections
used were based on the number of batches produced.
Materials
—
10% of the materials handling activity was unused. The
handling
materials handling activity used was based on the number
of production runs.
Customer
—
50% of the customer service activity was unused. The usage
service
was given as follows: M 1,000, N 1000, O 500
Plant depreciation
General administration
—
—
facility level cost
facility level cost
The operating income for EWIN would be
A. $9,000.
B. $13,840.
C. $19,000.
D. $27,000.
49. Figure 17-1
The following information pertains to the EWIN Company's three products:
Unit sales per month
M
9,000
N
14,000
O
8,000
Selling price per unit
Variable costs per unit
Unit contribution margin
Batches
Setups
Direct fixed costs
Advertising
Supervision
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
$6.00
3.00
$3.00
5
6
$11.25
9.00
$ 2.25
10
3
$ 7.50
7.00
$ 0.50
5
1
$3,000
5,000
$2,000
5,000
$1,000
5,000
Refer to Figure 17-1. The product margin for product M using functional-based costing would be
A. $9,000.
B. $13,840.
C. $19,000.
D. $41,500.
50. Houston Corporation manufacturers a part for its production cycle. The costs per unit
for 5,000 units of this part are as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
$ 32
40
16
32
$120
Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If Houston
Corporation accepts Johnson Company's offer, total fixed costs will be reduced to $60,000. What alternative is more
desirable and by what amount is it more desirable?
Alternative
Amount
A. Make
B. Make
C. Buy
D. Buy
$20,000
$120,000
$40,000
$100,000
51. A decision to make or eliminate an unprofitable product is a
A. special-order decision.
B. keep-or-drop a product-line decision.
C. make-or-buy decision.
D. both b and c.
52. The operations of Smits Corporation are divided into the Childs Division and the
Jackson Division. Projections for the next year are as follows:
Sales
Variable costs
Contribution margin
Direct fixed costs
Segment margin
Allocated common costs
Operating income (loss)
Childs
Division
$250,000
90,000
$160,000
75,000
$ 85,000
35,000
$ 50,000
Jackson
Division
$180,000
100,000
$ 80,000
62,500
$ 17,500
27,500
$(10,000)
Total
$430,000
190,000
$240,000
137,500
$102,500
62,500
$ 40,000
Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be
A. $22,500.
B. $40,000.
C. $50,000.
D. $60,000.
53. The operations of Knickers Corporation are divided into the Pacers Division and the
Bulls Division. Projections for the next year are as follows:
Sales
Variable costs
Contribution margin
Direct fixed costs
Segment margin
Allocated common costs
Operating income (loss)
Pacers
Division
$420,000
147,000
$273,000
126,000
$147,000
63,000
$ 84,000
Bulls
Division
$252,000
115,500
$136,500
105,000
$ 31,500
47,250
$(15,750)
Total
$672,000
262,500
$409,500
231,000
$178,500
110,250
$ 68,250
Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be
A. $99,750.
B. $84,000.
C. $68,250.
D. $36,750.
54. The following information pertains to Ewing Company's three products:
Unit sales per month
D
900
E
1,400
F
800
Selling price per unit
Variable costs per unit
Unit contribution margin
$6.00
3.00
$3.00
$11.25
9.00
$ 2.25
$ 7.50
7.80
$(0.30)
Assume that product F is discontinued and the space used to produce product F is rented for $600 per month. Monthly
profits will
A. increase by $360.
B. decrease by $5,400.
C. increase by $600.
D. increase by $840.
55. The following information pertains to Ewing Company's three products:
Unit sales per month
D
900
E
1,400
F
800
Selling price per unit
Variable costs per unit
Unit contribution margin
$6.00
3.00
$3.00
$11.25
9.00
$ 2.25
$ 7.50
7.80
$(0.30)
Assume that product F is discontinued and the space is used to produce E. Product E's production is increased to 2,200
units per month, but E's selling price of all units of E is reduced to $10.20. Monthly profits will
A. decrease by $2,070.
B. increase by $1,200.
C. decrease by $270.
D. increase by $2,640.
56. The following information pertains to the Ewing Company's three products:
Unit sales per month
D
900
E
1,400
F
800
Selling price per unit
Variable costs per unit
Unit contribution margin
$6.00
3.00
$3.00
$11.25
9.00
$ 2.25
$ 7.50
7.80
$(0.30)
Assume that the selling price of product F is increased to $8.25 with a reduction in monthly sales to 400 units. Monthly
profits will
A. increase by $2,070.
B. increase by $420.
C. increase by $180.
D. decrease by $60.
57. The following information pertains to Dodge Company's three products:
Unit sales per year
A
250
B
400
C
250
Selling price per unit
Variable costs per unit
Unit contribution margin
$9.00
3.60
$5.40
$12.00
9.00
$ 3.00
$ 9.00
9.90
$(0.90)
Contribution margin ratio
60%
25%
(10)%
Assume that product C is discontinued and the extra space is rented for $300 per month. All other information remains
the same as the original data. Annual profits will
A. increase by $75.
B. decrease by $75.
C. increase by $525.
D. remain the same.
58. Figure 17-2
Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$12
36
18
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
Refer to Figure 17-2. A wholesaler has offered to pay $110 a unit for 7,500 units.
If the special order is accepted, the effect on operating income would be a
A. $75,000 decrease.
B. $429,000 increase.
C. $495,000 increase.
D. $249,000 increase.
59. Figure 17-2
Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$12
36
18
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
Refer to Figure 17-2. If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income
would be a
A. $153,000 increase.
B. $45,000 increase.
C. $450,000 increase.
D. $90,000 decrease.
60. Firms may be asked to accept a special order of their product for a reduced price if
A. it can be concealed from the government.
B. excess capacity exists.
C. the order is small.
D. the plant is producing at maximum capacity.
61. A decision that focuses on whether a specially priced order should be accepted or
rejected is a
A. special-order decision.
B. keep-or-drop a product-line decision.
C. make-or-buy decision.
D. both a and c.
62. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Direct materials
Direct labor
Factory overhead (30% variable)
Selling expenses (50% variable)
Administrative expenses (10% variable)
Total per unit
$2,400
960
1,800
900
840
$6,900
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
What is the profit earned by Reggie Corporation on the original 1,000 units?
A. $6,900,000
B. $8,400,000
C. $900,000
D. $2,640,000
63. The following information relates to a product produced by Creamer Company:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Unit cost
$24
15
30
18
$87
Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production
capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product
normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.
The incremental cost per unit associated with the special order is
A. $84.
B. $81.
C. $69.
D. $64.
64. Meco Company produces a product that has a regular selling price of $360 per unit.
At a typical monthly production volume of 2,000 units, the product's average unit cost of
goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing
costs. All selling and administrative costs are fixed and amount to $30,000 per month.
Meco Company has just received a special order for 1,000 units at $240 per unit. The
buyer will pay transportation, and the regular selling price will not be affected if Meco
accepts the order.
Assuming Meco Company has excess capacity, the effect on profits of accepting the
order would be a
A. $60,000 increase.
B. $60,000 decrease.
C. $30,000 increase.
D. $30,000 decrease.
65. Meco Company produces a product that has a regular selling price of $360 per unit.
At a typical monthly production volume of 2,000 units, the product's average unit cost of
goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing
costs. All selling and administrative costs are fixed and amount to $30,000 per month.
Meco Company has just received a special order for 1,000 units at $240 per unit. The
buyer will pay transportation, and the regular selling price will not be affected if Meco
accepts the order.
Assuming Meco Company is operating at capacity and accepting the order would require
an offsetting reduction in regular sales, the effect on profits of accepting the order would
be a
A. $240,000 decrease.
B. $30,000 increase.
C. $120,000 decrease.
D. $150,000 decrease.
66. The following information relates to a product produced by Creamer Company:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Unit cost
$24
15
30
18
$87
Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production
capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product
normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.
If the firm produces the special order, the effect on income would be a
A. $360,000 increase.
B. $360,000 decrease.
C. $540,000 increase.
D. $540,000 decrease.
67. If there is excess capacity, the minimum acceptable price for a special order must
cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus the
contribution margin usually earned on regular units.
68. If a firm is at full capacity, the minimum special order price must cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus
foregone contribution margin on regular units not produced.
69. Gundy Company manufactures a product with the following costs per unit at the
expected production of 30,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$4
12
6
8
The company has the capacity to produce 40,000 units. The product regularly sells for $40. A wholesaler has offered to
pay $32 a unit for 2,000 units.
If the firm is at capacity and the special order is accepted, the effect on operating income would be
A. a $20,000 increase.
B. a $16,000 decrease.
C. a $4,000 increase.
D. $-0-.
70. Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$12
36
18
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered
to pay $110 a unit for 7,500 units.
If the special order is accepted, the effect on operating income would be a
A. $75,000 decrease.
B. $429,000 increase.
C. $495,000 increase.
D. $249,000 increase.
71. Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$12
36
18
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income would be a
A. $153,000 increase.
B. $45,000 increase.
C. $450,000 increase.
D. $90,000 decrease.
72. Rose Manufacturing Company had the following unit costs:
Direct materials
Direct labor
$24
8
Variable factory overhead
Fixed factory overhead (allocated)
10
18
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that sufficient unused
production capacity exists to produce the order and no regular customers will be affected by the order, how much
additional profit (loss) will be generated by accepting the special order?
A. $12,000 profit
B. $96,000 profit
C. $84,000 loss
D. $24,000 loss
73. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total
$ 9.00
4.50
3.00
1.50
$18.00
Fixed
costs
per
month:
Factory overhead
Selling and admin.
Total
$120,000
60,000
$180,000
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced price of $24 per
unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative
costs of $3,000. All other information remains the same as the original data. What is the effect on profits if the special
order is accepted?
A. increase of $75,000
B. increase of $57,000
C. decrease of $168,000
D. increase of $12,000
74. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total
$ 9.00
4.50
3.00
1.50
$18.00
Fixed
costs
per
month:
Factory overhead
Selling and admin.
Total
$120,000
60,000
$180,000
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of $25.20 per
unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative
costs of $6,000. In addition, assume that overtime production is not possible and that all other information remains the
same as the original data. What is the effect on profits if the special order is accepted?
A. increase of $54,900
B. increase of $30,900
C. increase of $36,900
D. increase of $176,400
75. Boone Products had the following unit costs:
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead (allocated)
$24
10
8
18
A one-time customer has offered to buy 1,000 units at a special price of $48 per unit. Assuming that sufficient unused
production capacity exists to produce the order and no regular customers will be affected by the order, how much
additional profit (loss) will be generated from the special order?
A. $12,000 loss
B. $14,000 profit
C. $48,000 profit
D. $6,000 profit
76. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Direct materials
Direct labor
Factory overhead (30% variable)
Selling expenses (50% variable)
Administrative expenses (10% variable)
Total per unit
$2,400
960
1,800
900
840
$6,900
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
How much will income change if the special order is accepted?
A. increase by $398,400
B. decrease by $180,000
C. increase by $111,600
D. no change
77. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Direct materials
Direct labor
Factory overhead (30% variable)
Selling expenses (50% variable)
Administrative expenses (10% variable)
Total per unit
$2,400
960
1,800
900
840
$6,900
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
If Reggie Corporation wants to increase its profit by $18,000 on the special order, what is the minimum price it should
charge per unit?
A. $4,014
B. $4,164
C. $5,100
D. $6,900
78. Boone Products had the following unit costs:
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead (allocated)
$24
10
8
18
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of capacity constraints,
1,000 units will need to be produced during overtime. Overtime premium is $8 per unit. How much additional profit
(loss) will be generated by accepting the special order?
A. $30,000 loss
B. $4,000 loss
C. $24,000 loss
D. $4,000 profit
79. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Direct materials
Direct labor
Factory overhead (30% variable)
Selling expenses (50% variable)
Administrative expenses (10% variable)
Total per unit
$2,400
960
1,800
900
840
$6,900
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800.
Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales by 40 units in
order to contract the special order. There are selling expenses on only the sales to the regular customers. What is the
net income if the special order of 100 units is accepted?
A. $831,960
B. $876,960
C. $1,011,600
D. $900,000
80. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint
process. The joint costs amount to $200,000.
If Processed Further
Product
A1
B2
C3
D4
Units Produced
3,000
5,000
4,000
6,000
Sales Value
at Split-Off
$10,000
30,000
20,000
40,000
Additional
Costs
$2,500
3,000
4,000
6,000
Sales Value
$15,000
35,000
25,000
45,000
If Product B2 is processed further, profits will
A. increase by $30,000.
B. decrease by $3,000.
C. increase by $32,000.
D. increase by $2,000.
81. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint
process. The joint costs amount to $200,000.
If Processed Further
Product
A1
B2
C3
D4
Units Produced
3,000
5,000
4,000
6,000
Sales Value
at Split-Off
$10,000
30,000
20,000
40,000
Additional
Costs
$2,500
3,000
4,000
6,000
Which product(s) should be sold at split-off to maximize profits in the short run?
A. Product A1
B. Product D4
C. Product B2
D. Products A1 and D4
Sales Value
$15,000
35,000
25,000
45,000
82. Manning Company uses a joint process to produce products W, X, Y, and Z. Each
product may be sold at its split-off point or processed further. Additional processing costs
of specific products are entirely variable. Joint processing costs for a single batch of joint
products are $120,000. Other relevant data are as follows:
Product
W
X
Y
Z
Sales Value
at Split-Off
$ 40,000
$ 12,000
$ 20,000
$ 28,000
$100,000
Additional
Processing Costs
$ 60,000
$ 4,000
$ 32,000
$ 20,000
$116,000
Sales Value of
Final Product
$ 80,000
$ 20,000
$120,000
$ 32,000
$252,000
Which products should Manning process further?
A. all
B. all except Z
C. X and Y
D. none
83. Manning Company uses a joint process to produce products W, X, Y, and Z. Each
product may be sold at its split-off point or processed further. Additional processing costs
of specific products are entirely variable. Joint processing costs for a single batch of joint
products are $120,000. Other relevant data are as follows:
Product
W
X
Y
Z
Sales Value
at Split-Off
$ 40,000
$ 12,000
$ 20,000
$ 28,000
$100,000
Additional
Processing Costs
$ 60,000
$ 4,000
$ 32,000
$ 20,000
$116,000
Sales Value of
Final Product
$ 80,000
$ 20,000
$120,000
$ 32,000
$252,000
Processing Y further will cause profits to
A. increase by $120,000.
B. increase by $52,000.
C. increase by $68,000.
D. decrease by $32,000.
84. Information about three joint products follows:
Anticipated production
Selling price/lb. at split-off
Additional processing costs/lb.
after split-off (all variable)
Selling price/lb. after further
processing
A
5,000 lbs.
$10
B
1,000 lbs.
$30
C
2,000 lbs.
$16
$ 6
$12
$24
$20
$40
$50
The cost of the joint process is $60,000. Which of the joint products should be sold at split-off?
A. A
B. B
C. C
D. both A and B
85. Information about three joint products follows:
Anticipated production
Selling price/lb. at split-off
Additional processing costs/lb.
after split-off (all variable)
Selling price/lb. after further
processing
X
12,000 lbs.
$16
Y
8,000 lbs.
$26
Z
7,000 lbs.
$48
$ 8
$20
$20
$20
$40
$70
The cost of the joint process is $140,000. Which of the joint products should be processed further?
A. X
B. Y
C. Z
D. both X and Y
86. Information about three joint products follows:
Anticipated production
Selling price/lb. at split-off
Additional processing costs/lb.
after split-off (all variable)
Selling price/lb. after further
processing
X
12,000 lbs.
$16
Y
8,000 lbs.
$26
Z
7,000 lbs.
$48
$ 8
$20
$20
$20
$40
$70
The cost of the joint process is $140,000.
If the firm is currently processing all three products beyond split-off, the firm's income would be
A. $736,000.
B. $654,000.
C. $596,000.
D. $514,000.
87. Information about three joint products follows:
Anticipated production
Selling price/lb. at split-off
Additional processing costs/lb.
after split-off (all variable)
X
12,000 lbs.
$16
Y
8,000 lbs.
$26
Z
7,000 lbs.
$48
$ 8
$20
$20
Selling price/lb. after further
processing
$20
$40
$70
The cost of the joint process is $140,000.
Assuming all of the sell now or process further decisions were correctly made, what will be the firm's income?
A. $736,000
B. $654,000
C. $596,000
D. $610,000
88. Describe the steps in the decision-making process. What is the role of qualitative
factors in tactical decision-making?
89. What are relevant costs? How do they relate to decision making?
90. How is understanding of committed resources and flexible resources important to the
activity resource usage model? How does this relate to relevance?
91. Given the following three situations:
I.
II.
III.
Clessin Architects employs 10 architects who can supply a capacity of 18,000 billable hours
per year. The costs related to these 10 architects amounts to $900,000 or $50 per hour. Last
year, the firm billed 17,800 hours. Next year, the firm estimates billing hours to take a slight
downturn to 17,000 hours. However, Clessin plans to retain all 10 architects.
Clessin Architects also employs surveyors on a contract basis. Last year, Clessin contracted
with 8 surveyors to provide surveys for existing projects. Due to the expected downturn for
next year, Clessin will only contract services of 7 surveyors as needed.
Clessin currently leases space in a building at the cost of $36,000 per year. They are
outgrowing their space and contemplating a decision to design and build their own building at
a cost of $250,000. The new building would have space for at least 18 architects.
Identify which resource category relates to each situation under the activity resource usage model and explain your
choice.
92. Junior Company currently buys 30,000 units of a part used to manufacture its product
at $40 per unit. Recently the supplier informed Junior Company that a 20 percent
increase will take effect next year. Junior has some additional space and could produce
the units for the following per-unit costs (based on 30,000 units):
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
$16
12
12
10
$50
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant
can be rented out for $20,000 per year if the parts are purchased externally.
Required:
Should Junior Company buy the part externally or make it internally?
93. Rippey Corporation manufactures a single product with the following unit costs for
5,000 units:
Direct materials
Direct labor
Factory overhead (40% variable)
Selling expenses (60% variable)
Administrative expenses (20% variable)
Total per unit
$ 60
30
90
30
15
$225
Recently, a company approached Rippey Corporation about buying 1,000 units for $225. Currently, the models are sold
to dealers for $412.50. Rippey's capacity is sufficient to produce the extra 1,000 units. No additional selling expenses
would be incurred on the special order.
Required:
a.
b.
c.
d.
What is the profit earned by Rippey Corporation on the original 5,000 units?
Should Rippey accept the special order if its goal is to maximize short-run profits? How much will income be
affected?
Determine the minimum price Rippey would want to receive in order to increase profits by $7,500 on the
special order.
When making a special order decision, what qualitative aspects of the decision should Rippey Corporation
consider?
94. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint
process is $30,000. Information about the three products follows:
Anticipated production
Selling price/lb. at split-off
Additional processing costs/lb.
after split-off (all variable)
Selling price/lb. after
further processing
Allocated joint costs
X
5,600 lbs.
$2.00
Y
10,000 lbs.
$1.00
Z
2,500 lbs.
$3.00
$1.50
$1.25
$.75
$2.50
$12,000
$3.75
$10,500
$6.25
$7,500
Required:
a.
b.
Determine whether each product should be sold at split-off or processed further. Show all supporting
calculations in good form.
Determine the firm's income if the firm processed all three products beyond split-off.
95. The operations of Grant Corporation are divided into the Fix Division and the Roach
Division. Projections for the next year are as follows:
Sales
Variable costs
Contribution margin
Direct fixed costs
Segment margin
Allocated common costs
Operating income (loss)
Fix
Division
$60,000
20,000
$40,000
12,500
$27,500
10,000
$17,500
Roach
Division
$ 40,000
15,000
$ 25,000
30,000
$ (5,000)
7,500
$(12,500)
Total
$100,000
35,000
$ 65,000
42,500
$ 22,500
17,500
$ 5,000
Required:
a.
b.
Determine operating income for Grant Corporation as a whole if the Roach Division is dropped.
Should the Roach Division be eliminated?
96. Arcadia, Inc., uses a joint process to produce Products W, X, Y, Z. Each product may
be sold at its split-off point or processed further. Additional processing costs of specific
products are entirely variable. Joint processing costs for a single batch of joint products
are $200,000. Other relevant data are as follows:
Product
W
X
Y
Z
Sales Value
at Split-off
$ 40,000
16,000
20,000
24,000
$100,000
Additional
Processing Costs
$24,000
10,000
10,000
16,000
$60,000
Sales Value of
Final Product
$ 70,000
20,000
48,000
36,000
$174,000
Required:
a.
b.
Determine which products should be processed further.
How will processing each product further affect profits?
97. Barron Company's 2011 income statement is as follows:
Sales (5,000 units ´ $15)
Less variable expenses:
Cost of goods sold:
Direct materials
Direct labor
Variable factory overhead
Selling and administrative
Contribution margin
Less fixed expenses:
Factory overhead
Selling and administrative
Net income (loss)
$75,000
$15,000
10,000
10,000
2,500
$10,000
15,000
37,500
$37,500
25,000
$12,500
In an attempt to improve the company's profit performance, management is considering a number of alternative
actions.
Required:
Determine the effect of each of the following on monthly profit. Each situation is to be evaluated independently of all
the others.
a.
b.
c.
Purchasing automated assembly equipment. This action should reduce direct labor costs by 40 percent. It also
will increase variable overhead costs by 10 percent and fixed factory overhead by $2,500.
Reducing the unit selling price by $2 per unit. This should increase the monthly sales by 5,000 units. Fixed
factory overhead will increase by $1,500.
Increase fixed selling and administrative expenses by $1,000 for advertising costs. The number of units sold
will increase to 8,000 units.
98. The management of James Industries has been evaluating whether the company
should continue manufacturing a component or buy it from an outside supplier. A $200
cost per component was determined as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$ 15
40
10
35
$100
James Industries uses 4,000 components per year. After Light, Inc., submitted a bid of $80 per component, some
members of management felt they could reduce costs by buying from outside and discontinuing production of the
component. If the component is obtained from Light, Inc., James's unused production facilities could be leased to
another company for $50,000 per year.
Required:
a.
b.
c.
Determine the maximum amount per unit James should pay an outside supplier.
Indicate if the company should make or buy the component and the total dollar difference in favor of that
alternative.
Assume the company could eliminate production supervisors with salaries totaling $30,000 if the component
is purchased from an outside supplier. Indicate if the company should make or buy the component and the
total dollar difference in favor of that alternative.
99. Scott Company has an annual capacity of 18,000 units. Budgeted operating results
for 2006 are as follows:
Revenues (16,000 units @ $60)
Variable costs:
Manufacturing
Selling
Contribution margin
Fixed costs:
Manufacturing
Selling and administrative
Operating income
$960,000
$384,000
128,000
$160,000
120,000
512,000
$448,000
280,000
$168,000
A foreign wholesaler wants to buy 1,000 units at a price of $40 per unit. All fixed costs would remain within the
relevant range. Variable selling costs on the special order would be the same as variable selling costs for regular
orders.
Required:
a.
b.
c.
d.
e.
Determine the effect on operating income if the company produces the special order.
Should the company produce the special order?
Determine operating income if the customer had wanted a special order of 3,000 units and the company
produced the special order.
Should the company produce the 3,000-unit special order?
Discuss any nonquantitative factors the company might want to consider when making the decision.
100. Bonilla Corporation, which produces one product, had the following income
statement for a recent month:
Bonilla Corporation
Income Statement
For the Month of April 2011
Sales
Cost of goods sold
Gross profit
Selling and administrative
Net income
$30,000
27,000
$ 3,000
2,500
$ 500
There were no beginning or ending inventories of work-in-process or finished goods. Bonilla's manufacturing costs
were as follows:
Direct materials (1,200 units ´ $5)
Direct labor (1,200 units ´ $8)
Variable overhead (1,200 units ´ $4.50)
Fixed overhead
Total
$ 6,000
9,600
5,400
6,000
$27,000
Average cost per unit
$ 22.50
Selling and administrative expenses are all fixed.
Bonilla has just received a special order from a firm in Canada to purchase 800 units at $20 each. The order will not
affect the selling price to regular customers.
Required:
a.
Prepare a differential analysis of the relevant costs and revenues associated with the decision to accept or
reject the special order, assuming Bonilla has excess capacity.
b.
Determine the net advantage or disadvantage (profit increase or decrease) of accepting the order, assuming
Bonilla does not have excess capacity.
Chapter 17--Activity Resource Usage Model and
Tactical Decision Making Key
1. The steps in the tactical decision making process are:
I.
II.
III.
IV.
V.
Comparing relevant costs and relating to strategic goals
Identifying feasible alternatives
Identifying costs and benefits and eliminating irrelevant costs
Selecting best alternative
Defining the problem
What is the proper sequence of steps?
A. I, II, V, III, IV
B. II, I, V, III, IV
C. V, II, III, I, IV
D. V, III, II, IV, I
2. Which of the following is NOT a step in the tactical decision-making process?
A. Compare full costs and benefits for alternatives.
B. Identify feasible alternatives.
C. Select the best alternative.
D. Recognize and define the problem.
3. Which of the following statement is true concerning the nature of tactical decisions?
A. Tactical decisions are often small-scale actions.
B. Tactical decisions often have an immediate or limited end in view.
C. Tactical decisions should support alternatives that result in long-term competitive
advantage.
D. All of these statements are true.
4. Sound tactical decision making
A. only concerns the short run.
B. consists of large scale actions that serve a broad purpose.
C. consists of supporting the strategic objectives of the firm.
D. only concerns the long run.
5. Tactical decision making relies
A. only on relevant cost information.
B. only on qualitative factors.
C. on relevant costs as well as other qualitative factors.
D. on neither relevant costs nor qualitative decisions.
6. _______________ consists of choosing among alternatives with an immediate or limited
end in view.
A. Long-run decision making
B. Tactical decision making
C. Universal decision making
D. All of these
7. The use of relevant cost data to identify the alternative that provides the greatest
benefit to the organization describes
A. target cost analysis.
B. functional cost analysis.
C. activity cost analysis.
D. tactical cost analysis.
8. An important qualitative factor to consider regarding a special order is the
A. variable costs associated with the special order.
B. avoidable fixed costs associated with the special order.
C. effect the sale of special-order units will have on the sale of regularly priced units.
D. incremental revenue from the special order.
9. Qualitative factors that should be considered when evaluating a make-or-buy decision
are
A. the quality of the outside supplier's product.
B. whether the outside supplier can provide the needed quantities.
C. whether the outside supplier can provide the product when it is needed.
D. all of these.
10. Future costs that differ across alternatives describe
A. relevant costs.
B. target cost.
C. full costs.
D. activity-based costs.
11. Relevant costs are
A. past costs.
B. future costs.
C. full costs.
D. cost drivers.
12. ______________ are future costs that differ across alternatives.
A. Relevant costs
B. Irrelevant costs
C. Sunk costs
D. Past costs
13. In order for costs or benefits to be relevant, what must be true?
A. All decisions must relate to future.
B. Identifying relevant costs and benefits is an easy process.
C. Relevancy will relate both to the future and the past.
D. All of these are true statements.
14. Sunk costs are
A. future costs that have no benefit.
B. relevant costs that have only short-run benefits.
C. target costs.
D. always irrelevant.
15. Which item is NOT an example of a sunk cost?
A. materials needed for production
B. purchase cost of machinery
C. depreciation
D. all are sunk costs
16. The Titanic hit an iceberg and sank. In deciding whether or not to salvage the ship,
its book value is a(n)
A. relevant cost.
B. sunk cost.
C. opportunity cost.
D. discretionary cost.
17. A purchasing agent has two potential firms from which to buy materials for
production. If both firms charge the same price, the material cost is a(n)
A. irrelevant cost.
B. relevant cost.
C. sunk cost.
D. opportunity cost.
18. Which of the following statements is TRUE when making a decision between two
alternatives?
A. Variable costs may not be relevant when the decision alternatives have the same
activity levels.
B. Variable costs are not relevant when the decision alternatives have different activity
levels.
C. Sunk costs are always relevant.
D. Fixed costs are never relevant.
19. Which of the following costs is NOT relevant to a special-order decision?
A. the direct labor costs to manufacture the special-order units
B. the variable manufacturing overhead incurred to manufacture the special-order units
C. the portion of the cost of leasing the factory that is allocated to the special order
D. all of these costs are relevant
20. Which of the following costs is NOT relevant to a make-or-buy decision?
A. $10,000 of direct labor used to manufacture the parts
B. $30,000 of depreciation on the plant used to manufacture the parts
C. the supervisor's salary of $25,000 that will be avoided if the part is purchased from an
outside supplier
D. $15,000 in rent from leasing the production space to another company if the part is
purchased from an outside supplier
21. Which of the following costs is NOT relevant to a decision to sell a product at split-off
or process the product further and then sell the product?
A. joint costs allocated to the product
B. the selling price of the product at split-off
C. the additional processing costs after split-off
D. the selling price of the product after further processing
22. Which of the following costs is NOT relevant for special decisions?
A. incremental costs
B. sunk costs
C. avoidable costs
D. all of the above costs are relevant for special decisions
23. Which of the following costs is relevant to a make-or-buy decision?
A. original cost of the production equipment
B. annual depreciation of the equipment
C. the amount that would be received if the production equipment were sold
D. the cost of direct materials purchased last month and used to manufacture the
component
24. Which of the following is NOT a way that companies might reduce tariffs?
A. Alter materials to increase the domestic content.
B. Restrict the amount of imported materials.
C. Increase the amount of imported materials.
D. Utilize foreign trade zones.
25. The U.S. government has set up foreign trade zones (FTZ) that
A. are located on U.S. soil but are considered to be outside of U.S. commerce for tariff
purposes.
B. are located in foreign countries and designed to export to the United States.
C. are located in foreign countries and are designed to import from the United States.
D. are located in the United States and are considered part of the United States for tariff
purposes.
26. Abbott Company is considering purchasing a new machine to replace a machine
purchased one year ago that is not achieving the expected results. The following
information is available:
Expected maintenance costs of new machine
Purchase price of existing machine
Expected cost savings of new machine
Expected maintenance costs of existing machine
Resale value of existing machine
Which of these items is IRRELEVANT?
A. Expected maintenance costs of new machine
B. Purchase cost of existing machine
C. Expected maintenance costs of existing machine
D. Expected resale value of existing machine
$ 12,000 per year
$150,000
$ 20,000 per year
$ 8,000 per year
$ 35,000
27. Which of the following would be TRUE?
Category
of Cost
A. Flexible
B. Flexible
C. Committed
D. Committed
Relationships
Relevancy
Demand changes
Demand constant
Demand increase > Unused capacity
Demand increase < Unused capacity
Irrelevant
Irrelevant
Not relevant
Relevant
28. _______________ is(are) the cost of acquiring activity capacity.
A. Joint costs
B. Resource spending
C. Absorption costing
D. Variable costing
29. For flexible resources, which of the following statements is true?
A. A change in resource spending will only occur if the demand for a resource drops
permanently and exceeds demand enough so the activity capacity will be reduced.
B. Often, resources are acquired in advance for multiple periods and are therefore
irrelevant.
C. Decisions often affect multi-period capabilities.
D. If the demand for an activity changes across alternatives, then resource spending will
change and the cost of the activity will be relevant to the decision.
30. Salda Industries employs 500 workers in the factory. These workers produced 85,000
units in 2009. Due to a special order, the units produced in 2010 increased to 95,000
units. However, Salda produced these units without adding workers. How is that
possible?
A. The plant had some unused activity capacity.
B. The employees were a flexible resource in this situation.
C. The labor cost associated with the additional units sold will be a relevant cost.
D. None of these
31. Upfront resource spending
A. is always relevant because it relates to the future.
B. is always relevant because it could reduce future costs.
C. is a sunk cost and therefore never relevant.
D. is always relevant because upfront resource spending will generate future revenues or
benefits.
32. Which of the following items would be classified as flexible resources?
A. salaried employees
B. depreciation on building
C. fuel to generate electricity internally
D. lease on machinery
33. Which of the following items would be classified as committed resources (shortterm)?
A. salaried employees
B. depreciation on building
C. fuel to generate electricity internally
D. lease on machinery
34. Which of the following items would be classified as committed resources (longterm)?
A. salaried employees
B. depreciation on building
C. lease on machinery
D. both b and c
35. In the activity resource model, flexible resources are
A. resources acquired in advance of usage.
B. resources acquired as used and needed.
C. usually acquired in lumpy amounts.
D. are normally fixed or mixed costs.
36. A decision to make a component internally versus through a supplier is a
A. special-order decision.
B. keep-or-drop a product-line decision.
C. make-or-buy decision.
D. both a and c.
37. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$150,000
240,000
90,000
120,000
$600,000
An outside supplier has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?
A. $30,000 decrease
B. $30,000 increase
C. $90,000 decrease
D. $90,000 increase
38. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
Direct materials
Direct labor
Inspecting products
Providing power
Providing supervision
Setting up equipment
Moving materials
Total
$150,000
240,000
60,000
30,000
40,000
60,000
20,000
$600,000
If the component is not produced by Foster, inspection of products and provision of power costs will only be 10 percent
of the production costs; moving materials costs and setting up equipment costs will only be 50 percent of the
production costs; and supervision costs will amount to only 40 percent of the production amount. An outside supplier
has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?
A. $25,000 increase
B. $45,000 increase
C. $90,000 decrease
D. $90,000 increase
39. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$150,000
240,000
90,000
120,000
$600,000
An outside supplier has offered to sell the component for $25.50.
Foster Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the
outside supplier.
What is the effect on income if Foster purchases the component from the outside supplier?
A. $45,000 increase
B. $15,000 increase
C. $75,000 decrease
D. $105,000 increase
40. Vest Industries manufactures 40,000 components per year. The manufacturing cost
of the components was determined as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$ 75,000
120,000
45,000
60,000
$300,000
An outside supplier has offered to sell the component for $12.75.
What is the effect on income if Vest Industries purchases the component from the outside supplier?
A. $270,000 decrease
B. $270,000 increase
C. $30,000 decrease
D. $30,000 increase
41. Vest Industries manufactures 40,000 components per year. The manufacturing cost
of the components was determined as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$ 75,000
120,000
45,000
60,000
$300,000
An outside supplier has offered to sell the component for $12.75.
Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside
supplier.
What is the effect on income if Vest purchases the component from the outside supplier?
A. $225,000 decrease
B. $195,000 increase
C. $165,000 decrease
D. $135,000 increase
42. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total
$ 9.00
4.50
3.00
1.50
$18.00
Fixed costs per month:
Factory overhead
Selling and admin.
Total
$120,000
60,000
$180,000
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $6.00 per unit. If
Miller Company accepts the offer, it will be able to reduce variable costs by 30 percent and rent unused space to an
outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on
profits if Miller Company buys from the Tennessee firm?
A. decrease of $19,000
B. increase of $19,000
C. increase of $13,000
D. increase of $6,000
43. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total
$ 9.00
4.50
3.00
1.50
$18.00
Fixed costs per month:
Factory overhead
Selling and admin.
Total
$120,000
60,000
$180,000
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $16.00 per unit. If
Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other
information remains the same as the original data. What is the effect on profits if Miller Company buys from the
Tennessee firm?
A. decrease of $19,000
B. increase of $19,000
C. increase of $38,000
D. decrease of $6,000
44. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
$ 9.00
4.50
3.00
1.50
Fixed costs per month:
Factory overhead
Selling and admin.
Total
$120,000
60,000
$180,000
Total
$18.00
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
The speakers are currently unpackaged. Packaging them individually would increase costs by $1.20 per unit. However,
the units could then be sold for $33.00. All other information remains the same as the original data. What is the effect
on profits if Miller Company packages the speakers?
A. decrease of $36,000
B. decrease of $24,000
C. increase of $36,000
D. no change
45. Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing
one unit of part AA1 at this volume is as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
$10.00
14.00
6.00
4.00
$34.00
An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of $31.00. If
Harris Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part AA1. Furthermore, the
space devoted to the manufacture of part AA1 would be rented to another company for $24,000 per year. If Harris
Company accepts the offer of the outside supplier, annual profits will
A. increase by $29,000.
B. increase by $14,500.
C. increase by $22,000.
D. increase by $2,500.
46. Figure 17-1
The following information pertains to the EWIN Company's three products:
Unit sales per month
Selling price per unit
Variable costs per unit
Unit contribution margin
Batches
Setups
Direct fixed costs
Advertising
Supervision
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
M
9,000
N
14,000
O
8,000
$6.00
3.00
$3.00
5
6
$11.25
9.00
$ 2.25
10
3
$ 7.50
7.00
$ 0.50
5
1
$3,000
5,000
$2,000
5,000
$1,000
5,000
Refer to Figure 17-1. When EWIN converted over to ABC it discovered the following:
inspecting products
—
20 percent of the inspection activity was unused. The
inspections used were based on the number of batches
produced.
materials handling
—
10 percent of the materials handling activity was unused.
The materials handling activity used was based on the
number of production runs.
customer service
—
50 percent of the customer service activity was unused.
The usage was given as follows: M 1,000, N 1,000, O 500
plant depreciation
—
facility level cost
general administration
—
facility level cost
The operating income for EWIN would be
A. $9,000.
B. $8,500.
C. $19,000.
D. $27,000.
47. Figure 17-1
The following information pertains to the EWIN Company's three products:
Unit sales per month
Selling price per unit
Variable costs per unit
Unit contribution margin
Batches
Setups
Direct fixed costs
Advertising
Supervision
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
M
9,000
N
14,000
O
8,000
$6.00
3.00
$3.00
5
6
$11.25
9.00
$ 2.25
10
3
$ 7.50
7.00
$ 0.50
5
1
$3,000
5,000
$2,000
5,000
$1,000
5,000
Refer to Figure 17-1. When EWIN converted over to ABC it discovered the following:
Inspecting products
—
Materials
handling
—
Customer
service
—
Plant depreciation
General administration
—
—
20% of the inspection activity was unused. The inspections
used were based on the number of batches produced.
10% of the materials handling activity was unused. The
materials handling activity used was based on the number of
production runs.
50% of the customer service activity was unused. The usage
was given as follows: M 1,000, N 1000, O 500
facility level cost
facility level cost
The product margin for product M using ABC would be
A. $9,000.
B. $13,840.
C. $19,000.
D. $27,000.
48. Figure 17-1
The following information pertains to the EWIN Company's three products:
Unit sales per month
Selling price per unit
Variable costs per unit
Unit contribution margin
Batches
Setups
Direct fixed costs
Advertising
Supervision
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
M
9,000
N
14,000
O
8,000
$6.00
3.00
$3.00
5
6
$11.25
9.00
$ 2.25
10
3
$ 7.50
7.00
$ 0.50
5
1
$3,000
5,000
$2,000
5,000
$1,000
5,000
Refer to Figure 17-1. When EWIN converted over to ABC it discovered the following:
Inspecting products
—
20% of the inspection activity was unused. The inspections
used were based on the number of batches produced.
Materials
—
10% of the materials handling activity was unused. The
handling
materials handling activity used was based on the number
of production runs.
Customer
—
50% of the customer service activity was unused. The usage
service
was given as follows: M 1,000, N 1000, O 500
Plant depreciation
General administration
—
—
facility level cost
facility level cost
The operating income for EWIN would be
A. $9,000.
B. $13,840.
C. $19,000.
D. $27,000.
49. Figure 17-1
The following information pertains to the EWIN Company's three products:
Unit sales per month
M
9,000
N
14,000
O
8,000
Selling price per unit
Variable costs per unit
Unit contribution margin
Batches
Setups
Direct fixed costs
Advertising
Supervision
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
$6.00
3.00
$3.00
5
6
$11.25
9.00
$ 2.25
10
3
$ 7.50
7.00
$ 0.50
5
1
$3,000
5,000
$2,000
5,000
$1,000
5,000
Refer to Figure 17-1. The product margin for product M using functional-based costing would be
A. $9,000.
B. $13,840.
C. $19,000.
D. $41,500.
50. Houston Corporation manufacturers a part for its production cycle. The costs per unit
for 5,000 units of this part are as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
$ 32
40
16
32
$120
Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If Houston
Corporation accepts Johnson Company's offer, total fixed costs will be reduced to $60,000. What alternative is more
desirable and by what amount is it more desirable?
Alternative
Amount
A. Make
B. Make
C. Buy
D. Buy
$20,000
$120,000
$40,000
$100,000
51. A decision to make or eliminate an unprofitable product is a
A. special-order decision.
B. keep-or-drop a product-line decision.
C. make-or-buy decision.
D. both b and c.
52. The operations of Smits Corporation are divided into the Childs Division and the
Jackson Division. Projections for the next year are as follows:
Sales
Variable costs
Contribution margin
Direct fixed costs
Segment margin
Allocated common costs
Operating income (loss)
Childs
Division
$250,000
90,000
$160,000
75,000
$ 85,000
35,000
$ 50,000
Jackson
Division
$180,000
100,000
$ 80,000
62,500
$ 17,500
27,500
$(10,000)
Total
$430,000
190,000
$240,000
137,500
$102,500
62,500
$ 40,000
Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be
A. $22,500.
B. $40,000.
C. $50,000.
D. $60,000.
53. The operations of Knickers Corporation are divided into the Pacers Division and the
Bulls Division. Projections for the next year are as follows:
Sales
Variable costs
Contribution margin
Direct fixed costs
Segment margin
Allocated common costs
Operating income (loss)
Pacers
Division
$420,000
147,000
$273,000
126,000
$147,000
63,000
$ 84,000
Bulls
Division
$252,000
115,500
$136,500
105,000
$ 31,500
47,250
$(15,750)
Total
$672,000
262,500
$409,500
231,000
$178,500
110,250
$ 68,250
Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be
A. $99,750.
B. $84,000.
C. $68,250.
D. $36,750.
54. The following information pertains to Ewing Company's three products:
Unit sales per month
D
900
E
1,400
F
800
Selling price per unit
Variable costs per unit
Unit contribution margin
$6.00
3.00
$3.00
$11.25
9.00
$ 2.25
$ 7.50
7.80
$(0.30)
Assume that product F is discontinued and the space used to produce product F is rented for $600 per month. Monthly
profits will
A. increase by $360.
B. decrease by $5,400.
C. increase by $600.
D. increase by $840.
55. The following information pertains to Ewing Company's three products:
Unit sales per month
D
900
E
1,400
F
800
Selling price per unit
Variable costs per unit
Unit contribution margin
$6.00
3.00
$3.00
$11.25
9.00
$ 2.25
$ 7.50
7.80
$(0.30)
Assume that product F is discontinued and the space is used to produce E. Product E's production is increased to 2,200
units per month, but E's selling price of all units of E is reduced to $10.20. Monthly profits will
A. decrease by $2,070.
B. increase by $1,200.
C. decrease by $270.
D. increase by $2,640.
56. The following information pertains to the Ewing Company's three products:
Unit sales per month
D
900
E
1,400
F
800
Selling price per unit
Variable costs per unit
Unit contribution margin
$6.00
3.00
$3.00
$11.25
9.00
$ 2.25
$ 7.50
7.80
$(0.30)
Assume that the selling price of product F is increased to $8.25 with a reduction in monthly sales to 400 units. Monthly
profits will
A. increase by $2,070.
B. increase by $420.
C. increase by $180.
D. decrease by $60.
57. The following information pertains to Dodge Company's three products:
Unit sales per year
A
250
B
400
C
250
Selling price per unit
Variable costs per unit
Unit contribution margin
$9.00
3.60
$5.40
$12.00
9.00
$ 3.00
$ 9.00
9.90
$(0.90)
Contribution margin ratio
60%
25%
(10)%
Assume that product C is discontinued and the extra space is rented for $300 per month. All other information remains
the same as the original data. Annual profits will
A. increase by $75.
B. decrease by $75.
C. increase by $525.
D. remain the same.
58. Figure 17-2
Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$12
36
18
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
Refer to Figure 17-2. A wholesaler has offered to pay $110 a unit for 7,500 units.
If the special order is accepted, the effect on operating income would be a
A. $75,000 decrease.
B. $429,000 increase.
C. $495,000 increase.
D. $249,000 increase.
59. Figure 17-2
Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$12
36
18
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
Refer to Figure 17-2. If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income
would be a
A. $153,000 increase.
B. $45,000 increase.
C. $450,000 increase.
D. $90,000 decrease.
60. Firms may be asked to accept a special order of their product for a reduced price if
A. it can be concealed from the government.
B. excess capacity exists.
C. the order is small.
D. the plant is producing at maximum capacity.
61. A decision that focuses on whether a specially priced order should be accepted or
rejected is a
A. special-order decision.
B. keep-or-drop a product-line decision.
C. make-or-buy decision.
D. both a and c.
62. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Direct materials
Direct labor
Factory overhead (30% variable)
Selling expenses (50% variable)
Administrative expenses (10% variable)
Total per unit
$2,400
960
1,800
900
840
$6,900
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
What is the profit earned by Reggie Corporation on the original 1,000 units?
A. $6,900,000
B. $8,400,000
C. $900,000
D. $2,640,000
63. The following information relates to a product produced by Creamer Company:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Unit cost
$24
15
30
18
$87
Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production
capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product
normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.
The incremental cost per unit associated with the special order is
A. $84.
B. $81.
C. $69.
D. $64.
64. Meco Company produces a product that has a regular selling price of $360 per unit.
At a typical monthly production volume of 2,000 units, the product's average unit cost of
goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing
costs. All selling and administrative costs are fixed and amount to $30,000 per month.
Meco Company has just received a special order for 1,000 units at $240 per unit. The
buyer will pay transportation, and the regular selling price will not be affected if Meco
accepts the order.
Assuming Meco Company has excess capacity, the effect on profits of accepting the
order would be a
A. $60,000 increase.
B. $60,000 decrease.
C. $30,000 increase.
D. $30,000 decrease.
65. Meco Company produces a product that has a regular selling price of $360 per unit.
At a typical monthly production volume of 2,000 units, the product's average unit cost of
goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing
costs. All selling and administrative costs are fixed and amount to $30,000 per month.
Meco Company has just received a special order for 1,000 units at $240 per unit. The
buyer will pay transportation, and the regular selling price will not be affected if Meco
accepts the order.
Assuming Meco Company is operating at capacity and accepting the order would require
an offsetting reduction in regular sales, the effect on profits of accepting the order would
be a
A. $240,000 decrease.
B. $30,000 increase.
C. $120,000 decrease.
D. $150,000 decrease.
66. The following information relates to a product produced by Creamer Company:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Unit cost
$24
15
30
18
$87
Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production
capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product
normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.
If the firm produces the special order, the effect on income would be a
A. $360,000 increase.
B. $360,000 decrease.
C. $540,000 increase.
D. $540,000 decrease.
67. If there is excess capacity, the minimum acceptable price for a special order must
cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus the
contribution margin usually earned on regular units.
68. If a firm is at full capacity, the minimum special order price must cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus
foregone contribution margin on regular units not produced.
69. Gundy Company manufactures a product with the following costs per unit at the
expected production of 30,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$4
12
6
8
The company has the capacity to produce 40,000 units. The product regularly sells for $40. A wholesaler has offered to
pay $32 a unit for 2,000 units.
If the firm is at capacity and the special order is accepted, the effect on operating income would be
A. a $20,000 increase.
B. a $16,000 decrease.
C. a $4,000 increase.
D. $-0-.
70. Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$12
36
18
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered
to pay $110 a unit for 7,500 units.
If the special order is accepted, the effect on operating income would be a
A. $75,000 decrease.
B. $429,000 increase.
C. $495,000 increase.
D. $249,000 increase.
71. Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$12
36
18
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income would be a
A. $153,000 increase.
B. $45,000 increase.
C. $450,000 increase.
D. $90,000 decrease.
72. Rose Manufacturing Company had the following unit costs:
Direct materials
Direct labor
$24
8
Variable factory overhead
Fixed factory overhead (allocated)
10
18
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that sufficient unused
production capacity exists to produce the order and no regular customers will be affected by the order, how much
additional profit (loss) will be generated by accepting the special order?
A. $12,000 profit
B. $96,000 profit
C. $84,000 loss
D. $24,000 loss
73. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total
$ 9.00
4.50
3.00
1.50
$18.00
Fixed
costs
per
month:
Factory overhead
Selling and admin.
Total
$120,000
60,000
$180,000
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced price of $24 per
unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative
costs of $3,000. All other information remains the same as the original data. What is the effect on profits if the special
order is accepted?
A. increase of $75,000
B. increase of $57,000
C. decrease of $168,000
D. increase of $12,000
74. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total
$ 9.00
4.50
3.00
1.50
$18.00
Fixed
costs
per
month:
Factory overhead
Selling and admin.
Total
$120,000
60,000
$180,000
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of $25.20 per
unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative
costs of $6,000. In addition, assume that overtime production is not possible and that all other information remains the
same as the original data. What is the effect on profits if the special order is accepted?
A. increase of $54,900
B. increase of $30,900
C. increase of $36,900
D. increase of $176,400
75. Boone Products had the following unit costs:
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead (allocated)
$24
10
8
18
A one-time customer has offered to buy 1,000 units at a special price of $48 per unit. Assuming that sufficient unused
production capacity exists to produce the order and no regular customers will be affected by the order, how much
additional profit (loss) will be generated from the special order?
A. $12,000 loss
B. $14,000 profit
C. $48,000 profit
D. $6,000 profit
76. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Direct materials
Direct labor
Factory overhead (30% variable)
Selling expenses (50% variable)
Administrative expenses (10% variable)
Total per unit
$2,400
960
1,800
900
840
$6,900
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
How much will income change if the special order is accepted?
A. increase by $398,400
B. decrease by $180,000
C. increase by $111,600
D. no change
77. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Direct materials
Direct labor
Factory overhead (30% variable)
Selling expenses (50% variable)
Administrative expenses (10% variable)
Total per unit
$2,400
960
1,800
900
840
$6,900
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
If Reggie Corporation wants to increase its profit by $18,000 on the special order, what is the minimum price it should
charge per unit?
A. $4,014
B. $4,164
C. $5,100
D. $6,900
78. Boone Products had the following unit costs:
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead (allocated)
$24
10
8
18
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of capacity constraints,
1,000 units will need to be produced during overtime. Overtime premium is $8 per unit. How much additional profit
(loss) will be generated by accepting the special order?
A. $30,000 loss
B. $4,000 loss
C. $24,000 loss
D. $4,000 profit
79. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Direct materials
Direct labor
Factory overhead (30% variable)
Selling expenses (50% variable)
Administrative expenses (10% variable)
Total per unit
$2,400
960
1,800
900
840
$6,900
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800.
Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales by 40 units in
order to contract the special order. There are selling expenses on only the sales to the regular customers. What is the
net income if the special order of 100 units is accepted?
A. $831,960
B. $876,960
C. $1,011,600
D. $900,000
80. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint
process. The joint costs amount to $200,000.
If Processed Further
Product
A1
B2
C3
D4
Units Produced
3,000
5,000
4,000
6,000
Sales Value
at Split-Off
$10,000
30,000
20,000
40,000
Additional
Costs
$2,500
3,000
4,000
6,000
Sales Value
$15,000
35,000
25,000
45,000
If Product B2 is processed further, profits will
A. increase by $30,000.
B. decrease by $3,000.
C. increase by $32,000.
D. increase by $2,000.
81. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint
process. The joint costs amount to $200,000.
If Processed Further
Product
A1
B2
C3
D4
Units Produced
3,000
5,000
4,000
6,000
Sales Value
at Split-Off
$10,000
30,000
20,000
40,000
Additional
Costs
$2,500
3,000
4,000
6,000
Which product(s) should be sold at split-off to maximize profits in the short run?
A. Product A1
B. Product D4
C. Product B2
D. Products A1 and D4
Sales Value
$15,000
35,000
25,000
45,000
82. Manning Company uses a joint process to produce products W, X, Y, and Z. Each
product may be sold at its split-off point or processed further. Additional processing costs
of specific products are entirely variable. Joint processing costs for a single batch of joint
products are $120,000. Other relevant data are as follows:
Product
W
X
Y
Z
Sales Value
at Split-Off
$ 40,000
$ 12,000
$ 20,000
$ 28,000
$100,000
Additional
Processing Costs
$ 60,000
$ 4,000
$ 32,000
$ 20,000
$116,000
Sales Value of
Final Product
$ 80,000
$ 20,000
$120,000
$ 32,000
$252,000
Which products should Manning process further?
A. all
B. all except Z
C. X and Y
D. none
83. Manning Company uses a joint process to produce products W, X, Y, and Z. Each
product may be sold at its split-off point or processed further. Additional processing costs
of specific products are entirely variable. Joint processing costs for a single batch of joint
products are $120,000. Other relevant data are as follows:
Product
W
X
Y
Z
Sales Value
at Split-Off
$ 40,000
$ 12,000
$ 20,000
$ 28,000
$100,000
Additional
Processing Costs
$ 60,000
$ 4,000
$ 32,000
$ 20,000
$116,000
Sales Value of
Final Product
$ 80,000
$ 20,000
$120,000
$ 32,000
$252,000
Processing Y further will cause profits to
A. increase by $120,000.
B. increase by $52,000.
C. increase by $68,000.
D. decrease by $32,000.
84. Information about three joint products follows:
Anticipated production
Selling price/lb. at split-off
Additional processing costs/lb.
after split-off (all variable)
Selling price/lb. after further
processing
A
5,000 lbs.
$10
B
1,000 lbs.
$30
C
2,000 lbs.
$16
$ 6
$12
$24
$20
$40
$50
The cost of the joint process is $60,000. Which of the joint products should be sold at split-off?
A. A
B. B
C. C
D. both A and B
85. Information about three joint products follows:
Anticipated production
Selling price/lb. at split-off
Additional processing costs/lb.
after split-off (all variable)
Selling price/lb. after further
processing
X
12,000 lbs.
$16
Y
8,000 lbs.
$26
Z
7,000 lbs.
$48
$ 8
$20
$20
$20
$40
$70
The cost of the joint process is $140,000. Which of the joint products should be processed further?
A. X
B. Y
C. Z
D. both X and Y
86. Information about three joint products follows:
Anticipated production
Selling price/lb. at split-off
Additional processing costs/lb.
after split-off (all variable)
Selling price/lb. after further
processing
X
12,000 lbs.
$16
Y
8,000 lbs.
$26
Z
7,000 lbs.
$48
$ 8
$20
$20
$20
$40
$70
The cost of the joint process is $140,000.
If the firm is currently processing all three products beyond split-off, the firm's income would be
A. $736,000.
B. $654,000.
C. $596,000.
D. $514,000.
87. Information about three joint products follows:
Anticipated production
Selling price/lb. at split-off
Additional processing costs/lb.
after split-off (all variable)
X
12,000 lbs.
$16
Y
8,000 lbs.
$26
Z
7,000 lbs.
$48
$ 8
$20
$20
Selling price/lb. after further
processing
$20
$40
$70
The cost of the joint process is $140,000.
Assuming all of the sell now or process further decisions were correctly made, what will be the firm's income?
A. $736,000
B. $654,000
C. $596,000
D. $610,000
88. Describe the steps in the decision-making process. What is the role of qualitative
factors in tactical decision-making?
The decision-making process consists of 5 steps:
1) Define the problem.
2) Identify alternatives that are feasible.
3) Identify the cost/benefit of each feasible alternative.
4) Compare the relevant costs and benefits for each alternative, incorporating important
qualitative factors, and fit with strategy.
5) Select the alternative that has the greatest cost/benefit and supports the strategy.
Not all costs are readily quantifiable so qualitative information must be incorporated into
the process. Reliability, quality, and strategic fit are examples of things that must be
weighed into the decision-making process.
89. What are relevant costs? How do they relate to decision making?
Relevant costs are future costs that would differ among alternatives. They are important
to decision making because only relevant costs should be considered. Decisions are
about something that will take place in the future. Costs that are past costs or that do
not differ between alternatives should not be considered in decision making.
90. How is understanding of committed resources and flexible resources important to the
activity resource usage model? How does this relate to relevance?
The activity resource usage model is useful for understanding how costs behave. There
are two categories of activity resources: flexible and committed. Flexible resources are
resources purchased when needed so the resources used equals the resources supplied.
Committed resources are those that are acquired in advance so the usage may or may
not be equal to the supply. These distinctions are important for understanding relevance
and costs that can be avoided.
91. Given the following three situations:
I.
II.
III.
Clessin Architects employs 10 architects who can supply a capacity of 18,000 billable hours
per year. The costs related to these 10 architects amounts to $900,000 or $50 per hour. Last
year, the firm billed 17,800 hours. Next year, the firm estimates billing hours to take a slight
downturn to 17,000 hours. However, Clessin plans to retain all 10 architects.
Clessin Architects also employs surveyors on a contract basis. Last year, Clessin contracted
with 8 surveyors to provide surveys for existing projects. Due to the expected downturn for
next year, Clessin will only contract services of 7 surveyors as needed.
Clessin currently leases space in a building at the cost of $36,000 per year. They are
outgrowing their space and contemplating a decision to design and build their own building at
a cost of $250,000. The new building would have space for at least 18 architects.
Identify which resource category relates to each situation under the activity resource usage model and explain your
choice.
Situation I is an example of a committed resource. Committed resources are acquired in
advance of usage, usually in “lumps.” The understanding that a firm will maintain
employment levels even though there may be temporary downturns in demand indicates
a committed resource. The company can then take advantage of excess capacity by
possibly accepting special jobs or orders.
Situation II is an example of a flexible resource. In this instance, the cost of the activity
reduces due to a change in activity level.
Situation III is an example of a longer-term decision that would affect the company’s
multi-period capabilities. This would be an example of a capital decision and is not in the
realm of tactical decision making.
92. Junior Company currently buys 30,000 units of a part used to manufacture its product
at $40 per unit. Recently the supplier informed Junior Company that a 20 percent
increase will take effect next year. Junior has some additional space and could produce
the units for the following per-unit costs (based on 30,000 units):
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
$16
12
12
10
$50
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant
can be rented out for $20,000 per year if the parts are purchased externally.
Required:
Should Junior Company buy the part externally or make it internally?
Produce internally; it saves $120,000. ($1,620,000 - $1,500,000)
If purchased externally:
Purchase price (30,000 ´ $40 ´ 1.20)
Fixed costs
Rent received
Net cost to purchase
$1,440,000
200,000
(20,000)
$1,620,000
If produced internally:
Cost to produce (30,000 ´ $50)
$1,500,000
93. Rippey Corporation manufactures a single product with the following unit costs for
5,000 units:
Direct materials
Direct labor
Factory overhead (40% variable)
Selling expenses (60% variable)
Administrative expenses (20% variable)
Total per unit
$ 60
30
90
30
15
$225
Recently, a company approached Rippey Corporation about buying 1,000 units for $225. Currently, the models are sold
to dealers for $412.50. Rippey's capacity is sufficient to produce the extra 1,000 units. No additional selling expenses
would be incurred on the special order.
Required:
a.
b.
c.
d.
What is the profit earned by Rippey Corporation on the original 5,000 units?
Should Rippey accept the special order if its goal is to maximize short-run profits? How much will income be
affected?
Determine the minimum price Rippey would want to receive in order to increase profits by $7,500 on the
special order.
When making a special order decision, what qualitative aspects of the decision should Rippey Corporation
consider?
a.
Sales (5,000 ´ $412.50)
Less: costs (5,000 ´ $225)
Net income
b.
Yes, profit will increase by:
Increase in sales (1,000 ´ $225)
Less:
$2,062,500
1,125,000
$ 937,500
$225,000
Increase in direct materials (1,000 ´ $60)
Increase in direct labor (1,000 ´ $30)
Increase in var. overhead (1,000 ´ $90 ´ 0.40)
Increase in var. selling (1,000 ´ $30 ´ 0.60)
Increase in var. adm. (1,000 ´ $15 ´ 0.20)
Increase in profits
(60,000)
(30,000)
(36,000)
(18,000)
(3,000)
$ 78,000
c.
$60 + $30 + ($90 ´ 0.40) + ($30 ´ 0.60) + ($15 ´ 0.20) +
($7,500/1,000) = $154.50 per unit
d.
What is the impact on regular customers?
Will regular customers demand a similar price?
Do we have the capacity to produce the extra units?
Will we lose some regular customers?
Will we be penetrating new markets?
Will we be violating the Robinson-Patman Act?
94. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint
process is $30,000. Information about the three products follows:
Anticipated production
Selling price/lb. at split-off
Additional processing costs/lb.
after split-off (all variable)
Selling price/lb. after
further processing
Allocated joint costs
X
5,600 lbs.
$2.00
Y
10,000 lbs.
$1.00
Z
2,500 lbs.
$3.00
$1.50
$1.25
$.75
$2.50
$12,000
$3.75
$10,500
$6.25
$7,500
Required:
a.
b.
Determine whether each product should be sold at split-off or processed further. Show all supporting
calculations in good form.
Determine the firm's income if the firm processed all three products beyond split-off.
a.
X
Y
Z
Sell at
Split-Off
$11,200
$10,000
$ 7,500
Process Further
Then Sell
$14,000
(8,400)
$ 5,600
Sell at split-off
$37,500
(12,500)
$25,000
Process further
$15,625
(1,875)
$13,750
Process further
The joint costs are not relevant to the decision.
b.
Decision
$14,350 ($13,750 + $25,000 + $5,600 - $30,000)
95. The operations of Grant Corporation are divided into the Fix Division and the Roach
Division. Projections for the next year are as follows:
Sales
Variable costs
Contribution margin
Direct fixed costs
Segment margin
Allocated common costs
Operating income (loss)
Fix
Division
$60,000
20,000
$40,000
12,500
$27,500
10,000
$17,500
Roach
Division
$ 40,000
15,000
$ 25,000
30,000
$ (5,000)
7,500
$(12,500)
Total
$100,000
35,000
$ 65,000
42,500
$ 22,500
17,500
$ 5,000
Required:
a.
b.
a.
b.
Determine operating income for Grant Corporation as a whole if the Roach Division is dropped.
Should the Roach Division be eliminated?
Sales
Variable costs
Contribution margin
Direct fixed costs
Segment margin
Allocated common costs:
($10,000 + $7,500)
Operating income
$60,000
20,000
$40,000
12,500
$27,500
17,500
$10,000
Yes. The Roach division should be dropped, since it has a negative segment margin of $5,000. Dropping the
Roach Division increases the firm's income by $5,000.
96. Arcadia, Inc., uses a joint process to produce Products W, X, Y, Z. Each product may
be sold at its split-off point or processed further. Additional processing costs of specific
products are entirely variable. Joint processing costs for a single batch of joint products
are $200,000. Other relevant data are as follows:
Product
W
X
Y
Z
Sales Value
at Split-off
$ 40,000
16,000
20,000
24,000
$100,000
Additional
Processing Costs
$24,000
10,000
10,000
16,000
$60,000
Sales Value of
Final Product
$ 70,000
20,000
48,000
36,000
$174,000
Required:
a.
b.
Determine which products should be processed further.
How will processing each product further affect profits?
Product
W
Additional Sales Value
$30,000
Additional Costs
$24,000
Difference
$ 6,000
X
Y
Z
4,000
28,000
12,000
10,000
10,000
16,000
(6,000)
18,000
(4,000)
Arcadia, Inc., should process products W and Y further because they increase profits by $6,000 and $18,000,
respectively. Products X and Z should be sold at the split-off point.
97. Barron Company's 2011 income statement is as follows:
Sales (5,000 units ´ $15)
Less variable expenses:
Cost of goods sold:
Direct materials
Direct labor
Variable factory overhead
Selling and administrative
Contribution margin
Less fixed expenses:
Factory overhead
Selling and administrative
Net income (loss)
$75,000
$15,000
10,000
10,000
2,500
$10,000
15,000
37,500
$37,500
25,000
$12,500
In an attempt to improve the company's profit performance, management is considering a number of alternative
actions.
Required:
Determine the effect of each of the following on monthly profit. Each situation is to be evaluated independently of all
the others.
a.
b.
c.
Purchasing automated assembly equipment. This action should reduce direct labor costs by 40 percent. It also
will increase variable overhead costs by 10 percent and fixed factory overhead by $2,500.
Reducing the unit selling price by $2 per unit. This should increase the monthly sales by 5,000 units. Fixed
factory overhead will increase by $1,500.
Increase fixed selling and administrative expenses by $1,000 for advertising costs. The number of units sold
will increase to 8,000 units.
a.
Increase in variable overhead ($10,000 ´ 0.10)
Increase in fixed costs
Decrease in direct labor cost ($10,000 ´ 0.40)
Net decrease in costs (increase in profits)
$ 1,000
2,500
(4,000)
$ 500
b.
Increase in sales [($13 ´ 10,000) - $75,000]
Less:
Increase in variable expenses
[5,000 ´ ($37,500/5,000)]
Increase in fixed overhead
Increase in net income
$55,000
c.
Increase in sales (3,000 ´ $15)
Less:
Increase in variable expenses
[3,000 ´ ($37,500/5,000)]
Increase in fixed S & A expenses
Net income
$37,500
1,500
39,000
$16,000
$45,000
$22,500
1,000
23,500
$21,500
98. The management of James Industries has been evaluating whether the company
should continue manufacturing a component or buy it from an outside supplier. A $200
cost per component was determined as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$ 15
40
10
35
$100
James Industries uses 4,000 components per year. After Light, Inc., submitted a bid of $80 per component, some
members of management felt they could reduce costs by buying from outside and discontinuing production of the
component. If the component is obtained from Light, Inc., James's unused production facilities could be leased to
another company for $50,000 per year.
Required:
a.
b.
c.
Determine the maximum amount per unit James should pay an outside supplier.
Indicate if the company should make or buy the component and the total dollar difference in favor of that
alternative.
Assume the company could eliminate production supervisors with salaries totaling $30,000 if the component
is purchased from an outside supplier. Indicate if the company should make or buy the component and the
total dollar difference in favor of that alternative.
a.
$77.50 [$15 + $40 + $10 + ($50,000/4,000)]
b.
$10,000 difference in favor of making the component
Buy
Outside supplier's price
($80 ´ 4,000)
Direct materials
($15 ´ 4,000)
Direct labor
($40 ´ 4,000)
Variable manufacturing overhead
($10 ´ 4,000)
Fixed manufacturing overhead
($35 ´ 4,000)
Rental revenue
Totals
Make
$(320,000)
$ (60,000)
(160,000)
(40,000)
(140,000)
50,000
$(410,000)
(140,000)
$(400,000)
The make or buy alternatives also could be analyzed as follows excluding the fixed manufacturing overhead:
Outside supplier's price
Direct materials
Direct labor
Variable manufacturing overhead
Rental revenue
Totals
Buy
$(320,000)
Make
$ (60,000)
(160,000)
(40,000)
50,000
$(270,000)
$(260,000)
c.
$20,000 difference in favor of buying the component from the outside supplier
Buy
Outside supplier's price
($80 ´ 4,000)
Direct materials
($15 ´ 4,000)
Direct labor
($40 ´ 4,000)
Variable manufacturing overhead
($10 ´ 4,000)
Fixed manufacturing overhead
($35 ´ 4,000)
($140,000 - $30,000)
Rental revenue
Totals
Make
$(320,000)
$ (60,000)
(160,000)
(40,000)
(140,000)
(110,000)
50,000
$(380,000)
$(400,000)
Buy
Make
The analysis could be done including only avoidable fixed costs:
Outside supplier's price
($80 ´ 4,000)
Direct materials
($15 ´ 4,000)
Direct labor
($40 ´ 4,000)
Variable manufacturing overhead
($10 ´ 4,000)
Avoidable fixed manufacturing overhead
Rental revenue
Totals
$(320,000)
$ (60,000)
(160,000)
(40,000)
(30,000)
50,000
$(270,000)
$(290,000)
99. Scott Company has an annual capacity of 18,000 units. Budgeted operating results
for 2006 are as follows:
Revenues (16,000 units @ $60)
Variable costs:
Manufacturing
Selling
Contribution margin
Fixed costs:
Manufacturing
Selling and administrative
Operating income
$960,000
$384,000
128,000
$160,000
120,000
512,000
$448,000
280,000
$168,000
A foreign wholesaler wants to buy 1,000 units at a price of $40 per unit. All fixed costs would remain within the
relevant range. Variable selling costs on the special order would be the same as variable selling costs for regular
orders.
Required:
a.
b.
Determine the effect on operating income if the company produces the special order.
Should the company produce the special order?
c.
d.
e.
a.
Determine operating income if the customer had wanted a special order of 3,000 units and the company
produced the special order.
Should the company produce the 3,000-unit special order?
Discuss any nonquantitative factors the company might want to consider when making the decision.
$8,000 increase
Incremental revenue ($40 ´ 1,000)
Incremental costs:
Variable manufacturing ($24 ´ 1,000)
Variable selling ($8 ´ 1,000)
Incremental contribution margin
$ 40,000
(24,000)
(8,000)
$ 8,000
Since the company would still be operating within the relevant range, fixed costs would remain the same.
b.
Yes, the company should produce the special order.
c.
$164,000
Without
Special Order
Revenues:
(16,000 ´ $60)
(15,000 ´ $60)
(3,000 ´ $40)
Variable costs:
Manufacturing:
(16,000 ´ $24)
(18,000 ´ $24)
Selling:
(16,000 ´ $8)
(18,000 ´ $8)
Contribution margin
Fixed costs:
Manufacturing
Selling and administrative
Operating income
With
Special Order
$ 960,000
$900,000
120,000
(384,000)
(432,000)
(128,000)
_
$508,000
(144,000)
$ 384,000
(160,000)
(120,000)
$228,000
(160,000)
(120,000)
$ 104,000
d.
No. If the decision is based on quantitative factors, the company should not produce the special order.
e.
Qualitative considerations might include:
The possibility of repeat business with the special-order customer.
Increasing the selling price on subsequent special orders.
The reliability of regular customer repeat business.
If the special order is produced, the reaction of regular customers to the reduced price on the special order.
100. Bonilla Corporation, which produces one product, had the following income
statement for a recent month:
Bonilla Corporation
Income Statement
For the Month of April 2011
Sales
Cost of goods sold
Gross profit
Selling and administrative
Net income
$30,000
27,000
$ 3,000
2,500
$ 500
There were no beginning or ending inventories of work-in-process or finished goods. Bonilla's manufacturing costs
were as follows:
Direct materials (1,200 units ´ $5)
Direct labor (1,200 units ´ $8)
Variable overhead (1,200 units ´ $4.50)
Fixed overhead
Total
$ 6,000
9,600
5,400
6,000
$27,000
Average cost per unit
$ 22.50
Selling and administrative expenses are all fixed.
Bonilla has just received a special order from a firm in Canada to purchase 800 units at $20 each. The order will not
affect the selling price to regular customers.
Required:
a.
b.
a.
b.
Prepare a differential analysis of the relevant costs and revenues associated with the decision to accept or
reject the special order, assuming Bonilla has excess capacity.
Determine the net advantage or disadvantage (profit increase or decrease) of accepting the order, assuming
Bonilla does not have excess capacity.
Increase
in
revenues
(800 ´
$20)
Increas
e in
costs:
Direct materials (800 ´ $5) $4,000
Direct labor (800 ´ $8)
6,400
Variable overhead (800 ´
3,600
4.50)
Increas
e in
profits
Contrib
ution
margin
of
special
order
$ 2,000
$16,000
14,000
$ 2,000
Opport
unity
cost:
Regular selling price
Variable costs ($5 + $8 +
$4.50)
Regular unit contribution
margin
Lost
sales
Net
disadv
antage
$25.00
17.50
$ 7.50
800
6,000
$ 4,000