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thermo (Egyptian Russian University)
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TEST BANK CH.6
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1) In a make-or-buy decision for a part for a product, which of the following qualitative factors
play a role?
A) quality of purchased part
B) credit terms offered by supplier of part
C) timeliness of delivery of purchased part by supplier
D) all of the above
Answer: D
2) What is the most common value-chain function outsourced in most businesses?
A) production process
B) research and development
C) product design
D) corporate support
Answer: D
3) In make-or-buy decisions for a part for a product, relevant costs include ________.
A) some variable costs of making the part
B) all variable costs of making the part
C) fixed costs that can be avoided in the future if the part is purchased
D) B and C
Answer: D
4) In a make-or-buy decision, which of the following is the fundamental question that is asked
in making the decision?
A) What is the difference in present costs between the two alternatives?
B) What is the difference in present revenues between the two alternatives?
C) What is the difference in future revenues between the two alternatives?
D) What is the difference in future costs between the two alternatives?
Answer: D
5) Bonneville Company is producing a subassembly used in the production of a product. The
costs incurred for the subassembly follow:
Per Unit
Direct materials $6.00
Direct labor 4.00
Variable factory overhead 1.00
Fixed supervisor salary 3.00
Depreciation expense on factory equipment 2.00
General fixed factory overhead allocated 5.00
Total costs $21.00
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The above per unit costs are based on 8,000 units. An outside supplier will provide 8,000
subassemblies for $19 per unit. The supervisor will be terminated if the subassemblies are not
produced in house. The idle factory will be used to manufacture another product with a
contribution margin of $60,000. What should Bonneville do?
A) make the subassemblies and save $20,000
B) make the subassemblies and save $40,000
C) buy the subassemblies and save $20,000
D) buy the subassemblies and save $40,000
Answer: C
6) Blue Company is a small company with limited expertise with customer service. Blue
Company has a contract with New Company to handle all of Blue Company's customer service
needs. For Blue Company, this is an example of ________.
A) technology transfer
B) technology osmosis
C) outsourcing
D) none of the above
Answer: C
7) Fixed overhead costs that will continue regardless of a make-or-buy decision are ________ to
the make-or-buy decision.
A) relevant
B) irrelevant
C) opportunity costs
D) incremental costs
Answer: B
8) When making a make-or-buy decision for a part used in a product, which of the following
item is relevant to the decision?
A) variable costs of making the part
B) contribution margin on new products manufactured in idle area not used for making part
C) rental income from idle plant when not making the part
D) all of the above
Answer: D
9) Buddy Company manufactures a part for its production cycle. The costs per unit for 5,000
units of the part are as follows:
Per Unit
Direct materials $3.00
Direct labor 5.00
Variable factory overhead 4.00
Fixed factory overhead 4.00
Total costs $16.00
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The fixed factory overhead costs are avoidable. Spalding Company has offered to sell 5,000
units of the same part to Buddy Company for $15 per unit. Assuming no other use for the
facilities, Buddy Company should ________.
A) make the part to save $5,000
B) make the part to save $15,000
C) buy the part from Spalding Company to save $5,000
D) buy the part from Spalding Company to save $15,000
Answer: C
10) Benton Company manufactures a part for its production cycle. The costs per unit for
38,000 units of the part are as follows:
Per Unit
Direct materials $3.00
Direct labor 5.00
Variable factory overhead 3.00
Fixed factory overhead 4.00
Total costs $15.00
The fixed factory overhead costs are unavoidable. Assume no other use for the facilities. What
is the highest price Benton Company should pay for the part from an outside supplier?
A) $8
B) $11
C) $12
D) $15
Answer: B
11) Christian Company manufactures a part for its production cycle. The annual costs per unit
for 5,000 units of the part are as follows:
Per Unit
Direct materials $3.00
Direct labor 5.00
Variable factory overhead 4.00
Fixed factory overhead 2.00
Total costs $14.00
The fixed factory overhead costs are unavoidable. Another company has offered to sell 5,000
units of the same part to Christian Company for $15 per unit. The facilities currently used to
make the part could be rented out to another manufacturer for $20,000 a year. Christian
Company should ________.
A) make the part to save $5,000
B) make the part to save $15,000
C) buy the part and rent facilities to save $5,000
D) buy the part and rent facilities to save $15,000
Answer: C
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12) Laskowski Company manufactures a part for its production cycle. The annual costs per
unit for 5,000 units of the part are as follows:
Per Unit
Direct materials $3.00
Direct labor 5.00
Variable factory overhead 4.00
Fixed factory overhead 2.00
Total costs $14.00
The fixed factory overhead costs are unavoidable. Hendricks Company has offered to sell 5,000
units of the same part to Laskowski Company for $14 per unit. The facilities currently used for
the part could be used to make 5,000 units annually of a new product that would contribute $5
a unit to fixed expenses. No additional fixed costs would be incurred with the new product.
Laskowski Company should ________.
A) make the part to save $5,000
B) make the part to save $15,000
C) make the new product and buy the part to save $5,000
D) make the new product and buy the part to save $15,000
Answer: D
13) Krakowski Company manufactures a part for its production cycle. The costs per unit for
10,000 units of the part are as follows:
Per Unit
Direct materials $20.00
Direct labor 15.00
Variable factory overhead 16.00
Fixed factory overhead 10.00
Total costs $61.00
The fixed factory overhead costs are unavoidable. Winters Company has offered to sell 10,000
units of the same part to Krakowski Company for $55 per unit. Assuming no other use for the
facilities, Krakowski Company should ________.
A) make the part to save $40,000
B) make the part to save $60,000
C) buy the part from Winters Company to save $40,000
D) buy the part from Winters Company to save $60,000
Answer: A
14) Corrao Company manufactures a part for its production cycle. The costs per unit for
10,000 units of the part are as follows:
Per Unit
Direct materials $20.00
Direct labor 13.00
Variable factory overhead 15.00
Fixed factory overhead 14.00
Total costs $62.00
The fixed factory overhead costs are unavoidable. Assuming no other use for the facilities, what
is the highest price that Corrao Company should be willing to pay for the part?
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A) $33
B) $47
C) $48
D) $62
Answer: C
15) Potter Company manufactures a part for its production cycle. The annual costs per unit for
10,000 units of the part are as follows:
Per Unit
Direct materials $20.00
Direct labor 15.00
Variable factory overhead 16.00
Fixed factory overhead 10.00
Total costs $61.00
The fixed factory overhead costs are unavoidable. Paulson Company has offered to sell 10,000
units of the same part to Potter Company for $60 per unit. The facilities currently used to
make the part could be rented out to another manufacturer for $100,000 per year. Potter
Company should ________.
A) make the part to save $10,000
B) make the part to save $25,000
C) buy the part and rent the facilities to save $10,000
D) buy the part and rent the facilities to save $25,000
Answer: C
16) Golden Company manufactures a part for its production cycle. The annual costs per unit
for 10,000 units of the part are as follows:
Per Unit
Direct materials $20.00
Direct labor 15.00
Variable factory overhead 6.00
Fixed factory overhead 10.00
Total costs $51.00
The fixed factory overhead costs are unavoidable. Olson Company has offered to sell 10,000
units of the same part to Golden Company for $55 per unit. The facilities currently used to
make the part could be used to make 10,000 units per year of a new product that has a
contribution margin of $20 per unit. No additional fixed costs would be incurred with the new
product. Golden Company should ________.
A) make the part to save $40,000
B) make the part to save $140,000
C) make the new product and buy the part to save $60,000
D) make the new product and buy the part to save $140,000
Answer: C
17) Kaiman Company currently produces a key part at a total cost of $210,000. Annual
variable costs are $170,000. Of the annual fixed costs, $10,000 relate specifically to this part.
The remaining fixed costs are unavoidable.
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Another manufacturer has offered to supply the part annually for $200,000. The facilities
currently used to manufacture the part could be used to manufacture a new product with an
expected contribution margin of $30,000 per year. Alternatively, the facilities could be rented
out at $60,000 per year. Given all of these alternatives, what is Kaiman Company's lowest net
relevant cost for the parts?
A) $130,000
B) $140,000
C) $170,000
D) $180,000
Answer: B
18) Dolphin Company currently produces 10,000 units of a key part at a total cost of $512,000
annually. Variable costs are $300,000 annually. Of the annual fixed costs, $140,000 relate
specifically to this part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $48 per unit. The facilities currently
used to manufacture the part could be used to manufacture a new product with an expected
contribution margin of $30,000 per year. Alternatively, the facilities could be rented out at
$60,000 per year. Given all of these alternatives, what is Dolphin Company's lowest net
relevant cost for the parts?
A) $420,000
B) $440,000
C) $450,000
D) $480,000
Answer: A
19) Thompson Company currently produces 10,000 units of a key part at a total cost of
$512,000 annually. Annual variable costs are $300,000. Of the annual fixed costs, $140,000
relate specifically to this part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $48 per unit. The facilities currently
used to manufacture the part could be used to manufacture a new product with an expected
contribution margin of $60,000 annually. Alternatively, the facilities could be rented out at
$70,000 annually. If Thompson Company makes the part, what is the annual opportunity cost
of the facilities?
A) $13,000
B) $28,000
C) $60,000
D) $70,000
Answer: D
20) Madison Company produces a part that is used in the manufacture of one of its products.
The costs associated with the production of 5,000 units of this part are as follows:
Direct materials $108,000
Direct labor 156,000
Variable factory overhead 72,000
Fixed factory overhead 168,000
Total costs $504,000
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Of the fixed factory overhead costs, $72,000 are avoidable. Middleton Company has offered to
sell 5,000 units of the same part to Madison for $87.00 per unit. Assuming there is no other use
for the facilities, Madison Company should ________.
A) make the part to save $24,000
B) make the part to save $27,000
C) buy the part to save $24,000
D) buy the part to save $27,000
Answer: B
21) Davidson Company produces a part that is used in the manufacture of one of its products.
The costs associated with the production of 5,000 units of this part are as follows:
Direct materials $108,000
Direct labor 156,000
Variable factory overhead 70,000
Fixed factory overhead 168,000
Total costs $502,000
Of the fixed factory overhead costs, $72,000 are avoidable. Assuming there is no other use for
the facilities. What is the highest price Davidson Company should be willing to pay for 5,000
units of the part?
A) $264,000
B) $334,000
C) $406,000
D) $502,000
Answer: C
22) Gonzalez Company produces a part that is used in the manufacture of one of its products.
The annual costs associated with the production of 5,000 units of this part are as follows:
Direct materials $100,000
Direct labor 56,000
Variable factory overhead 72,000
Fixed factory overhead 168,000
Total costs $396,000
Of the fixed factory overhead costs, $72,000 are avoidable. Another company has offered to sell
5,000 units of the same part to Gonzalez for $70.00 per unit. The facilities currently used to
make the part can be rented out to another manufacturer for $72,000 per year. What should
Gonzalez Company do?
A) Make the part to save $22,000.
B) Make the part to save $50,000.
C) Buy the part and rent the facilities to save $22,000.
D) Buy the part and rent the facilities to save $72,000.
Answer: C
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23) Fast Company has just decided to outsource the production of a part for a product. Assume
Fast Company leaves the area of the manufacturing plant idle where it was producing the
outsourced part. It has no alternative uses of the plant. What is the opportunity cost of the idle
area of the manufacturing plant to Fast Company?
A) zero
B) definitely a negative number
C) the disposal value of the entire manufacturing plant
D) none of the above
Answer: A
24) Outsourcing is the purchase of products or services by a company from an outside supplier.
Answer: TRUE
25) Qualitative factors do not affect a make-or-buy decision.
Answer: FALSE
26) In a make-or-buy decision, if plant facilities will remain idle when the decision is made to
outsource a part used in a product, then the opportunity cost of the plant facilities is zero.
Assume there are no alternative uses of the plant facilities available.
Answer: TRUE
27) Each year, Madsen Company purchases 8,000 units of a part that it needs for production of
its product. The supplier notified Madsen Company that a price increase will take effect
shortly, which will bring the price of the part to $25 per part. Madsen Company is considering
the use of idle facilities to produce the part. The annual production costs to produce the needed
8,000 parts are as follows:
Direct materials $17,500
Direct labor 30,000
Variable indirect production costs 14,000
Fixed indirect production costs 33,500
The idle facilities could also be rented out at an annual rent of $99,000. All the fixed indirect
production costs are avoidable.
Required:
Determine if Madsen Company should buy the part or produce it internally.
Answer: Alternatives:
Buy Part: $25 × 8,000 units = $200,000
Buy Part and Rent Facilities: ($25 × 8,000) - $99,000 = $101,000
Make Part: ($17,500 + $30,000 + $14,000 + $33,500) = $95,000
Conclusion:
The lowest cost alternative is to make the part. Madsen Company should make the part.
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28) Andrea Company manufactures a part for its production cycle. The annual costs per unit
for 20,000 units of this part are as follows:
Direct materials $15
Direct labor 12
Variable indirect production costs 19
Fixed indirect production costs 16
Total cost $62
Andrea Company has been approached by a supplier who will sell 20,000 units of the same
part for $940,000. All the fixed indirect production costs are unavoidable if Andrea Company
ceases production of the part.
Required:
A) Assuming there is no alternative use for the facilities, should Andrea Company buy or make
the part?
B) Assume the facilities can be rented out for $100,000 per year. Should Andrea Company buy
the part? If so, how much money will be saved?
Answer:
A)
Alternatives:
Make part: ($15 + $12 + $19) × 20,000 = $920,000
Buy part: $940,000
Conclusion:
The least costly alternative is to make the part.
B)
Alternatives:
Make part: $920,000
Buy part: $940,000
Buy part and rent out facilities: $940,000 - $100,000 = $840,000
Conclusion:
The least costly alternative is to buy the part and rent out the facilities. In contrast to making the part,
the company would save $80,000 ($920,000 - $840,000) per year.
29) Jeff Company produces a part that is used in the manufacture of one of its products. The
annual costs associated with the production of 11,000 units of this part are as follows:
Direct materials $25,000
Direct labor 34,000
Variable indirect production costs 65,000
Fixed indirect production costs 40,000
Total costs $164,000
A supplier is willing to sell 11,000 units of the part to Jeff Company for $12.50 per unit. When
examining the fixed indirect production costs, Jeff Company determines $10,000 is avoidable.
Required:
A) If there are no alternative uses for the facilities, should Jeff Company take advantage of
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the supplier's offer?
B) If Jeff Company decides to buy the part from the supplier, Jeff Company can rent out the
idle facilities for $50,000 per year. Should Jeff Company take advantage of the supplier's offer?
Answer:
A)
Alternatives:
Make part: ($25,000 + $34,000 + $65,000 + $10,000) = $134,000
Buy part: ($12.50 × 11,000) = $137,500
Conclusion:
The least costly alternative is to make the part. Jeff should not accept the supplier's offer.
B)
Alternatives:
Make part: $134,000
Buy part: $137,500
Buy part and rent out facilities: $137,500 - $50,000 = $87,500
Conclusion:
The least costly alternative is to buy the part and rent out the facilities.
6.2 Questions " Add or Delete a product line "
1) If a department in a department store is under consideration to be eliminated, unavoidable
fixed expenses are ________ to the decision.
A) incremental
B) marginal
C) relevant
D) irrelevant
Answer: D
2) Department A covers one section of a large factory building. Which of the following costs is
relevant to the decision to eliminate Department A?
A) Heating expenses of building allocated to Department A
B) General corporate overhead allocated to Department A
C) Depreciation Expense on store building allocated to Department A
D) Salary Expense of Supervisor in Department A; he only works in Department A
Answer: D
3) If a department in a grocery store is under consideration to be eliminated, which of the
following cost(s) is(are) NOT relevant to the decision?
A) avoidable fixed expenses
B) unavoidable costs
C) common costs
D) B and C
Answer: D
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4) If a department in a department store is eliminated, ________ costs will not continue.
A) unavoidable
B) common
C) corporate
D) avoidable
Answer: D
5) Central Industries has three product lines: A, B and C. The following information is
available:
Product A Product B Product C
Sales $100,000 $90,000 $44,000
Variable costs 76,000 48,000 35,000
Contribution margin 24,000 42,000 9,000
Avoidable fixed costs 9,000 18,000 3,000
Unavoidable fixed costs 6,000 9,000 7,700
Operating income(loss) $9,000 $15,000 $(1,700)
Central Industries is thinking about dropping Product C because it is reporting a loss. Assume
Central Industries drops Product C and does not replace it. What will happen to operating
income?
A) increase by $600
B) increase by $2,400
C) decrease by $6,000
D) decrease by $9,000
Answer: C
6) Sahara Industries has three product lines: A, B and C. The following annual information is
available:
Product A Product B Product C
Sales $100,000 $90,000 $88,000
Variable costs 76,000 48,000 79,000
Contribution margin 24,000 42,000 9,000
Avoidable fixed costs 9,000 18,000 3,000
Unavoidable fixed costs 6,000 9,000 9,400
Operating income(loss) $9,000 $15,000 $(3,400)
Sahara Industries is thinking about dropping Product C because it is reporting a loss. Assume
Sahara Industries drops Product C and the space formerly used to produce Product C is rented
out for $15,000 per year. What will happen to operating income?
A) increase by $6,600
B) increase by $9,000
C) increase by $14,400
D) increase by $15,000
Answer: B
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7) Cesar Company has three product lines: A, B and C. The following annual information is
available:
Product A Product B Product C
Sales $100,000 $90,000 $44,000
Variable costs 76,000 48,000 35,000
Contribution margin 24,000 42,000 9,000
Avoidable fixed costs 9,000 18,000 3,000
Unavoidable fixed costs 6,000 9,000 7,700
Operating income(loss) $9,000 $15,000 $(1,700)
Assume Cesar Company drops Product C. Cesar Company then doubles the production and
sales of Product B without increasing fixed costs. What will happen to operating income?
A) increase by $15,000
B) increase by $24,000
C) increase by $36,000
D) increase by $42,000
Answer: C
8) Bally Company has three product lines: A, B and C. The following annual information is
available:
Product A Product B Product C
Sales $60,000 $90,000 $24,000
Variable costs 36,000 48,000 20,000
Contribution margin 24,000 42,000 4,000
Avoidable fixed costs 9,000 18,000 3,000
Unavoidable fixed costs 6,000 9,000 2,400
Operating income(loss) $9,000 $15,000 $(1,400)
Assume Bally Company drops Product C. What will happen to operating income?
A) increase by $1,400
B) increase by $3,800
C) decrease by $1,000
D) decrease $1,400
Answer: C
9) The most recent income statement for the Venetian Branch of Palm Harbor Bank is
presented below:
Sales $57,000
Variable costs 31,500
Contribution margin 25,500
Avoidable fixed costs 13,500
Unavoidable fixed costs 20,000
Operating loss $(8,000)
Palm Harbor Bank is thinking about eliminating the Venetian Branch. If the branch is
eliminated, Palm Harbor Bank's operating income will ________.
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A) increase by $8,000
B) increase by $25,500
C) decrease by $12,000
D) decrease by $31,500
Answer: C
10) The most recent income statement for the South Branch of First Financial Bank is
presented below:
Sales $57,000
Variable costs 31,500
Contribution margin 25,500
Avoidable fixed costs 13,500
Unavoidable fixed costs 18,000
Operating loss $(6,000)
First Financial Bank is thinking about eliminating the South Branch. If the branch is
eliminated, First Financial Bank's operating income will ________.
A) increase by $6,000
B) increase by $25,500
C) decrease by $12,000
D) decrease by $31,500
Answer: C
11) ________ are relevant in deciding whether to add or delete a department from a
department store.
A) Avoidable fixed expenses
B) Common costs
C) Unavoidable fixed expenses
D) None of the above
Answer: A
12) In deciding whether to add or delete a product or service, common costs are
probably_____.
A) relevant and avoidable
B) relevant and unavoidable
C) irrelevant and avoidable
D) irrelevant and unavoidable
Answer: D
13) When deciding whether to add or delete a department, managers should keep the
department as long as ________ from the department exceeds ________.
A) contribution margin; variable costs
B) contribution margin; common costs
C) contribution margin; avoidable fixed costs
D) contribution margin; unavoidable fixed costs
Answer: C
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14) In deciding whether to add or delete a product, the insurance expense associated with the
custom-built equipment used to produce the product is an ________ cost. Assume the
equipment will be sold if the company discontinues the product.
A) avoidable fixed
B) avoidable variable
C) unavoidable fixed
D) unavoidable variable
Answer: A
15) In deciding whether to add or delete a product, the salary of the plant manager is an
________. Assume the plant manager supervised the production of several products.
A) avoidable fixed cost
B) avoidable variable cost
C) unavoidable fixed cost
D) unavoidable variable cost
Answer: C
16) Variable expenses are divided into avoidable and unavoidable costs.
Answer: FALSE
17) Unavoidable costs are never relevant in deciding whether to eliminate a product or
department.
Answer: TRUE
18) Heating and air conditioning costs are examples of common costs to the different
departments in a retail store.
Answer: TRUE
19) When adding or dropping a product line, variable costs are the only relevant costs.
Answer: FALSE
20) When adding or dropping a product line, fixed avoidable costs may be relevant costs.
Answer: TRUE
21) Qualitative information can influence decisions to add or drop a department.
Answer: TRUE
22) Freedom Company has three departments. Data for the most recent year are presented
below:
Dept. X Dept. Y Dept. Z
Sales $400 $200 $80
Variable expenses 128 52 34
Unavoidable fixed expenses 96 52 12
Avoidable fixed expenses 116 104 54
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Required:
A) Compute the operating income for Freedom Company.
B) Compute the contribution margin for each department.
C) Compute the operating income for each department.
D) Which department(s) should be eliminated? Why?
Answer:
A)
Sales $680
Variable expenses (214)
Avoidable fixed expenses (274)
Unavoidable fixed expenses (160)
Operating income $32
B)
Dept. X: $400 - $128 = $272
Dept. Y: $200 - $52 = $148
Dept. Z: $80 - $34 = $46
C)
Dept. X: $272 - $212 = $60
Dept. Y: $148 - $156 = $(8)
Dept. Z: $46 - $66 = $(20)
D)
Dept. Z should be eliminated because the contribution margin of $46 is less than avoidable fixed
expenses of $54. Dept. Y should not be eliminated because the contribution margin of $148 exceeds
the avoidable fixed expenses of $104. Dept. X should not be eliminated because the contribution
margin of $272 exceeds the avoidable fixed expenses of $116.
23) Olson Company has three departments. Data for the most recent year is presented below:
Dept. C Dept. A Dept. T
Sales $4,000 $1,920 $2,240
Variable expenses 3,280 1,420 520
Unavoidable fixed expenses 480 180 440
Avoidable fixed expenses 555 265 360
Operating income (loss) $(315) $55 $920
Olson Company is considering eliminating Dept. C because it is operating at a loss.
Required:
A) Compute the change in operating income if Olson Company eliminates Dept. C and does not
replace it.
B) Compute the change in operating income if Olson Company eliminates Dept. C and doubles
the sales of Dept. T without increasing fixed costs.
Answer:
A) Operating income will decrease by $165. $4,000 - ($3,280 + $555) = $165
B) Operating income will increase by $1,555. $2,240 - ($520 + $165) = $1,555
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6.3 Questions " Optimal Mix "
1) A company can sell any mix of Product A and Product B at full capacity. The company has
100,000 hours of capacity. The demand for each product exceeds the capacity. It takes one hour
to make one unit of Product A and two hours to make one unit of Product B. The following
information is available:
Product A Product B
Units produced from capacity available 100,000 50,000
Contribution margin per unit $20 $30
If capacity is the limiting factor, which product should be produced?
A) 0 units of Product A and 50,000 units of Product B
B) 20,000 units of Product A and 30,000 units of Product B
C) 30,000 units of Product A and 20,000 units of Product B
D) 100,000 units of Product A and 0 units of Product B
Answer: D
2) A company has 100,000 hours of capacity and manufactures two products, Product X and
Product Z. Neither product has enough demand to utilize the entire capacity, but the combined
demand of both products exceeds the capacity of the plant. It takes one hour to make one unit
of Product X and two hours to make one unit of Product Z. The following information is
available:
Product X Product Z
Units produced from capacity available 100,000 50,000
Contribution margin per unit $20 $30
What product or products should be made?
A) only make Product X
B) only make Product Z
C) make Product X to meet customer demand and then make Product Z
D) make Product Z to meet customer demand and then make Product X
Answer: C
3) A company has 10,000 hours of capacity and manufactures two products. Product 1 takes 2
hours per unit. Product 2 takes 3 hours per unit. The contribution margin per unit for Product
1 is $5. The contribution margin per unit for Product 2 is $6. The demand for either product
exceeds the factory capacity. Which product or products should be manufactured?
A) 3,000 units of Product 1 and 2,000 units of Product 2
B) 2,500 units of Product 1 and 3,333 units of Product 2
C) make 5,000 units of Product 1 and 0 units of Product 2
D) make 3,333 units of Product 2 and 0 units of Product 1
Answer: C
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4) A company has 10,000 hours of capacity and manufactures two products. Product 1 takes 2
hours per unit. Product 2 takes 3 hours per unit. The contribution margin per unit for Product
1 is $5. The contribution margin per unit for Product 2 is $6. Neither product has enough
demand to use all of the plant capacity, but the demand for both products exceeds the plant
capacity. Which product or products should be manufactured?
A) 5,000 units of Product 1 and 0 units of Product 2
B) 0 units of Product 1 and 5,000 units of Product 2
C) make Product 1 first until meet customer demand, then make Product 2
D) make Product 2 first until meet customer demand, then make Product 1
Answer: C
5) ________ is the item that restricts or constrains the production or sale of a product.
A) A limiting factor
B) A scarce resource
C) Floor space
D) All of the above
Answer: D
6) If demand is the limiting factor, and there are no other scarce resources, managers should
emphasize the product with ________.
A) the highest selling price per unit
B) the lowest variable costs per unit
C) the highest contribution margin per unit
D) the highest contribution margin per hour
Answer: C
7) Bronski Corporation manufactures two products, Simple and Complex. The following
information was gathered:
Simple Complex
Selling price per unit $37.00 $26.00
Variable cost per unit 32.00 22.00
Total fixed costs are $18,000. Assume demand for either product exceeds the factory's capacity.
It takes one hour of production time to make Simple and two hours to make Complex. The
annual capacity of the plant is 10,000 hours. How many units of Simple and Complex should
Bronski Corporation produce and sell to maximize profits?
A) 0 units of Simple and 5,000 units of Complex
B) 6,000 units of Simple and 3,000 units of Complex
C) 10,000 units of Simple and 0 units of Complex
D) 3,000 units of Simple and 6,000 units of Complex
Answer: C
8) Watson Corporation manufactures two products, Simple and Complex. The following
annual information was gathered:
Simple Complex
Selling price per unit $47.00 $26.00
Variable cost per unit 42.00 22.00
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Total annual fixed costs are $18,000. Assume demand for either product exceeds the factory's
capacity. It takes one hour to make one unit of Complex. However, Simple takes 50% longer to
manufacture when compared to Complex. Only 120,000 hours of plant capacity are available.
How many units of Simple and Complex should Watson Corporation produce and sell in a year
to maximize profits?
A) an equal number of Simple and Complex
B) 80,000 units of Simple and 0 units of Complex
C) 0 units of Simple and 120,000 units of Complex
D) either Simple or Complex; it does not matter
Answer: C
9) A scarce resource restricts or constrains the production or sale of a product.
Answer: TRUE
10) Scarce resources include labor hours.
Answer: TRUE
11) In retail sales, the limiting resource is often floor space.
Answer: TRUE
12) If the limiting factor is demand, the most profitable product is the one with the highest
contribution margin per unit.
Answer: TRUE
13) Inventory turnover is the number of times the average inventory is sold per year.
Answer: TRUE
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