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To help you practice solving problems, I've regenerated the same questions from the
provided PDF file with new numbers while maintaining the original format. Here are the
new questions:
(1): ABC Corporation currently operates two divisions which
had operating results last year as follows:
Cairo Division:
Sales: $650,000
Variable costs: $320,000
Contribution margin: $330,000
Traceable fixed costs: $120,000
Allocated common corporate costs: $95,000
Net operating income: $115,000
Alex Division:
Sales: $310,000
Variable costs: $210,000
Contribution margin: $100,000
Traceable fixed costs: $80,000
Allocated common corporate costs: $50,000
Net operating income: ($40,000)
Since the Alex Division also sustained an operating loss in the prior year, ABC's president
is considering the elimination of this division. Alex Division's traceable fixed costs could be
avoided if the division were eliminated. If the Alex Division had been eliminated at the
beginning of last year, ABC Corporation's operating income for last year would have been:
A) $40,000 higher
B) $20,000 lower
C) $60,000 lower
D) $80,000 higher
(2): Beaver Company (a multi-product firm) produces 6,000
units of Product X each year. Each unit of Product X sells for
$9 and has a contribution margin of $6. If Product X is
dropped, $20,000 of fixed overhead would be eliminated. As
a result of dropping Product X, the company's overall
operating income would:
A) decrease by $36,000
B) increase by $50,000
C) decrease by $10,000
D) increase by $6,000
(3): The management of Furrow Corporation is considering
dropping product L07E. Data from the company's
accounting system appear below:
Sales: $900,000
Variable expenses: $380,000
Fixed manufacturing expenses: $310,000
Fixed selling and administrative expenses: $180,000
In the company's accounting system, all fixed expenses of the company are fully allocated
to products. Further investigation has revealed that $200,000 of the fixed manufacturing
expenses and $110,000 of the fixed selling and administrative expenses are avoidable if
product L07E is discontinued. What would be the effect on the company's overall net
operating income if product L07E were dropped?
A) Overall net operating income would increase by $10,000.
B) Overall net operating income would decrease by $180,000.
C) Overall net operating income would decrease by $10,000.
D) Overall net operating income would increase by $180,000.
(4): A study has been conducted to determine if Product A
should be dropped. Sales of the product total $220,000 per
year; variable expenses total $150,000 per year. Fixed
expenses charged to the product total $95,000 per year. The
company estimates that $45,000 of these fixed expenses will
continue even if the product is dropped. These data indicate
that if Product A is dropped, the company's overall net
operating income would:
A. decrease by $25,000 per year
B. increase by $25,000 per year
C. decrease by $15,000 per year
D. increase by $35,000 per year
(5): Lusk Company produces and sells 16,000 units of
Product A each month. The selling price of Product A is $21
per unit, and variable expenses are $15 per unit. A study has
been made concerning whether Product A should be
discontinued. The study shows that $75,000 of the $110,000
in fixed expenses charged to Product A would continue even
if the product was discontinued. These data indicate that if
Product A is discontinued, the company's overall net
operating income would:
A. decrease by $75,000 per month
B. increase by $12,000 per month
C. increase by $25,000 per month
D. decrease by $30,000 per month
(6): Sharp Company produces 9,000 parts each year, which
are used in the production of one of its products. The unit
product cost of a part is $38, computed as follows:
Variable production costs: $18
Fixed production costs: $20
Unit product cost: $38
The parts can be purchased from an outside supplier for only $30 each. The space in
which the parts are now produced would be idle and fixed production costs would be
reduced by one-fourth. If the parts are purchased from the outside supplier, the annual
impact on the company's operating income will be:
A) $27,000 increase
B) $27,000 decrease
C) $63,000 increase
D) $63,000 decrease
(7): Motor Company manufactures 11,000 units of Part M-l
each year for use in its production. The following total costs
were reported last year:
Direct materials: $22,000
Direct labor: $60,000
Variable manufacturing overhead: $50,000
Fixed manufacturing overhead: $75,000
Total manufacturing cost: $207,000
Valve Company has offered to sell Motor 11,000 units of Part M-l for $19 per unit. If Motor
accepts the offer, some of the facilities presently used to manufacture Part M-l could be
rented to a third party at an annual rental of $18,000. Additionally, $5 per unit of the fixed
overhead applied to Part M-l would be totally eliminated. Should Motor Company accept
Valve Company's offer, and why?
A) No, because it would be $5,000 cheaper to make the part.
B) Yes, because it would be $15,000 cheaper to buy the part.
C) No, because it would be $20,000 cheaper to make the part.
D) Yes, because it would be $30,000 cheaper to buy the part.
(8): Talboe Company makes wheels which it uses in the
production of children's wagons. Talboe's costs to produce
210,000 wheels annually are as follows:
Direct material: $45,000
Direct labor: $65,000
Variable manufacturing overhead: $35,000
Fixed manufacturing overhead: $75,000
Total: $220,000
An outside supplier has offered to sell Talboe similar wheels for $0.85 per wheel. If the
wheels are purchased from the outside supplier, $30,000 of annual fixed manufacturing
overhead would be avoided and the facilities now being used to make the wheels would
be rented to another company for $60,000 per year.
If Talboe chooses to buy the wheel from the outside supplier, then the change in annual
net operating income is:
A. $6,000 decrease
B. $55,000 increase
C. $75,000 increase
D. $45,000 increase
(9): Pitkin Company produces a part used in the
manufacture of one of its products. The unit product cost of
the part is $35, computed as follows:
Direct material: $14
Direct labor: $9
Variable manufacturing overhead: $4
Fixed manufacturing overhead: $8
Unit product cost: $35
An outside supplier has offered to provide the annual requirement of 12,000 of the parts
for only $29 each. The company estimates that 40% of the fixed manufacturing overhead
costs above will continue if the parts are purchased from the outside supplier. Based on
these data, the per unit dollar advantage or disadvantage of purchasing the parts from the
outside supplier would be:
A. $4 advantage
B. $2 advantage
C. $2 disadvantage
D. $6 disadvantage
(10): Peluso Company, a manufacturer of snowmobiles, is
operating at 75% of plant capacity. Peluso's plant manager
is considering making the headlights now being purchased
from an outside supplier for $12 each. The Peluso plant has
idle equipment that could be used to manufacture the
headlights. The design engineer estimates that each
headlight requires $5 of direct materials, $4 of direct labor,
and $7 of manufacturing overhead. Forty-five percent of the
manufacturing overhead is a fixed cost that would be
unaffected by this decision. A decision by Peluso Company
to manufacture the headlights should result in a net gain
(loss) for each headlight of:
A. $(2.50)
B. $2.20
C. $0.50
D. $3.30
(11): Faustina Chemical Company manufactures three
chemicals (TX14, NJ35, and KS63) from a joint process. The
three chemicals are in industrial grade form at the split-off
point. They can either be sold at that point or processed
further into premium grade. Costs related to each batch of
this chemical process are as follows:
TX14:
Sales value at split-off point: $17,000
Allocated joint costs: $6,500
Sales value after further processing: $21,000
Cost of further processing: $5,500
NJ35:
Sales value at split-off point: $13,000
Allocated joint costs: $6,500
Sales value after further processing: $19,000
Cost of further processing: $3,500
KS63:
Sales value at split-off point: $6,000
Allocated joint costs: $6,500
Sales value after further processing: $10,000
Cost of further processing: $2,500
For which product(s) above would it be more