1.
For decision making, a listing of the relevant costs:
a.
will help the decision maker concentrate on the pertinent data
b.
will only include future costs
c.
will only include costs that differ among alternatives
d.
All of these answers are correct.
Answer:
Terms to Learn:
2.
2
Objective:
2
Objective:
2
A computer system installed last year is an example of a(n):
a.
sunk cost
b.
relevant cost
c.
differential cost
d.
avoidable cost
Answer:
Terms to Learn:
3.
d
Difficulty:
relevant costs
a
sunk costs
Difficulty:
1
In evaluating different alternatives, it is useful to concentrate on:
a.
variable costs
b.
fixed costs
c.
total costs
d.
relevant costs
Answer:
Terms to Learn:
d
Difficulty:
relevant costs
1
Objective:
2
4.
Jim’s 5-year-old Geo Prizm requires repairs estimated at $3,000 to make it
roadworthy again. His friend, Julie, suggested that he should buy a 5-year-old used
Honda Civic instead for $3,000 cash. Julie estimated the following costs for the
two cars:
Acquisition cost
Repairs
Annual operating costs
(Gas, maintenance, insurance)
Geo Prizm
$15,000
$ 3,000
Honda Civic
$3,000
—
$ 2,280
$2,100
What should Jim do? What are his savings in the first year?
a.
Buy the Honda Civic; $9,780
*b. Buy the Honda Civic; $180
c.
Fix the Geo Prizm; $5,518
d.
Fix the Geo Prizm; $5,280
Answer:
b
Difficulty: 2
Objective: 2
Terms to Learn: relevant costs
Geo ($3,000 + $2,280) – Honda ($3,000 + $2,100) = $180 cost savings with the
Honda option
5.
When making decisions:
a.
quantitative factors are the most important
b.
qualitative factors are the most important
c.
appropriate weight must be given to both quantitative and qualitative factors
d.
both quantitative and qualitative factors are unimportant
Answer:
Terms to Learn:
c
Difficulty: 2
qualitative factors, quantitative factors
Objective:
3
6.
Ratzlaff Company has a current production capacity level of 20,000 units per
month. Unit costs at this level are:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Marketing/distribution - variable
$0.25
0.40
0.15
0.20
0.40
Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff
Company about purchasing 1,500 units at $2.00 each. Current sales would not be
affected by the one-time-only special order, and variable marketing/distribution
costs would not be incurred on the special order. What is Ratzlaff Company’s
change in operating profits if the special order is accepted?
*a.
b.
c.
d.
$1,800 increase in operating profits
$1,800 decrease in operating profits
$1,500 increase in operating profits
$1,500 decrease in operating profits
Answer:
a
Difficulty: 3
Terms to Learn: one-time-only special order
Manufacturing cost per unit = $0.25 + $0.40 + $0.15 = $0.80
Ignore the Fixed overhead when there is extra capacity
1,500 x ($2.00 – $0.80) = $1,800 increase
Objective:
3
7.
Konrade’s Engine Company manufactures part TE456 used in several of its engine
models. Monthly production costs for 1,000 units are as follows:
Direct materials
Direct labor
Variable overhead costs
Fixed overhead costs
Total costs
$ 40,000
10,000
30,000
20,000
$100,000
It is estimated that 10% of the fixed overhead costs assigned to TE456 will be avoided if
the company purchases TE456 from the outside supplier. Konrade’s Engine Company
has the option of purchasing the part from an outside supplier at $85 per unit.
If Konrade’s Engine Company purchases 1,000 TE456 parts from the outside
supplier per month, then its monthly operating income will:
a.
increase by $2,000
b.
increase by $80,000
c.
decrease by $3,000
d.
decrease by $85,000
Answer:
c
Difficulty: 2
Objective: 4
Terms to Learn: make-or-buy decision, outsourcing
Avoidable costs ($40,000 + $10,000 + $30,000 + ($20,000 x 10%) = $82,000
$82,000 – ($85 x 1,000 units) = decrease of $3,000
8.
Schmidt Corporation produces a part that is used in the manufacture of one of its
products. The costs associated with the production of 10,000 units of this part are
as follows:
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Total costs
$ 45,000
65,000
30,000
70,000
$210,000
Of the fixed factory overhead costs, $30,000 is avoidable.
Phil Company has offered to sell 10,000 units of the same part to Schmidt Corporation
for $18 per unit. Assuming there is no other use for the facilities, Schmidt should:
a.
make the part, as this would save $30,000
b.
buy the part, as this would save $3 per unit
c.
buy the part, as this would save the company $30,000
d.
make the part, as this would save $10,000
Answer:
d
Difficulty: 3
Objective: 4
Terms to Learn: make-or-buy decision, outsourcing
Avoidable costs total $170,000 = $45,000 + $65,000 + $30,000 + $30,000.
$18 – ($170,000/10,000) = $1
9.
Helmer’s Rockers manufactures two models, Standard and Premium. Weekly
demand is estimated to be 100 units of the Standard Model and 70 units of the
Premium Model. The following per unit data apply:
Contribution margin per unit
Number of machine-hours required
Standard
$18
3
Premium
$20
4
If only 496 machine-hours are available per week, how many rockers of each model
should Jim Helmer produce to maximize profits?
*a. 100 units of Standard and 49 units of Premium
b.
72 units of Standard and 70 units of Premium
c.
100 units of Standard and 70 units of Premium
d.
85 units of Standard and 60 units of Premium
Answer:
a
Difficulty: 2
Objective: 6
Terms to Learn: product-mix decisions, constraint
The CM per machine hour is $6 for Standard and $5 for Premium respectively, so
Standard should be produced to its maximum with any remaining hours then going
to Premium.
Standard (100 units x 3mh) + Premium (49 units x 4 mh) = 496 machine-hours of
the constrained resource
10. Camera Corner is considering eliminating Model AE2 from its camera line because
of losses over the past quarter. The past three months of information for Model AE2
are summarized below. The next three months are projected to look the exact same:
Sales (1,000 units)
Manufacturing costs:
Direct materials
Direct labor ($15 per hour)
Total Overhead
Operating loss
$300,000
150,000
60,000
100,000
($10,000)
Total Overhead costs are 70% variable and the remaining 30% is depreciation of
special equipment for model AE2 that has no resale value.
If Model AE2 is dropped from the product line, operating income will:
a.
increase by $10,000
b.
decrease by $20,000
c.
increase by $30,000
d.
decrease by $10,000
Answer:
Terms to Learn:
b
Difficulty: 3
relevant revenues, relevant costs
Objective:
7
$300,000 – $150,000 – $60,000 – $70,000 = $20,000 This product contributes
$20,000 toward corporate profits, therefore, discontinuing this product will decrease
operating income by $20,000.
$300,000 – $150,000 – $60,000 – $70,000 = $20,000 This product contributes
$20,000 toward corporate profits, therefore, discontinuing this product will decrease
operating income by $20,000.