chapter 13 test bank use this one copydoc

As a result of discontinuing Product X, the company's overall operating income would: A decrease by $25,000 B increase by $43,000 C decrease by $7,000 D increase by $7,000 Ans: C AACSB:

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16 Costs which can be eliminated in whole or in part if a particular business segment

is discontinued are called:

A) sunk costs

B) opportunity costs

C) avoidable costs.

D) irrelevant costs

17 Consider the following statements:

I Assemble all costs associated with each alternative being considered

II Eliminate those costs that are sunk

III Eliminate those costs that differ between alternatives

Which of the above statements does not represent a step in identifying the relevant costs in a decision problem?

A) Only I

B) Only II

C) Only III

D) Only I and III

18 Which of the following cash flows is relevant in a decision about accepting

Alternative X or Alternative Y?

A) a cash inflow for Alternative X that is not a cash inflow for Alternative Y

B) a cash inflow that is lost if Alternative X is accepted and is not lost if Alternative

Y is accepted

C) a cash outflow that is avoided if Alternative X is accepted and is not avoided if Alternative Y is accepted

D) all of the above.

19 Which of the following best describes an opportunity cost:

A) it is a relevant cost in decision making, but is not part of the traditional accounting records.

B) it is not a relevant cost in decision making, but is part of the traditional

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I A division's net operating income, after deducting both traceable and allocated common corporate costs, is negative.

II The division's avoidable fixed costs exceed its contribution margin

III The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin

Which of the above statements give an economic reason for eliminating the division?A) Only I

B) Only II

C) Only III

D) Only I and II

21 The Jabba Company manufactures the “Snack Buster” which consists of a wooden

snack chip bowl with an attached porcelain dip bowl Which of the following would

be relevant in Jabba's decision to make the dip bowls or buy them from an outside supplier?

Fixed overhead cost The variablethat can be eliminated if selling

the bowls are purchased cost of the

from the outside supplier Snack Buster

A) the contribution margin on the order

B) the incremental costs associated with the order.

C) the variable costs associated with the order

D) the sunk costs associated with the order

23 Kinsi Corporation manufactures five different products All five of these products

must pass through a stamping machine in its fabrication department This machine is Kinsi's constrained resource Kinsi would make the most profit if it produces the product that:

A) uses the lowest number of stamping machine hours

B) generates the highest contribution margin per unit

C) generates the highest contribution margin ratio

D) generates the highest contribution margin per stamping machine hour.

13-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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I A variable production cost incurred prior to split-off.

II A variable production cost incurred after split-off

III An avoidable fixed production cost incurred after split-off

Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further?

B) Only III

C) Only I and II

D) Only I and III

25 Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of $50,000 If the lamps are reworked for $20,000, they could

be sold for $35,000 Alternatively, the lamps could be sold for $8,000 for scrap In

a decision model analyzing these alternatives, the sunk cost would be:

A) $8,000

B) $15,000

C) $20,000

D) $50,000

26 Hodge Inc has some material that originally cost $74,600 The material has a scrap

value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for

$54,400 What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?

Incremental revenue from reworking ($54,400 − $1,500) $52,900

Less incremental revenue from selling as scrap 57,400

Net loss from reworking ($ 4,500)

27 Milford Corporation has in stock 16,100 kilograms of material R that it bought five

years ago for $5.75 per kilogram This raw material was purchased to use in a product line that has been discontinued Material R can be sold as is for scrap for $3.91 per kilogram An alternative would be to use material R in one of the company's current products, S88Y, which currently requires 2 kilograms of a raw material that is

available for $7.60 per kilogram Material R can be modified at a cost of $0.77 per kilogram so that it can be used as a substitute for this material in the production of product S88Y However, after modification, 4 kilograms of material R is required for every unit of product S88Y that is produced Milford Corporation has now received a

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that Milford Corporation could use all of its stock of material R to make product S88Y

or the company could sell all of its stock of the material at the current scrap price of

$3.91 per kilogram, what is the minimum acceptable selling price of material R to the company that could use material R in its own production process?

28 Otool Inc is considering using stocks of an old raw material in a special project The

special project would require all 240 kilograms of the raw material that are in stock and that originally cost the company $2,112 in total If the company were to buy new supplies of this raw material on the open market, it would cost $9.25 per kilogram However, the company has no other use for this raw material and would sell it at the discounted price of $8.35 per kilogram if it were not used in the special project The sale of the raw material would involve delivery to the purchaser at a total cost of

$71.00 for all 240 kilograms What is the relevant cost of the 240 kilograms of the rawmaterial when deciding whether to proceed with the special project?

Less: delivery cost 71

Relevant cost of 240 kilograms of raw material $1,933

29 Hamby Corporation is preparing a bid for a special order that would require 780

liters of material W34C The company already has 640 liters of this raw material in stock that originally cost $8.30 per liter Material W34C is used in the company's mainproduct and is replenished on a periodic basis The resale value of the existing stock ofthe material is $7.60 per liter New stocks of the material can be readily purchased for

$8.35 per liter What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order?

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B) $6,376

D) $5,928

Solution:

Relevant cost = $8.35 per liter × 780 liters = $6,513

30 Schickel Inc regularly uses material B39U and currently has in stock 460 liters of the material for which it paid $3,128 several weeks ago If this were to be sold as is on theopen market as surplus material, it would fetch $5.95 per liter New stocks of the material can be purchased on the open market for $6.45 per liter, but it must be

purchased in lots of 1,000 liters You have been asked to determine the relevant cost of

760 liters of the material to be used in a job for a customer The relevant cost of the

760 liters of material B39U is:

A) $4,902

B) $4,672

C) $4,522

D) $6,450

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Decision Making; Reporting LO: 1 Level: Hard

Source: CIMA, adapted

Solution:

Relevant cost = $6.45 per liter × 760 liters = $4,902

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31 Munafo Corporation is a specialty component manufacturer with idle capacity

Management would like to use its extra capacity to generate additional profits A potential customer has offered to buy 6,500 units of component VGI Each unit of VGIrequires 1 unit of material I57 and 5 units of material M97 Data concerning these two materials follow:

Material Units inStock

OriginalCost PerUnit

CurrentMarketPricePer Unit

DisposalValuePer UnitI57 2,400 $9.10 $9.40 $8.95

M97 33,960 $4.70 $4.70 $3.50

Material I57 is in use in many of the company's products and is routinely replenished Material M97 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up

What would be the relevant cost of the materials, in total, for purposes of determining

a minimum acceptable price for the order for product VGI?

A) $174,850

B) $213,130

C) $213,850

D) $171,925

Solution:

Material

# Requiredper unit

Relevantprice TotalI57 1 × $9.40 = $ 9.40

M97 5 × $3.50 = 17.50

Total per unit relevant cost $26.90

Minimum acceptable price for 6,500 units of VGI =

$26.90 per unit × 6,500 units = $174,850

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32 Winder Corporation is a specialty component manufacturer with idle capacity

Management would like to use its extra capacity to generate additional profits A potential customer has offered to buy 3,000 units of component QEA Each unit of QEA requires 5 units of material F85 and 5 units of material E71 Data concerning these two materials follow:

Material

Units inStock

OriginalCost PerUnit

CurrentMarket PricePer Unit

DisposalValue PerUnitF85 740 $4.90 $4.75 $4.20

E71 13,680 $5.00 $4.70 $3.60

Material F85 is in use in many of the company's products and is routinely replenished Material E71 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up

What would be the relevant cost of the materials, in total, for purposes of determining

a minimum acceptable price for the order for product QEA?

A) $126,702

B) $141,750

C) $126,295

D) $145,965

Solution:

Total needed Inventory

# of units topurchase onmarket

Relevantprice Total costF85

(3,000 × 5) =

E71 (3,000 × 5) =15,000 13,680) = 1,320(15,000 − $4.70 6,204

13,680 $3.60 49,248Minimum acceptable price for 3,000 units of QEA $126,702

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33 Rice Corporation currently operates two divisions which had operating results last year as follows:

West TroyDivision DivisionSales $600,000 $300,000

Variable costs 310,000 200,000

Contribution margin 290,000 100,000

Traceable fixed costs 110,000 70,000

Allocated common corporate costs 90,000 45,000

Net operating income (loss) $ 90,000 ($ 15,000)

Since the Troy Division also sustained an operating loss in the prior year, Rice's president is considering the elimination of this division Troy Division's traceable fixed costs could be avoided if the division were eliminated The total common corporate costs would be unaffected by the decision If the Troy Division had been eliminated at the beginning of last year, Rice Corporation's operating income for last year would have been:

A) $15,000 higher

B) $30,000 lower

C) $45,000 lower

D) $60,000 higher

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Decision Making; Reporting LO: 2 Level: Medium

Source: CPA, adapted

Solution:

Troy Division:

Contribution margin $100,000

Less: traceable fixed costs 70,000

Segment margin of Troy Division $ 30,000

Rice Corporation’s operating income would have been $30,000 less without the segment margin contributed by the Troy Division

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34 Beaver Company (a multi-product firm) produces 5,000 units of Product X each year Each unit of Product X sells for $8 and has a contribution margin of $5 If Product X

is discontinued, $18,000 of fixed overhead would be eliminated As a result of

discontinuing Product X, the company's overall operating income would:

A) decrease by $25,000

B) increase by $43,000

C) decrease by $7,000

D) increase by $7,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Solution:

Fixed overhead savings if Product X is eliminated $18,000

Less: contribution margin lost if Product X is

Solution:

Fixed overhead savings if division is discontinued $45,000

Less: contribution margin lost if division is eliminated 20,000

Increase in operating income if division is eliminated $25,000

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36 ABD Realty manages five apartment complexes in its region Shown below are summary income statements for each apartment complex:

A) V, W, X, Y

B) W, X, Y

C) X, Y

D) X

Source: CMA, adapted

*expenses rounded to nearest whole dollar

Since complexes X and Y have negative margins, ABD Realty should consider

dropping those two divisions

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37 The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation:

Contribution margin $200,000

Fixed expenses 500,000

Net operating loss ($300,000)

If Children's Division is dropped, half of the fixed costs above can be eliminated What will be the effect on Grunge's profit next year if Children's Division is dropped instead of being kept?

A) $50,000 increase

B) $250,000 increase

C) $250,000 decrease

D) $550,000 increase

Solution:

Keep theDivision

Drop theDivision DifferenceContribution margin $200,000 $ 0 ($200,000)Fixed expenses 500,000 250,000 250,000 Net operating income (loss) ($300,000) ($250,000) ($ 50,000)Net operating income would increase by $50,000 if the Children’s Division were dropped Therefore, the division should be dropped

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38 The management of Furrow Corporation is considering dropping product L07E Data from the company's accounting system appear below:

Sales $830,000

Variable expenses $365,000

Fixed manufacturing expenses $291,000

Fixed selling and administrative expenses $166,000

In the company's accounting system all fixed expenses of the company are fully allocated to products Further investigation has revealed that $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expensesare 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 $8,000

B) Overall net operating income would decrease by $173,000

C) Overall net operating income would decrease by $8,000

D) Overall net operating income would increase by $173,000

AICPA FN: Decision Making; Reporting LO: 2 Level: Easy

Solution:

Keep theProduct

Drop theProduct DifferenceSales $830,000 $ 0 ($830,000)Variable expenses 365,000 0 365,000 Contribution margin 465,000 0 (465,000)Fixed expenses:

Fixed manufacturing expenses 291,000 *105,000 186,000 Fixed selling and administrative

expenses 166,000 **60,000 106,000 Total fixed expenses 457,000 165,000 292,000 Net operating income (loss) $ 8,000 ($165,000) ($173,000)

Net operating income would decline by $173,000 if product L07E were dropped Therefore, the product should not be dropped

*$291,000 − $186,000 = $105,000

**$166,000 − $106,000 = $60,000

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39 Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product

altogether Data from the company's accounting system appear below:

Sales $730,000

Variable expenses $350,000

Fixed manufacturing expenses $234,000

Fixed selling and administrative expenses $161,000

In the company's accounting system all fixed expenses of the company are fully allocated to products Further investigation has revealed that $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling and administrative expenses are avoidable if product U23N is discontinued What would be the effect on the company's overall net operating income if product U23N were dropped?

A) Overall net operating income would increase by $15,000

B) Overall net operating income would increase by $143,000

C) Overall net operating income would decrease by $143,000.

D) Overall net operating income would decrease by $15,000

Solution:

Keep theProduct

Drop theProduct DifferenceSales $730,000 $ 0 ($730,000)Variable expenses 350,000 0 350,000

Contribution margin 380,000 0 ( 380,000)Fixed expenses:

Fixed manufacturing expenses 234,000 *90,000 144,000

Fixed selling and administrative

expenses 161,000 **68,000 93,000Total fixed expenses 395,000 158,000 237,000

Net operating income (loss) ($ 15,000) ($ 158,000) ($143,000)Net operating income would decline by $143,000 if product U23N were dropped Therefore, the product should not be dropped

*$234,000 − $144,000 = $90,000

**$161,000 − $93,000 = $68,000

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40 Supler Company produces a part used in the manufacture of one of its products The unit product cost is $18, computed as follows:

Direct materials $ 8

Direct labor 4

Variable manufacturing overhead 1

Fixed manufacturing overhead 5

Unit product cost $18

An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only $14 each It is estimated that 60 percent of the fixed overhead cost above could be eliminated if the parts are purchased from the outside supplier Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be: A) $1 disadvantage B) $1 advantage C) $2 advantage D) $4 disadvantage Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Solution: Relevant cost per unit: Direct materials $ 8

Direct labor 4

Fixed manufacturing overhead ($5 × 0.60) 3

Relevant manufacturing cost $16

Net advantage (disadvantage): Relevant manufacturing cost savings $16

Less: cost from outside supplier 14

Net advantage $ 2

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41 Sharp Company produces 8,000 parts each year, which are used in the production of one of its products The unit product cost of a part is $36, computed as follows:

Variable production costs $16

Fixed production costs 20

The parts can be purchased from an outside supplier for only $28 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) $24,000 increase

B) $24,000 decrease

C) $56,000 increase

D) $56,000 decrease

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

Solution:

Relevant cost per unit:

Relevant manufacturing cost savings ($21 × 8,000) $168,000

Less: cost to purchase from outside supplier ($28 × 8,000) 224,000

Net disadvantage of purchasing from outside supplier ($ 56,000)

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42 Motor Company manufactures 10,000 units of Part M-l each year for use in its

production The following total costs were reported last year:

Direct materials $ 20,000

Direct labor 55,000

Variable manufacturing overhead 45,000

Fixed manufacturing overhead 70,000

Total manufacturing cost $190,000

Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 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 $15,000 Additionally, $4 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 $10,000 cheaper to buy the part

C) No, because it would be $15,000 cheaper to make the part

D) Yes, because it would be $25,000 cheaper to buy the part

Solution:

Relevant cost of manufacturing:

Direct materials $ 20,000

Direct labor 55,000

Fixed manufacturing overhead ($4 × 10,000) 40,000

Relevant manufacturing cost $160,000

Net advantage (disadvantage):

Relevant manufacturing cost savings $160,000

Annual rental of manufacturing facilities

given up if manufacture Part M-1 15,000

Cost of purchasing the part ($18 × 10,000) ( 180,000)

Net disadvantage of purchasing part M-1 ($ 5,000)

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43 Kingston Company needs 10,000 units of a certain part to be used in its production cycle The following information is available concerning Kingston's unit product cost:

Direct labor 24

Fixed manufacturing overhead 15

Utica Company has offered to supply Kingston's entire annual requirements of the part for $53 each If Kingston buys the part from Utica instead of making it, Kingston would have no other use for the facilities and 60 percent of the fixed manufacturing overhead would continue In deciding whether to make or buy the part, the total relevant costs to make the part internally are: A) $342,000 B) $480,000 C) $530,000 D) $570,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking

Source: CPA, adapted Solution: Relevant cost per unit: Direct materials $ 6

Direct labor 24

Total relevant costs to make the part internally ($48 × 10,000) = $480,000

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44 The following standard costs pertain to a component part manufactured by Bor Company:

Direct labor 10

Manufacturing overhead 40

Standard cost per unit $54

An outside supplier has offered to supply all of the parts needed by Bor Company for $50 each The 60% of the manufacturing overhead cost that is fixed would be unaffected by this decision In the decision to “make or buy,” what is the relevant unit cost to make the part internally? A) $54 B) $38 C) $30 D) $5 Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Source: CPA, adapted Solution: Relevant cost per unit: Direct materials $ 4

Direct labor 10

Manufacturing overhead ($40 × 0.40) 16

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45 Gordon Company produces 1,000 units of a part per year which are used in the assembly of one of its products The unit cost of producing these parts is:

Variable manufacturing cost $15

Fixed manufacturing cost 12

Total manufacturing cost $27

The part can be purchased from an outside supplier at $20 per unit If the part is purchased from the outside supplier, two thirds of the total fixed costs incurred in producing the part can be eliminated The annual increase or decrease on the

company's operating incomes as a result of buying the part from the outside supplier would be:

A) $3,000 increase

B) $1,000 decrease

C) $7,000 increase

D) $5,000 decrease

Solution:

Fixed manufacturing overhead ($12 × 2/3) 8

Net advantage (disadvantage) per unit:

Manufacturing cost savings $23

Cost of purchasing the part 20

Net advantage (disadvantage) $ 3

Total = $3 × 1,000 units = $3000 increase

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46 Quikcook Microwave Company currently manufactures the doors that it uses for its microwave ovens The annual costs to manufacture the 40,000 doors needed each yearare as follows:

Total CostDirect material $200,000

Direct labor 40,000

Fixed manufacturing overhead 320,000

Total $640,000

Delilah Glass Corporation has offered to provide Quikcook with all of its annual door needs for $14 per door If Quikcook accepts this offer, only 40% of the fixed overhead above could be totally eliminated Also, Quikcook has no alternative use for the idle facilities if the decision was made to go with Delilah's offer Based on this

information, would Quikcook be better off to make the doors or buy the doors and by how much?

A) $48,000 better to buy

B) $48,000 better to make

C) $112,000 better to buy

D) $112,000 better to make

Solution:

Relevant cost:

Direct materials $200,000

Direct labor 40,000

Fixed manufacturing overhead ($320,000 × 0.40) 128,000

Relevant manufacturing cost $448,000

Net advantage (disadvantage):

Manufacturing cost savings $448,000

Cost of purchasing the part ($14 × 40,000) ( 560,000)

Net advantage (disadvantage) of buying ($ 112,000)

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47 Sardi Inc is considering whether to continue to make a component or to buy it from anoutside supplier The company uses 17,000 of the components each year The unit product cost of the component according to the company's cost accounting system is given as follows:

Direct materials $ 8.20

Direct labor 8.30

Variable manufacturing overhead 1.20

Fixed manufacturing overhead 4.30

Unit product cost $22.00

Assume that direct labor is a variable cost Of the fixed manufacturing overhead, 70%

is avoidable if the component were bought from the outside supplier In addition, making the component uses 2 minutes on the machine that is the company's current constraint If the component were bought, this machine time would be freed up for use

on another product that requires 4 minutes on the constraining machine and that has a contribution margin of $7.00 per unit

When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?

A) $24.21

B) $25.50

C) $20.71

D) $22.00

Solution:

Direct labor 8.30

Fixed manufacturing overhead ($4.30 × 0.70) 3.01

Relevant manufacturing cost $20.71

Add contribution margin lost* 3.50

$24.21

*$7.00 ÷ 4 minutes = $1.75 per minute; $1.75 per minute × 2 minutes = $3.50

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48 Part S51 is used in one of Haberkorn Corporation's products The company makes 12,000 units of this part each year The company's Accounting Department reports the following costs of producing the part at this level of activity:

Per UnitDirect materials $6.30

Direct labor $5.70

Variable manufacturing overhead $4.80

Supervisor’s salary $7.00

Depreciation of special equipment $8.60

Allocated general overhead $7.20

An outside supplier has offered to produce this part and sell it to the company for

$37.70 each If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided The special equipment used to make the part was purchased many years ago and has no salvage value or other use The

allocated general overhead represents fixed costs of the entire company If the outside supplier's offer were accepted, only $17,000 of these allocated general overhead costs would be avoided

If management decides to buy part S51 from the outside supplier rather than to

continue making the part, what would be the annual impact on the company's overall net operating income?

A) Net operating income would decline by $5,800 per year

B) Net operating income would decline by $22,800 per year

C) Net operating income would decline by $149,800 per year

D) Net operating income would decline by $39,800 per year

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Direct materials (12,000 units @ $6.30 per unit) $ 75,600

Direct labor (12,000 units @ $5.70 per unit) 68,400

Variable overhead (12,000 units @ $4.80 per unit) 57,600

Supervisor’s salary (12,000 units @ $7.00 per unit) 84,000

Depreciation of special equipment (not relevant) 0

Allocated general overhead (avoidable only) 17,000

Outside purchase price (12,000 units @ $37.70 per

unit) $452,400Total cost $302,600 $452,400The total cost of the make alternative is lower by $149,800 ($302,600 − $452,400) Thus, net operating income would decline by $149,800 if the offer from the supplier were accepted Therefore, the company should continue to make the part itself

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49 Norgaard Corporation makes 8,000 units of part G25 each year This part is used in one of the company's products The company's Accounting Department reports the following costs of producing the part at this level of activity:

Direct labor $8.10

An outside supplier has offered to make and sell the part to the company for $21.20 each If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided The special equipment used to make the part was purchased many years ago and has no salvage value or other use The allocated general overhead represents fixed costs of the entire company If the outside supplier's offer were accepted, only $2,000 of these allocated general overhead costs would be avoided In addition, the space used to produce part G25 would be used to make more

of one of the company's other products, generating an additional segment margin of

$16,000 per year for that product

What would be the impact on the company's overall net operating income of buying part G25 from the outside supplier?

B) Net operating income would increase by $16,000 per year

D) Net operating income would decline by $40,000 per year

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Allocated general overhead (avoidable only) 2,000

unit) $169,600Opportunity cost ( 16,000)Total cost $145,200 $153,600

The total cost of the make alternative is lower by $8,400 ($145,200 − $153,600) Thus,net operating income would decline by $8,400 if the offer from the supplier were accepted Therefore, the company should continue to make the part itself

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50 Rebelo Corporation is presently making part E07 that is used in one of its products A total of 17,000 units of this part are produced and used every year The company's Accounting Department reports the following costs of producing the part at this level

of activity:

Direct labor $3.80

An outside supplier has offered to make and sell the part to the company for $20.80 each If this offer is accepted, the supervisor's salary and all of the variable costs can

be avoided The special equipment used to make the part was purchased many years ago and has no salvage value or other use The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally If management decides to buy part E07 fromthe outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

C) Net operating income would increase by $163,200 per year

D) Net operating income would increase by $6,800 per year

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Allocated general overhead (not relevant) 0

unit) $353,600Total cost $190,400 $353,600

The total cost of the make alternative is lower by $163,200 ($353,600 − $190,400) Thus, net operating income would decline by $163,200 if the offer from the supplier were accepted Therefore, the company should continue to make the part itself

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51 Part U16 is used by Mcvean Corporation to make one of its products A total of 13,000units of this part are produced and used every year The company's Accounting

Department reports the following costs of producing the part at this level of activity:

Direct labor $7.50

An outside supplier has offered to make the part and sell it to the company for $29.80 each If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided The special equipment used to make the part was purchased many years ago and has no salvage value or other use The

allocated general overhead represents fixed costs of the entire company, none of whichwould be avoided if the part were purchased instead of produced internally In

addition, the space used to make part U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product What would be the impact on the company's overall net

operating income of buying part U16 from the outside supplier?

A) Net operating income would increase by $25,000 per year

D) Net operating income would increase by $14,600 per year

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Allocated general overhead (not relevant) 0

unit) $387,400Opportunity cost (segment margin) ( 25,000)Total cost $283,400 $362,400

The total cost of the make alternative is lower by $79,000 ($283,400 − $362,400) Thus, net operating income would decline by $79,000 if the offer from the supplier were accepted Therefore, the company should continue to make the part itself

52 Landor Appliance Company makes and sells electric fans Each fan regularly sells for

$42 The following cost data per fan is based on a full capacity of 150,000 fans produced each period

Direct materials $8

Direct labor $9

Manufacturing overhead

(70% variable and 30% unavoidable fixed) $10

A special order has been received by Landor for a sale of 25,000 fans to an overseascustomer The only selling costs that would be incurred on this order would be $4 per fan for shipping Landor is now selling 120,000 fans through regular channels each period What should Landor use as a minimum selling price per fan in negotiating a price for this special order?

A) $28

B) $27

C) $31

D) $24

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Direct labor 9

Variable manufacturing overhead ($10 × 0.70) 7

Variable selling cost 4

Minimum selling price $28

53 Ignace Timekeepers, Inc manufactures and sells wrist watches Ignace has the capacity to manufacture and sell 20,000 watches each year but is currently only manufacturing and selling 15,000 The following costs relate to annual operations at 15,000 watches:

Total CostVariable manufacturing cost $150,000

Fixed manufacturing cost $120,000

Variable selling and administrative cost $90,000

Fixed selling and administrative cost $180,000

Ignace normally sells its watches for $42 each A discount chain is interesting in purchasing Ignace's excess capacity of 5,000 watches This special order would not affect regular sales or the cost structure above Ignace's profits for the year will increase as long as the price on this special order exceeds:

A) $12.00

B) $13.50

C) $16.00

D) $31.00

Solution:

Total relevant costs:

Variable manufacturing cost $150,000

Variable selling and administrative cost 90,000

Total relevant costs $240,000

Divided by 15,000 watches 15,000 ÷

Minimum selling price for special order $16

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54 Gallerani Corporation has received a request for a special order of 6,000 units of product A90 for $21.20 each Product A90's unit product cost is $16.20, determined as follows:

Direct labor 4.20

Direct labor is a variable cost The special order would have no effect on the

company's total fixed manufacturing overhead costs The customer would like

modifications made to product A90 that would increase the variable costs by $4.20 perunit and that would require an investment of $21,000 in special molds that would have

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55 A customer has requested that Lewelling Corporation fill a special order for 9,000 units of product S47 for $20.50 a unit While the product would be modified slightly for the special order, product S47's normal unit product cost is $14.40:

Direct labor 1.50

Direct labor is a variable cost The special order would have no effect on the

company's total fixed manufacturing overhead costs The customer would like

modifications made to product S47 that would increase the variable costs by $5.00 per unit and that would require an investment of $36,000 in special molds that would have

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56 Holden Company produces three products, with costs and selling prices as follows:

Product A Product B Product CSelling price per unit $30 100% $20 100% $15 100%Variable costs per unit 18 60% 15 75% 6 40%Contribution margin per unit $12 40% $ 5 25% $ 9 60%

A particular machine is a bottleneck On that machine, 3 machine hours are required toproduce each unit of Product A, 1 hour is required to produce each unit of Product B, and 2 hours are required to produce each unit of Product C In which order should it produce its products?

A) C, A, B

B) A, C, B

C) B, C, A

D) The order of production doesn't matter

Solution:

Product A Product B Product CContribution margin per unit $12 $5 $9Machine-hours per unit 3 1 2Contribution margin per hour $4.00 $5.00 $4.50Rank in terms of profitability 3 1 2

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57 Wood Carving Corporation manufactures three products Because of a recent lack of skilled wood carvers, the corporation has had a shortage of available labor hours The following per unit data relates to the three products of the corporation:

Letter Openers Elvis Statues Candle HoldersSales price $30 $80 $42

Variable costs $20 $40 $20

Assume that Wood Carving only has 1,800 labor hours available next month Also assume that Wood Carving can only sell 800 units of each product in a given month What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage?

A) $12,000

B) $19,000

C) $19,600

D) $19,800

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Demand for wood carvers:

Letter Openers Elvis Statues Candle Holders

Monthly demand in units 800 800 800

Total hours required 800 4,800 1,600

Total time required for all products: 7,200

Optimal production plan:

Letter Openers Elvis Statues Candle HoldersSelling price per unit $30.00 $80.00 $42.00Variable cost per unit $20.00 $40.00 $20.00Contribution margin per unit $10.00 $40.00 $22.00Labor-hours per unit 1 6 2Contribution margin per hour $10.00 $6.67 $11.00Rank in terms of profitability 2 3 1Optimal production 200 0 800Total hours available 1,800

Less: hours required for 800 Candle Holders (800 × 2) 1,600

Hours remaining 200

Divided by hours required per Letter Opener ÷ 1

Number of Letter Openers to produce 200

Maximum contribution margin:

Candle Holders (800 × $22) $17,600

Letter Openers (200 × $10) 2,000

Maximum contribution margin $19,600

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58 Banfield Corporation makes three products that use compound W, the current

constrained resource Data concerning those products appear below:

Selling price per unit $248.04 $230.66 $505.44

Variable cost per unit $190.71 $172.14 $388.80

Centiliters of compound W 3.90 3.80 8.10

Rank the products in order of their current profitability from most profitable to least profitable In other words, rank the products in the order in which they should be emphasized

A) WX, VP, YI

B) YI, VP, WX

C) WX, YI, VP

D) VP, WX, YI

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59 An automated turning machine is the current constraint at Jordison

Corporation Three products use this constrained resource Data concerning those products appear below:

Minutes on the constraint 2.60 4.90 7.80

Rank the products in order of their current profitability from most profitable to least profitable In other words, rank the products in the order in which they should be emphasized

60 The constraint at Rauchwerger Corporation is time on a particular machine The company makes three products that use this machine Data concerning those products appear below:

Minutes on the constraint 3.20 8.60 3.60

Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product Up to how much should the company be willing

to pay to acquire more of the constrained resource?

A) $33.28 per unit

B) $10.40 per minute

C) $122.12 per unit

D) $15.30 per minute

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Solution:

Variable cost per unit 158.72 420.54 167.76

Contribution margin per unit $33.28 $122.12 $55.08

Machine minutes per unit 3.20 8.60 3.60

Contribution margin per minute $10.40 $14.20 $15.30

Rank in terms of profitability 3 2 1

The company should be willing to pay up to the contribution margin per minute for theleast profitable job, which is $10.40

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61 The Freed Company produces three products, X, Y, Z, from a single raw material input Product Y can be sold at the splitoff point for total revenues of $50,000, or it can

be processed further at a total cost of $16,000 and then sold for $68,000 Product Y:A) should be sold at the split-off point, rather than processed further

B) would increase the company's overall net operating income by $18,000 if processed further and then sold

C) would increase the company's overall net operating income by $68,000 if processed further and then sold

D) would increase the company's overall net operating income by $2,000 if

processed further and then sold

Solution:

Product YSales value after further processing $68,000

Costs of further processing 16,000

Benefit of further processing 52,000

Less: Sales value at split-off point 50,000

Net advantage $ 2,000

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62 Pendall Company manufactures products Dee and Eff from a joint process Product Dee has been allocated $2,500 of the $20,000 in total joint costs associated with the production of 1,000 units each of Dee and Eff each year Dee can be sold at the split-off point for $3 per unit, or it can be processed further with additional costs of $1,000 and sold for $5 per unit If Dee is processed further and sold, the result would be:A) A break-even situation.

B) An additional gain of $1,000 from further processing

C) A loss of $1,000 from further processing

D) An additional gain of $2,000 from further processing

Solution:

DeeSales value after further processing ($5 × 1,000) $5,000

Costs of further processing 1,000

Benefit of further processing 4,000

Less: Sales value at split-off point ($3 × 1,000) 3,000

Net advantage $1,000

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