Relevant Costing – Chapter 25 Test Bank | Docx file – 24th Ed - Answer Key + Test Bank | Fundamental Accounting Principles 24e by John J. Wild. DOCX document preview.

Relevant Costing – Chapter 25 Test Bank | Docx file – 24th Ed

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Fundamental Accounting Principles, 24e (Wild)

Chapter 25 Relevant Costing for Managerial Decisions

1) An opportunity cost is the potential benefit lost by taking a specific action when two or more alternative choices are available.

2) Incremental costs are the additional costs incurred if a company pursues a certain course of action.

3) Opportunity costs are the additional or incremental revenues generated by selecting a certain course of action.

4) A sunk cost will change with a future course of action.

5) A sunk cost arises from a past decision and cannot be avoided or changed.

6) Sunk costs are irrelevant to future decisions.

7) An out-of-pocket cost requires a future outlay of cash and is relevant for current and future decision making.

8) Another name for relevant cost is unavoidable cost.

9) Incremental revenues refer to the additional revenue generated by selecting a particular course or action over another.

10) Significant sunk costs are relevant to decisions about the future.

11) The concept of incremental cost is the same as the concept of differential cost.

12) Additional business in the form of a special order of goods or services should be accepted when the incremental revenue equals the incremental costs.

13) In a make or buy decision, management should focus on costs that are the same under the two alternatives.

14) Part of the decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

15) Incremental costs should be considered in a make or buy decision.

16) If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B; assuming fixed costs are the same, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin per unit of operating capacity.

17) The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

18) Sunk costs are irrelevant to future decisions as they cannot be changed or avoided.

19) Wages from a job a student gives up to attend summer school would be a sunk cost.

20) The cost of equipment purchased by a company last year would be an avoidable cost.

21) A special order of goods or services should be accepted when the incremental revenue exceeds the normal revenue.

22) Assuming a company has excess operating capacity, a special order should be accepted if its incremental revenues exceed the incremental costs, and the special order does not negatively impact existing business.

23) The decision to accept additional business should be based on a comparison of the incremental costs of the added production with the additional revenues to be received.

24) If the cost to buy a part is less than the direct material, direct labor, and incremental overhead cost of making the part, the company should buy the part.

25) A company's best sales mix is determined using contribution margin per unit of scarce resource.

26) The total cost method determines a selling price equal to a product's total costs plus a desired profit on the product.

27) Markup percentage equals total costs divided by desired profit.

28) Incremental costs are also called out-of-pocket costs.

29) Additional costs incurred if a company pursues a certain course of action are sunk costs.

30) If accepting additional business would cause existing sales to decline, the offer should always be declined.

31) Contribution margin lost from a decline in sales is an opportunity cost.

32) Additional power for operating machines, extra supplies, and added cleanup costs are examples of incremental overhead costs.

33) Employee morale, timeliness of delivery, and the reactions of customers are examples of nonfinancial factors that should be considered when making a managerial decision.

34) Costs already incurred in manufacturing the units of a product that do not meet quality standards are relevant costs in a scrap or rework decision.

35) Sales mix refers to the combination of products sold by a company.

36) To maximize profit when a constrained resource exists, management should produce the sales mix that has the highest contribution margin per unit of scarce resource.

37) The decision to sell or process a product further is analyzed by identifying the incremental costs and benefits of further processing.

38) An opportunity cost:

A) Is an unavoidable cost because it remains the same regardless of the alternative chosen.

B) Requires a current outlay of cash.

C) Results from past managerial decisions.

D) Is the potential benefit lost by choosing a specific alternative course of action among two or more.

E) Is irrelevant in decision making because it occurred in the past.

39) The potential benefits lost by taking a specific action when two or more alternative choices are available is known as a(n):

A) Alternative cost.

B) Sunk cost.

C) Out-of-pocket cost.

D) Differential cost.

E) Opportunity cost.

40) A cost that requires a future outlay of cash, and is relevant for current and future decision making, is a(n):

A) Out-of-pocket cost.

B) Sunk cost.

C) Opportunity cost.

D) Operating cost.

E) Uncontrollable cost.

41) A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n):

A) Uncontrollable cost.

B) Incremental cost.

C) Opportunity cost.

D) Out-of-pocket cost.

E) Sunk cost.

42) A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $200,000 original cost of the machine is an example of a(n):

A) Incremental cost.

B) Opportunity cost.

C) Variable cost.

D) Sunk cost.

E) Out-of-pocket cost.

43) An additional cost incurred only if a company pursues a particular course of action is a(n):

A) Period cost.

B) Pocket cost.

C) Discount cost.

D) Incremental cost.

E) Sunk cost.

44) A company is considering a new project that will cost $19,000. This project would result in additional annual revenues of $6,000 for the next 5 years. The $19,000 cost is an example of a(n):

A) Sunk cost.

B) Fixed cost.

C) Incremental cost.

D) Uncontrollable cost.

E) Opportunity cost.

45) Gordon Corporation produced 10,000 digital watches in the current year. Variable costs are $8 per watch. Overhead assigned is $2.25 per watch. A supplier offers the watches for $9.50 each. Gordon's production manager reports the incremental overhead is $1.25 per watch. Gordon should:

A) Continue making the watches as an additional $1.50 per watch would be incurred if bought from the supplier.

B) Continue making the watches as an additional $0.25 per watch would be incurred if bought from the supplier.

C) Buy the watches as they would save $0.75 per watch.

D) Buy the watches as they would save $1.50 per watch.

E) Buy the watches as they would save $1.75 per watch.

46) Chang Industries has 2,000 tables that cost $115 each to produce. Each table can be sold as is for $221 or finished with a stain or paint. The cost to add a finish to each table is $75. Finished tables can be sold for $310. Chang should:

A) Finish the table for incremental cost of $190 per table.

B) Sell the unfinished tables for profit of $195 per table.

C) Finish the table for profit of $89 per table.

D) Sell unfinished tables for $106 incremental revenue per table.

E) Finish the table for profit of $14 per table.

47) Chang Industries has 2,000 defective units of product that already cost $14 each to produce. A salvage company will purchase the defective units as is for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. The $14 per unit is a: 

A) Incremental cost.

B) Sunk cost.

C) Out-of-pocket cost.

D) Opportunity cost.

E) Period cost.

48) Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product it produces, the company should:

A) Produce only Product A.

B) Produce only Product B.

C) Produce equal amounts of A and B.

D) Produce A and B in the ratio of 62.5% A to 37.5% B.

E) Produce A and B in the ratio of 40% A and 60% B.

49) Epsilon Co. can produce a unit of product for the following costs:

 

 

 

 

Direct material

$

8

 

Direct labor

 

24

 

Overhead

 

40

 

Total product costs per unit

$

72

 

An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to:

A) Buy since the relevant cost to make it is $72.

B) Make since the relevant cost to make it is $56.

C) Buy since the relevant cost to make it is $48.

D) Make since the relevant cost to make it is $48.

E) Buy since the relevant cost to make it is $56.

50) Factor Co. can produce a unit of product for the following costs:

 

 

 

 

 

Direct material

$

8

 

Direct labor

 

24

 

Overhead

 

40

 

Total product cost per unit

$

72

 

An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to:

A) Buy since the relevant cost to make it is $56.

B) Make since the relevant cost to make it is $48.

C) Buy since the relevant cost to make it is $48.

D) Make since the relevant cost to make it is $32.

E) Buy since the relevant cost to make it is $32.

51) Listmann Corp. processes four different products that can either be sold as is or processed further.

 

Listed below are sales and additional cost data:

Product

Sales Value with no further Processing

 

Additional Processing Costs

 

Sales Value after further processing

Premier

 

$

1,350

 

 

$

900

 

 

$

2,700

 

Deluxe

 

 

450

 

 

 

225

 

 

 

630

 

Super

 

 

900

 

 

 

450

 

 

 

1,800

 

Basic

 

 

90

 

 

 

45

 

 

 

180

 

Which product(s) should not be processed further?

A) Premier.

B) Deluxe.

C) Super.

D) Basic.

E) Premier and Basic.

52) Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. Assuming Maxim further processes Green Health further into Premium Green and Green Deluxe, revenue from the two products would be:

A) $98,000.

B) $96,000.

C) $8,000.

D) $6,000.

E) $2,000.

53) Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The incremental revenue of processing Green Health further into Premium Green and Green Deluxe would be:

A) $98,000.

B) $96,000.

C) $8,000.

D) $6,000.

E) $2,000.

54) Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be:

A) $98,000.

B) $96,000.

C) $8,000.

D) $6,000.

E) $2,000.

55) Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be:

A) $68,000.

B) $78,000.

C) $96,000.

D) $98,000.

E) $100,000.

56) Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?

A) No, because additional production would exceed capacity.

B) No, because incremental costs exceed incremental revenue.

C) Yes, because incremental revenue exceeds incremental costs.

D) Yes, because incremental costs exceed incremental revenues.

E) No, because the incremental revenue is too low.

57) Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?

A) No, because net income would decrease by $1,500.

B) No, because net income would decrease by $2,000.

C) Yes, because net income would increase by $7,500.

D) Yes, because net income would increase by $2,000.

E) No, because net income would decrease by $5,500.

58) Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the incremental revenue will be:

A) $45,000.

B) $11,250.

C) $33,750.

D) $7,500.

E) $26,250.

59) Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the incremental cost will be:

A) $45,000.

B) $11,250.

C) $38,750.

D) $7,500.

E) $33,750.

60) Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Minor wishes to earn $1,250 on the special order, the size of the order would need to be:

A) 4,500 units.

B) 2,250 units.

C) 1,125 units.

D) 625 units.

E) 300 units.

61) Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:

A) $45,000 increase.

B) $11,250 increase.

C) $33,750 increase.

D) $7,500 decrease.

E) $33,750 decrease.

62) Bannister Co. is thinking about having one of its products manufactured by a subcontractor.

 

Currently, the cost of manufacturing 1,000 units is:

      

Direct material

$

45,000

 

Direct labor

 

30,000

 

Factory overhead (30% is variable)

 

98,000

 

If Bannister can buy 1,000 units from an outside supplier for $100,000, it should:

A) Make the product because current factory overhead is less than $100,000.

B) Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000.

C) Buy the product because the total incremental costs of manufacturing are greater than $100,000.

D) Buy the product because total fixed and variable manufacturing costs are greater than $100,000.

E) Make the product because factory overhead is a sunk cost.

63) Frederick Co. is thinking about having one of its products manufactured by an outside supplier.

 

Currently, the cost of manufacturing 5,000 units is:

 

 

 

Direct material

$

62,000

 

Direct labor

 

47,000

 

Variable factory overhead

 

38,000

 

Factory overhead

 

52,000

 

If Frederick can buy 5,000 units from an outside supplier for $130,000, it should:

A) Make the product because current factory overhead is less than $130,000.

B) Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000.

C) Make the product because factory overhead is a sunk cost.

D) Buy the product because total fixed and variable manufacturing costs are greater than $130,000.

E) Buy the product because the total incremental costs of manufacturing are greater than $130,000.

64) A company has the choice of either selling 1,000 unfinished units as is or completing them. The company could sell the unfinished units as is for $4.00 per unit. Alternatively, it could complete the units with incremental costs of $1.00 per unit for direct materials, $2.00 per unit for direct labor, and $1.50 per unit for overhead, and then sell the finished units for $8.00 each. What should the company do?

A) Sell the units as is.

B) Finish the units.

C) It does not matter because both alternatives have the same result.

D) Neither sell nor finish because both alternatives produce a loss. Instead, the company should store the units permanently.

E) Donate the units.

65) A company has the choice of either selling 1,000 unfinished units as is or completing them. The company could sell the unfinished units as is for $4.00 per unit. Alternatively, it could complete the units with incremental costs of $1.00 per unit for direct materials, $2.00 per unit for direct labor, and $1.50 per unit for overhead, and then sell the completed units for $8.00 each. If the company completes the units, what is the impact on income?

A) Income will increase by $4,000.

B) Income will increase by $500.

C) Income will decrease by $4,500.

D) Income will decrease by $500.

E) Income will increase by $8,000.

66) A company has the choice of either selling 600 apples or processing them into applesauce. The company could sell the apples as is for $2.00 per unit. Alternatively, each apple could be made into one unit of applesauce with incremental costs of $0.60 per unit for direct materials, $1.00 per unit for direct labor, and $0.80 per unit for overhead, and then sold for $5.00 each. What is the amount of incremental revenue from processing the apples into applesauce?

A) $3.00 per unit.

B) $5.00 per unit.

C) $7.00 per unit.

D) $2.40 per unit.

E) $0.60 per unit.

67) A company has the choice of either selling 600 apples or processing them into applesauce. The company could sell the apples as they are for $2.00 per unit. Alternatively, each apple could be made into one unit of applesauce with incremental costs of $0.60 per unit for direct materials, $1.00 per unit for direct labor, and $0.80 per unit for overhead, and then sold for $5.00 each. What is the amount of incremental cost from processing the apples into applesauce?

A) $3.00 per unit.

B) $5.00 per unit.

C) $7.00 per unit.

D) $2.40 per unit.

E) $0.60 per unit.

68) A company has the choice of either selling 600 apples or processing them into applesauce. The company could sell the apples as they are for $2.00 per unit. Alternatively, each apple could be made into one unit of applesauce with incremental costs of $0.60 per unit for direct materials, $1.00 per unit for direct labor, and $0.80 per unit for overhead, and then sold for $5.00 each. What is the amount of incremental income (loss) from processing the apples into applesauce?

A) $3.00 per unit.

B) $(3.00) per unit.

C) $7.00 per unit.

D) $(0.60) per unit.

E) $0.60 per unit.

69) Riener Hospital has an x-ray machine with a book value of $60,000 and a remaining useful life of three years. At the end of the three years the equipment will have a zero salvage value. The market value of the equipment is currently $32,000. Riener can purchase a new machine for $145,000 and receive $28,000 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $27,000 per year over the three-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

A) $36,000 decrease

B) $76,000 increase

C) $18,000 decrease

D) $52,000 increase

E) $36,000 increase

70) Ahngram Corp. has 1,000 carton of oranges that cost $10 per carton in direct costs and $16.50 per carton in indirect costs and sold for $30 per carton. The oranges can be processed further into orange juice at an additional cost of $12.50 and sold at a price of $46. The incremental income (loss) from processing the oranges into orange juice would be:

A) $30,500.

B) $22,500.

C) ($30,500).

D) $33,500.

E) $23,500.

71) Benjamin Company had the following results of operations for the past year:

 

 

 

 

 

 

 

 

 

Sales (16,000 units at $10)

 

 

 

$

160,000

 

 

Direct materials and direct labor

$

96,000

 

 

 

 

 

Overhead (20% variable)

 

16,000

 

 

 

 

 

Selling and administrative expenses (all fixed)

 

32,000

 

 

(144,000

)

 

Operating income

 

 

 

$

16,000

 

 

A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. Assuming Benjamin has excess capacity and accepts the offer, its profits will:

A) Increase by $30,000.

B) Increase by $6,000.

C) Decrease by $6,000.

D) Increase by $5,200.

E) Increase by $4,300.

72) Benjamin Company had the following results of operations for the past year:

 

 

 

 

 

 

Sales (16,000 units at $10)

 

 

 

$

160,000

 

 

Direct materials and direct labor

$

96,000

 

 

 

 

 

Overhead (20% variable)

 

16,000

 

 

 

 

 

Selling and administrative expenses (all fixed)

 

32,000

 

 

(144,000

)

 

Operating income

 

 

 

$

16,000

 

 

A foreign company offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. Assuming Benjamin's productive capacity is 16,000 units per year and it accepts the offer, its profits will:

A) Decrease by $10,000.

B) Decrease by $10,900.

C) Decrease by $6,000.

D) Increase by $9,100.

E) Increase by $4,300.

73) Lattimer Company had the following results of operations for the past year:

 

 

 

 

 

 

 

 

 

Sales (15,000 units at $12)

 

 

 

$

180,000

 

 

Variable manufacturing costs

$

97,500

 

 

 

 

 

Fixed manufacturing costs

 

21,000

 

 

 

 

 

Selling and administrative expenses (all fixed)

 

36,000

 

 

(154,500

)

 

Operating income

 

 

 

$

25,500

 

 

A foreign company offers to buy 5,000 units at $7.50 per unit. In addition to existing costs, selling these units would add a $0.25 selling cost for export fees. Lattimer's annual production capacity is 25,000 units. If Lattimer accepts this additional business, the special order will yield a:

A) $2,000 loss.

B) $8,250 loss.

C) $3,750 profit.

D) $3,250 loss.

E) $5,000 profit.

74) Markson Company had the following results of operations for the past year:

 

 

 

 

 

 

 

 

Sales (8,000 units at $20)

 

 

 

$

160,000

 

 

Variable manufacturing costs

$

86,000

 

 

 

 

 

Fixed manufacturing costs

 

15,000

 

 

 

 

 

Variable administrative expenses

 

12,000

 

 

 

 

 

Fixed selling and administrative expenses

 

20,000

 

 

(133,000

)

 

Operating income

 

 

 

$

27,000

 

 

A foreign company offers to buy 2,000 units at $14 per unit. In addition to variable manufacturing and administrative costs, selling these units would increase fixed overhead by $1,600 for the purchase of special tools. Markson's annual productive capacity is 12,000 units. If Markson accepts this additional business, its profits will:

A) Increase by $3,500.

B) Decrease by $5,650.

C) Decrease by $1,600.

D) Increase by $1,900.

E) Decrease by $5,100.

75) Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the product to Wheeler for $45. If Wheeler buys from the supplier, it will still incur 45% of its overhead cost. Compute the net incremental cost or savings of buying.

A) $4.00 savings per unit.

B) $4.00 cost per unit.

C) $2.20 cost per unit.

D) $3.80 cost per unit.

E) $2.20 savings per unit.

76) Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $10; direct labor, $14, variable overhead $3 and fixed overhead, $8. An outside supplier has offered to sell the product to Paxton for $32. Compute the net incremental cost or savings of buying the component.

A) $5.00 savings per unit.

B) $3.00 cost per unit.

C) $0 cost or savings per unit.

D) $5.00 cost per unit.

E) $3.00 savings per unit.

77) Walters manufactures a specialty food product that can currently be sold for $22 per unit and has 20,000 units on hand. Alternatively, it can be further processed at a cost of $12,000 and converted into 12,000 units of Deluxe and 6,000 units of Super. The selling price of Deluxe and Super are $30 and $20, respectively. The incremental income of processing further would be:

A) $40,000.

B) $28,000.

C) $18,000.

D) $44,000.

E) $12,000.

78) Cornish Company had the following results of operations for the past year:

 

 

 

 

 

 

 

 

 

Sales (20,000 units at $22)

 

 

 

$

440,000

 

 

Direct materials and direct labor

$

200,000

 

 

 

 

 

Overhead (40% variable)

 

100,000

 

 

 

 

 

Selling and administrative expenses (all fixed)

 

92,000

 

 

(392,000

)

 

Operating income

 

 

 

$

48,000

 

 

A foreign company offers to buy 3,000 units at $17.00 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. If Cornish accepts the offer, its profits will:

A) Decrease by $4,500.

B) Increase by $4,500.

C) Decrease by $300.

D) Increase by $13,500.

E) Increase by $15,000.

79) Elliot Company can sell all of its products A and Z that it can produce, but it has limited production capacity. It can produce 8 units of A per hour or 10 units of Z per hour, and it has 20,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for Elliot Company?

A) 84,000 units of A and 60,000 units of Z.

B) 48,000 units of A and 80,000 units of Z.

C) 60,000 units of A and 100,000 units of Z.

D) 120,000 units of A and 0 units of Z.

E) 0 units of A and 200,000 units of Z.

80) Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $3,000. The division sales for the year were $1,050,000 and the variable costs were $860,000. The fixed costs of the division were $193,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

A) $57,900 decrease

B) $132,100 decrease

C) $54,900 decrease

D) $190,000 increase

E) $190,000 decrease

81) Granfield Company is considering eliminating its backpack division, which reported an operating loss for the recent year of $42,000. The division sales for the year were $960,000 and the variable costs were $475,000. The fixed costs of the division were $527,000. If the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on Granfield's operating income for eliminating this business segment would be:

A) $485,000 decrease

B) $210,800 increase

C) $274,200 decrease

D) $485,000 increase

E) $274,200 increase

82) Granfield Company has a piece of manufacturing equipment with a book value of $40,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,000. Granfield can purchase a new machine for $120,000 and receive $22,000 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

A) $22,000 decrease

B) $76,000 increase

C) $18,000 decrease

D) $52,000 increase

E) $22,000 increase

83) Beta Inc. can produce a unit of Zed for the following costs:

 

 

 

 

 

Direct material

$

10

 

Direct labor

 

20

 

Overhead

 

50

 

Total costs per unit

$

80

 

An outside supplier offers to provide Beta with all the Zed units it needs at $58 per unit. If Beta buys from the supplier, it will still incur 40% of its overhead. Beta should:

A) Buy Zed since the relevant cost to make it is $60.

B) Make Zed since the relevant cost to make it is $60.

C) Buy Zed since the relevant cost to make it is $80.

D) Make Zed since the relevant cost to make it is $30.

E) Buy Zed since the relevant cost to make it is $30.

84) To determine a product selling price based on the total cost method, management should include:

A) Total production and nonproduction costs plus a markup.

B) Total production and nonproduction costs only.

C) Total production costs plus a markup.

D) Total nonproduction costs plus a markup.

E) Only a markup.

85) Assume markup percentage equals desired profit divided by total costs. What is the correct calculation to determine the dollar amount of the markup per unit?

A) Total cost times markup percentage.

B) Total cost per unit times markup percentage per unit.

C) Total cost per unit divided by markup percentage per unit.

D) Markup percentage per unit divided by total cost per unit.

E) Markup percentage divided by total cost.

86) Wade Company is operating at 75% of its manufacturing capacity of 140,000 product units per year. A customer has offered to buy an additional 20,000 units at $32 each and sell them outside the country so as not to compete with Wade. The following data are available:

Costs at 75% capacity:

Per Unit

 

Total

Direct materials

$

12.00

 

 

$

1,260,000

 

Direct labor

 

9.00

 

 

 

945,000

 

Overhead (fixed and variable)

 

15.00

 

 

 

1,575,000

 

Totals

$

36.00

 

 

$

3,780,000

 

    

In producing 20,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $6 per unit would be incurred. What is the effect on income if Wade accepts this order?

A) Income will decrease by $4 per unit.

B) Income will increase by $4 per unit.

C) Income will increase by $5 per unit.

D) Income will decrease by $5 per unit.

E) Income will increase by $11 per unit.

87) Derby Inc. manufactures a product which contains a small motor. The company has always purchased this motor from a supplier for $125 each. Derby recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the motor instead of buying it. The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost.

   

 

 

 

 

Direct material

$

38

 

Direct labor

 

50

 

Overhead (fixed and variable)

 

75

 

Total

$

163

 

  

The required volume of output to produce the motors will not require any incremental fixed overhead. Incremental variable overhead cost is $21 per motor. What is the effect on income if Derby decides to make the motors?

A) Income will decrease by $16 per unit.

B) Income will increase by $16 per unit.

C) Income will increase by $23 per unit.

D) Income will decrease by $23 per unit.

E) Income will increase by $39 per unit.

88) A company has already incurred a $55,000 cost in partially producing its three products. Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing. Based on this information, should any products be processed further?

  

Product

Unfinished

Selling Price

 

Finished

Selling Price

 

Further

Processing Costs

A

$

72

 

 

$

108

 

 

$

35

 

 

B

 

83

 

 

 

124

 

 

 

42

 

 

C

 

94

 

 

 

141

 

 

 

45

 

 

A) All of these products should be processed further.

B) None of these products should be processed further.

C) Products A and B should be processed further.

D) Products B and C should be processed further.

E) Products A and C should be processed further.

89) Bandy Corporation owns a machine that manufactures lawn game sets. Production time for the croquet set is 10 units per hour and for the volleyball set is 8 units per hour. The machine's capacity is 1,500 hours per year. Both products are sold to a single customer who has agreed to buy all of the company's output up to a maximum of 4,000 croquet sets and 10,000 volleyball sets. Selling prices and variable costs per unit are shown below. Based on this information, what is Bandy Corporation's most profitable sales mix?

   

 

Croquet Set

 

Volleyball Game

Selling price per unit

$

75

 

 

$

62

 

Variable costs per unit

 

42

 

 

 

25

 

A) 15,000 croquet sets.

B) 12,000 volleyball sets.

C) 4,000 croquet sets and 10,000 volleyball sets.

D) 4,000 croquet sets and 8,800 volleyball sets.

E) 2,500 croquet sets and 10,000 volleyball sets.

90) The Mad Hatter Company owns a machine that manufactures two types of chimney caps. Production time is .20 hours for cap A and .40 hours for cap B. The machine's capacity is 2,000 hours per year. Both products are sold to a single customer who has agreed to buy all of the company's output up to a maximum of 1,000 units of cap A and 6,000 units of cap B. Selling prices and variable costs per unit are shown below. Based on this information, what is Mad Hatter's most profitable sales mix?

 

Cap A

 

Cap B

Selling price per unit

$

80

 

 

$

60

 

Variable costs per unit

 

53

 

 

 

42

 

A) 10,000 units of cap A.

B) 5,000 units of cap B.

C) 1,000 units of cap A and 5,000 units of cap B.

D) 1,000 units of cap A and 6,000 units of cap B.

E) 1,000 units of cap A and 4,500 units of cap B.

91) What decision rule should be followed when deciding if a business segment should be eliminated?

A) Segments generating a net loss should always be eliminated.

B) Segments with revenues that are more than avoidable expenses should be considered for elimination.

C) Segments with revenues that are more than unavoidable expenses should be considered for elimination.

D) Segments with revenues that are less than avoidable expenses should be considered for elimination.

E) Segments with revenues that are less than unavoidable expenses should be considered for elimination.

92) Rocko Inc. has a machine with a book value of $50,000 and a five-year remaining life. A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine. The new machine will reduce variable manufacturing costs by $14,000 per year over its five-year life. Should the machine be replaced?

A) Yes, because income will increase by $14,000 per year.

B) Yes, because income will increase by $23,000 in total.

C) No, because the company will be $23,000 worse off in total.

D) No, because the income will decrease by $14,000 per year.

E) Rocko will be not be better or worse off by replacing the machine.

93) Janko Wellspring Inc. has a pump with a book value of $24,000 and a four-year remaining life. A new, more efficient pump, is available at a cost of $45,000. Janko can also receive $8,000 for trading in the old pump. The new pump will reduce variable costs by $10,000 per year over its four-year life. Should the pump be replaced?

A) Yes, because income will increase by $3,000 in total.

B) Yes, because income will increase by $3,000 per year.

C) No, because the company will be $3,000 worse off in total.

D) No, because income will decrease by $10,000 per year.

E) No, Janko will record a loss of $16,000 if they replace the pump.

94) Janko Wellspring Inc. has a pump with a book value of $24,000 and a four-year remaining life. A new, more efficient pump, is available at a cost of $45,000. Janko can also receive $8,000 for trading in the old pump. The new pump will reduce variable costs by $10,000 per year over its four-year life. The costs not relevant to the decision of whether or not to replace the pump are:

A) $40,000.

B) $8,000.

C) $10,000.

D) $24,000.

E) $16,000.

95) Dragoo Building Inc. has a crane with a book value of $240,000 and a four-year remaining life. A new crane is available at a cost of $615,000. Dragoo can also receive $48,000 for trading in the old pump. The new crane will reduce variable costs by $145,000 per year over its four-year life. The total impact to Dragoo over the crane's four-year life is:

A) Increase of $13,000.

B) Increase of $23,000.

C) Decrease of $13,000.

D) Decrease of $615,000.

E) Decrease of $48,000.

96) J&H Company has a router platform with a book value of $65,000 and a three-year remaining life. A new router platform is available at a cost of $125,000, and J&H can also receive $16,000 for trading in the old router platform. The new router platform will reduce variable manufacturing costs by $31,000 per year over its three-year life. Should the router platform be replaced?

A) Yes, as will increase income by $31,000 in total.

B) Yes, as it is always important to have the current technology.

C) No, it will decrease income by $16,000 in total.

D) Yes, as the company will increase income by $16,000 total.

E) J&H will be not be better or worse off by replacing the router platform.

97) iSooky has a spotter truck with a book value of $40,000 and a remaining useful life of five years. At the end of the five years the spotter truck will have a zero salvage value. The market value of the spotter truck is currently $32,000. iSooky can purchase a new spotter truck for $120,000 and receive $31,000 in return for trading in its old spotter truck. The new spotter truck will reduce variable manufacturing costs by $25,000 per year over the five-year life of the new spotter truck. The total increase or decrease in income by replacing the current spotter truck with the new truck (ignoring the time value of money) is:

A) $31,000 decrease

B) $31,000 increase

C) $36,000 decrease

D) $120,000 decrease

E) $36,000 increase

98) Janko Wellspring Inc. has a pump with a book value of $24,000 and a four-year remaining life. A new, more efficient pump, is available at a cost of $45,000. Janko can also receive $8,000 for trading in the old pump. The new pump will reduce variable costs by $10,000 per year over its four-year life. The costs not relevant to the decision of whether or not to replace the pump are:

A) $40,000.

B) $8,000.

C) $10,000.

D) $24,000.

E) $16,000.

99) iSooky has a spotter truck with a book value of $40,000 and a remaining useful life of five years. At the end of the five years the spotter truck will have a zero salvage value. The market value of the spotter truck is currently $32,000. iSooky can purchase a new spotter truck for $120,000 and receive $31,000 in return for trading in its old spotter truck. The new spotter truck will reduce variable manufacturing costs by $25,000 per year over the five-year life of the new spotter truck. The costs not relevant to the decision of whether or not to replace the spotter truck are:

A) $31,000.

B) $25,000.

C) $125,000.

D) $120,000.

E) $40,000.

100) Logan Company can sell all of the standard and premier products they can produce, but it has limited production capacity. It can produce 6 standard units per hour or 4 premier units per hour, and it has 36,000 production hours available. Contribution margin per unit is $24 for the standard product and $30 for the premier product. What is the most profitable sales mix for Logan Company?

A) 0 standard units and 144,000 premier units.

B) 180,000 standard units and 24,000 premier units.

C) 216,000 standard units and 0 premier units.

D) 36,000 standard units and 120,000 premier units.

E) 120,000 standard units and 64,000 premier units.

101) Logan Company can sell all of the standard and premier products they can produce, but it has limited production capacity. It can produce 6 standard units per hour or 4 premier units per hour, and it has 36,000 production hours available. Contribution margin per unit is $24 for the standard product and $30 for the premier product. What is the total contribution margin if Logan chooses the most profitable sales mix?

A) $7,280,000.

B) $8,800,000.

C) $4,960,000.

D) $5,184,000.

E) $6,704,000.

102) Bricktan Inc. makes three products, basic, classic, and deluxe. The maximum Bricktan can sell is 715,000 units of basic, 420,000 units of classic, and 120,000 units of deluxe. Bricktan has limited production capacity of 90,000 hours. It can produce 10 units of basic, 8 units of classic, and 4 units of deluxe per hour. Contribution margin per unit is $15 for the basic, $25 for the classic, and $55 for the deluxe. What is the most profitable sales mix for Bricktan Inc.?

A) 71,500 basic, 420,000 classic and 240,000 deluxe.

B) 150,000 basic, 120,000 classic and 240,000 deluxe.

C) 300,000 basic, 240,000 classic and 120,000 deluxe.

D) 600,000 basic, 0 classic and 120,000 deluxe.

E) 75,000 basic, 420,000 classic and 120,000 deluxe.

103) Bricktan Inc. makes three products, basic, classic, and deluxe. The maximum Bricktan can sell is 75,000 units of basic, 420,000 units of classic, and 120,000 units of deluxe. Bricktan has limited production capacity of 90,000 hours. It can produce 10 units of basic, 8 units of classic, and 4 units of deluxe per hour. Contribution margin per unit is $15 for the basic, $25 for the classic, and $55 for the deluxe. What is the total contribution margin if Bricktan chooses the most profitable sales mix?

A) $8,000,000.

B) $9,700,000.

C) $15,500,000.

D) $18,225,000.

E) $12,800,000.

104) Rosie's Company has three products, P1, P2, and P3. The maximum Rosie's can sell is 65,000 units of P1, 24,000 units of P2, and 12,000 units of P3. Rosie's has limited production capacity of 9,000 hours. It can produce 12 units of P1, 6 units of P2, and 3 units of P3 per hour. Contribution margin per unit is $5 for the P1, $15 for the P2, and $25 for the P3. What is the most profitable sales mix for Rosie's Company?

A) 12,000 P1, 24,000 P2, 12,000 P3.

B) 10,800 P1, 24,000 P2, 12,000 P3.

C) 12,000 P1, 20,000 P2, 1,200 P3.

D) 16,800 P1, 20,000 P2, 12,000 P3.

E) 10,800 P1, 25,000 P2, 10,800 P3.

105) JK Company can sell all of the plush and supreme products it can produce, but it has limited production capacity. It can produce 4 plush units per hour or 2 supreme units per hour, and it has 2,000 production hours available. Contribution margin per unit is $214 for the plush product and $300 for the supreme product. What is the most profitable sales mix for JK Company?

A) 0 plush units and 4,000 supreme units.

B) 4,000 plush units and 4,000 supreme units.

C) 8,000 plush units and 0 supreme units.

D) 8,000 plush units and 4,000 supreme units.

E) 4,000 plush units and 2,000 supreme units.

106) JK Company can sell all of the plush and supreme products it can produce, but it has limited production capacity. It can produce 4 plush units per hour or 2 supreme units per hour, and it has 2,000 production hours available. Contribution margin per unit is $214 for the plush product and $300 for the supreme product. What is the total contribution margin if JK chooses the most profitable sales mix?

A) $824,000.

B) $1,424,000.

C) $1,648,000.

D) $1,712,000.

E) $2,400,000.

107) Valdez Company is considering eliminating its kitchen division, which reported an operating loss of $53,000 for the past year. Kitchen division sales for the year were $1,040,000, and its variable costs were $775,000. The fixed costs of the division were $318,000. If the kitchen division is dropped, 60% of the fixed costs allocated to it could be eliminated. The impact on Valdez's operating income from eliminating this business segment would be:

A) $74,200 decrease

B) $265,000 increase

C) $274,200 decrease

D) $74,200 increase

E) $265,000 decrease

108) Valber Company is considering eliminating its phone division. The company allocates fixed costs based on sales. If the phone division is dropped, $150,000 of the fixed costs allocated to that division could be eliminated. The impact on Valber's operating income from eliminating the phone division would be:

 

Desktops

 

Laptops

 

Tablets

 

Phones

Sales

$

356,000

 

 

$

871,500

 

 

$

694,000

 

 

$

975,000

 

 

Variable costs

 

201,000

 

 

 

635,000

 

 

 

528,000

 

 

 

795,000

 

 

Contribution margin

 

155,000

 

 

 

236,500

 

 

 

166,000

 

 

 

180,000

 

 

Fixed costs

 

71,200

 

 

 

174,300

 

 

 

138,800

 

 

 

195,000

 

 

Net income (loss)

 

83,800

 

 

 

62,200

 

 

 

27,200

 

 

 

(15,000

)

 

A) $30,000 increase

B) $150,000 increase

C) $150,000 decrease

D) $15,000 increase

E) $30,000 decrease

109) Carns Company is considering eliminating its small tools division, which reported an operating loss for the recent year of $85,000. Division sales for the year were $1,310,000 and its variable costs were $1,175,000. The fixed costs of the division were $220,000. If the kitchen division is dropped, 45% of the fixed costs allocated it could be eliminated. The impact on Carns's operating income from eliminating the small tools division would be:

A) $74,200 decrease

B) $36,000 decrease

C) $220,000 decrease

D) $36,000 increase

E) $99,000 decrease

110) Gion Company is considering eliminating its windows division, which reported an operating loss for the recent year of $105,000. Division sales for the year were $1,110,000 and its variable costs were $975,000. The fixed costs of the division were $220,000. If the windows division is dropped, 65% of the fixed costs allocated to it could be eliminated. The impact on Gion's operating income from eliminating this business segment would be:

A) $7,200 decrease

B) $8,000 increase

C) $143,000 decrease

D) $143,000 increase

E) $8,000 decrease

111) Sammy Company is considering eliminating its commercial division. The company allocates fixed costs based on division sales. If the commercial division is dropped, $100,000 of the fixed costs allocated to it could be eliminated. The impact on Sammy's operating income from eliminating the commercial division would be:

 

Garden

 

Farm

 

Commercial

 

Sales

$

678,000

 

 

$

920,000

 

 

$

692,000

 

 

Variable costs

 

372,900

 

 

 

414,000

 

 

 

649,800

 

 

Contribution margin

 

305,100

 

 

 

506,000

 

 

 

42,200

 

 

Fixed costs

 

247,200

 

 

 

335,500

 

 

 

252,400

 

 

Net income (loss)

 

57,900

 

 

 

170,500

 

 

 

(210,200

)

 

A) $10,200 decrease

B) $45,000 increase

C) $57,800 increase

D) $15,000 increase

E) $57,800 decrease

112) Pinkin Inc. needs to determine a price for a new phone model. Pinkin desires a 25% markup on the total cost of the phone. Pinkin expects to sell 30,000 phones. Additional information is as follows:

 

 

 

 

Variable product cost per unit

$

75

 

Variable administrative cost per unit

 

50

 

Total fixed overhead

 

85,000

 

Total fixed administrative

 

65,000

 

 

Using the total cost method what price should Pinkin charge?

A) $156.10

B) $162.50

C) $130.10

D) $142.50

E) $161.25

113) Galla Inc. needs to determine a price for a new product. Galla desires a 25% markup on the total cost of the product. Galla expects to sell 5,000 units. Additional information is as follows:

 

 

 

 

Variable product cost per unit

$

15

 

Variable administrative cost per unit

 

10

 

Total fixed overhead

 

45,000

 

Total fixed administrative

 

18,000

 

Using the total cost method what price should Galla charge?

A) $56

B) $47

C) $62

D) $30

E) $42

114) Galla Inc. operates in a highly competitive market where the market price for its product is $170 per unit. Galla desires a $15 profit per unit. Galla expects to sell 5,000 units. Additional information is as follows:

 

 

 

 

Variable product cost per unit

$

15

 

Variable administrative cost per unit

 

10

 

Total fixed overhead

 

45,000

 

Total fixed administrative

 

18,000

 

 

Using target costing, what is the target cost?

A) $135.00

B) $160.00

C) $130.00

D) $145.00

E) $155.00

115) Jaybird Company operates in a highly competitive market where the market price for its product is $50 per unit. Jaybird desires a $15 profit per unit. Jaybird expects to sell 5,000 units. Additional information is as follows:

 

 

 

 

 

Variable product cost per unit

$

15

 

Variable administrative cost per unit

 

10

 

Total fixed overhead

 

45,000

 

Total fixed administrative

 

18,000

 

  

To achieve the target cost per unit, Jaybird must reduce total expenses by how much?

A) $14,500

B) $3,500

C) $23,000

D) $20,000

E) $13,000

116) Pauley Company needs to determine a markup for a new product. Pauley expects to sell 15,000 units and wants a target profit of $22 per unit. Additional information is as follows:

 

 

 

 

 

Variable product cost per unit

$

19

 

Variable administrative cost per unit

 

11

 

Total fixed overhead

 

13,500

 

Total fixed administrative

 

21,000

 

 

Using the variable cost method, what markup percentage to variable cost should be used?

A) 71%

B) 76%

C) 92%

D) 81%

E) 80%

117) Hordel Company needs to determine a markup for a new product. Hordel expects to sell 5,000 units and wants a target profit of $82 per unit. Additional information is as follows:

 

 

 

 

 

Variable product cost per unit

$

79

 

Variable administrative cost per unit

 

21

 

Total fixed overhead

 

42,000

 

Total fixed administrative

 

31,000

 

 

Using the variable cost method, what markup percentage to variable cost should be used?

A) 80.1%

B) 98.20%

C) 94.1%

D) 91.7%

E) 96.6%

118) Yelk Garage uses time and materials pricing. It is setting prices for next year using the following information:

 

 

Labor rate, including fringe benefits

$

50

per hour

Annual labor hours

 

3,350

hours

Annual materials purchases

$

825,000

 

Materials purchasing, handling, and storage

$

46,000

 

Overhead for depreciation, taxes, insurance, etc.

$

67,000

 

Target profit margin for both labor and materials

 

20

%

 

What should Yelk set as the direct labor rate per hour?

A) $70 per hour.

B) $50 per hour.

C) $64 per hour.

D) $100 per hour.

E) $84 per hour.

119) Yelk Garage uses time and materials pricing. It is setting prices for next year using the following information:

 

Labor rate, including fringe benefits

$

50

per hour

Annual labor hours

 

3,350

hours

Annual materials purchases

$

825,000

 

Materials purchasing, handling, and storage

$

41,250

 

Overhead for depreciation, taxes, insurance, etc.

$

67,000

 

Target profit margin for both labor and materials

 

20

%

 

What should Yelk set as the materials markup per dollar of materials used?

A) 25%.

B) 5%.

C) 20%.

D) 35%.

E) 30%.

120) Carly's Clips charges for their grooming services based on the following:

 

 

Direct labor rate

$

60

per hour

Materials markup

 

30

%

 

Using time and materials pricing, what is the total price for a job requiring 3 direct labor hours and $50 of materials? 

A) $195.

B) $230.

C) $245.

D) $180.

E) $250.

121) Aven Salon charges for their services based on the following:

 

 

Direct labor rate

$

90

per hour

Materials markup

 

40

%

Using time and materials pricing, what is the total price for services requiring 4 direct labor hours and $150 of materials?

A) $510.

B) $420.

C) $600.

D) $570.

E) $360.

122) Shale Remodeling uses time and materials pricing. It is setting prices for next year using the following information:

 

 

Labor rate, including fringe benefits

$

75

per hour

Annual labor hours

 

6,350

hours

Annual materials purchase

$

1,206,250

 

Materials purchasing, handling, and storage

$

241,250

 

Overhead for depreciation, taxes, insurance, etc.

$

670,000

 

Target profit margin for both labor and materials

 

25

%

   

What should Shale set as the materials markup per dollar of materials used?

A) 25%.

B) 45%.

C) 40%.

D) 20%.

E) 50%.

123) Shale Remodeling uses time and materials pricing. It is setting prices for next year using the following information:

 

 

Labor rate, including fringe benefits

$

75

per hour

Annual labor hours

 

6,350

hours

Annual materials purchases

$

1,206,250

 

Materials purchasing, handling, and storage

$

241,250

 

Overhead for depreciation, taxes, insurance, etc.

$

666,750

 

Target profit margin for both labor and materials

 

25

%

 

What should Shale set as rate per hour of labor hour?

A) $250.

B) $200.

C) $150.

D) $225.

E) $180.

124) Shale Remodeling uses time and materials pricing. It is setting prices for next year using the following information:

 

 

Labor rate, including fringe benefits

$

75

per hour

Annual labor hours

 

6,350

hours

Annual materials purchases

$

1,206,250

 

Materials purchasing, handling, and storage

$

241,250

 

Overhead for depreciation, taxes, insurance, etc.

$

666,750

 

Target profit margin for both labor and materials

 

25

%

 

What is the total price for a project requiring 160 direct labor hours and $150,000 of materials?

A) $184,000.

B) $210,000.

C) $256,000.

D) $225,000.

E) $253,500.

125) Weng CPAs charges for their services based on the following:

 

 

Labor rate

$

160

per hour

Materials markup

 

40

%

 

Using time and materials pricing, what is the total price for services requiring 8 labor hours and $50 of materials?

A) $1,350.

B) $1,450.

C) $1,300.

D) $1,330.

E) $1,360.

126) Identify the five steps involved in managerial decision-making.

127) Good management accounting indicates that projects be evaluated using relevant data. In choosing among alternatives, what factors (considerations) are relevant?

128) A company received a special one-time order to buy 6,000 of its portable radios for $20. The radios generally sell for $25. Each radio's total manufacturing cost is $21.50, which includes $2.50 of allocated fixed overhead. Should the company accept the special order?

129) A company manufactures two products. Each unit of product X requires 10 machine hours and each unit of product Y requires 4 machine hours. The company's productive capacity is limited to 180,000 machine hours. Each unit of product X sells for $15 and has variable costs of $7. Each unit of product Y sells for $8 and has variable costs of $3. If the company can sell all that it produces of both products, what should the sales mix be?

130) Goodfellow Company had the following results of operations for the past year:

Sales (8,000 units at $6.80)

$ 54,400

Materials and direct labor

(20,000)

Overhead (40% variable)

(10,000)

Selling and administrative expenses (all fixed)

(6,000)

Operating income

$ 18,400

A foreign company offers to buy 2,000 units at $5.00 per unit. In addition to variable manufacturing costs, there would be shipping costs of $1,200 in total on these units. Prepare an analysis of this additional business to show whether Goodfellow should take this order.

131) Variations Company had the following results of operations for the past year:

Sales (8,000 units at $7 per unit)

$ 56,000

Variable manufacturing costs

(30,000)

Fixed manufacturing costs

(6,000)

Fixed selling and administrative expenses

(4,500)

Operating income

$ 15,500

A foreign company offers to buy 700 units at $4 per unit. In addition to variable manufacturing costs, there would be an export cost of $0.30 per unit. Prepare an analysis of this additional business to show whether Variations should take this order.

132) A company produces three different products that all require processing on the same machines. The company has only 27,000 machine hours available in each year. Production information for each product is:

A

B

C

Sales price per unit

$20.00

$38.00

$35.00

Variable costs per unit

$12.00

$26.00

$17.00

Machine hours necessary to produce one unit

2.5

4.0

4.50

Required:

(1) Determine the preferred sales mix if there are no market constraints on any of the products.

(2) Determine the preferred sales mix if the demand is limited to 5,000 units for each product.

(3) Determine the preferred sales mix if the demand is limited to 3,000 units for each product.

133) A company puts four products through a common production process. This process costs $100,000 each year. The four products can be sold when they emerge from this process at the "split-off point," or processed further and then sold. Data about the four products for the coming period are:

Unit Sales

Unit Sales

Price per

Price per

unit at

unit after

Additional

Split-Off

Further

Processing

Product

Volume

Point

Processing

Costs

Stroller

20,000 lb.

$28.00

$42.00

$400,000

Walker

10,000 lb.

7.00

28.00

144,000

Jogger

5,000 lb.

36.00

58.00

120,000

Runner

5,000 lb.

18.00

22.00

40,000

Determine which products should be sold at the split-off point and which should be processed further.

134) A company has just received a special, one-time order for 1,000 units. Producing the order will have no effect on the production and sales of other units. The buyer's name will be stamped on each unit, at a cost of $1.50 per unit. Normal cost data, excluding stamping, follows:

Direct materials…………………………… $ 10 per unit

Direct labor……………………………….. 16 per unit

Variable overhead………………………… 4 per unit

Allocated fixed overhead…………………. 12 per unit

Allocated fixed selling expense…………… 8 per unit

Prepare an analysis that indicates the selling price per unit this company will require to earn $3,000 on the order.

135) Spilker Linens Store has three departments: Bath, Kitchen, and Bedding. The most recent income statement, showing the total operating profit and departmental results is shown below:

Total

Bath

Kitchen

Bedding

Sales

$2,100,000

$1,000,000

$600,000

$500,000

Cost of goods sold

(1,260,000)

(500,000)

(400,000)

(360,000)

Gross profit

840,000

500,000

200,000

140,000

Direct expenses

(420,000)

(200,000)

(100,000)

(120,000)

Allocated expenses

(350,000)

(100,000)

(75,000)

(175,000)

Net income (loss)

$ 70,000

$ 200,000

$ 25,000

$(155,000)

Based on this income statement, management is planning on eliminating the Bedding department, as it is generating a net loss. If the Bedding department is eliminated, the Kitchen department will expand to fill the space, but sales will not change in total, nor will direct expenses. None of Bedding's allocated expenses will be avoided, but they will be reallocated to Bath and Kitchen. Bath will be allocated $100,000 additional expenses, and Kitchen will be allocated $75,000 additional expenses. Prepare a new income statement for Spilker Linens Store, showing the results if the Bedding Department is eliminated and indicate whether eliminating the department is advisable.

136) Luxury Linens has three departments: Bath, Kitchen, and Bedding. The most recent income statement, showing the total operating profit and departmental results is shown below:

Total

Bath

Kitchen

Bedding

Sales

$2,100,000

$1,000,000

$500,000

$600,000

Cost of goods sold

(1,260,000)

(500,000)

(360,000)

(400,000)

Gross profit

840,000

500,000

140,000

200,000

Direct expenses

(420,000)

(200,000)

(120,000)

(100,000)

Allocated expenses

(325,000)

(100,000)

(150,000)

(75,000)

Net income (loss)

$ 95,000

$ 200,000

$(130,000)

$25,000

Based on this income statement, management is considering eliminating the Kitchen department. If the Kitchen department is eliminated, the other departments will expand to fill the space but sales are not expected to change. Twenty percent of Kitchen's allocated expenses will be avoided due to restructuring and the remainder reallocated equally to Bath and Bedding. Show an analysis indicating whether the Kitchen department should be eliminated.

137) Generalware, Inc. sells a single product and reports the following results from sales of 100,000 units:

Sales ($45 unit) …………..…………….… $4,500,000

Less costs and expenses:

Direct materials ($16/unit)………….… $1,600,000

Direct labor ($9/unit)…………….….… 900,000

Variable overhead ($3/unit)…….…….. 300,000

Fixed overhead ($8.10/unit)…….......... 810,000

Variable administrative ($4.50/unit)…. 450,000

Fixed administrative ($4/unit)………... 400,000

Total costs and expenses……………... $(4,460,000)

Operating income………………………… $ 40,000

A foreign buyer wants to purchase 15,000 units. However, they are willing to pay only $36 per unit for this one-time order. They also agree to pay all freight costs. To fill the order, Generalware will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance. No additional administrative costs (variable or fixed) will be incurred in association with this special order.

Required:

(1) Should Generalware accept the order if it does not affect regular sales? Explain.

(2) Assume that Generalware can accept the special order only by giving up 5,000 units of its normal sales. Should the company accept the special order under these circumstances?

138) A company is planning to introduce a new portable computer to its existing product line. Management must decide whether to make the computer case or buy it from an outside supplier. The lowest outside price is $90. If the case is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the following:

Per case

Direct materials $ 40.00

Direct labor 32.00

Variable overhead 10.00

Equipment depreciation 6.50

Building rental 10.00

Allocated fixed overhead 7.50

Total cost $106.00

Required:

(1) Determine whether the company should make the cases or buy them from the outside supplier.

(2) What other factors, besides cost, should the company consider?

139) Leopal Company is considering replacing a freight elevator. The current freight elevator has a book value of $37,500 and a remaining useful life of four years, at which time its salvage value will be zero. The current market value of the freight elevator is $5,000. Variable operating costs per year are $201,600 per year. Leopal has identified the following two possible replacement options. Prepare an analysis of the alternatives and whether either option should be used to replace the current elevator.

Option A

Option B

Cost

$124,600

$140,200

Variable operating costs per year

$177,000

$163,600

140) Chipper Company is considering replacing a delivery vehicle. The current vehicle has a book value of $14,500 and a remaining useful life of three years, at which time its salvage value will be zero. The current market value of the vehicle is $9,000. Variable operating costs per year are $15,600 per year. The new vehicle has a cost of $32,500. Operating costs for the new vehicle are $9,200 per year.

141) Mays Company can sell all of product A that it produces but only 160,000 units of product Z. The company has limited production capacity. It can produce 6 units of A per hour or 10 units of Z per hour, and it has 30,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for this company?

142) Marshall Company currently manufactures one of its parts at a cost of $3.25 per unit. This cost is based on a normal production rate of 50,000 units. Variable costs are $2.10 per unit, fixed costs related to making this part are $40,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Marshall is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Support your answer with analyses.

143) Relevant costs are also known as ________.

144) A(n) ________ requires a future outlay of cash and is relevant for current and future decision making.

145) A(n) ________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.

146) A(n) ________ arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions.

147) ________ revenues are the additional revenue generated by selecting a certain course of action over another..

148) The process of buying goods or services from an external supplier is called ________.

149) A ________ is the combination of products sold by a company.

150) In this chapter, you examined several short-term managerial decision tasks. Identify (list) any three of these types of decision tasks:

________; ________; ________

Document Information

Document Type:
DOCX
Chapter Number:
25
Created Date:
Jun 30, 2025
Chapter Name:
Chapter 25 Relevant Costing for Managerial Decisions
Author:
John J. Wild

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