Test Bank Ch4 Fundamentals of Cost Analysis for Decision

Fundamentals of Cost Accounting, 6e (Lanen)

Chapter 4 Fundamentals of Cost Analysis for Decision Making

1) Differential analysis involves the comparison of one or more alternative courses of action with the status quo.

2) If there is only one alternative course of action and the status quo is unacceptable, then there really is no decision to make.

3) A decision must involve at least two alternative courses of action.

4) Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of revenues and costs (i.e., the time value of money).

5) Short-run decisions often have long-run implications.

6) Only variable costs can be differential costs.

7) Fixed costs are always classified as sunk costs in differential cost analysis.

8) The full-cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost.

9) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.

10) The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis.

11) Target costs equal the difference between the target selling price and the desired profit margin.

12) Dumping occurs when a company exports its product to consumers in another country at an export price that is below the domestic price.

13) Price discrimination is the practice of selling identical goods or services to different customers at different prices.

14) Peak-load pricing is the practice of setting prices lowest when the quantity demanded for the product approaches the physical capacity to produce it.

15) The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally or (b) purchase needed items externally.

16) The reason opportunity costs are not included in the accounting system is because they involve estimates.

17) Financial statements prepared in accordance with generally accepted accounting principles (GAAP) provide differential cost information.

18) In the short-run, plant capacity is fixed and product choices have to be made that optimize the use of available capacity.

19) With constrained resources, the important measure of profitability is the contribution margin per unit of scarce resource.

20) The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective.

21) The relevance of a particular cost to a decision is determined by the: (CMA adapted)

A) riskiness of the decision.

B) number of decision variables.

C) amount of the cost.

D) potential effect on the decision.

22) In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? (CMA adapted)

A) Labor.

B) Overhead.

C) Straight-line Depreciation.

D) Selling.

23) Differential costs are: (CMA adapted)

A) the difference in total costs that result from selecting one choice instead of another.

B) the profit foregone by selecting one choice instead of another.

C) a cost that continues to be incurred in the absence of activity.

D) a cost common to all choices in questions and not clearly allocable to any of them.

24) The period of time over which capacity will be unchanged is:

A) long run.

B) sunk cost.

C) short run.

D) product life cycle.

25) Which of the following statements regarding differential costs is (are) false?

(A) The full-cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost.

(B) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.

A) Only A.

B) Only B.

C) Neither A nor B is false.

D) Both A and B are false.

26) Which of the following costs are irrelevant for a special order that will allow an organization to utilize some of its present idle capacity?

A) Direct materials.

B) Indirect materials.

C) Variable overhead.

D) Unavoidable fixed overhead.

27) Which of the following statements regarding special orders is (are) true? 

(A) The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order.

(B) The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis.

A) Only A.

B) Only B.

C) Neither A nor B is true.

D) Both A and B are true.

28) The Arthur Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 20,000 utensils at $0.75 each. Arthur sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits?

A) $400.

B) $800.

C) $1,600.

D) $2,000.

29) The Minton Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000 units at a price of $16 per unit. This special order would not disturb regular sales. Variable shipping and other selling expenses would be an additional $1 per unit for the special order. If the special order is accepted, Minton's operating profits will increase by:

A) $1,000.

B) $1,600.

C) $2,000.

D) $4,000.

30) The following information relates to the Magna Company for the upcoming year, based on 400,000 units.

The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per unit has been made to Magna. Fortunately, there will be no additional operating expenses associated with the order and Magna has sufficient capacity to handle the order. How much will operate profits be increased if Magna accepts the special order?

A) $25,000.

B) $62,500.

C) $100,000.

D) $125,000.

31) The following information relates to a product produced by Faulkland Company:

Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to cover the transportation cost. Although production capacity is 500,000 units per year, Faulkland expects to produce only 400,000 units next year. The product normally sells for $40 each. A customer has offered to buy 60,000 units for $30 each. The customer will pay the transportation company directly for the transportation charges on the units purchased. If Faulkland accepts the special order, the effect on operating profits would be a:

A) $60,000 increase.

B) $180,000 increase.

C) $420,000 increase.

D) $600,000 decrease.

32) If there is excess capacity, the minimum acceptable price for a special order must cover:

A) only variable costs associated with the special order.

B) variable and fixed manufacturing costs associated with the special order.

C) variable and incremental fixed costs associated with the special order.

D) variable costs and incremental fixed costs associated with the special order, plus the contribution margin usually earned on regular units.

33) Park Corporation is preparing a bid for a special order that would require 720 liters of material SUN100. The company already has 560 liters of this raw material in stock that originally cost $6.30 per liter. Material SUN100 is used in the company's main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $5.80 per liter. New stocks of the material can be readily purchased for $6.65 per liter. What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order? (CIMA adapted)

A) $4,592.

B) $4,788.

C) $4,456.

D) $4,176.

34) Tori Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 'as is', but if reworked at a cost of $1,400, it could be sold for $30,800. 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? (CIMA adapted)

A) $(69,100)

B) $(700)

C) $29,400

D) $(39,000)

35) Lafferty Corporation is a specialty component manufacturer with idle capacity. Management would like to use its unused capacity to generate additional profits. A potential customer has offered to buy 6,200 units of component Rocket. Each unit of Rocket requires 8 units of material CES4 and 6 units of material XES7. Data concerning these two materials follow:

Material CES4 is in use in many of the company's products and is routinely replenished. Material XES7 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 Rocket? (CIMA adapted)

A) $528,551

B) $523,280

C) $476,350

D) $484,455

36) Alpha Inc. regularly uses material FLAV4 and currently has in stock 460 liters of the material for which it paid $2,622 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.25 per liter. New stocks of the material can be purchased on the open market for $5.85 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer. The relevant cost of the 800 liters of material FLAV4 is: (CIMA adapted)

A) $5,850.

B) $4,200.

C) $4,404.

D) $4,680.

37) Starla 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 4,200 units of component JOLT. Each unit of JOLT requires 6 units of material OX8 and 9 units of material POW6. Data concerning these two materials follow:

Material OX8 is in use in many of the company's products and is routinely replenished. Material POW6 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 JOLT? (CIMA adapted)

A) $146,790.

B) $199,080.

C) $155,610.

D) $212,340.

38) Tara Inc. is considering using stocks of an old raw material in a special project. The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company $1,136 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.50 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 $75.00 for all 160 kilograms. What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project? (CIMA adapted)

A) $1,040

B) $965

C) $1,136

D) $1,160

39) Which of the following costs are not considered in a differential analysis for a make-or-buy decision?

A) Indirect materials and indirect labor if the item is manufactured internally.

B) Direct materials and direct labor if the item is purchased.

C) Variable overhead if the item is manufactured internally.

D) Fixed overhead that will continue if the item is purchased.

40) The Crispy Baking Company is considering the expansion of its business into door-to-door delivery service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding into the home delivery market?

A) $12,500

B) $17,500

C) $19,750

D) $20,425

41) The time from initial research and development to the time that support to the customer ends is the:

A) product life cycle.

B) short run.

C) target time.

D) predatory price.

42) The price based on customers' perceived value for the product and the price that competitors charge is the:

A) predatory price.

B) target price.

C) target cost.

D) dumping price.

43) The practice of setting the selling price below cost with the intent to drive competitors out of business is: 

A) predatory pricing.

B) target pricing.

C) target costing.

D) peak-load pricing.

44) The practice of setting prices highest when the quantity demanded for the product approaches capacity is:

A) predatory pricing.

B) target pricing.

C) peak-load pricing.

D) price fixing.

45) Agreement among business competitors to set prices at a particular level is:

A) predatory pricing.

B) target pricing.

C) peak-load pricing.

D) price fixing.

46) Exporting a product to another country at a price below the domestic price is:

A) dumping.

B) target pricing.

C) peak-load pricing.

D) price fixing.

47) A target cost is computed as:

A) cost to manufacture plus a desired markup.

B) cost to manufacture plus designated selling expenses.

C) market willingness to pay – cost to manufacture.

D) market willingness to pay – desired profit.

48) The operations of Bridgeton Corporation are divided into the Adams Division and the Carter Division. Projections for the next year are as follows:

Operating income for Bridgeton Corporation as a whole if the Carter Division were dropped would be:

A) $133,000.

B) $112,000.

C) $91,000.

D) $49,000.

49) Damon Industries manufactures 20,000 components per year. The manufacturing costs of the components was determined as follows:

An outside supplier has offered to sell the component for $17. If Damon purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $10,000. If Damon purchases the component from the supplier instead of manufacturing it, the effect on operating profits would be a:

A) $70,000 increase.

B) $50,000 decrease.

C) $10,000 decrease.

D) $30,000 increase.

50) Brevard Industries produces two products. Information about the products is as follows:

The company's fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1 and $40,000 can be directly traced to Product 2. The effect on the firm's profits if Product 2 is dropped would be a:

A) $10,000 increase.

B) $35,000 increase.

C) $35,000 decrease.

D) $10,000 decrease.

51) Which of the following costs would continue to be incurred even if a segment is eliminated?

A) Direct fixed expenses

B) Variable cost of goods sold

C) Common fixed costs

D) Variable selling and administrative expenses

52) AirStep Shoe Company has two retail stores, one in Gainesville and the other in Orlando. The Gainesville store had sales of $100,000, a contribution margin of 35 percent, and a segment margin of $14,000. The company's two stores have total sales of $250,000, contribution margin of 32 percent, and a total segment margin of $31,000. The contribution margin for the Orlando store must have been:

A) $65,000.

B) $170,000.

C) $105,000.

D) $45,000.

53) Carter Industries has two divisions: the West Division and the East Division. Information relating to the divisions for the year just ended is as follows:

Common fixed expenses have been allocated equally to each of the two divisions. Carter's segment margin for the West Division is:

A) $150,000.

B) $102,000.

C) $30,000.

D) $110,000.

54) Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows:

Assume that the fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Ortega for $34. If Ortega Industries purchases the component from the outside supplier, the effect on operating profits would be a:

A) $30,000 decrease.

B) $30,000 increase.

C) $90,000 decrease.

D) $90,000 increase.

55) Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows:

Assume Ortega Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the component from an outside supplier. An outside supplier has offered to sell the component for $34. If Ortega purchases the component from the supplier instead of manufacturing it, the effect on income would be a:

A) $60,000 increase.

B) $10,000 increase.

C) $100,000 decrease.

D) $140,000 increase.

56) The operations of Ranger Corporation are divided into the Stargate Division and the Cosmos Division. Projections for the next year are as follows:

Operating income for Ranger Corporation, as a whole, if the Cosmos Division were dropped would be

A) $45,000.

B) $80,000.

C) $100,000.

D) $120,000.

57) The Hammer Division of Excel Company produces hardened sledge hammers. One-third of Hammer's output is sold to the Government Products Division of Excel; the remainder is sold to outside customers. Hammer's estimated operating profit for the year is:

The Government Products Division has an opportunity to purchase 10,000 hammers of the same quality from an outside supplier on a continuing basis. The Hammer Division cannot sell any additional products to outside customers. Should the Excel Company allow its Government Products Division to purchase the hammers from the outside supplier at $1.25 per unit?

A) No; making the hammers will save Excel $1,500.

B) Yes; buying the hammers will save Excel $1,500.

C) No; making the hammers will save Excel $2,500.

D) Yes; buying the hammers will save Excel $2,500.

58) The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000.

The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $15,000 per year. What are the relevant costs for the "make" alternative?

A) $160,000.

B) $165,000.

C) $175,000.

D) $185,000.

59) The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000.

The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $15,000 per year. At what price would Camel be indifferent to Yukon's offer?

A) $17.00.

B) $17.50.

C) $18.50.

D) $19.50.

60) For the past five years, the MAG Company has produced and sold electronic magnets to chemistry labs throughout the United States. Recently, a strong competitor has entered the market and MAG is considering whether it should continue to produce and sell the electronic magnets. The following information has been gathered to assist management in its decision: 

A) The machinery used to produce the magnet was purchased five years ago for $500,000.

B) Four of the employees who produce magnets would be reassigned to the magnifying glass division.

C) The space now used to produce the magnets would be used to eliminate the need to rent warehouse space.

D) Sales volume (units) is estimated to drop by 50% once the competitor becomes fully operational.

Which of the items listed above is (are) relevant to the decision to continue the production and sale of the electronic magnets?

A) A and C.

B) B and C.

C) C and D.

D) A, B, and D.

61) Which of the following statements about the theory of constraints is (are) true?

(A) The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective.

(B) The theory of constraints focuses on the rate of throughput contribution and minimizing investment and other operating costs.

A) Only A

B) Only B

C) Neither of these is true.

D) Both of these are true.

62) The theory of constraints focuses on minimizing all of the following except: 

A) selling expenses per unit sold.

B) production bottlenecks.

C) investment in buildings.

D) investment in inventories.

63) The Widner Company manufactures two products: Stainless Serving Spoons and Stainless Serving Forks. The costs and revenues are as follows:

Total demand for Spoons is 14,000 units and for Forks is 9,000 units. Machine time is a scarce resource. During the year, 54,000 machine hours are available. Spoons require 5 machine hours per unit, while Forks require 3 machine hours per unit.

How many units of Spoons and Forks should Widner produce?

A) Option A

B) Option B

C) Option C

D) Option D

64) Morgan Inc. has 5,400 machine hours available each month. The following information on the company's three products is available:

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

A) Product 1 first, product 2 second, and product 3 third.

B) Product 2 first, product 3 second, and product 1 third.

C) Product 3 first, product 2 second, and product 1 third.

D) Product 3 first, product 1 second, and product 2 third.

65) Xenos Inc. has 6,600 machine hours available each month. The following information on the company's three products is available:

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

A) Product X first, product Z second, and product Y third.

B) Product Y first, product Z second, and product X third.

C) Product Y first, product X second, and product Z third.

D) Product Z first, product X second, and product Y third.

66) The Garrison Company manufactures two products: Oxy Cleaner and Sonic Cleaner. The costs and revenues are as follows:

Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine hours is a scarce resource. During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while Sonic requires 2.5 machine hours per unit.

How many units of Oxy and Sonic should Garrison produce?

A) Option A

B) Option B

C) Option C

D) Option D

67) The Garrison Company manufactures two products: Oxy Cleaner and Sonic Cleaner. The costs and revenues are as follows:

Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine time is a scarce resource. During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while Sonic requires 2.5 machine hours per unit.

What is the maximum contribution margin Garrison can achieve during a year?

A) $444,250.

B) $1,014,000.

C) $488,000.

D) $855,500.

68) Zantaq Inc. has 5,400 machine hours available each month. The following information on the company's three products is available:

The market demand is limited to 2,000 units of each of the three products. How many units of each should Zantaq produce and sell?

A) Option A

B) Option B

C) Option C

D) Option D

69) Zantaq Inc. has 5,400 machine hours available each month. The following information on the company's three products is available:

The market demand is limited to 2,000 units of each of the three products. What is the maximum possible contribution margin that Zantaq could make in any month?

A) $81,000.

B) $46,500.

C) $43,000.

D) $51,000.

70) Warrior Inc. has 12,000 machine hours available each month. The following information on the company's four products is available:

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

A) Product W first, product X second, product Z third, and product Y last.

B) Product Z first, product W second, product X third, and product Y last.

C) Product X first, product W second, product Y third, and product Z last.

D) Product X first, product Z second, product Y third, and product W last.

71) The Tire Division of Traker Company produces tires for off-road sport vehicles. One-third of Tire's output is sold to an internal division of Traker; the remainder is sold to outside customers. Tire's estimated operating profit for the year is:

The internal division has an opportunity to purchase 10,000 tires of the same quality from an outside supplier on a continuing basis. The Tire Division cannot sell any additional products to outside customers. Should Traker Company allow its internal division to purchase the tires from the outside supplier at $13.00 per unit?  

A) No; making the tires will save Traker $15,000.

B) Yes; buying the tires will save Traker $15,000.

C) No; making the tires will save Traker $30,000.

D) Yes; buying the tires will save Traker $30,000.

72) The Tire Division of Traker Company produces tires for off-road sport vehicles. One-third of Tire's output is sold to an internal division of Traker; the remainder is sold to outside customers. Tire's estimated operating profit for the year is:

The internal division has an opportunity to purchase 10,000 tires of the same quality from an outside supplier on a continuing basis. The Tire Division cannot sell any additional products to outside customers. What is the minimum selling price that Tire should accept from the internal division?

A) $10.00.

B) $13.00.

C) $15.00.

D) $50.00.

73) The Bogart Company produces 5,000 units of item SLM 46 annually at a total cost of $200,000.

The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If Bogart accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's leased facilities could be vacated, reducing lease payments by $30,000 per year. What are the relevant costs for the "make" alternative?

A) $120,000.

B) $175,000.

C) $190,000.

D) $200,000.

74) The Bogart Company produces 5,000 units of item SLM 46 annually at a total cost of $200,000.

The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If Bogart accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's leased facilities could be vacated, reducing lease payments by $30,000 per year. At what price would Bogart be indifferent to Conner's offer?

A) $40.

B) $38.

C) $35.

D) $24.

75) The Rapid Delivery Service is considering the expansion of its business into afternoon retail delivery service. This would require an additional $25,000 in labor costs per month. Company-owned vehicles now used to make morning deliveries to local manufacturers could be used in the afternoons to make retail deliveries. However, it is estimated that an additional $10,000 would be required per month for gas, oil, and maintenance. It is further estimated that the retail delivery use of the trucks would be allocated 45% of the existing $13,000 fixed vehicle costs. What is the differential delivery cost per month for expanding into the retail delivery market?

A) $25,000.

B) $35,000.

C) $39,500.

D) $40,850.

76) The Lamar Company manufactures wiring tools. The company is currently producing well below its full capacity. The Boston Company has approached Lamar with an offer to buy 10,000 tools at $1.75 each. Lamar sells its tools wholesale for $1.85 each; the average cost per unit is $1.83, of which $0.27 is fixed costs. If Lamar were to accept Boston's offer, what would be the increase in Lamar's operating profits?

A) $800

B) $1,000

C) $1,900

D) $2,900

77) The Young Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit. This special order would not disturb regular sales. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. If the special order is accepted, Young's operating profits will increase by:

A) $4,000.

B) $6,400.

C) $8,000.

D) $19,000.

78) The Young Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit. The distributor claims this special order would not disturb regular sales at $42. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. How many units of regular sales could be lost before this contract is not profitable?

A) 0 units

B) 950 units

C) 1,000 units

D) 2,000 units

79) The following information relates to the Jasmine Company for the upcoming year, based on 400,000 units:

The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00 per unit has been made to Jasmine. Fortunately, there will be no additional operating expenses associated with the order and Jasmine has sufficient capacity to handle the order. How much will operating profits increase if Jasmine accepts the special order?

A) $50,000

B) $125,000

C) $200,000

D) $250,000

80) The following information relates to the Jasmine Company for the upcoming year:Sales

The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00 per unit has been made to Jasmine. Fortunately, there will be no additional operating expenses associated with the order; however, Jasmine is operating at full capacity. How much will operating profits increase if Jasmine accepts the special order?

A) $50,000.

B) $125,000.

C) $200,000.

D) Operating profits will not increase as a result of accepting the special order.

81) The following information relates to a product produced by Orca Company:

Fixed selling costs are $1,000,000 per year. Although production capacity is 500,000 units per year, Orca expects to produce only 400,000 units next year. The product normally sells for $80 each. A customer has offered to buy 60,000 units for $60 each. The customer will pay the transportation charge on the units purchased. If Orca accepts the special order, the effect on operating profits would be a:  

A) $120,000 increase.

B) $360,000 increase.

C) $840,000 increase.

D) $1,200,000 decrease.

82) The operations of Winston Corporation are divided into the Blink Division and the Blur Division. Projections for the next year are as follows:

Operating income for Winston Corporation, as a whole, if the Blur Division were dropped would be:

A) $66,500.

B) $56,000.

C) $45,500.

D) $24,500.

83) The operations of Winston Corporation are divided into the Blink Division and the Blur Division. Projections for the next year are as follows:

If the Blur Division were dropped, Blink Division's sales would increase by 30%. If this happened, the operating income for Winston Corporation as a whole would be:  

A) $72,800.

B) $56,000.

C) $79,100.

D) $59,150.

84) Which of the following statements regarding differential costs is (are) true?

(A) The full-cost fallacy occurs when a decision-maker includes fixed manufacturing overhead in the product's cost.

(B) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.

A) Only A

B) Only B

C) Neither of these is true.

D) Both of these are true.

85) Which of the following statements regarding special orders is (are) false?

(A) The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order.

(B) The differential analysis approach to pricing for special orders will always lead to underpricing in the long-run because fixed costs are not included in the analysis.

A) Only A

B) Only B

C) None of these is false.

D) Both of these are false.

86) Which of the following costs are not considered in a differential analysis for a make-or-buy decision?

A) Indirect materials if the item is purchased.

B) Direct labor if the item is manufactured internally.

C) Fixed overhead that will be eliminated if the item is purchased.

D) Factory supervisor salaries that will continue if the item is purchased.

87) For the past five years, the McArthur Company has produced and sold frequency meters to genetics labs throughout the United States. Recently, a strong competitor has entered the market and McArthur is considering whether it should continue to produce and sell the frequency meters. The following information has been gathered to assist management in its decision:

A) Sales volume (units) is estimated to drop by 25% once the competitor becomes fully operational.

B) The equipment used to produce the meters was purchased five-years ago for $1,500,000.

C) The space now used to produce the meters would be reallocated to eliminate the need to rent warehouse space.

D) The share of the CEO's salary allocated to the frequency meters would be reassigned to the oscillator division. 

Which of the items listed above is (are) relevant to the decision to continue the production and sale of the frequency meters?

A) A and C.

B) B and C.

C) C and D.

D) A, B, and D.

88) Which of the following statements about the theory of constraints is (are) true?

(A) The theory of constraints focuses on determining the optimal product mix when two or more resources restrict the attainment of a goal or objective.

(B) The theory of constraints focuses on maximizing the rate of throughput contribution while maximizing investment and other operating costs.

A) Only A

B) Only B

C) Neither of these is true.

D) Both of these are true.

89) The opportunity cost of making a component part in a factory with no excess capacity is the: (CMA adapted)

A) variable manufacturing cost of the component.

B) fixed manufacturing cost of the component.

C) total manufacturing cost of the component.

D) net benefit foregone from the best alternative use of the capacity required.

90) When there is a production constraint, a company should emphasize the products with:

A) the highest unit contribution margins.

B) the highest contribution margin ratios.

C) the highest contribution margin per unit of the constrained resource.

D) the highest contribution margins and contribution margin ratios.

91) A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would:

A) decrease by $20,000 per year.

B) increase by $20,000 per year.

C) decrease by $10,000 per year.

D) increase by $30,000 per year.

92) The King Company has two divisions—North and South. The divisions have the following revenues and expenses:

Management at King is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of:

A) $100,000.

B) $150,000.

C) $(140,000).

D) $50,000.

93) Parton Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Parton's plant manager is considering making the headlights now being purchased from an outside supplier for $11.00 each. The Parton plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4.00 of direct materials, $3.00 of direct labor, and $6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Parton Company to manufacture the headlights should result in a net gain (loss) for each headlight of: (CMA adapted)

A) $(2.00).

B) $1.60.

C) $0.40.

D) $2.80.

94) Item I51 is used in one of Policy Corporation's products. The company makes 18,000 units of this item each year. The company's Accounting Department reports the following costs of producing Item 151 at this level of activity:

An outside supplier has offered to produce Item 151 and sell it to the company for $15.80 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 item 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 $26,000 of these allocated general overhead costs would be avoided.

If management decides to buy Item I51 from the outside supplier rather than to continue making the Item, what would be the annual impact on the company's overall net operating income?

A) Net operating income would decline by $81,800 per year.

B) Net operating income would decline by $55,800 per year.

C) Net operating income would decline by $119,800 per year.

D) Net operating income would decline by $29,800 per year.

95) Liu Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 13,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the components were bought from the outside supplier. In addition, making one  component uses 1 minute on the machine that is the company's current constraint. If the components were bought, this machine time would be freed up for use on another product that requires 2 minutes on the constraining machine and that has a contribution margin of $5.20 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? (CIMA adapted)

A) $22.40.

B) $19.80.

C) $17.28.

D) $19.88.

96) Item N29 is used by Tyner Corporation to make one of its products. A total of 11,000 units of this item are produced and used every year. The company's Accounting Department reports the following costs of producing Item N29 at this level of activity

An outside supplier has offered to make Item N29 and sell it to the company for $21.20 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 Item 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 items were purchased instead of produced internally. In addition, the space used to make Item N29 could be used to make more of one of the company's other products, generating an additional segment margin of $29,000 per year for that product. What would be the impact on the company's overall net operating income of buying Item N29 from the outside supplier?  

A) Net operating income would decline by $38,900 per year.

B) Net operating income would increase by $29,000 per year.

C) Net operating income would decline by $32,600 per year.

D) Net operating income would increase by $19,100 per year.

97) Bacon Company makes four products in a single facility. These products have the following unit product costs:

Additional data concerning these products are listed below.

The grinding machines are the constraint in the production facility. A total of 53,600 minutes is available per month on these machines.

Direct labor is a variable cost in this company.

How many minutes of grinding machine time would be required to satisfy demand for all four products?

A) 56,100

B) 40,900

C) 53,600

D) 13,000

98) Bacon Company makes four products in a single facility. These products have the following unit product costs:

Additional data concerning these products are listed below.

The grinding machines are the constraint in the production facility. A total of 53,600 minutes is available per month on these machines.

Direct labor is a variable cost in this company.

Which product makes the LEAST profitable use of the grinding machines?

A) Product A

B) Product B

C) Product C

D) Product D

99) Bacon Company makes four products in a single facility. These products have the following unit product costs:

Additional data concerning these products are listed below.

The grinding machines are the constraint in the production facility. A total of 53,600 minutes is available per month on these machines.

Direct labor is a variable cost in this company.

Which product makes the MOST profitable use of the grinding machines?

A) Product A

B) Product B

C) Product C

D) Product D

100) Bacon Company makes four products in a single facility. These products have the following unit product costs:

Additional data concerning these products are listed below.

The grinding machines are the constraint in the production facility. A total of 53,600 minutes is available per month on these machines.

Direct labor is a variable cost in this company.

Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.)

A) $35.90

B) $0.00

C) $8.58

D) $11.60

101) Darren Company produces three products with the following costs and selling prices:

If Darren has a limit of 20,000 direct labor hours but no limit on units sold or machine hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

A) X, Y, Z.

B) Y, Z, X.

C) X, Z, Y.

D) Z, Y, X.

102) Darren Company produces three products with the following costs and selling prices:

If Darren has a limit of 30,000 machine hours but no limit on units sold or direct labor hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

A) Y, Z, X.

B) X, Y, Z.

C) X, Z, Y.

D) Z, X, Y.

103) The Morris Company manufactures wiring tools. The company is currently producing well below its full capacity. The Baker Company has approached Morris with an offer to buy 5,000 tools at $17.50 each. Morris sells its tools wholesale for $18.50 each; the average cost per unit is $18.30, of which $2.70 is fixed costs.

Required:

a. If Morris were to accept Baker's offer, what would be the increase in Morris' operating profits?

b. Assume that Morris is operating at full capacity. If Morris were to accept Baker's offer, what would be the change in Morris' operating profits?

104) The Parton Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 10,000 units. Parton currently sells 8,500 units for $62 per unit. A distributor has offered to buy 1,000 units at a price of $50 per unit. This special order would not disturb regular sales.

Required:

a. Calculate Parton's change in operating profits if the special order is accepted.

b. How many units of regular sales could be lost before this contract is not profitable?

105) The following information relates to the Klear Company for the upcoming year, based on 300,000 units:

The cost of goods sold includes $3,000,000 of fixed manufacturing overhead; the operating expenses include $450,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $25.00 per unit has been made to Klear. Fortunately, there will be no additional operating expenses associated with the order and Klear has sufficient capacity to handle the order.

Required:

a. How much will operating profits increase if Klear accepts the special order?

b. Assume that Klear is operating at full capacity. How much will operating profits change if Klear accepts the special order?

106) The following information relates to a product produced by Baywatch Company:

Fixed selling costs are $1,000,000 per year. Although production capacity is 900,000 units per year, Baywatch expects to produce only 800,000 units next year. The product normally sells for $180 each. A customer has offered to buy 60,000 units for $150 each. The customer will pay the transportation charge on the units purchased.

Required:

a. Compute the effect on operating profits if Baywatch accepts the special order.

b. If Baywatch accepts the special order, how much could normal sales drop before all of the differential profits disappear?

107) Douglas Corporation produces and sells three products. The three products, Alpha, Beta, and Gamma, are sold in a local market and in a regional market. At the end of the first quarter of the current year, the following income statement (in thousands of dollars) has been prepared:

Management has expressed special concern with the regional market because of the extremely poor return on sales. This market was entered a year ago because of excess capacity. It was originally believed that the return on sales would improve with time, but after a year, no noticeable improvement can be seen from the results as reported in the above quarterly statement. In attempting to decide whether to eliminate the regional market, the following information has been gathered:

All administrative costs and fixed manufacturing costs are common to the three products and the two markets and are fixed for the period. Remaining marketing costs are fixed for the period and separable by market. All fixed costs have been arbitrarily allocated to markets.

Required:

a. Assuming there are no alternative uses for the Douglas Corporation's present capacity, would you recommend dropping the regional market? Why or why not?

b. Prepare the quarterly income statement showing contribution margins by products. Do not allocate fixed costs to products.

c. It is believed that a new product can be ready for sale next year if the Douglas Corporation decides to go ahead with continued research. The new product can be produced by simply converting equipment presently used in producing product Gamma. This conversion will increase fixed costs by $40,000 per quarter. What must the minimum contribution margin per quarter be for the new product to make the changeover financially feasible?  

108) Macro Electronics manufactures low-cost, consumer-grade computers. It sells these computers to various electronics retailers to market under store brand names. It manufactures two computers, the Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, memory, and hard drive capacity. The following information is available:

The average wage rate is $30 per hour. The plant has a capacity of 32,000 direct labor-hours.

Required:

1. A nationwide discount chain has approached Macro with an offer to buy 2,000 Lightning 2.0 computers and 2,000 Lightning 2.4 computers if the unit prices are lowered to $350 and $450, respectively.

a. If Macro accepts the offer, how many direct labor-hours will be required to produce the additional computers?

b. How much will the profit increase (or decrease) if Macro accepts this proposal? All other prices will remain the same.

2. Suppose that the customer has offered instead to buy up to 3,000 each of the two models at $350 and $450, respectively.

a. How many of each product should be manufactured and sold? Assume current demand will not be affected by the special order. Also assume that the company cannot increase its production capacity to meet the extra demand.

b. How much will the profits change if this order is accepted instead?

109) The operations of Balance Corporation are divided into the Kaplan Division and the Norton Division. Projections for the next year are as follows:

Required:

a. Operating income for Balance Corporation, as a whole, if the Norton Division were dropped would be:

b. If the Norton Division were dropped, Kaplan Division's sales would increase by 45%. If this happened, the operating income for Balance Corporation as a whole would be:

110) The Fortune Company produces 15,000 units of Part QT34 annually at a total cost of $600,000.

Manufacturing overhead is 36% variable. The Xu Company has offered to supply all 15,000 units of Part QT34 per year for $35 per unit. If Fortune accepts the offer, $8 per unit of the fixed overhead would be avoided. In addition, some of Fortune's leased facilities could be vacated, reducing lease payments by $90,000 per year.

Required:

a. By how much would Fortune's operating profits change if 15,000 of Part QT34 are purchased from Xu?

b. At what price would Fortune be indifferent to Xu's offer?

111) The Fair Play Division of Fast Company produces wheels for off-road sport vehicles. One-half of Fair Play's output is sold to the Glow Division of Fast; the remainder is sold to outside customers. Fair Play's estimated operating profit for the year is:

Glow Division has an opportunity to purchase 20,000 wheels of the same quality from an outside supplier on a continuing basis.

Required:

a. The Fair Play Division cannot sell any additional products to outside customers. Should the Fast Company allow Glow Division to purchase the wheels from the outside supplier at $13.00 per unit?

b. If the Fair Play Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the differential cost to Fast of requiring that the wheels be made internally and sold to Glow Division?

c. If the Fair Play Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the minimum selling price that Fair Play should accept from Glow Division?

d. The Fair Play Division cannot sell any additional products to outside customers. What is the minimum selling price that Fair Play should accept from the Glow Division?

112) Halfway Industries produces two products. Information about the products is as follows:

The company's fixed costs totaled $140,000, of which $30,000 can be directly traced to Clocks and $90,000 can be directly traced to Headphones.

Required:

The effect on the firm's profits if the Headphone product is dropped would be:

113) Everett Tool Company has two retail stores, one in Dallas and the other in Sand Creek. The Dallas store had sales of $200,000, a contribution margin of 35 percent, and a segment margin of $28,000. The company's two stores have total sales of $500,000, an average contribution margin of 32 percent, and a total segment margin of $62,000.

Required:

Prepare a segmented income statement for Everett.

114) Dickson Industries has two divisions: the North Division and the South Division. Information relating to the divisions for the year just ended is as follows:

Common fixed expenses have been allocated equally to each of the two divisions.

Required:

Prepare a segmented income statement for Dickson.

115) The operations of Jorge Corporation are divided into the Northern Division and the Eastern Division. Projections for the next year are as follows:

Required:

a. Operating income for Jorge Corporation, as a whole, if the Eastern Division were dropped would be:

b. If Eastern Division is dropped, Northern's sales will increase by 20%. What will Jorge Corporation's operating income be?

116) The Ramos Company manufactures two products: Treadmills and Elliptical Trainers. The costs and revenues are as follows:

Total demand for the Treadmill product is 7,000 units and for the Elliptical Trainer product is 5,000 units. Machine time is a scarce resource. During the year, 48,000 machine hours are available. A Treadmill requires 6 machine hours per unit, while an Elliptical Trainer requires 2.5 machine hours per unit.

Required:

a. How many units of Treadmills and Elliptical Trainers should Ramos produce?

b. What will be the maximum possible contribution margin?

117) Short Inc. has 5,200 machine hours available each month. The following information on the company's three products is available:

Required:

a. What production schedule will maximize the company's profits?

b. What will be the maximum possible contribution margin?

118) Rainier Inc. has 6,400 machine hours available each month. The following information on the company's three products is available:

Required:

a. What production schedule will maximize the company's profits?

b. What will be the maximum possible contribution margin?

119) The Valor Company manufactures two products: L and M. The costs and revenues are as follows:

Total demand for Product L is 2,000 units and for Product M is 1,000 units. Machine time is a scarce resource. During the year, 36,000 machine hours are available.

Required:

a. How many units of Products L and M should Valor produce?

120) Giant Inc. has 3,600 machine hours available each month. The following information on the company's three surgical kits is available:

Required:

a. What production schedule will maximize the company's profits?

b. What will be the maximum possible contribution margin?

121) Moxy Inc. has 9,600 machine hours available each month. The following information on the company's three products is available:

Required:

a. What production schedule will maximize the company's profits?

b. What will be the maximum possible contribution margin?

122) Frank Industries manufactures 200,000 components per year. The manufacturing cost of the components was determined as follows:

An outside supplier has offered to sell the component for $3.40 each. If Frank purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $20,000.

Required:

a. If Frank purchases the component from the supplier instead of manufacturing it, the effect on income would be:

b. What is the maximum price Frank would be willing to pay the outside supplier?

123) Talent Industries manufactures 30,000 components per year. The manufacturing cost of the components was determined to be as follows:

Required:

a. Assume that the fixed manufacturing overhead reflects the cost of Talent's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Talent for $34. If Talent Industries purchases the component from the outside supplier, the effect on income would be a:

b. Assume Talent Industries could avoid $80,000 of fixed manufacturing overhead if it purchases the component from an outside supplier. An outside supplier has offered to sell the component for $34. If Talent purchases the component from the supplier instead of manufacturing it, the effect on income would be a:  

124) The Sands Company manufactures and sells several products, one of which is called a slip differential. The company normally sells 30,000 units of the slip differentials each month. At this activity level, unit costs are:

An outside supplier has offered to produce the slip differentials for the Sands Company, and to ship them directly to the Sands Company's customers. This arrangement would permit the Sands Company to reduce its variable selling expenses by one third (due to elimination of freight costs). The facilities now being used to produce the slip differentials would be idle and fixed manufacturing overhead would continue at 60 percent of its present level. The total fixed selling expenses of the company would be unaffected by this decision.

Required:

What is the maximum acceptable price quotation for the slip differentials from the outside supplier?

125) Carlson Company makes 4,000 units per year of a part called an axial tap for use in one of its products. Data concerning the unit production costs of the axial tap follow:

An outside supplier has offered to sell Carlson Company all of the axial taps it requires. If Carlson Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost.

Required:

a. Assume Carlson Company has no alternative use for the facilities presently devoted to production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each, should Carlson Company accept the offer? Fully support your answer with appropriate calculations.

b. Assume that Carlson Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Carlson Company should be willing to pay the outside supplier for axial taps?

126) Part XE3 is used in one of Sun Corporation's products. The company's Accounting Department reports the following costs of producing the 12,000 units of the part that are needed every year.

An outside supplier has offered to make the part and sell it to the company for $14.70 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 $5,000 of these allocated general overhead costs would be avoided.

Required:

a. Prepare a report that shows the effect on the company's total net operating income of buying part XE3 from the supplier rather than continuing to make it inside the company.

b. Which alternative should the company choose?

127) Snagless Corporation has received a request for a special order of 9,000 units of product ZX9 for $46.50 each. The normal selling price of this product is $51.60 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product ZX9 is computed as follows:

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 some modifications made to product ZX9 that would increase the variable costs by $6.20 per unit and that would require a one-time investment of $46,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample capacity for producing the special order.

Required:

Determine the effect on the company's total net operating income of accepting the special order. Show your work!

128) A customer has asked Balkans Corporation to supply 5,000 units of product DX9, with some modifications, for $40.20 each. The normal selling price of this product is $52.80 each. The normal unit product cost of product DX9 is computed as follows:

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 some modifications made to product DX9 that would increase the variable costs by $3.50 per unit and that would require a one-time investment of $23,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample capacity for producing the special order.

Required:

Determine the effect on the company's total net operating income of accepting the special order. Show your work!

129) Florence Corporation makes three products that use the current constraint, which is a particular type of machine. Data concerning those products appear below:

Required:

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

b. Assume that sufficient constraint time is available 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?

130) Atuso, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:

Fixed costs are applied to the products on the basis of direct labor hours.

Demand for the three products exceeds the company's productive capacity. The grinding machine is the constraint, with only 2,400 minutes of grinding machine time available this week.

Required:

a. Given the grinding machine constraint, which product should be emphasized? Support your answer with appropriate calculations.

b. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of grinding machine time?

131) Varix Company makes three products in a single facility. These products have the following unit product costs: