Test Bank Relevant Costs For Short-Term Decisions Chapter 8

Managerial Accounting, 6e (Braun et al.)

Chapter 8 Relevant Costs for Short-Term Decisions

8.1 Describe and identify information relevant to short-term business decisions

1) Irrelevant costs are costs that do not affect short-term decisions.

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

2) Relevant information is future data that do not differ among alternatives.

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

3) Management accountants gather and analyze relevant information to compare alternatives.

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

4) One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits.

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

5) One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs.

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

6) Relevant information is expected future data that will not differ among alternatives.

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

7) Costs that differ between alternatives are irrelevant.

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

8) One cost that is irrelevant in decision making is a sunk cost.

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

9) Managers' decisions are based solely on quantitative factors.

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

10) Which of the following best describes a "sunk cost"?

A) Costs that were incurred in the past and cannot be changed

B) Benefits foregone by choosing a particular alternative course of action

C) A factor that restricts the production or sale of a product

D) Expected future data that differ among alternatives

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

11) An "opportunity cost" is best described by which of the following?

A) Benefits foregone by choosing a particular alternative course of action

B) Costs that were incurred in the past and cannot be changed

C) The distribution of all products to be sold

D) Expected future costs that differ among alternatives

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

12) A "relevant cost" is best described by which of the following?

A) A factor that restricts production or sales of a product

B) Cost of developing, producing, and delivering a product or service

C) Costs that were incurred in the past and cannot be changed

D) Expected future costs that differ among alternatives

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

13) Expected future data that differs among alternative courses of action are referred to as

A) relevant information.

B) historical information.

C) predictable information.

D) irrelevant information.

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

14) Which of the following is irrelevant when making a decision?

A) Fixed overhead costs that differ among alternatives

B) The cost of an asset that the company is considering replacing

C) The cost of further processing a product that could be sold as is

D) The expected increase in contribution margin of one product line as a result of a decision to discontinue a separate unprofitable product line

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

15) Which of the following is relevant when deciding to replace old equipment with new?

A) Depreciation accumulated on the old equipment.

B) The cost of the old equipment that the company is replacing

C) Trade-in value of the old equipment

D) Variable cost of utilities that will not change between the old and new equipment

Diff: 1

LO: 8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

16) Which of the following is relevant when deciding whether to drive or fly home for semester break?

A) Cost of car insurance

B) Cost of vehicle registration

C) Cost of the gasoline

D) Cost of annual parking at school

Diff: 1

LO: 8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

17) Which of the following is irrelevant when deciding whether to drive or fly home for semester break?

A) Cost of plane ticket

B) Wear and tear on your vehicle

C) Cost of the gasoline

D) Cost of car insurance

Diff: 1

LO: 8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

18) Fixed costs that do not differ between two alternatives are

A) irrelevant to the decision.

B) considered opportunity costs.

C) relevant to the decision.

D) important only if they represent a material dollar amount.

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

19) Which of the following is a sunk cost?

A) Operating costs for a new vehicle

B) Trade in value of old vehicle

C) Purchase price of vehicle to be traded in

D) Purchase price of new vehicle

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

20) Fixed costs that may be avoided in the future are referred to as

A) relevant costs.

B) opportunity costs.

C) replacement costs.

D) sunk costs.

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

21) A sunk cost is described as which of the following?

A) One that is relevant to a decision because it changes depending on the alternative course of action selected

B) A historical cost that is always irrelevant

C) An outlay expected to be incurred in the future

D) A historical cost that may be relevant

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

22) A sunk cost can be described as which of the following?

A) A historical cost

B) Always irrelevant

C) Cannot be changed regardless of future actions taken

D) All of the above

Diff: 1

LO: 8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

23) The effect of a plant closing on employee morale is an example of which of the following?

A) A qualitative factor

B) A quantitative factor

C) A sunk cost

D) A variable cost

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

24) The format of the income statement most useful in decision-making is which of the following?

A) Absorption costing format

B) Traditional format

C) Contribution margin format

D) Single-step format

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

25) Freda Enterprises is considering replacing a machine that is presently used in its production process. The following information is available:

Which of the information provided in the table is irrelevant to the replacement decision?

A) The annual operating cost of the old machine

B) The original cost of the old machine

C) The current disposal value of the old machine

D) Both A and C

Diff: 2

LO: 8-1

EOC: S8-1

AACSB: Analytical thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

26) All of the following are relevant to the decision to replace equipment except the

A) cost of old equipment.

B) selling price of old equipment.

C) future maintenance costs of old equipment.

D) cost of new equipment.

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

27) Which of the following is most important in making a short-term special decision?

A) Focus on total costs

B) Separate variable from fixed costs

C) Use a conventional absorption costing approach

D) Calculating the fixed cost per unit

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

28) Managers should never consider ________ when making any sort of decision.

A) only fixed costs

B) sunk costs

C) only variable costs

D) revenues that differ among alternatives

Diff: 2

LO: 8-1

EOC: S8-1

AACSB: Reflective thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

29) Label each item below as relevant or irrelevant in making a decision.

a) Cost of roof repair made on rental property last year

b) The cost of insurance on a new vehicle when deciding to buy a new vehicle

c) Cost of new equipment under evaluation to replace used equipment

d) Original cost of old equipment that is being evaluated for replacement

e) Cost of previous year's insurance policy on old equipment being evaluated for replacement

f) Accumulated depreciation on old equipment being evaluated for replacement

Diff: 1

LO: 8-1

EOC: S8-1

AACSB: Analytical thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

30) What is the difference between relevant and irrelevant information for making decisions? Provide examples of each.

Diff: 1

LO: 8-1

EOC: E8-15

AACSB: Analytical thinking

Learning Outcome: Distinguish between relevant and irrelevant costs.

8.2 Describe and apply different approaches to pricing

1) Companies operating in highly competitive industries are generally price-setters.

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

2) When setting prices, a company need not consider whether it is a price-taker or a price-setter for each product that it sells.

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

3) A price-setter company emphasizes a cost-plus approach to pricing.

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

4) For a product, revenue at market price plus desired operating profit equals target total cost.

Diff: 1

LO: 8-2

EOC: S8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

5) When a company is a price-setter, it emphasizes a target costing approach to pricing.

Diff: 1

LO: 8-2

EOC: S8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

6) When making a pricing decision, it is not necessary to separate costs into fixed and variable.

Diff: 1

LO: 8-2

EOC: S8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

7) Cost-plus price minus desired profit equals total cost.

Diff: 1

LO: 8-2

EOC: S8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

8) When using a target costing approach, the company starts with revenue at market price, and then subtracts its desired profit, to yield the target total cost.

Diff: 1

LO: 8-2

EOC: S8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

9) Companies often try to gain more control over pricing by attempting to differentiate their products.

Diff: 1

LO: 8-2

EOC: S8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

10) Product differentiation allows companies to become more of a price-setter, and less of a price-taker.

Diff: 1

LO: 8-2

EOC: S8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

11) When setting prices, managers need to consider all costs.

Diff: 1

LO: 8-2

EOC: S8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

12) Managers need to consider variable costs, fixed costs, product costs and period costs when setting prices.

Diff: 1

LO: 8-2

EOC: S8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

13) Cost-plus pricing is essentially the opposite of target-costing.

Diff: 1

LO: 8-2

EOC: S8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

14) Which of the following best describes "target costing"?

A) An approach to pricing that begins with revenue at market price and subtracts desired profit to arrive at target total cost

B) A factor that restricts production or sales of a product

C) All costs incurred along the value chain in connection with the product or service

D) An approach to pricing that begins with the product's total cost and adds desired profit

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

15) "Total cost of product or service" is best described as which of the following?

A) Benefits foregone by choosing a particular alternative course of action

B) A factor that restricts production or sales of a product

C) Costs that were incurred in the past and cannot be changed

D) All costs incurred along the value chain in connection with the product or service

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

16) Which of the following describes the products and services of companies that are price-setters?

A) They tend to be unique.

B) They are priced by managers using a target-costing emphasis.

C) They tend to have a lot of competitors.

D) They tend to be commodities.

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

17) Stockholders' expectations of company profits are affected by which of the following?

A) Industry risk

B) Historical company earnings

C) General economic conditions

D) All of the above

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

18) The cost-plus price is described by which of the following?

A) Target total cost plus desired profit

B) Total cost plus desired profit

C) Revenue at market price plus desired profit

D) Variable cost plus desired profit

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

19) Target total cost is described by which of the following?

A) Total cost plus desired profit

B) Revenue at market price plus desired profit

C) Revenue at market price minus desired profit

D) Total cost minus actual cost

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

20) Managers must consider which of the following when pricing a product or service?

A) All costs

B) Only period costs

C) Only manufacturing costs

D) Only variable costs

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

21) Which of the following pairs are characteristics of price-takers?

A) Less competition and target pricing

B) Cost-plus pricing and less competition

C) Target costing and heavy competition

D) Cost-plus pricing and lack of product uniqueness

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

22) Which of the following pairs are characteristics of price-setters?

A) Less competition and target costing

B) Cost-plus pricing and less competition

C) Lack of product uniqueness and heavy competition

D) Less competition and lack of product uniqueness

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

23) Big-box retailers such as Lowe's are considered price-takers because

A) their products are not unique.

B) there is less competition in the home improvement retail sector.

C) their products are unique.

D) they emphasize cost-plus pricing.

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

24) Target total cost is defined as

A) cost of goods sold less desired profit.

B) revenue at market price less desired profit.

C) revenue at market price less variable costs.

D) revenue at market price less fixed costs.

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

25) Methods for a company to meet target total cost and the profit goals if the current cost of the product is higher than the target cost include which of the following?

A) Accept a lower profit

B) Cut fixed costs, cut variable costs

C) Cut fixed costs

D) Any of the above

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

26) In pricing a product, managers should consider which of the following?

A) Only fixed costs

B) Only variable costs

C) Only period costs

D) None of the above

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

27) All of the following factors affect the amount a customer is willing to pay for a product, except

A) the selling company's costs.

B) the competition's price.

C) the product's uniqueness.

D) general economic conditions.

Diff: 1

LO: 8-2

EOC: S8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

28) Companies that are considered price-setters usually employ the ________ approach to pricing products.

A) cost-plus pricing

B) percentage pricing

C) target costing

D) cost plus one

Diff: 1

LO: 8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

29) Companies that are considered price-takers usually employ the ________ approach to pricing products.

A) cost-plus pricing

B) percentage pricing

C) target costing

D) cost plus one

Diff: 1

LO: 8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

30) Rocky Pines golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $23,000,000 for the golfing season. About 420,000 golfers are expected each year. Variable costs are about $16 per golfer. Rocky Pines golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should the course charge for a round of golf? (Round the final answer to the nearest cent.)

A) $70.76

B) $133.33

C) $85.05

D) $16

Diff: 2

LO: 8-2

EOC: S8-4

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

31) Rocky Pines golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $48,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $22,000,000 for the golfing season. About 440,000 golfers are expected each year. Variable costs are about $17 per golfer. The Rocky Pines golf course is a price-taker and won't be able to charge more than its competitors who charge $94 per round of golf. What profit (loss) will it earn in terms of dollars?

A) $26,840,000

B) $(11,880,000)

C) $11,880,000

D) $(22,000,000)

Diff: 2

LO: 8-2

EOC: E8-20A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

32) Rocky Pines golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $46,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $21,000,000 for the golfing season. About 440,000 golfers are expected each year. Variable costs are about $18 per golfer. Rocky Pines golf course is a price-taker and won't be able to charge more than its competitors who charge $122 per round of golf. What profit (loss) will it earn as a percent of assets? (Round the percent to two decimal places.)

A) Loss of 53.83%

B) Profit of 159.06%

C) Profit of 53.83%

D) Loss of 85.69%

Diff: 3

LO: 8-2

EOC: E8-20A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

33) Yoga, Spa, and Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $35,000,000 of assets. The company primarily incurs fixed costs to maintain the swimming pool. Fixed costs are projected to be $12,800,000 for the year. About 510,000 members are expected to swim each year. Variable costs are about $13 per swimmer. The club has a favorable reputation in the area and therefore, has some control over the membership price. Using a cost-plus approach, what price should club charge for a membership? (Round the final answer to the nearest cent.)

A) $44.96

B) $38.10

C) $31.24

D) $6.86

Diff: 2

LO: 8-2

EOC: E8-20A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

34) Yoga, Spa, and Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $35,000,000 of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,800,000 for the year. About 520,000 members are expected to swim each year. Variable costs are about $11 per swimmer. The club is a price-taker and won't be able to charge more than its competitors who charge $39 for a membership. What profit (loss) will it earn in terms of dollars?

A) $7,599,961

B) $12,800,000

C) $1,760,000

D) $(1,760,000)

Diff: 2

LO: 8-2

EOC: E8-20A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

35) Yoga, Spa, and Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $37,000,000 of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,700,000 for the year. About 550,000 members are expected to swim each year. Variable costs are about $11 per swimmer. The club is a price-taker and won't be able to charge more than its competitors who charge $40 for a membership. What profit (loss) will it earn as a percent of assets? (Round the percent to two decimal places.)

A) Profit of 8.78%

B) Loss of 8.78%

C) Loss of 50.68%

D) Profit of 34.32%

Diff: 3

LO: 8-2

EOC: E8-20A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

36) Crosscreek golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Crosscreek course has a favorable reputation in the area and therefore, has some control over the price of a round of golf.

Based on these numbers, what are Crosscreek's total costs?

Diff: 2

LO: 8-2

EOC: S8-4; E8-20A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

37) Crosscreek golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Crosscreek course has a favorable reputation in the area and therefore, has some control over the price of a round of golf.

Based on these numbers, what is Crosscreek's target revenue?

Diff: 2

LO: 8-2

EOC: E8-20A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

38) Poplar Valley golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Poplar Valley golf course is a price-taker and won't be able to charge more than $60 per round because of local competition.

What will Poplar Valley's revenue be at a market price of $60/round?

Diff: 2

LO: 8-2

EOC: E8-20A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

39) Poplar Valley golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Poplar Valley golf course is a price-taker and won't be able to charge more than $60 per round because of local competition.

What will Poplar Valley's expected profit shortfall be if it charges $60/round?

Diff: 2

LO: 8-2

EOC: E8-20A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

40) Indicate whether each item below is a characteristic of a price-taker or a price-setter. Use PT for price-taker and PS for price-setter.

a) Cost-plus pricing

b) Product lacks uniqueness

c) Less competition

d) Target pricing

e) Heavy competition

Diff: 1

LO: 8-2

EOC: E8-18A

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

41) Rocky Pines golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Rocky Pines charge for a round of golf?

Diff: 3

LO: 8-2

EOC: E8-18A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

42) Rocky Pines golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?

Diff: 3

LO: 8-2

EOC: E8-18A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

8.3 Decide whether to accept a special order

1) A special order occurs when a customer requests a one-time order at an increased sales price.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

2) Special orders increase income if the revenue from the order does not exceed the incremental variable and fixed costs incurred to fill the order.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

3) In deciding whether to accept a special sales order, any fixed costs that would remain unchanged are considered relevant data.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

4) Variable costs are irrelevant to a special decision when those variable costs differ between alternatives.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

5) Managers should consider the potential effect of a special order on long-run profits and operations.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

6) When deciding whether to accept a special order, managers need to consider whether they have available excess capacity.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

7) If the expected increase in revenues from a special order is greater than the expected increase in variable and fixed costs, then the special order should be accepted.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

8) In a special sales order decision, the special price must exceed the variable cost of filling the order. In other words, the special order must have

A) sunk costs.

B) a positive contribution margin.

C) opportunity costs.

D) a negative contribution margin.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

9) In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be

A) opportunity costs.

B) irrelevant to the decision.

C) relevant to the decision.

D) sunk costs.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

10) Managers should consider all of the following when deciding whether to accept a special order, except

A) available excess capacity.

B) the variable costs associated with the special order.

C) the effect of the order on regular sales.

D) fixed costs that will not be affected by the order.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

11) A manager should always reject a special order if

A) the special order price is less than the variable costs of the order.

B) there is available excess capacity.

C) the special order price is less than the regular sales price.

D) the special order will require variable nonmanufacturing expenses.

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

12) Which would not be a consideration for making special orders?

A) Available capacity to fill the order

B) If price will cover incremental costs of filling the order

C) If the order will affect regular sales in the long run

D) Fixed costs already being incurred

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

13) A company should ________ when making a short-term special decision.

A) focus on qualitative factors only

B) focus on quantitative factors only

C) separate variable costs from fixed costs

D) use a traditional direct costing approach

Diff: 1

LO: 8-3

EOC: S8-2

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

14) Not factoring in qualitative factors, if the incremental revenue from fulfilling a special order is ________ the incremental costs of the order, the company should accept the special order.

A) less than

B) equal to

C) greater than

D) added to

Diff: 1

LO: 8-3

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

15) Comfort Ride manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to the current production of the product:

If a special sales order is accepted for 7,200 seats at a price of $330 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $288,000

B) Decrease by $288,000

C) Increase by $2,376,000

D) Increase by $4,000,000

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

16) Comfort Ride manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to current production of seats:

If a special sales order is accepted for 4,300 seats at a price of $325 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $2,343,500

B) Increase by $451,500

C) Increase by $279,500

D) Decrease by $451,500

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

17) Comfort Ride manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but currently produces and sells 75,000 seats per year. The following information relates to current production of seats:

If a special sales order is accepted for 3,300 seats at a price of $350 per unit, and fixed costs increase by $14,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Decrease by $118,000

B) Increase by $415,000

C) Increase by $132,000

D) Increase by $118,000

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

18) Shady Inc. manufactures outdoor umbrellas. The company has the capacity to produce 100,000 units per year, but it currently produces and sells 75,000 units per year. The following information relates to current production:

If a special sales order is accepted for 2,900 umbrellas at a price of $36 per unit, fixed costs increase by $7,000, and variable marketing and administrative costs for that order are $5 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $23,200

B) Decrease by $16,200

C) Increase by $16,200

D) Increase by $30,700

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

19) Shady Inc. manufactures outdoor umbrellas. The company has the capacity to produce 100,000 units per year, but it currently produces and sells 75,000 units per year. The following information relates to current production:

If a special sales order is accepted for 6,900 umbrellas at a price of $40 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Decrease by $69,000

B) Increase by $69,000

C) Increase by $276,000

D) Increase by $2,400,000

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

20) Shady Inc. manufactures outdoor umbrellas. The company has the capacity to produce 100,000 units per year, but it currently produces and sells 75,000 units per year. The following information relates to current production:

If a special sales order is accepted for 5,500 umbrellas at a price of $42 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $231,000

B) Increase by $38,500

C) Increase by $93,500

D) Decrease by $93,500

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

21) Shady Inc. manufactures outdoor umbrellas. The company has the capacity to produce 100,000 units per year, but it currently produces and sells 75,000 units per year. The following information relates to current production:

If a special sales order is accepted for 3,700 umbrellas at a price of $35 per unit, and fixed costs increase by $13,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Decrease by $5,500

B) Increase by $31,400

C) Increase by $31,500

D) Increase by $5,500

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

22) Comfort Sleep manufactures mattresses. The company has the capacity to produce 100,000 mattresses per year, but currently produces and sells 75,000 mattresses per year. The following information relates to current production:

If a special sales order is accepted for 2,700 mattresses at a price of $340 per unit, fixed costs increase by $6,600, and variable marketing and administrative costs for that order are $5 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $290,400

B) Decrease by $276,900

C) Increase by $283,500

D) Increase by $276,900

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

23) Cecil Incorporated provided the following information regarding its only product:

Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 5,200 units at a sale price of $44 per product? (NOTE: Assume regular sales are not affected by the special order. Round any intermediary calculations to the nearest cent.)

A) Decrease by $100,932

B) Increase by $100,932

C) Increase by $228,800

D) Increase by $356,668

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

24) Cecil Incorporated provided the following information regarding its only product:

Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 3,500 units at a sale price of $43 per product assuming additional fixed manufacturing overhead costs of $5,300 is incurred? (NOTE: Assume regular sales are not affected by the special order. Round any intermediary calculations to the nearest cent.)

A) Increase by $150,500

B) Decrease by $87,660

C) Increase by $87,660

D) Increase by $92,960

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

25) Cecil Incorporated provided the following information regarding its only product:

Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 1,400 units at a sale price of $47 per product? The 1,400 units would not require any variable selling and administrative expenses. (NOTE: Assume regular sales are not affected by the special order. Round any intermediary calculations to the nearest cent.)

A) Decrease by $30,100

B) Decrease by $35,700

C) Increase by $30,100

D) Increase by $35,700

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

26) Blue Technologies manufactures and sells tablets. Great Products Company has offered Blue Technologies $22 per tablet for 10,000 tablets. Blue Technologies' normal selling price is $35 per tablet. The total manufacturing cost per tablet is $15 and consists of variable costs of $10 per tablet and fixed overhead costs of $5 per tablet. (NOTE: Assume excess capacity and no effect on regular sales.)

How much are the expected increase (decrease) in revenues and expenses from the special sales order?

A) Expected increase in revenues $220,000; expected increase in expenses $100,000

B) Expected increase in revenues $220,000; expected increase in expenses $50,000

C) Expected increase in revenues $350,000; expected increase in expenses $100,000

D) Expected increase in revenues $220,000; expected increase in expenses $150,000

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

27) Blue Technologies manufactures and sells tablets. Great Products Company has offered Blue Technologies $21 per tablet for 10,000 tablets. Blue Technologies' normal selling price is $32 per tablet. The total manufacturing cost per tablet is $16 and consists of variable costs of $11 per tablet and fixed overhead costs of $5 per tablet. (NOTE: Assume excess capacity and no effect on regular sales.)

Should Blue Technologies accept or reject the special sales order?

A) Accept, because operating income would increase $320,000.

B) Reject, because operating income would decrease $100,000.

C) Accept, because operating income would increase $100,000.

D) Reject, because operating income would decrease $210,000.

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

28) Wooden Things manufactures and sells wooden toys for $12 each. The company has the capacity to produce 27,000 toys in a year, but currently produces and sells 19,000 toys per year. The company currently incurs the following costs at its current production level of 19,000 toys:

A retailer is interested in purchasing the excess capacity of 8,000 toys if it can receive a special price. This special order would not affect the company's regular sales or its cost structure. Wooden Things' profits would increase from this special order if the special order price per toy is greater than (Round the final answer to the nearest cent.)

A) $8.47.

B) $5.41.

C) $7.68.

D) $15.21.

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

29) Faux Trees Company produces artificial Christmas trees. A local shopping mall recently made a special order offer; the shopping mall would like to purchase 250 extra-large white trees. Faux Trees Company is currently producing and selling 20,000 trees; the company has the excess capacity to handle this special order. The shopping mall has offered to pay $160 for each tree. An accountant at Faux Trees Company provides an estimate of the unit product cost as follows:

This special order would require an investment of $10,000 for the molds required for the extra-large trees. These molds would have no other purpose and would have no salvage value. The special order trees would also have an additional variable cost of $9.11 per unit associated with having a white tree. This special order would not have any effect on the company's other sales. If the special order is accepted, the company's operating income would increase (decrease) by (Round the final answer to the nearest dollar.)

A) $20,067.50 decrease.

B) $23,262.50 decrease.

C) $13,262.50 increase.

D) $23,262.50 increase.

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

30) The following information relates to current production of outdoor wicker sofas at Backyard Posh:

The regular selling price per wicker sofa is $330. The company is analyzing the opportunity to accept a special sales order for 1,400 wicker sofas at a price of $205 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 55,000 wicker sofas per year, but is currently producing and selling 9,000 wicker sofas per year. Regular sales will not be affected by the special order. What is the impact on operating income if the company accepts the special order?

A) Increase by $287,000

B) Increase by $93,800

C) Decrease by $93,800

D) Decrease by $287,000

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

31) The following information relates to current production of outdoor wicker sofas at Backyard Posh:

The regular selling price per wicker sofa is $260. The company is analyzing the opportunity to accept a special sales order for 1,000 wicker sofa at a price of $220 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 65,000 wicker sofas per year, but is currently producing and selling 8,000 wicker sofas per year. The 1,000 units would not require any variable marketing and administrative expenses. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

A) Decrease by $82,000

B) Decrease by $116,000

C) Increase by $82,000

D) Increase by $116,000

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

32) The following information relates to current production of outdoor wicker sofas at Backyard Posh:

The regular selling price per wicker sofa is $310. The company is analyzing the opportunity to accept a special sales order for 400 wicker sofas at a price of $250 per unit. Fixed costs would increase by $20,000. The company has the capacity to produce 15,000 wicker sofas per year, but is currently producing and selling 12,000 wicker sofas per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

A) Decrease by $24,400

B) Increase by $44,400

C) Decrease by $44,400

D) Increase by $24,400

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

33) The following information relates to current production of outdoor wicker sofas at Backyard Posh:

The regular selling price per wicker sofa is $310. The company is analyzing the opportunity to accept a special sales order for 600 wicker sofas at a price of $200 per unit. Variable marketing and administrative costs would be $12 per unit lower than on regular sales. Fixed costs would increase by $13,000. The company has the capacity to produce 55,000 wicker sofas per year, but is currently producing and selling 12,000 wicker sofas per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

A) Decrease by $43,800

B) Decrease by $30,800

C) Increase by $43,800

D) Increase by $30,800

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

34) Bottle Incorporated provided the following information regarding its single product:

The regular selling price for the product is $80. The annual quantity of units produced and sold is 42,000 units (the costs above relate to the 42,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.

What would be the effect on operating income of accepting a special order for 8,000 units at a sale price of $60 per product? (Round any intermediary calculations to the nearest cent.)

A) Increase by $308,560

B) Increase by $651,440

C) Decrease by $308,560

D) Decrease by $651,440

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

35) Bottle Incorporated provided the following information regarding its single product:

The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.

What would be the effect on operating income of accepting a special order for 1,500 units at a sale price of $52 per product assuming additional fixed manufacturing overhead costs of $14,000 are incurred? (Round any intermediary calculations to the nearest cent.)

A) Decrease by $44,055

B) Decrease by $30,055

C) Increase by $30,055

D) Increase by $44,055

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

36) Bottle Incorporated provided the following information regarding its single product:

The regular selling price for the product is $80. The annual quantity of units produced and sold is 57,200 units (the costs above relate to the 57,200 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.

What would be the effect on operating income of accepting a special order for 1,430 units at a sale price of $40 per product? The special order units would not require any variable selling and administrative expenses. (Round any intermediary calculations to the nearest cent. Round your final answer to the nearest dollar.)

A) Decrease by $21,750

B) Decrease by $35,450

C) Increase by $21,750

D) Increase by $35,450

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

37) Each month, Neal Incorporated produces 500 units of a product that has unit variable costs of $23. Total fixed costs for the month are $4,700. A special sales order is received for 200 units of the product at a price of $24 per unit. In deciding to accept or reject the special sales order, it is appropriate to consider the

A) new fixed cost per unit of $6.71.

B) current fixed cost per unit of $9.40.

C) difference between the offered price and the variable cost per unit.

D) difference between the two fixed costs per unit, or $2.69.

Diff: 2

LO: 8-3

EOC: S8-5

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

38) Ross Sports received a special order for 1,000 units of its beginner snowboards at a selling price of $250 per snowboard. Ross Sports has enough extra capacity to accept the order. No additional selling costs will be incurred.

Unit costs to make and sell this product are as follows: Direct materials, $100; direct labor, $50; variable manufacturing overhead, $14; fixed manufacturing overhead, $10, and variable selling costs, $2.

A) List the relevant costs.

B) What will be the change in operating income if Ross Sports accepts the special order?

C) Should Ross Sports accept the special order?

Diff: 2

LO: 8-3

EOC: S8-2

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

39) Gears Galore Corporation produces and sells a part used in the production of bicycles. The unit costs associated with this part are as follows:

Direct materials $.14

Direct labor .30

Variable manufacturing overhead .20

Fixed manufacturing overhead .05

Total cost $.69

Spin Company has approached Gears Galore Corporation with an offer to purchase 20,000 units of this part at a price of $.80. Accepting this special sales order will put idle manufacturing capacity to use and will not affect regular sales. Total fixed costs will not change.

Determine whether or not the special order should be accepted. Justify your conclusion.

Diff: 2

LO: 8-3

EOC: E8-19A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

40) Revved Up Toys manufactures a computer chip used in the production of remote-control cars. When 6,000 cars are produced, the costs per part are:

Sam's Associates has offered to sell Revved Up Toys 6,000 parts for $5.75 each. If Revved Up Toys accepts the offer, $1.00 of the fixed manufacturing overhead costs can be eliminated.

a. What is the relevant per unit cost to manufacture the part?

b. Which alternative is best for Revved Up Toys and by how much?

Diff: 2

LO: 8-3

EOC: P8-42A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

41) Elite Office Furniture received a special order for 1,200 units of its executive chair at a selling price of $90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5.

List the relevant costs (and amount) to Elite Office Furniture for this special order.

Diff: 2

LO: 8-3

EOC: S8-2

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

42) Elite Office Furniture received a special order for 1,200 units of its executive chairs at a selling price of $90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5.

What will be Elite Office Furniture's change in operating income if they accept the special order? Should Elite Office Furniture accept the order? Explain why or why not.

Diff: 2

LO: 8-3

EOC: P8-42A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

8.4 Decide whether to discontinue a product, department, or store

1) If the cost savings from discontinuing a product exceed the lost revenues from discontinuing the product, it should be retained.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

2) From a purely financial standpoint, if a product line has a negative contribution margin, the product line should be discontinued.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

3) Fixed costs that exist even after a product is discontinued are called unavoidable fixed costs.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

4) When deciding whether to discontinue a product, managers should only consider the costs that will be saved.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

5) If a product has a negative contribution margin, it should not be discontinued.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

6) Fixed costs that will continue to exist if a product is discontinued are relevant.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

7) Unavoidable fixed costs are

A) irrelevant to the decision of whether to discontinue a product line because they will differ between alternatives.

B) relevant to the decision of whether to discontinue the department.

C) irrelevant to the decision of whether to discontinue a product line because they will not differ between alternatives.

D) relevant because they are sunk costs.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

8) Common fixed costs that are allocated between departments are generally

A) direct fixed costs of the department.

B) relevant to the decision of whether to discontinue the department.

C) irrelevant to the decision of whether to discontinue the department.

D) direct fixed costs of other departments.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

9) Fixed costs that are allocated among all departments are known as

A) direct fixed costs.

B) relevant fixed costs.

C) general fixed costs.

D) common fixed costs.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

10) A company's manager would consider which of the following in deciding whether to discontinue its electronics product line?

A) The costs it could save by discontinuing the product line

B) The revenues it would lose from discontinuing the product line

C) How discontinuing the electronics product line would affect sales of its other products (like CDs)

D) All of the above

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

11) All of the following are considerations for discontinuing a product or product line, except

A) whether the product has a positive or negative contribution margin.

B) not having any free capacity.

C) if discontinuing the product or product line will affect sales of remaining products.

D) determining if direct fixed costs could be avoided if the product or product line is discontinued.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

12) A drug store decides to discontinue its health and beauty section of products because it has been unprofitable. This strategy could backfire because

A) the store can readily fill the available space.

B) the store's sales may suffer by not having this convenience category of products.

C) it has automatically saved that department's fixed costs.

D) none of the above

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

13) Fixed costs that continue to exist even after a product line is discontinued are called

A) unavoidable fixed costs.

B) avoidable fixed costs.

C) variable fixed costs.

D) relevant fixed costs.

Diff: 1

LO: 8-4

EOC: S8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

14) Fixed costs that cease to exist after a product line is discontinued are called

A) unavoidable fixed costs.

B) avoidable fixed costs.

C) variable fixed costs.

D) irrelevant fixed costs.

Diff: 1

LO: 8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

15) A product line should be discontinued if the contribution margin lost is

A) more than the fixed costs saved.

B) less than the fixed costs saved.

C) more than the variable costs saved.

D) less than the variable costs saved.

Diff: 1

LO: 8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

16) A product line should not be discontinued if the contribution margin lost is

A) more than the fixed costs saved.

B) less than the fixed costs saved.

C) more than the variable costs saved.

D) less than the variable costs saved.

Diff: 1

LO: 8-4

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

17) Sole Sisters Company has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:

Assuming fixed costs remain unchanged, how would discontinuing the Fashion line affect operating income?

A) Increase in total operating income of $29,000

B) Increase in total operating income of $106,000

C) Decrease in total operating income of $140,000

D) Decrease in total operating income of $1,000

Diff: 2

LO: 8-4

EOC: E8-21A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

18) Sole Sisters Company has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:

If $30,000 of fixed costs will be eliminated by discontinuing the Fashion line, how will operating income be affected?

A) Increase $10,000

B) Decrease $47,500

C) Increase $81,000

D) Increase $155,000

Diff: 2

LO: 8-4

EOC: E8-21A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

19) Sole Sisters Company has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:

Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $27,000 per year, how will operating income be affected?

A) Decrease $7,000

B) Increase $96,000

C) Increase $7,000

D) Increase $185,000

Diff: 2

LO: 8-4

EOC: E8-21A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

20) Sole Sisters Company has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:

Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Fashion line is used to increase the production of Hiking boots by 250%, how will operating income be affected?

A) Increase $182,500

B) Increase $245,000

C) Increase $260,500

D) Decrease $182,500

Diff: 2

LO: 8-4

EOC: E8-21A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

21) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:

Assuming fixed costs remain unchanged, how would discontinuing the Sporty line affect operating income?

A) Increase in total operating income of $49,000

B) Increase in total operating income of $130,000

C) Decrease in total operating income of $3,000

D) Decrease in total operating income of $128,000

Diff: 2

LO: 8-4

EOC: E8-21A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

22) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:

If $25,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

A) Decrease $35,000

B) Increase $15,000

C) Increase $30,000

D) Increase $145,000

Diff: 2

LO: 8-4

EOC: E8-21A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

23) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:

Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $33,000 per year, how will operating income be affected?

A) Increase $23,000

B) Increase $249,000

C) Decrease $23,000

D) Increase $117,000

Diff: 2

LO: 8-4

EOC: E8-21A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

24) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:

Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Sporty line is used to increase the production of Luxury watches by 250%, how will operating income be affected?

A) Increase $412,500

B) Increase $237,500

C) Increase $332,500

D) Decrease $237,500

Diff: 2

LO: 8-4

EOC: E8-21A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

25) Lantern Company has three product lines: D, E, and F. The following information is available:

D E F

Sales revenue $80,000 $47,000 $21,000

Variable expenses $45,000 $24,000 $15,000

$35,000 $23,000 $6,000

Fixed expenses $12,000 $15,000 $17,000

Operating income (loss) $23,000 $8,000 -$11,000

Lantern Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed expenses are unavoidable. Assuming Lantern Company discontinues product line F and does not replace it, what affect will this have on operating income?

A) Increase $11,000

B) Increase $45,000

C) Increase $6,000

D) Decrease $6,000

Diff: 3

LO: 8-4

EOC: E8-34A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

26) Lantern Company has three product lines: D, E, and F. The following information is available:

D E F

Sales revenue $84,000 $46,000 $20,000

Variable expenses $42,000 $24,000 $12,000

Contribution margin $42,000 $22,000 $ 8,000

Fixed expenses $12,000 $15,000 $17,000

Operating income (loss) $30,000 $ 7,000 $(9,000)

Lantern Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Lantern Company discontinues product line F and rents the space formerly used to produce product F for $19,000 per year, what affect will this have on operating income?

A) Increase $28,000

B) Increase $11,000

C) Decrease $11,000

D) Increase $39,000

Diff: 3

LO: 8-4

EOC: E8-34A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

27) Lantern Company has three product lines: D, E, and F. The following information is available:

D E F

Sales revenue $81,000 $45,000 $20,000

Variable expenses $45,000 $23,000 $12,000

Contribution margin $36,000 $22,000 $ 8,000

Fixed expenses $12,000 $15,000 $17,000

Operating income (loss) $24,000 $7,000 $(9,000)

Lantern Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Assuming Lantern Company discontinues line F and is able to double the production and sales of product line E without increasing fixed costs. What affect will this have on operating income?

A) Decrease $14,000

B) Increase $14,000

C) Increase $36,000

D) Increase $31,000

Diff: 3

LO: 8-4

EOC: E8-34A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

28) Lantern Company has three product lines: D, E, and F. The following information is available:

D E F

Sales revenue $83,000 $42,000 $20,000

Variable expenses $42,000 $21,000 $12,000

Contribution margin $41,000 $21,000 $ 8,000

Fixed expenses $12,000 $15,000 $17,000

Operating income (loss) $29,000 $ 6,000 $(9,000)

Lantern Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Assume Lantern Company is able to increase the sales revenue of product F to $36,000 with no change in volume of units sold and no change in variable costs or fixed costs. What affect will this have on operating income?

A) Increase $42,000

B) Increase $16,000

C) Decrease $16,000

D) Decrease $20,000

Diff: 3

LO: 8-4

EOC: E8-34A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

29) The income statement for Wake Me Up Appliances is divided by its two product lines, Toasters and Coffee Machine, as follows:

If fixed costs remain unchanged and Wake Me Up Appliances discontinues the Coffee Machine line, how will operating income change?

A) Will decrease by $170,000

B) Will increase by $45,000

C) Will decrease by $45,000

D) Will increase by $170,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

30) The income statement for Wake Me Up Appliances is divided by its two product lines, Toasters and Coffee Machine, as follows:

If Wake Me Up Appliances can eliminate fixed costs of $32,000 by discontinuing the Coffee Machine line, then discontinuing it should result in which of the following?

A) Increase in total operating income of $65,000

B) Increase in total operating income of $13,000

C) Decrease in total operating income of $13,000

D) Decrease in total operating income of $65,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

31) The income statement for Wake Me Up Appliances is divided by its two product lines, Toasters and Coffee Machine, as follows:

If Wake Me Up Appliances can eliminate fixed costs of $35,000 and increase the sale of Toasters by 6,500 units at a selling price of $30 per unit and a contribution margin of $12 per unit, then discontinuing the Wake Me Up should result in which of the following?

A) Increase in total operating income of $68,000

B) Increase in total operating income of $153,000

C) Decrease in total operating income of $68,000

D) Decrease in total operating income of $153,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

32) The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows:

If fixed costs remain unchanged and Lovely Locks discontinues the Straightener line, how will operating income change?

A) Will decrease by $190,000

B) Will increase by $50,000

C) Will increase by $190,000

D) Will decrease by $50,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

33) The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows:

If Lovely Locks can eliminate fixed costs of $32,000 by discontinuing the Straightener line, then discontinuing it should result in which of the following?

A) Increase in total operating income of $10,000

B) Decrease in total operating income of $18,000

C) Increase in total operating income of $18,000

D) Decrease in total operating income of $10,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

34) The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows:

If Lovely Locks can eliminate fixed costs of $34,000 and increase the sale of Curling Irons by 6,000 units at a selling price of $33 per unit and a contribution margin of $12 per unit, then discontinuing the Straighteners should result in which of the following?

A) Decrease in total operating income of $56,000

B) Increase in total operating income of $86,000

C) Increase in total operating income of $56,000

D) Decrease in total operating income of $86,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

35) The internal financial statements of Shiny Pockets Incorporated show that their beaded purses incurred an operating loss in the most recent year. There were 28,000 purses sold in that year. Selected financial information about the purse line follows.

If the line of purses were to be discontinued, the company would avoid $18,000 in fixed costs per year.

If Shiny Pockets Incorporated were to discontinue the line of purses, the change in annual operating income would be a(n)

A) increase in total operating income of $80,000.

B) decrease in total operating income of $7,000.

C) increase in total operating income of $7,000.

D) decrease in total operating income of $80,000.

Diff: 2

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

36) Worldwide Corporation operates two divisions with the following operating results from last year:

Management is considering whether the Eastern Division should be discontinued since it incurred an operating loss last year. Allocated common fixed costs would continue for Worldwide Corporation whether the division is discontinued or not.

If the Eastern Division had been discontinued at the beginning of last year, what would the total operating income (loss) for Worldwide Corporation have been for the year?

A) $65,000

B) $10,000

C) $35,000

D) $110,000

Diff: 2

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

37) Ace Parts and Supply makes a variety of car parts. The company produces 6,000 A90 parts each year. Each A90 sells for $7 and has a contribution margin of $5. Currently, $16,500 of fixed manufacturing overhead is allocated to the A90 product line. If Ace Parts and Supply discontinues the A90 product line, $7,200 of fixed manufacturing overhead costs would be avoided. What would be the impact on total operating income if the A90 product line were to be discontinued?

A) Increase in total operating income of $22,800

B) Decrease in total operating income of $22,800

C) Increase in total operating income of $20,700

D) Decrease in total operating income of $20,700

Diff: 2

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

38) Solar Enterprises is considering whether to discontinue a division that generates a total contribution margin of $67,000 per year. Fixed manufacturing overhead allocated to this division is $54,000, of which 22,000 is unavoidable. If Solar Enterprises were to eliminate this division, the effect on the company's operating income would be a(n)

A) increase in total operating income of $35,000.

B) decrease in total operating income of $35,000.

C) increase in total operating income of $45,000.

D) decrease in total operating income of $45,000.

Diff: 2

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

39) Pet Food Inc. has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow:

Assuming total fixed costs remain unchanged, how would discontinuing the Dog food line affect operating income?

A) Increase in total operating income of $209,000

B) Increase in total operating income of $7,000

C) Decrease in total operating income of $45,000

D) Decrease in total operating income of $463,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

40) Pet Food Inc. has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow:

If $13,000 of fixed costs will be eliminated by discontinuing the Dog food line, how will operating income be affected?

A) Increase $496,000

B) Increase $232,000

C) Decrease $32,000

D) Decrease $53,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

41) Pet Food Inc. has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow:

Assuming the Dog food is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $22,000 per year, how will operating income be affected?

A) Increase $249,000

B) Increase $521,000

C) Decrease $23,000

D) Increase $23,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

42) Pet Food Inc. has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow:

Assuming the Dog food line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Dog food line is used to double the production of Cat food, how will operating income be affected?

A) Increase $121,000

B) Increase $300,000

C) Increase $150,000

D) Decrease $121,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

43) Maizy Productions has three models: D, E, and F. The following information is available:

Maizy Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed expenses are unavoidable. Assuming Maizy Productions discontinues model F and does not replace it, what effect will this have on operating income?

A) Decrease $14,000

B) Increase $14,000

C) Increase $8,000

D) Decrease $8,000

Diff: 2

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

44) Maizy Productions has three models: D, E, and F. The following information is available:

Maizy Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed costs are unavoidable. Maizy Productions discontinues model F and rents the space formerly used to produce product F for $15,000 per year, what effect will this have on operating income?

A) Increase $23,000

B) Increase $5,000

C) Decrease $23,000

D) Decrease $5,000

Diff: 2

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

45) Maizy Productions has three models: D, E, and F. The following information is available:

Maizy Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed costs are unavoidable. Assuming Maizy Productions discontinues line F and is able to double the production and sales of model E without increasing fixed costs. What effect will this have on operating income?

A) Increase $13,000

B) Decrease $13,000

C) Increase $18,000

D) Decrease $18,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

46) Maizy Productions has three models: D, E, and F. The following information is available:

Maizy Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed costs are unavoidable. Assume Maizy Productions is able to increase the sales revenue of product F to $31,000 with no change in volume of units sold and no change in variable costs or fixed costs. What effect will this have on operating income?

A) Increase $7,000

B) Increase $24,000

C) Decrease $7,000

D) Decrease $24,000

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

47) Totally Technology manufactures Cameras and Video Recorders. The company's product line income statement follows:

Management is considering discontinuing the Video Recorder product line. Accountants for the company estimate that discontinuing the Video Recorder line will decrease fixed cost of goods sold by $10,000 and fixed marketing and administrative expenses by $4,000.

Prepare an analysis supporting your opinion about whether or not the Video Recorder product line should be discontinued.

Diff: 3

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

48) Cornell Enterprises currently produces several products. Model L78 is showing a net operating loss as indicated by the following condensed income statement prepared for the year ended December 31.

Cornell Enterprises

Model L78

Condensed Income Statement

For the Year Ended December 11

You have been hired by Cornell Enterprises to help analyze the decision as to whether to eliminate Model L78. Upon investigation, you discover that if Model L78 is eliminated, $20,000 of the fixed costs shown on the above condensed income statement can be eliminated. The rest of the fixed costs allocated to Model L78 are common fixed costs that will be allocated to the remaining two products produced by Cornell Enterprises.

Determine if Cornell Enterprises should discontinue Model L78.

Diff: 2

LO: 8-4

EOC: P8-44A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

49) The Print Manufacturing Company manufactures Size 1, Size 2, and Size 3 printer ribbons to support the printers it manufactures. The managerial accountant reported the following information:

Print Manufacturing Company

Ribbon Report

The managerial accountant at Print Manufacturing noted that the Size 3 printer ribbon reports a loss and the managerial accountant needs to determine if the company should drop the Size 3 printer ribbon. What is the increase or decrease in operating income if the operations manager drops the Size 3 printer ribbon and does not replace it? If the managerial accountant recommends that the organization drop the Size 3 printer ribbon and rent out the space the company uses to store the product at $11,000 per year, is there an increase or a decrease in operating income?

Diff: 2

LO: 8-4

EOC: E8-39B

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

8.5 Factor resource constraints into product mix decisions

1) For some merchandisers, the primary constraint may be cubic feet of display space.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

2) A constraint is a factor that restricts production or sale of a product.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

3) Fixed costs affect product mix considerations.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

4) An example of an expansion constraint would be the size of the available labor pool.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

5) To maximize profits, produce the product with the lowest contribution margin per unit of the constraint.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

6) When making product mix decisions, companies are most profitable when they maximize production of the product with the greatest sales demand.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

7) When making product mix decisions, companies are most profitable when they maximize production of the product with the greatest sales price.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

8) When making product mix decisions, companies are most profitable when they maximize production of the product with the highest contribution margin per unit of constraint.

Diff: 1

LO: 8-5

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

9) All of the following are product mix considerations except

A) What constraint(s) stops us from making (or displaying) all of the units we can sell?

B) Which products offer the highest contribution margin per unit of the constraint?

C) Would emphasizing one product over another affect fixed costs?

D) Which product has the most sunk costs?

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

10) The contribution margin per unit of constraint is calculated as

A) contribution margin per unit × constraint per unit.

B) contribution margin per unit × units per constraint.

C) contribution margin per unit ÷ units per constraint.

D) contribution margin per unit + constraint per unit.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

11) Companies with production constraints and irrelevant fixed costs will be most profitable when they maximize production of the product with the highest

A) sales price.

B) demand for the product.

C) contribution margin per unit of the constraint.

D) contribution margin per unit.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

12) The factor that restricts production or sale of a product is which of the following?

A) Demanding factor

B) Constraint

C) Sunk factor

D) Relevant factor

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

13) A "constraint" is best described by which of the following?

A) The distribution of all products to be sold

B) A factor that restricts production or sales of a product

C) Benefits foregone by choosing a particular alternative course of action

D) Expected future costs that differ among alternatives

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

14) A "sales mix" is best described by which of the following?

A) A factor that restricts production or sales of a product

B) Costs that were incurred in the past and cannot be changed

C) Expected future costs that differ among alternatives

D) The relative number of all products to be sold

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

15) Which of the following could be a constraint for selling a product?

A) Store hours

B) Available labor hours for employees

C) Shelf space

D) All of the above could be constraints.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

16) All of the following would be considered in evaluating product or sales mix allocations, except

A) deciding which product offers the lowest contribution margin per unit.

B) deciding whether fixed costs would change as a result of the product sales mix.

C) deciding upon any and all constraints associated with the product/sale mix.

D) deciding which products will contribute the highest contribution margin per unit.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

17) Changing the product mix emphasis in the short run will usually not affect

A) total variable costs.

B) both total variable and total fixed costs.

C) total fixed costs.

D) total contribution margin.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

18) A company that has a constraint and produces multiple products should emphasize the production of the product that has the

A) highest sales price per unit.

B) highest contribution margin per unit.

C) highest contribution margin per unit of constraint.

D) most unit sales out of all the products.

Diff: 1

LO: 8-5

EOC: S8-8

AACSB: Reflective thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

19) Fresco Appliances manufactures two products: Food Processors and Espresso Makers. The following data are available:

The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,200 machine hours per month.

What is the contribution margin ratio for food processors?

A) 31.03%

B) 17.50%

C) 3.10%

D) 11.11%

Diff: 2

LO: 8-5

EOC: E8-23A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

20) Fresco Appliances manufactures two products: Food Processors and Espresso Machines. The following data are available:

The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,200 machine hours per month.

What is the contribution margin per machine hour for espresso machines?

A) $675

B) $195

C) $90

D) $65

Diff: 2

LO: 8-5

EOC: E8-23A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

21) Fresco Appliances manufactures two products: Food Processors and Espresso Machines. The following data are available:

The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,200 machine hours per month.

What is the contribution margin per machine hour for food processors?

A) $390

B) $225

C) $95

D) $190

Diff: 2

LO: 8-5

EOC: E8-23A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

22) Fresco Appliances manufactures two products: Food Processors and Espresso Machines. The following data are available:

The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,600 machine hours per month.

To maximize profits, what product and how many units should the company produce in a month (assuming unlimited demand for both products)?

A) 3,200 Food Processors and 0 Espresso Machines

B) 150 Food Processors and 195 Espresso Machines

C) 3,200 Food Processors and 4,800 Espresso Machines

D) 4,800 Espresso Machines and 0 Food Processors

Diff: 3

LO: 8-5

EOC: E8-23A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

23) Fresco Appliances manufactures two products: Food Processors and Espresso Machines. The following data are available:

The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,300 machine hours per month.

The company has demand of 2,700 espresso machines. How many espresso machines and food processors should they produce based on demand and available machine hours?

A) 900 espresso machines and 400 food processors

B) 2,700 espresso machines and 0 food processors

C) 2,700 espresso machines and 400 food processors

D) 2,700 espresso machines and 800 food processors

Diff: 3

LO: 8-5

EOC: E8-23A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

24) Massey Enterprises produces three products, with costs and selling prices as follows:

Model B3 Model D7 Model F5

Each product requires a certain number of minutes on the drill press. There is only one drill press available, so it is the constraint for this product. Model D7 requires 2 minutes of drill press time, Model B3 requires 1 minute of drill press time, and Model F5 requires 7 minutes of drill press time. In what order should Massey Enterprises emphasize its products to maximize its contribution margin? (Rank the products in order from most profitable to least profitable.)

A) Model B3, Model D7, Model F5

B) Model B3, Model F5, Model D7

C) Model D7, Model B3, Model F5

D) Model F5, Model D7, Model B3

Diff: 3

LO: 8-5

EOC: E8-23A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

25) Forrest Corporation processes all of its products through a lathe machine. The lathe is only available for 60 hours per week and is the constraint for all of the products. Data regarding Forrest Corporation's three products follows:

In what order should Forrest Corporation emphasize its products to maximize its contribution margin? (Rank the products in order from most profitable to least profitable.)

A) Product B, Product A, Product C

B) Product A, Product C, Product B

C) Product A, Product B, Product C

D) Product B, Product C, Product A

Diff: 3

LO: 8-5

EOC: E8-23A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

26) Family Furniture manufactures two products: Chairs and Sofas. The following data are available:

The company can manufacture two chairs per machine hour and one sofa per machine hour. The company's production capacity is 13,200 machine hours per month.

What is the contribution margin ratio for Chairs?

A) 30.77%

B) 44.44%

C) 16.92%

D) 42.14%

Diff: 2

LO: 8-5

EOC: E8-23A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

27) Family Furniture manufactures two products: Chairs and Sofas. The following data are available:

The company can manufacture 4 chairs per machine hour and 1 sofa(s) per machine hour. The company's production capacity is 1,000 machine hours per month.

What is the contribution margin per machine hour for sofas?

A) $365

B) $1,115

C) $1,460

D) $1,825

Diff: 2

LO: 8-5

EOC: E8-23A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

28) Family Furniture manufactures two products: Chairs and Sofas. The following data are available:

The company can manufacture 3 chairs per machine hour and 1 sofa(s) per machine hour. The company's production capacity is 12,800 machine hours per month.

What is the contribution margin per machine hour for chairs?

A) $2,760

B) $360

C) $120

D) $480

Diff: 2

LO: 8-5

EOC: E8-23A

AACSB: Analytical thinking

Learning Outcome: Use incremental analysis to make short-term decisions.

29) Family Furniture manufactures two products: Chairs and Sofas. The following data are available:

The company can manufacture 3 chairs per machine hour and 2 sofa(s) per machine hour. The company's production capacity is 900 machine hours per month.

To maximize profits, what product and how many units should the company produce in a month?

A) 2,700 chairs and 1,800 sofas

B) 1,800 sofas

C) 2,700 chairs

D) 1,800 chairs and 2,700 sofa