Test Questions & Answers Short-Term Decision Making Ch.4

Chapter 4

Short-Term Decision Making

MATCHING

1. Match the following terms with the definitions below.

A. Breakeven point

B. Contribution margin

C. Cost-volume-profit analysis

D. Sensitivity analysis

E. Incremental cost

F. Sunk cost

G. Relevant variable

H. Sales mix

_____ 1. Total sales less total variable cost at a given point of activity

_____ 2. A past cost that is not relevant in short-term decisions

_____ 3. The relative proportions of units of products sold in a multiple-product

company

_____ 4. The point where the total cost line intersects the total revenue line

_____ 5. A cost or revenue that will occur in the future and that differs among the

alternatives considered

_____ 6. The study of how costs and profits change in response to changes in the volume

of goods and services provided to consumers

_____ 7. The process of changing key variables to determine how a prior outcome is

impacted by the change in the variable

_____ 8. The additional cost associated with an alternative

Answers: 1.B; 2.F; 3.H; 4.A; 5.G; 6.C; 7.D; 8.E

2. Match the following terms with the definitions below.

A. Contribution margin

B. Contribution margin ratio

C. Incremental profit

D. Indirect labor

E. Manufacturing overhead

F. Nonproduct cost

G. Opportunity cost

H. Relevant variable

I. Unit-related cost

J. Direct material

_____ 1. All costs other than direct materials and direct labor that are incurred in the

manufacture of products

_____ 2. The cost of materials that are directly traceable to the product and that are costly

enough to warrant tracing them

_____ 3. Total sales less total variable costs at a given level of activity

_____ 4. A cost that varies with the number of units

_____ 5. The difference between the incremental revenues and incremental cost of a

particular alternative

_____ 6. A benefit forgone when choosing one alternative over another

_____ 7. The contribution margin per unit divided by the selling price per unit

_____ 8. The cost of production employees who do not physically manufacture the

product

_____ 9. A cost that is related to selling the products and services or administering the

company

_____ 10. A cost or revenue that will occur in the future and that differs among the

alternatives considered

Answers: 1.E; 2.J; 3.A; 4.I; 5.C; 6.G; 7.B; 8.D; 9.F; 10.H

3. Match the following terms with the definitions below.

A. Batch-related cost

B. Cost-volume-profit analysis

C. Direct labor

D. Facility-sustaining cost

E. Incremental cost

F. Indirect material

G. Manufacturing overhead

H. Product-sustaining cost

I. Unit-related cost.

_____ 1. All costs other than direct materials and direct labor that are incurred to

manufacture products

_____ 2. The cost of employees who manufacture products

_____ 3. A cost that varies with the number of product lines

_____ 4. A cost that varies with the number of batches regardless of how many units are

in each batch

_____ 5. A cost that varies with the number of products produced

_____ 6. The study of how cost and profits change in response to changes in the volume

of goods and services provided to customers

_____ 7. A cost incurred to maintain the company's capacity to operate

_____ 8. The additional cost associated with an alternative

_____ 9. The cost of production materials that either cannot be traced to the product or

whose cost is not enough to warrant tracing

Answers: 1. G; 2. C; 3. H; 4. A; 5. I; 6. B; 7. D; 8. E; 9. F

4. Sit-well Corporation Manufactures an exclusive line of chairs and recliners. Determine whether each of the following would be considered a product or nonproduct cost for Sit-well by using a P to identify the product cost and NP to identify nonproduct costs.

_____ A. Cost of the wood used in the chairs

_____ B. Cost of office supplies

_____ C. Cost of the fabric used on the recliners

_____ D. Cost of the utilities incurred to run the manufacturing plant

_____ E. The salary of the foreman who oversees the raw materials warehouse

_____ F. Depreciation on salespersons' cars

_____ G. The president of the corporation's salary

_____ H. Wages paid to employees who assemble the chairs

_____ I. Cost of the glue used to assemble the chairs

_____ J. Cost of shipping the finished product to consumers

Answers: A. P; B. NP; C. P; D. P; E. P; F. NP; G. NP; H. P; I. P; J. NP

5. JJ Corporation manufactures exercise equipment. From the list that follows, indicate whether the item would be classified as DM—direct material, DL—direct labor, MOH—manufacturing overhead, or NP—nonproduct cost.

_____ 1. Cost of the cables used in the equipment

_____ 2. Setup cost to change from one piece of equipment to another

_____ 3. Research cost incurred to develop new types of equipment

_____ 4. Salary of the quality control inspector

_____ 5. Cost of the oil used to cut metal tubing

_____ 6. Insurance on factory equipment

_____ 7. Wages of employees who put the equipment together

_____ 8. Salary of warehouse foreman where raw material is stored

_____ 9. Cost of shipping equipment to customers

_____ 10. Shipping cost paid to get raw materials

Answers: 1. DM; 2. MOH; 3. NP; 4. MOH; 5. MOH; 6. MOH; 7. DL; 8. MOH; 9. NP; 10. DM

6. Using the items that follow, classify each of the cost as U—unit related, B—batch related, P—product sustaining, F—facility sustaining, or N—none of the above

_____ 1. Cost of the cables used in the equipment

_____ 2. Setup cost to change from one piece of equipment to another

_____ 3. Research cost incurred to develop new types of equipment

_____ 4. Salary of the quality control inspector

_____ 5. Cost of the oil used to cut metal tubing

_____ 6. Insurance on factory equipment

_____ 7. Wages of employees who put the equipment together

_____ 8. Salary of warehouse foreman where raw material is stored

_____ 9. Cost of shipping equipment to customers

_____ 10. Shipping cost paid to get raw materials

8. Match the following terms with the descriptions below:

A. Direct labor

B. Indirect labor

C. Nonproduct cost

D. Other overhead

E. Direct material

G. Indirect material

_____ 1. Wages of person who assembles product

_____ 2. Manufacturing supervisor’s salary

_____ 3. Sales commissions

_____ 4. Cost of utilities for manufacturing plant

_____ 5. Plastic used in case of computer

_____ 6. Solution used to clean parts before assembly

Answers: 1. A; 2 B; 3. C ; 4. D; 5. E; 6. G;

9. Match the following breakeven terms with the descriptions below:

A. Variable cost

B. Fixed cost

C. Contribution margin

D. Sales price

_____ 1. Soda served to customer

_____ 2. Disposable cup that holds beverage

_____ 3. Tables in restaurant

_____ 4. Cost to launder uniforms of waiters

_____ 5. Food served to customers

_____ 6. Price of food less cost of food

_____ 7. Cost of soap to wash dishes

_____ 8. Price of food served

_____ 9. Percent of tips remitted to owners of restaurant

_____10. Salary of store accountant.

10. Short-term decision making differs from long-term decision making because:

A) short-term decision making assumes capacity is fixed.

B) short-term decision making assumes that variable costs are fixed.

C) short-term decision making assumes selling prices are fixed.

D) short-term decision making assumes the accounting data is fixed.

11. Short-term decision making differs from normal operating decision making in two ways.

Which of the following are the two ways?

A) Short-term decision cannot be planned and address routine operating decision.

B) Short-term operating decisions are unique and cannot be planned.

C) Short-term operating decisions are routine and anticipated.

D) Short-term operating decisions are unique and will expand plant capacity.

12. Which of the following is a short-term operating decision?

A) Decision to make a new product

B) Decision to buy a new plant

C) Decision to discontinue a product line

D) Decision to reduce the normal price to get large order from one customer

13. Selling price less variable costs equals:

A) markup.

B) net income.

C) gross margin.

D) contribution margin.

14. Contribution margin is defined as

1. selling price less variable cost.
2. selling price less operating expenses.
3. sales less fixed cost.
4. sales less variable cost and mixed cost.

15. The point where the total revenue line intersects the total cost line is called the

A) origin.

B) breakeven point.

C) X axis intercept .

D) Y axis intercept.

16. The breakeven point is the point at which:

A) total contribution margin equals total fixed costs.

B) total fixed costs equal total variable costs.

C) the total revenue line intersects the Y axis.

D) the total cost line intersects the X axis.

17. Which of the following generates the contribution margin?

A) Variable cost per unit—fixed cost per unit

B) Selling price per unit—fixed cost per unit

C) Selling price per unit—variable cost per unit

D) Fixed cost per unit—selling price per unit

18. Which of the following is the formula for the contribution margin ratio?

A) Selling price per unit—variable cost per unit/ selling price per unit

B) Selling price per unit— fixed cost per unit/ selling price per unit

C) Variable cost per unit/selling price per unit

D) Fixed cost per unit/selling price per unit

19. The contribution margin ratio is calculated as:

A) variable cost per unit/fixed cost per unit.

B) selling price per unit/variable cost per unit.

C) total fixed cost/contribution margin per unit.

D) contribution margin per unit/selling price per unit.

20. If only the selling price increases, the breakeven point

A) decreases.

B) increases.

C) stays the same.

D) depends on customer demand.

21. If only the fixed cost increases, the breakeven point

A) decreases.

B) increases.

C) stays the same.

D) depends on customer demand.

22. If only the variable cost decreases, the breakeven point

A) decreases.

B) increases.

C) stays the same.

D) depends on customer demand.

23. Dreary Days, Inc. sells raincoats at a selling price of $25.00 for each raincoat. The variable cost per coat is $16.25. Total fixed costs are $142,000. The contribution margin ratio is:

A) 0.65.

B) 0.54.

C) 0.30.

D) 0.35.

24. Dreary Days, Inc. sells raincoats at a selling price of $25.00 for each raincoat. The variable cost per raincoat is $16.25. Total fixed costs are $142,000. The breakeven point in units is:

A) 5,680.

B) 8,738.

C) 16,229.

D) 16,000.

25. True Fruit, Inc. sells frozen raspberry fruit bars for $2.50 each. The variable cost per bar is $1.35. Total fixed costs are $25,645. The contribution margin ratio is:

A) 0.54.

B) 0.46.

C) 0.22.

D) .019.

26. True Fruit, Inc. sells frozen raspberry fruit bars for $2.50 each. The variable cost per bar is $1.35. Total fixed costs are $25,645. The breakeven point in units is:

A) 10,258.

B) 18,996.

C) 22,300.

D) 25,260.

27. True Fruit, Inc. sells frozen raspberry fruit bars for $2.50 each. The variable cost per bar is $1.35. Total fixed costs are $25,645. The breakeven point in sales dollars is:

A) $25,645.

B) $47,490.

C) $55,750.

D) $63,150.

28. Bug-Ez Corporation manufactures one product, Itch-A-Way, which, when applied to a bug bite, soothes the itch. The unit contribution margin for Itch-A-Way is $4.20, and total fixed costs amount to $537,000. Given a selling price of $8.25 per unit, the breakeven point in units is:

A) 127,858.

B) 130,000.

C) 132,597.

D) 65,091.

29. Bug-Ez Corporation manufactures one product, Itch-A-Way, which, when applied to a bug bite, soothes the itch. The unit contribution margin for Itch-A-Way is $4.20, and total fixed costs amount to $537,000. Given a selling price of $8.25 per unit and a target profit of $147,000, Bug-Ez must sell:

A) 35,000 units.

B) 168,889 units.

C) 82,909 units.

D) 162,858 units.

30. Bug-Ez Corporation manufactures one product, Itch-A-Way, which, when applied to a bug bite, soothes the itch. The unit contribution margin for Itch-A-Way is $4.20, and total fixed costs amount to $537,000. Given a selling price of $8.25 per unit and a target profit of $147,000, Bug-Ez must have total sales of:

A) $1,054,821.

B) $709,334.

C) $683,999.

D) $1,343,578.

31. The Manhattan Company sells its one and only product for $89.00 per unit. Variable costs per unit amount to $63.50, and total fixed costs are $3,697,500. If management desires a before-tax profit of $765,000, total sales revenue must equal:

A) $ 2,670,000.

B) $ 4,462,500.

C) $15,575,000.

D) $68,085,000.

32. The Manhattan Company sells its one and only product for $89.00 per unit. Variable costs per unit amount to $63.50, and total fixed costs are $3,697,500. If Manhattan increases its total fixed costs by $267,500, it can reduce variable costs by $5.00 per unit. How will this affect the breakeven point in units?

A) The breakeven point will increase 48,415 units.

B) The breakeven point will decrease 15,000 units.

C) The breakeven point will increase 22,317 units.

D) The breakeven point will decrease 32,540 units.

33. The Manhattan Company sells its one and only product for $89.00 per unit. Variable costs per unit amount to $63.50, and total fixed costs are $3,697,500. If Manhattan increases its selling price to $95 how will this affect the breakeven point in units?

A) The breakeven point will increase 28,889 units.

B) The breakeven point will decrease 116,111 units.

C) The breakeven point will increase 116,111 units.

D) The breakeven point will decrease 28,889 units.

34. The Foggy Daze Company sells a one-size-fits-all rain poncho for $11.50. Variable costs per unit are $3.86, and total fixed costs amount to $572,200. The corporate tax rate is 30 percent and the company wants to earn an after-tax profit of $209,000. The breakeven point in units is

A) 102,251.

B) 113,975.

C) 75,720.

D) 74,896.

35. The Foggy Daze Company sells a one-size-fits-all rain poncho for $11.50. Variable costs per unit are $3.86, and total fixed costs amount to $572,200. The corporate tax rate is 30 percent and the company wants to earn an after-tax profit of $209,000. The total sales needed to break even are

A) $1,175,886.

B) $1,310,712.

C) $870,780.

D) $861,304.

36. The Foggy Daze Company sells a one-size-fits-all rain poncho for $11.50. Variable costs per unit are $3.86, and total fixed costs amount to $572,200. The corporate tax rate is 30 percent and the company wants to earn an after-tax profit of $209,000. How many units must be sold to achieve the after-tax profit goal?

A) 102,251

B) 113,975

C) 75,720

D) 74,896

37. Kapalua, Inc. manufactures hand-held planners. Total fixed costs are $3,950,000, with variable costs per unit of $148.28. The corporate tax rate is 35 percent. If Kapalua can sell 39,242 units, the per unit selling price necessary to earn an after-tax profit of $1,430,000 must be:

A) $305.00.

B) $285.38.

C) $353.05.

D) $248.94.

38. Kapalua, Inc. manufactures hand-held planners. The selling price per unit is $355.00, with variable costs per unit of $91.50. The corporate tax rate is 35 percent. If Kapalua can sell 15,000 units and can earn an after-tax profit of $1,513,000, total fixed costs must be:

A) $3,812,000.

B) $3,952,000.

C) $1,624,808.

D) $1,372,500.

39. The breakeven point prior to the purchase of the computer is:

A) 180,900.

B) 70,000.

C) 67,000.

D) 48,892.

40. Assuming Ogallah purchases the software, the breakeven point will be:

A) 70,000.

B) 62,379.

C) 50,000.

D) 30,000.

41. If Ogallah raised the selling price of its product, what effect would that have on the breakeven point prior to and after the purchase of the computer, respectively?

A) Decrease/decrease

B) Increase/increase

C) Decrease/increase

D) Increase/decrease

42. Andante Company had sales of 1,500 units more than breakeven point. Andante's fixed costs are $450,000 and its contribution margin was $30 per unit. How much profit did Andante have?

A) $45,000

B) $405,000

C) $495,000

D) Unable to determine from the information given

43. Adagio Company had sales of 2,500 units more than breakeven point. Adagio 's fixed costs are $500,000 and its contribution margin was $20 per unit. How many units did Adagio sell?

A) 2,500

B) 25,000

C) 27,500

D) Unable to determine from the information given

44. Allegro Corporation had total profit of $90,000. Its breakeven point is 15,000 units and its contribution margin was $25 per unit. How many units did Allegro sell?

A) 3,600

B) 18,600

C) 19,000

D) Unable to determine from the information given

45. If fixed costs increase, how will this affect the contribution margin and profit?

Contribution Margin Profit

A)

B)

C)

D)

46. If variable cost per unit increases, how will this affect the contribution margin and

breakeven point?

Contribution Margin Breakeven Point

1. Decrease Decrease
2. Increase Increases
3. Decrease Increase
4. Increase Decrease

47. If selling price per unit increases, how will this affect the contribution margin and

breakeven point?

Contribution Margin Breakeven Point

A) Decrease Decrease

B) Increase Increases

C) Decrease Increase

D) Increase Decrease

48. If a manufacturer's cost of direct material increases, how will this affect breakeven point?

A) No effect

B) Decrease

C) Increase

D) Unable to determine from the information given

49. If a company increases the sales commission rate from 5 percent to 8 percent, how will this impact the contribution margin and the breakeven point?

A)

B)

C)

D)

50. If a company decreases its fixed cost and decreases its variable cost, what is the impact on its contribution margin and breakeven point?

A)

B)

C)

D)

51. If a company decreases its fixed cost and decreases its variable cost, what is the impact on its contribution margin and breakeven point?

A) Increase Increase

B)

C)

D)

52. Meadow Glow Company desires an after-tax profit of $140,000. Its sales price and variable costs are $100 and $40 per unit, respectively. Fixed costs total $340,000. Assuming a 30 percent tax rate, how many units must Meadow Glow sell to achieve its desired profit?

A) 14,000

B) 9,000

C) 8,000

D) 5,667

53. Purinton Company has prepared the following income statement for the year:

How far above breakeven point is Purinton operating?

A) 9,000 units

B) 6,480 units

C) 15,000 units

D) Unable to determine from the information given

54. Short-term operating decisions:

A) assume current capacity is fixed.

B) arise during the planning phase of the management cycle.

C) arise during the evaluating phase of the management cycle.

D) are usually routine decisions which are not unique to any particular situation.

55. Expenditures associated with items already purchased that are irrelevant to future decisions are called

A) opportunity costs.

B) incremental costs.

C) sunk costs.

D) joint costs.

56. In making a decision regarding whether to sell a tract of land, the purchase price of the land is a(n):

A) incremental cost.

B) opportunity cost.

C) relevant cost.

D) sunk cost.

57. Opportunity costs:

A) are irrelevant.

B) are the foregone benefits of the next best alternative.

C) are the costs associated with the selected alternative.

D) are the combined benefits of all alternatives other than the one selected.

58. The salary of an executive who decides to quit her job and return to school full time is a(n)

A) sunk cost.

B) incremental cost.

C) opportunity cost.

D) incremental revenue.

59. The change in total revenue, if one alternative is implemented instead of another, is referred to as:

A) sales revenue.

B) joint revenue.

C) operating revenue.

D) incremental revenue.

60. The change in total cost, if one alternative is implemented instead of another, is referred to as:

A) incremental cost.

B) opportunity cost.

C) changing cost.

D) joint cost.

61. The rule for making sound economic decisions is that one should choose the alternative with the:

A) highest contribution margin.

B) lowest opportunity cost.

C) lowest sunk costs

D) highest revenue.

62. When deciding to purchase new equipment the cost of equipment being replaced is a(n):

A) sunk cost.

B) incremental cost.

C) opportunity cost.

D) incremental revenue.

63. All of the following are steps in incremental analysis except:

A) identifying the alternative actions.

B) determining the incremental revenue.

C) determining the relevant costs of each alternative.

D) choosing the alternative that produces the highest revenue.

64. When analyzing the incremental costs used to help make a short-term operating decision,

A) fixed costs are irrelevant.

B) variable costs are irrelevant.

C) both fixed costs and variable costs are relevant.

D) incremental revenues are irrelevant.

65. If JJ Enterprises adds Product C, the total incremental revenue will be:

A) $1,125,000.

B) $ 200,000.

C) $ 70,000.

D) $ 7,500.

66. If JJ Enterprises adds Product C, the total incremental cost will be:

A) $740,000.

B) $330,000.

C) $137,500.

D) $130,000.

67. The incremental income in the decision whether or not to manufacture Product C is:

A) $200,000.

B) $135,000.

C) $ 70,000.

D) $ 62,500.

68. Assuming Knockdown has enough excess gloves on hand to fill the special order, it should:

A) reject the offer since income will decrease by $7,500.

B) accept the offer since income will increase by $7,500.

C) reject the offer since income will decrease by $10,500.

D) accept the offer since income will increase by $10,500.

69. Assuming Knockdown has no way of purchasing any additional gloves, and, that accepting this order will mean losing an equivalent quantity of sales to regular customers, Knockdown should:

A) reject the offer since income will decrease by $7,500.

B) accept the offer since income will increase by $7,500.

C) reject the offer since income will decrease by $52,500.

D) accept the offer since income will increase by $52,500.

70. Assuming Naui has sufficient excess capacity to fill this special order without affecting sales to current customers, it should:

A) reject the offer since income will decrease by $8,000.

B) accept the offer since income will increase by $8,000.

C) reject the offer since income will decrease by $4,000.

D) accept the offer since income will increase by $4,000.

71. Assuming Naui presently sells all the shirts it produces, and therefore would have to cancel some of its current orders to fill the special order, Naui should:

A) reject the offer since income will decrease by $18,000.

B) accept the offer since income will increase by $18,000.

C) reject the offer since income will decrease by $14,000.

D) accept the offer since income will increase by $14,000.

72. Direct labor is an example of a

A) unit-related cost.

B) batch-related cost.

C) facility-sustaining cost.

D) product-sustaining cost.

73. Salaries of product-line managers are an example of a/an

A) unit-related cost.

B) batch-related cost.

C) facility-sustaining cost.

D) product-sustaining cost.

74. Qualco inspects 10% of each raw material shipment received. The inspection costs are an example of a/an

A) unit-related cost.

B) batch-related cost.

C) facility-sustaining cost.

D) product-sustaining cost.

75. The cost associated with maintaining the manufacturing equipment daily is a/an

A) unit-related cost.

B) batch-related cost.

C) facility-sustaining cost.

D) product-sustaining cost.

76. Nowlin & Rudder is a manufacturer of sports equipment. It has been approached by a large European retailer about the possibility of producing a special order of tennis rackets. Under which of the following conditions should Nowlin & Rudder accept this offer?

A) The firm has the capacity to produce the special order.

B) The firm has the capacity to produce the special order and the special-order price exceeds the fixed cost related to of the special order.

C) The firm has the capacity to produce the special order and the special-order price exceeds the total variable cost of the special order.

D) The firm has the capacity to produce the special order and the special-order price exceeds the incremental cost of the special order.

77. Cameron Company is considering discontinuing production of one of its products and buying the product instead. Which of the following would not be relevant to this decision?

A) Opportunity costs

B) Incremental costs

C) Product quality

D) Sales price

78. Nichols Corporation is trying to decide whether to sell its carpet-quality thread or to manufacture the carpets itself. Under which of the following conditions should Nichols sell its thread?

A) The incremental revenue from further processing is less than the incremental costs.

B) The incremental revenue from further processing is greater than the incremental costs.

C) The incremental cost from further processing is less than the cost of manufacturing the thread.

D) The incremental cost from further processing is greater than the cost of manufacturing the thread.

79. A product line should be temporarily discontinued if

A) it is operating at a loss.

B) it is failing to produce the desired profit.

C) the relevant costs saved exceed the relevant revenue lost.

D) dropping the product line will adversely affect remaining workers.

80. Managers of Prestissimo Corporation are thinking about eliminating one of their products, EasyGlo. EasyGlo sells for $8 per unit. Unit-related costs are $5, batch-related costs are $300 per batch, and 3 batches of EasyGlo have been required each month. Prestissimo spends $3,000 each month to advertise EasyGlo. Rent and insurance on the factory allocated to EasyGlo total $4,000. If Prestissimo is currently producing and selling 1,500 units of EasyGlo each month, what is the relevant profit for the product-elimination decision?

A) $4,500

B) $3,600

C) $ 600

D) ($3,400)

81. Managers of Pianissimo Corporation are thinking about eliminating one of their products, MoreGlo. MoreGlo sells for $10 per unit. Unit-related costs are $6, batch-related costs are $400 per batch, and 4 batches of MoreGlo have been required each month. Pianissimo spends $4,000 each month to advertise MoreGlo. Rent and insurance on the factory allocated to MoreGlo total $2,000. If Pianissimo is currently producing and selling 1,500 units of MoreGlo each month, it should not eliminate MoreGlo as long as relevant profit is at least

A) $1.

B) $400.

C) $2,000.

D) $4,400.

82. Brio Company is considering eliminating a product line. If it eliminates the product, equipment, which originally cost $250,000, will be disposed of for $6,000. The equipment has a book value of $75,000 and annual depreciation of $25,000. Ignoring income tax, what is the relevant amount for the product-elimination decision?

A) $250,000

B) $75,000

C) $25,000

D) $6,000

83. Marquette Company currently produces all its product components. Another firm has offered to supply the casings at $6 each. Marquette's total cost per casing is as follows:

The fixed overhead is based on production of 3,000 casings, and none of it would be eliminated if Marquette accepted the offer. By how much would profit change if Leggier accepts this offer and purchases 3,000 casings?

A) $7,500 increase

B) $9,900 decrease

C) $5,400 increase

D) $300 decrease

84. Bean Town Company currently produces and sells 12,000 units of its product each month at $15 each. Another firm has offered to buy an additional 1,000 units at $10 per unit. Bean Town's total cost per unit is as follows:

Fixed overhead costs per unit are based on production of 12,000 units per month. Bean Town currently has the capacity to produce 15,000 units per month. By how much would profit change if Bean Town accepts this offer?

A) $7,000 increase

B) $5,500 increase

C) $1,700 increase

D) $300 decrease

85. Explain the effect on breakeven point of an increase in (a) direct labor cost and (b) factory rent.

86. Explain the effect on breakeven point of an (a) increase in sales price, (b) a decrease in materials cost, and (c) an increase in insurance cost on the factory.

87. Define and distinguish between a sunk cost and an opportunity cost, and give an example of each. Is each one relevant to decision making? Explain.

88. Chill Out, Inc. manufactures a premium ceiling fan that sells for $650. The company expects to produce and sell 65,000 fans this year. The unit cost of a fan is shown below:

The company recently received a special order from Big Box Store for 5,000 fans at a price of $475. Chill Out, Inc. has the capacity to produce the extra 5,000 fans without affecting current sales. Determine whether Chill Out, Inc. should accept or reject the special order. Are any of the above costs irrelevant to the decision? Which ones and why?

89. Two firms, Alpha and Omega, had the same sales (units and dollars), total costs, and operating income. Alpha's breakeven point is lower than Omega's, however. What could cause this discrepancy?

90. Explain why contribution margin is all profit above the breakeven point.

91. Explain why the total amount of loss increases as the number of units sold falls below the breakeven point?

92. "Fixed costs are never relevant in short-term operating decisions." Do you agree with that statement? Why or why not?

93. A firm is facing a special-order decision. Explain what revenues and costs are relevant to this decision.

94. You are seeing your mother off on a cruise when you hear the cruise director say that they have "several empty cabins." The cruise is costing your mother $849 but you offer the cruise line $250 for a ticket. Under what conditions should the cruise line accept your offer?

95. Your firm is involved in a make-or-buy decision for an important component of its single product. The quantitative analysis results in a small advantage for the buy option. Would you accept this alternative? Why or why not?

96. Assume a person is considering starting a new business and calculates the expected

breakeven point for the business. Using the results of the breakeven analysis, what

should be the next step taken?

97. Promotion Industries manufacturers license plates for automobiles. The license plates sell for $10.50 each. During 2008, Miller sold 750,000 plates incurring total variable costs of $1,462,500 and fixed costs of $3,268,720.

(a) Determine the contribution margin per unit.

(b) Determine the breakeven point in units for 2008.

(c) Determine the amount of profit earned in 2008.

(d) Determine the breakeven point in units for 2009, assuming variable costs increase by 20 percent and fixed costs remain unchanged.

98. Techno Inc. manufactures pagers that sell for $130 each. Annual fixed costs total $3,185,000, and variable costs are $39 per unit. The company is subject to a 32 percent corporate tax and wants to earn an after-tax profit of $675,000.

(a) What is the contribution margin ratio?

(b) What is the breakeven point in sales dollars?

(c) How many pagers must the company sell to reach its after-tax profit goal?

(d) If Techno increased the selling price of the fax machine by 10 percent, what would the breakeven point in units be?

99. Zippo Inc. manufactures digital camera that sell for $240 each. Annual fixed costs total $4,850,000 while variable costs are $92 per unit. The company is subject to a 30% corporate tax and wants to earn an after-tax profit of $975,000.

(a) What is the contribution margin ratio?

(b) What is the breakeven point in sales dollars?

(c) How many pagers must the company sell to reach its after-tax profit goal?

(d) If Zippo increased the selling price of the digital camera by 10 percent, what would the breakeven point in units be?

100. Curio Enterprises currently manufactures two products, X and Y, for which the following data have been gathered:

*NOTE: All common costs are fixed costs, and they represent the total fixed costs for the company.

Curio is considering adding a new product, Product Z. It is expected that Product Z would sell for $50 per unit, have variable costs of $33 per unit, and that the addition of Product Z would result in one-third of the company's common costs being allocated to each product line. It is expected that 10,000 units of product Z would be produced and sold during the period.

Required:

What is the total incremental income in the decision whether or not to manufacture Product Z? Explain why Curio should or should not manufacture Product Z.

101. Kiechel Employment Counseling, Inc. provides career counseling to unemployed individuals. The standard rate for counseling services is $50 per hour. Variable costs per hour of counseling are $28, while fixed costs are estimated at $10 per hour. Kiechel has been approached by a company that has just laid off 50 employees and would like to provide 4 hours of counseling for each laid-off employee during the coming week. The company is willing to pay $35 per hour.

1. Assuming that Kiechel has ample counselors who have no clients scheduled for the coming week, Kiechel should:

102. Transcom Corporation sells three types of intercom systems, the deluxe model, the superior model and the regular model. The profit report for these intercom systems for the most recent period is shown below by product line. The facility sustaining costs are fixed and allocated equally between each of the three product lines.

Transcom has reviewed the data presented and is trying to determine whether to drop the deluxe and regular models of their intercom system. Should Transcom drop one or both of the product lines? Justify your position given the data you have been presented with.

103. WyKan Corporation sells three types of speaker systems, the Model A, the Model B and the Model C. The profit report for these speaker systems for the most recent period is shown below by product line. The facility sustaining costs are fixed and allocated as shown below between each of the three product lines.

WyKan has analyzed the data and wants to determine whether to drop Model C speakers of their line of product. What action should WyKan take? Justify your position given the data you have been given here.

104. Durango Company manufactures several products, one of which is a western style saddle. Total production costs for 5,000 saddles are as follows:

Durango has been approached by a supplier that will sell the same saddle to Durango for $1,100 per saddle. Assume that Durango could rent its manufacturing facilities for $350,000 per year. Should Durango continue to make the saddle, or should they buy the saddles? Explain the basis of your decision.

105. Kampalot, Inc. manufactures pop-up campers. One of the component parts, RV3, is produced in-house by Kampalot. A supplier has approached the company with an offer to supply the RV3 part at a price of $45 per unit. Kampalot's current costs to manufacture the 20,000 RV3 parts it needs each year are:

Assuming there is no alternative use for its current production facilities, determine whether Kampalot should purchase the part from the supplier or continue making the part. Alternatively, if the facilities Kampalot uses to produce part RV3 could be rented for $75,000 per year, should the company continue to produce the part or purchase it instead?