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Chapter 13
RelevantCostsforDecision-Making
True/False
T
Medium
One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.
T
Medium
Future costs that do not differ among the alternatives are not relevant in a decision.
F
Medium
Variable costs are always relevant costs.
T
Easy
An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another.
T
Easy
A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of what action is chosen.
T
Easy
The book value of old equipment is not a relevant cost in an equipment replacement decision problem.
F
Medium
Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product.
T
Easy
If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin, then the firm is better off economically if the product is dropped.
T Easy
The cost of a resource that has no alternative use in a make or buy decision problem has an opportunity cost of zero.
F
Hard
Managers should pay little attention to bottleneck operations since they have limited capacity for producing output.
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F
Easy
Opportunity costs are recorded in the accounts of an organization.
T
Easy
All other things equal, it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from further processing exceeds the incremental costs of further processing.
F
Medium
Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.
F
Medium
Two or more different products that are manufactured in the same production period are known as joint products.
F
Easy
A merchandising firm which buys all of its inventory from outside suppliers is an example of a firm that is vertically integrated.
Multiple Choice
B Easy
Costs which are always relevant in decision making are those costs which are: a. variable. b. avoidable. c. sunk. d. fixed.
D
Easy
Consider a decision facing a firm of either accepting or rejecting a special offer for one of its products. A cost that is not relevant is: a. direct materials. b. variable overhead. c. fixed overhead that will be avoided if the special offer is accepted. d. common fixed overhead that will continue if the special offer is not accepted.
C Easy
To maximize total contribution margin, a firm faced with a production constraint should: a. promote those products having the highest unit contribution margins. b. promote those products having the highest contribution margin ratios. c. promote those products having the highest contribution margin per unit of constrained resource. d. promote those products have the highest contribution margins and contribution margin ratios.
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D
Medium
Consider the following statements:
I. A vertically integrated firm is more dependent on its suppliers than a firm that is not vertically integrated. II. Many firms feel they can control quality better by making their own parts. III. A vertically integrated firm realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations.
Which of the above statements represent advantages to a firm that is vertically integrated? a. Only I b. Only III c. Only I and II d. Only II and III
A
Easy CPA adapted
The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of $20,000. If the lanterns are remachined for $5,000, they could be sold for $9,000. Alternatively, the lanterns could be sold for scrap for $1,000. Which alternative is more desirable and what are the total relevant costs for that alternative? a. remachine and $5,000. b. remachine and $25,000. c. scrap and $20,000. d. scrap and $19,000.
B
Medium CPA adapted
Relay Corporation manufactures batons. Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000. Based on Relay's predictions for next year, 240,000 batons will be sold at the regular price of $5.00 each. In addition, a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased or decreased as a result of the special order? a. $60,000 decrease. b. $30,000 increase. c. $36,000 increase. d. $180,000 increase.
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B
Medium CPA adapted
The manufacturing capacity of Jordan Company's facilities is 30,000 units a year. A summary of operating results for last year follows:
Sales (18,000 units @ $100) .... $1,800, Variable costs ................. 990, Contribution margin ........... 810, Fixed costs .................... 495, Net operating income ........... $ 315,
A foreign distributor has offered to buy 15,000 units at $90 per unit next year. Jordan expects its regular sales next year to be 18,000 units. If Jordan accepts this offer and rejects some business from regular customers so as not to exceed capacity, what would be the total net operating income next year? (Assume that the total fixed costs would be the same no matter how many units are produced and sold.) a. $390,000. b. $705,000. c. $840,000. d. $855,000.
A
Easy CPA adapted
Wagner Company sells product A for $21 per unit. Wagner's unit product cost based on the full capacity of 200,000 units is as follows:
Direct materials ..................... $ 4 Direct labor ......................... 5 Manufacturing overhead ............... 6 Unit product cost .................. $
A special order offering to buy 20,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $3 per unit for shipping. Wagner has sufficient idle capacity to manufacture the additional units. Two-thirds of the manufacturing overhead is fixed and would not be affected by this order. Assume that direct labor is an avoidable cost in this decision. In negotiating a price for the special order, the minimum acceptable selling price per unit should be: a. $14. b. $15. c. $16. d. $18.
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C
Easy CPA adapted
Gata Co. plans to discontinue a department that has a $48, contribution margin and $96,000 of fixed costs. Of these fixed costs, $42,000 cannot be avoided. What would be the effect of this discontinuance on Gata's overall net operating income? a. Increase of $48, b. Decrease of $48, c. Increase of $6, d. Decrease of $6,
B
Medium
The Cook Company has two divisions--Eastern and Western. The divisions have the following revenues and expenses:
Eastern Western Sales ......................... $550,000 $500, Variable costs ................ 275,000 200, Direct fixed costs ............ 180,000 150, Allocated corporate costs ..... 170,000 135, Net income (loss) ............. (75,000) 15,
The management of Cook is considering the elimination of the Eastern Division. If the Eastern Division were eliminated, the direct fixed costs associated with this division could be avoided. However, corporate costs would still be $305,000 in total. Given these data, the elimination of the Eastern Division would result in an overall company net income (loss) of: a. $15,000. b. ($155,000). c. ($75,000). d. ($60,000).
B
Medium
Manor Company plans to discontinue a department that has a contribution margin of $25,000 and $50,000 in fixed costs. Of the fixed costs, $21,000 cannot be eliminated. The effect on the profit of Manor Company of discontinuing this department would be: a. a decrease of $4,000. b. an increase of $4,000. c. a decrease of $25,000. d. an increase of $25,000.
D
Easy
Green Company produces 1,000 parts per year, which are used in the assembly of one of its products. The unit product cost of these parts is:
Variable manufacturing cost ..... $ Fixed manufacturing cost ........ 9 Unit product cost ............. $
The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be: a. $1,000 increase.
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b. $1,000 decrease. c. $5,000 increase. d. $2,000 decrease.
A
Easy
Pitkin Company produces a part used in the manufacture of one of its products. The unit product cost of the part is $33, computed as follows:
Direct materials ..................... $ Direct labor ......................... 8 Variable manufacturing overhead ...... 3 Fixed manufacturing overhead ......... 10 Unit product cost .................. $
An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each. The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision. Based on these data, the per unit dollar advantage or disadvantage of purchasing the parts from the outside supplier would be: a. $3 advantage. b. $1 advantage. c. $1 disadvantage. d. $4 disadvantage.
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B
Easy CPA adapted
The following standard costs pertain to a component part manufactured by Ashby Company:
Direct materials ................. $ 2 Direct labor ..................... 5 Manufacturing overhead ........... 20 Standard cost per unit ........ $
The company can purchase the part from an outside supplier for $25 per unit. The manufacturing overhead is 60% fixed and this fixed portion would not be affected by this decision. Assume that direct labor is an avoidable cost in this decision. What is the relevant amount of the standard cost per unit to be considered in a decision of whether to make the part internally or buy it from the external supplier? a. $ b. $ c. $ d. $
B Medium
The SP Company makes 40,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is:
Direct materials ............ $5. Direct labor ................ $5. Variable factory overhead ... $4. Fixed factory overhead ...... $4.
An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Company for this motor is $18. If SP Company decides not to make the motors, there would be no other use for the production facilities and total fixed factory overhead costs would not change. If SP Company decides to continue making the motor, how much higher or lower would net income be than if the motors are purchased from the outside suppler? Assume that direct labor is a variable cost in this company. a. $276,000 higher. b. $86,000 higher. c. $92,000 lower. d. $178,000 higher.
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B
Medium
Manico Company produces three products -- X, Y, & Z -- with the following characteristics: X Y Z o Selling price per unit ...... $20 100% $16 100% $15 100% Variable cost per unit ...... 12 60 12 75 6 40 Contribution margin per unit $ 8 40% $ 4 25% $ 9 60% Machine hours per unit ...... 5 3 6
The company has only 2,000 machine-hours available each month. If demand exceeds the company's capacity, in what sequence should orders be filled if the company wants to maximize its total contribution margin? a. orders for Z first, X second, and Y third. b. orders for X first, Z second, and Y third. c. orders for Y first, X second, and Z third. d. orders for Z first and no orders for X or Y.
B
Medium
Consider the following production and cost data for two products, L and C:
Product L Product C Contribution margin per unit ....... $130 $ Machine set-ups needed per unit .... 10 set-ups 8 set-ups
The company can only perform 65,000 machine set-ups each period due to limited skilled labor and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period? a. $845,000. b. $975,000. c. $910,000. d. $1,820,000.
B
Medium
Products A, B, and C are produced from a single raw material input. The raw material costs $90,000, from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period. Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of $12,500 and then sold for $5 per unit. Product A should be: a. sold at the split-off point, since further processing would result in a loss of $0.50 per unit. b. processed further, since this will increase profits by $2, each period. c. sold at the split-off point, since further processing will result in a loss of $2,500 each period. d. processed further, since this will increase profits by $12,500 each period.
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D
Medium Refer To: 13-
How much will the company's net operating income be increased or (decreased) if it prices the 1,000 units in the special order at $6 each? a. ($500) b. $ c. $2, d. $1,
C Medium Refer To: 13-
Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. What cost is relevant as a guide for setting a minimum price on these defective units? a. $6. b. $5. c. $1. d. $3.
Reference: 13- The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200.
B Easy Refer To: 13-
The sunk cost in this situation is: a. $10,000. b. $26,800. c. $11,200. d. $
A
Medium Refer To: 13-
What is the net advantage or disadvantage to the company from upgrading the calculators? a. $8,800 advantage b. $18,000 disadvantage c. $20,000 advantage d. $8,000 disadvantage
C Hard Refer To: 13-
Assume that Tolar decides to upgrade the calculators. At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition? a. $ b. $ c. $ d. $
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Reference: 13- The Immanuel Company has just obtained a request for a special order of 6, jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is:
Variable production cost ... $4. Fixed production cost ...... 1. Variable selling expense ... 1.
If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit.
A Medium Refer To: 13-
If Immanuel accepts this special order, the change in the monthly net operating income will be a: a. $12,600 increase. b. $14,400 increase. c. $3,600 increase. d. $1,800 increase.
D
Medium Refer To: 13-
At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer? a. $7. b. $7. c. $6. d. $4.
B
Hard Refer To: 13-
Suppose that regular sales of jigs total 85,000 units per month. All other conditions remain the same. If Immanuel accepts the special order, the change in monthly operating income will be: a. $14,400 increase. b. $7,200 increase. c. $3,600 decrease. d. $5,400 decrease.
Reference: 13- The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level follow:
Direct materials .................... $ Direct labor ........................ 10 Variable manufacturing overhead ..... 5 Fixed manufacturing overhead ........ 7 Variable selling expense ............ 8 Fixed selling expense ............... 2
The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order were accepted, variable selling expense would be reduced by 25%. However, Varone would have
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C
Medium Refer To: 13-
Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $76.40 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? a. ($17,000) b. $13, c. $48, d. ($5,000)
A
Hard Refer To: 13-
Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? a. $32. b. $8. c. $9. d. $7.
D Hard Refer To: 13-
Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 700 units for regular customers. The minimum acceptable price per unit for the special order is closest to: a. $86.10. b. $78.90. c. $69.10. d. $63.78.
Reference: 13- The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam.
Sales (6,500 Tams at $130 each) ............... $845, Variable cost of sales ........................ 390, Variable distribution costs ................... 65, Fixed advertising expense ..................... 275, Salary of product line manager ................ 25, Fixed manufacturing overhead .................. 145, Net loss ...................................... ($ 55,000)
Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tax product were dropped, there would be no change in the fixed manufacturing costs of the company.
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C
Medium Refer To: 13-
Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines. If the company discontinues the Tam product line, the change in annual operating income (or loss) should be: a. $55,000 decrease. b. $65,000 decrease. c. $90,000 decrease. d. $70,000 increase.
D
Hard Refer To: 13-
Assume that discontinuing the Tam product would result in a $120,000 increase in the contribution margin of other product lines. How many Tams would have to be sold next year for the company to be as well off as if it just dropped the line and enjoyed the increase in contribution margin from other products? a. 5,000 units b. 6,000 units c. 6,500 units d. 7,000 units
Reference: 13- Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement.
Mall Town Total Store Store
Sales ....................... $200,000 $80,000 $120, Less variable costs ......... 116,000 32,000 84, Contribution margin ......... 84,000 48,000 36, Less traceable fixed expenses .................. 60,000 20,000 40, Store segment margin ........ 24,000 28,000 (4,000) Less common fixed expenses .................. 10,000 4,000 6, Operating income ............ $ 14,000 $24,000 $(10,000)
Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be closed.
Cosmo allocates common fixed expenses to each store on the basis of sales dollars.
Management estimates that closing the Town Store would result in a ten percent decrease in Mall Store sales, while closing the Mall Store would not affect Town Store sales.
The operating results for November are representative of all months.
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Reference: 13- Bingham Company manufactures and sells a product, Product J. Results for last year for the manufacture and sale of Product J are as follows:
Sales--10,000 units at $160 each .................... $1,600, Less costs: Variable production costs ......................... 960, Sales commissions--15% of sales ................... 240, Salaries of line supervisors ...................... 195, Traceable fixed advertising expense ............... 180, Fixed general factory overhead (allocated to products on the basis of square feet occupied) .. 170, Total costs ..................................... 1,745, Net loss ............................................ $ (145,000)
Bingham Company anticipates no change in the operating result for Product J in the foreseeable future if the product is produced. Bingham is reexamining all of its products and is trying to decide whether to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision.
A Medium Refer To: 13-
Assume that discontinuing the manufacture and sale of Product J will not affect the sale of other products. If the company discontinues Product J, the change in annual net income due to this decision will be a: a. $25,000 decrease. b. $145,000 increase. c. $170,000 decrease. d. $315,000 decrease.
C Medium Refer To: 13-
Assume that discontinuing Product J would result in a $30, increase in the contribution margin of other product lines. If Bingham chooses to discontinue Product J, then the change in net income next year due to this action will be a: a. $145,000 increase. b. $145,000 decrease. c. $5,000 increase. d. $120,000 increase.
B
Hard Refer To: 13-
Assume that discontinuing Product J would result in a $100, increase in the contribution margin of other product lines. How many units of Product J would have to be sold next year for the company to be as well off as if it just dropped Product J and enjoyed the increase in contribution margin from other products? a. 2,500 units. b. 11,875 units. c. 16,125 units. d. 15,500 units.
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Reference: 13- Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5, units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs that would be allocated to this part amount to $300,000 per year.
B Medium Refer To: 13-
The change in the company’s overall annual net operating income that would result from making the component, rather than buying it, would be: a. $17,000 increase. b. $1,000 decrease. c. $14,000 decrease. d. $5,000 increase.
D Hard Refer To: 13-
What would the annual cost of additional supervision have to be in order for Hadley to be economically indifferent between making or buying the component? (Assume all other conditions stay the same.) a. $20,000. b. $19,000. c. $18,000. d. $17,000.
Reference: 13- The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows:
Direct materials .................... $4. Direct labor ........................ $12. Variable manufacturing overhead ..... $5. Fixed manufacturing overhead ........ $6.
Rogers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labor is a variable cost.
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