TRUE/FALSE
1. Information that is related to past events events is relevant in in the decision-making process. ANS: F
DIF:
Easy
!": 1#-1
$. Information that has a %earing on f&t&re f&t&re events is relevant relevant in the decision-making decision-making process. ANS: '
DIF:
Easy
!": 1#-1
(. In eval&ating alternative co&rses co&rses of action) action) a manager manager sho&ld select the alternative that that provides provides the highest incremental %enefit to the company. company. ANS: '
DIF:
Easy
!": 1#-$
*. 'he o&tso&rc o&tso&rcing ing decisio decision n is also referred referred to as as a +make-or-%&y +make-or-%&y,, decision. decision. ANS: '
DIF:
Easy
!": 1#-(
. A company company may o&tso&rc o&tso&rcee some of its prod&cti prod&ction on in order to foc&s foc&s on core competenci competencies. es. ANS: '
DIF:
Easy
!": 1#-(
. In an o&tso&rci o&tso&rcing ng decision decision)) &navoida% &navoida%le le fi/ed costs costs are irrelevan irrelevant. t. ANS: '
DIF:
0oderate
!": 1#-(
. In an o&tso&rci o&tso&rcing ng decision decision)) avoida%le avoida%le fi/ed fi/ed costs costs are irrelevan irrelevant. t. ANS: F
DIF:
0oderate
!": 1#-(
2. In an o&tso&rci o&tso&rcing ng decision decision)) varia%le varia%le costs costs of prod&ction prod&ction are are relevant. relevant. ANS: '
DIF:
0oderate
!": 1#-(
3. In an o&tso&rcing o&tso&rcing decision) decision) rent received from an an o&tside party for facility facility &se is a relevant relevant cash inflo4. inflo4. ANS: '
DIF:
0oderate
!": 1#-(
1#. 5hen m<iple m<iple prod&cts are prod&ced and sold) a change in the sales price of one one prod&ct 4ill ca&se a change in the sales mi/ of the firm. ANS: '
DIF:
0oderate
!": 1#-
11. 11. In setting setting compensation compensation str&ct& str&ct&res) res) fi/ed salary salary e/pense e/pense is normally not not considered. considered. ANS: '
DIF:
0oderate
!": 1#-
1$. In a special special order decision) &navoida%le &navoida%le fi/ed fi/ed costs are are taken into into consideration consideration in setting a sales price. ANS: F
DIF:
0oderate
!": 1#-
1(. In a special special order decision) the sales price sho&ld %e s&fficient to cover a 6o%7s 6o%7s varia%le varia%le costs) incremental incremental fi/ed costs) and generate a profit. ANS: '
DIF:
0oderate
!": 1#-
1*. 'he 8o%inson-9atman 8o%inson-9atman Act Act prohi%its prohi%its companies from pricing prod&cts at different levels levels 4hen there are no significant differences in prod&ction costs. ANS: '
DIF:
Easy
!": 1#-
1. 5hen making making a decision to discontin&e discontin&e an operating segment) allocated allocated common common costs are not considered. ANS: '
DIF:
Easy
!": 1#-
1. 5hen making a decision to discontin&e discontin&e an operating operating segment) segment) avoida%le fi/ed costs are not considered. ANS: F
DIF:
Easy
!": 1#-
1. Segment margin margin meas&res meas&res a segment7s contri%&tion to the coverage of indirect e/penses. ANS: '
DIF:
0oderate
!": 1#-
12. Depreciation on factory e&ipment is is normally a relevant cost in in prod&ct prod&ct line decisions. ANS: F
DIF:
0oderate
!": 1#-
13. 0inimi;ation of contri%&tion contri%&tion margin margin is a common o%6ective f&nction in linear programming. ANS: F
DIF:
Easy
!": 1#-2
$#. 0inimi;ati 0inimi;ation on of varia%le varia%le costs is a common common o%6ective o%6ective f&nction f&nction in linear linear programmin programming. g. ANS: '
DIF:
Easy
!": 1#-2
$1. 0a/imi;ati 0a/imi;ation on of varia%le varia%le costs is a common common o%6ective o%6ective f&nction f&nction in linear linear programmin programming. g. ANS: F
DIF:
Easy
!": 1#-2
$$. 0a/imi;ation of contri%&tion contri%&tion margin margin is is a common o%6ective o%6ective f&nction f&nction in linear programming. programming. ANS: '
DIF:
Easy
!": 1#-2
$(. In linear programm programming) ing) reso&rce reso&rce constraint constraintss are &s&ally e/pressed e/pressed as ine&ali ine&alities. ties. ANS: '
DIF:
0oderate
!": 1#-2
$*. In linear linear programming programming)) a slack varia%le varia%le represents represents the the &n&sed portio portion n of a reso&rce. reso&rce. ANS: '
DIF:
0oderate
!": 1#-2
1(. In a special special order decision) the sales price sho&ld %e s&fficient to cover a 6o%7s 6o%7s varia%le varia%le costs) incremental incremental fi/ed costs) and generate a profit. ANS: '
DIF:
0oderate
!": 1#-
1*. 'he 8o%inson-9atman 8o%inson-9atman Act Act prohi%its prohi%its companies from pricing prod&cts at different levels levels 4hen there are no significant differences in prod&ction costs. ANS: '
DIF:
Easy
!": 1#-
1. 5hen making making a decision to discontin&e discontin&e an operating segment) allocated allocated common common costs are not considered. ANS: '
DIF:
Easy
!": 1#-
1. 5hen making a decision to discontin&e discontin&e an operating operating segment) segment) avoida%le fi/ed costs are not considered. ANS: F
DIF:
Easy
!": 1#-
1. Segment margin margin meas&res meas&res a segment7s contri%&tion to the coverage of indirect e/penses. ANS: '
DIF:
0oderate
!": 1#-
12. Depreciation on factory e&ipment is is normally a relevant cost in in prod&ct prod&ct line decisions. ANS: F
DIF:
0oderate
!": 1#-
13. 0inimi;ation of contri%&tion contri%&tion margin margin is a common o%6ective f&nction in linear programming. ANS: F
DIF:
Easy
!": 1#-2
$#. 0inimi;ati 0inimi;ation on of varia%le varia%le costs is a common common o%6ective o%6ective f&nction f&nction in linear linear programmin programming. g. ANS: '
DIF:
Easy
!": 1#-2
$1. 0a/imi;ati 0a/imi;ation on of varia%le varia%le costs is a common common o%6ective o%6ective f&nction f&nction in linear linear programmin programming. g. ANS: F
DIF:
Easy
!": 1#-2
$$. 0a/imi;ation of contri%&tion contri%&tion margin margin is is a common o%6ective o%6ective f&nction f&nction in linear programming. programming. ANS: '
DIF:
Easy
!": 1#-2
$(. In linear programm programming) ing) reso&rce reso&rce constraint constraintss are &s&ally e/pressed e/pressed as ine&ali ine&alities. ties. ANS: '
DIF:
0oderate
!": 1#-2
$*. In linear linear programming programming)) a slack varia%le varia%le represents represents the the &n&sed portio portion n of a reso&rce. reso&rce. ANS: '
DIF:
0oderate
!": 1#-2
$. In linear linear programmin programming) g) a slack varia%l varia%lee is associated associated 4ith 4ith < constraints constraints.. ANS: '
DIF:
0oderate
!": 1#-2
$. In linear linear programmin programming) g) a s&rpl&s s&rpl&s varia%le varia%le is associate associated d 4ith = constrain constraints. ts. ANS: '
DIF:
0oderate
!": 1#-2
$. In linear linear programming) programming) a s&rpl&s varia%le represents overachievement of minim&m minim&m re&irements. re&irements. ANS: '
DIF:
0oderate
!": 1#-2
$2. In linear linear programming programming)) a s&rpl&s varia%l varia%lee represents represents the &n&sed &n&sed portion portion of a reso&rce. reso&rce. ANS: F
DIF:
0oderate
!": 1#-2
COMPLETION
1. 'he amo&nt amo&nt of reven&e reven&e that that differs differs across across decision decision choices choices is referred referred to to as >>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>>>>>>>>>>>>>>>>>>>>>>. >>. ANS: ANS: increm increment ental al reve reven&e n&e DIF:
Ea s y
!": 1#-1
$. 'he amo&nt of cost that differs differs across decision decision choices choices is referred to as >>>>>>>>>>>>>>>> >>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>>>>>>.. ANS: ANS: increm increment ental al cost cost DIF:
Ea s y
!": 1#-1
(. 'he %enefits %enefits forego foregone ne 4hen one one co&rse of of action is is chosen chosen over another another are referred referred to to as >>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>. >>>>>>. ANS: ANS: opp opport ort&ni &nity ty costs costs DIF:
Ea s y
!": 1#-1
*. ?osts inc&rred inc&rred in the past past to ac&ire an asset are referred to as >>>>>>>>>>>>>>>>>> >>>>>>>>>>>>>>>>>>>>>>>>>>>>>. >>>>>>>>>>>. ANS: ANS: s&nk s&nk cos costs ts DIF:
Ea s y
!": 1#-$
. 5hen a company company has 4ork 4ork performed performed %y an an e/ternal e/ternal s&pplier s&pplier)) it is engaging engaging in in >>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>>>>>>>>>>>>>>>>>>>>>. >. ANS: ANS: o&ts o&tso& o&rc rcin ing g
DIF:
Easy
!": 1#-(
. 'he relative prod&ct &antities composing a company7s total sales is referred to as a company7s >>>>>>>>>>>>>>>>>>>>>>>>>>>>. ANS: sales mi/ DIF:
Easy
!": 1#-
. 'he e/cess of reven&es over direct varia%le e/penses and avoida%le fi/ed e/penses is referred to as >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>. ANS: segment margin DIF:
Easy
!": 1#-
2. In linear programming) a limiting factor that hampers management7s p&rs&it of an o%6ective is referred to as a >>>>>>>>>>>>>>>>>>>>>>>>>>. ANS: constraint DIF:
Easy
!": 1#-2
3. In linear programming) the e&ation that specifies management7s o%6ective is referred to as a@n >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>. ANS: o%6ective f&nction DIF:
Easy
!": 1#-2
1#. In linear programming) a >>>>>>>>>>>>>>>>>>>>>>>>>> represents the &n&sed amo&nt of a reso&rce at any level of operation. ANS: slack varia%le DIF:
0oderate
!": 1#-2
11. In linear programming) a >>>>>>>>>>>>>>>>>>>>>>>>>> represents the overachievement of a minim&m re&irement. ANS: s&rpl&s varia%le DIF:
0oderate
!": 1#-2
MULTIPLE CHOICE
1. 5hich of the follo4ing is not a characteristic of relevant costing informationB It is a. associated 4ith the decision &nder consideration. %. significant to the decision maker. c. readily &antifia%le.
d. related to a f&t&re endeavor. ANS: ? $. a. %. c. d.
DIF:
Easy
!": 1#-1
A fi/ed cost is relevant if it is a f&t&re cost. Avoida%le. s&nk. a prod&ct cost.
ANS: !
DIF:
Easy
!": 1#-1
(. 8elevant costs are a. all fi/ed and varia%le costs. %. all costs that 4o&ld %e inc&rred 4ithin the relevant range of prod&ction. c. past costs that are e/pected to %e different in the f&t&re. d. anticipated f&t&re costs that 4ill differ among vario&s alternatives. ANS: D
DIF:
Easy
!": 1#-1
*. 5hich of the follo4ing is the least likely to %e a relevant item in deciding 4hether to replace an old machineB a. ac&isition cost of the old machine %. o&tlay to %e made for the ne4 machine c. ann&al savings to %e en6oyed on the ne4 machine d. life of the ne4 machine ANS: A
DIF:
Easy
!": 1#-$
. If a cost is irrelevant to a decision) the cost co&ld not %e a. a s&nk cost. %. a f&t&re cost. c. a varia%le cost. d. an incremental cost. ANS: D
DIF:
Easy
!": 1#-$
. 5hich of the follo4ing costs 4o&ld %e relevant in short-term decision makingB a. incremental fi/ed costs %. all costs of inventory c. total varia%le costs that are the same in the considered alternatives d. the cost of a fi/ed asset that co&ld %e &sed in all the considered alternatives ANS: A
DIF:
Easy
!": 1#-$
. 'he term incremental cost refers to a. the profit foregone %y selecting one choice instead of another. %. the additional cost of prod&cing or selling another prod&ct or service. c. a cost that contin&es to %e inc&rred in the a%sence of activity. d. a cost common to all choices in &estion and not clearly or feasi%ly alloca%le to any of them. ANS: !
DIF:
Easy
!": 1#-$
2. A cost is s&nk if it a. is not an incremental cost. %. is &navoida%le. c. has already %een inc&rred. d. is irrelevant to the decision at hand. ANS: ?
DIF:
Easy
!": 1#-$
3. 0ost>>>>>>>>>>> are relevant to decisions to ac&ire capacity) %&t not to short-r&n decisions involving the &se of that capacity. a. s&nk costs %. incremental costs c. fi/ed costs d. prime costs ANS: ?
DIF:
Easy
!": 1#-$
1#. Irrelevant costs generally incl&de S&nk costs a. %. c. d.
yes yes no yes
ANS: D
Cistorical costs yes no no yes
DIF:
Allocated costs no no yes yes
Easy
!": 1#-$
11. In deciding 4hether an organi;ation 4ill keep an old machine or p&rchase a ne4 machine) a manager 4o&ld ignore the a. estimated disposal val&e of the old machine. %. ac&isition cost of the old machine. c. operating costs of the ne4 machine. d. estimated disposal val&e of the ne4 machine. ANS: !
DIF:
Easy
!": 1#-$
1$. 'he potential rental val&e of space &sed for prod&ction activities a. is a varia%le cost of prod&ction. %. represents an opport&nity cost of prod&ction. c. is an &navoida%le cost. d. is a s&nk cost of prod&ction. ANS: !
DIF:
Easy
!": 1#-(
1(. 'he opport&nity cost of making a component part in a factory 4ith e/cess capacity for 4hich there is no alternative &se is a. the total man&fact&ring cost of the component. %. the total varia%le cost of the component. c. the fi/ed man&fact&ring cost of the component. d. ;ero. ANS: D
DIF:
Easy
!": 1#-(
1*. 5hich of the follo4ing are relevant in a make or %&y decisionB aria%le costs a. %. c. d.
no yes no yes
ANS: D
Avoida%le fi/ed costs
navoida%le fi/ed costs
yes no no yes
DIF:
yes yes yes no
Easy
!": 1#-(
1. In a make or %&y decision) the opport&nity cost of capacity co&ld a. %e considered to decrease the price of &nits p&rchased from s&ppliers. %. %e considered to decrease the cost of &nits man&fact&red %y the company. c. %e considered to increase the price of &nits p&rchased from s&ppliers. d. not %e considered since opport&nity costs are not part of the acco&nting records. ANS: A
DIF:
Easy
!": 1#-(
1. 5hich of the follo4ing are relevant in a make or %&y decisionB 9rime costs a. %. c. d.
yes yes yes no
ANS: !
S&nk costs yes no no no
DIF:
Incremental costs yes yes no yes
Easy
!": 1#-(
1. In a make or %&y decision) the relia%ility of a potential s&pplier is a. an irrelevant decision factor. %. relevant information if it can %e &antified. c. an opport&nity cost of contin&ed prod&ction. d. a &alitative decision factor. ANS: D
DIF:
Easy
!": 1#-(
12. 5hich of the follo4ing &alitative factors favors the %&y choice in a make or %&y decision for a partB a. maintaining a long-term relationship 4ith s&ppliers %. &ality control is critical c. &tili;ation of idle capacity d. part is critical to prod&ct ANS: A
DIF:
Easy
!": 1#-(
13. 5hen a scarce reso&rce) s&ch as space) e/ists in an organi;ation) the criterion that sho&ld %e &sed to determine prod&ction is a. contri%&tion margin per &nit. %. selling price per &nit. c. contri%&tion margin per &nit of scarce reso&rce.
d. total varia%le costs of prod&ction. ANS: ?
DIF:
Easy
!": 1#-*
$#. Fi/ed costs are ignored in allocating scarce reso&rces %eca&se a. they are s&nk. %. they are &naffected %y the allocation of scarce reso&rces. c. there are no fi/ed costs associated 4ith scarce reso&rces. d. fi/ed costs only apply to long-r&n decisions. ANS: !
DIF:
Easy
!": 1#-*
$1. 'he minim&m selling price that sho&ld %e accepta%le in a special order sit&ation is e&al to total a. prod&ction cost. %. varia%le prod&ction cost. c. varia%le costs. d. prod&ction cost pl&s a normal profit margin. ANS: ?
DIF:
Easy
!": 1#-
$$. 5hich of the follo4ing costs is irrelevant in making a decision a%o&t a special order price if some of the company facilities are c&rrently idleB a. direct la%or %. e&ipment depreciation c. varia%le cost of &tilities d. opport&nity cost of prod&ction ANS: !
DIF:
Easy
!": 1#-
$(. 'he >>>>>>>>>>>>>>> prohi%its companies from pricing prod&cts at different amo&nts &nless these differences reflect differences in the cost to man&fact&re) sell) or distri%&te the prod&cts. a. Internal 8even&e Service %. overnmental Acco&nting ffice c. Sherman Antitr&st Act d. 8o%inson-9atman Act ANS: D
DIF:
Easy
!": 1#-
$*. An ad hoc sales disco&nt is a. an allo4ance for an inferior &ality of marketed goods. %. a disco&nt that an ad hoc committee m&st decide on. c. %ro&ght a%o&t %y competitive press&res. d. none of the a%ove. ANS: ?
DIF:
0oderate
!": 1#-
$. A manager is attempting to determine 4hether a segment of the %&siness sho&ld %e eliminated. 'he foc&s of attention for this decision sho&ld %e on a. the net income sho4n on the segmentGs income statement. %. sales min&s total e/penses of the segment. c. sales min&s total direct e/penses of the segment. d. sales min&s total varia%le e/penses and avoida%le fi/ed e/penses of the segment.
ANS: D
DIF:
Easy
!": 1#-
$. Ass&me a company prod&ces three prod&cts: A) !) and ?. It can only sell &p to ()### &nits of each prod&ct. 9rod&ction capacity is &nlimited. 'he company sho&ld prod&ce the prod&ct @or prod&cts that has @have the highest a. contri%&tion margin per ho&r of machine time. %. gross margin per &nit. c. contri%&tion margin per &nit. d. sales price per &nit. ANS: ?
DIF:
Easy
!": 1#-
$. For a partic&lar prod&ct in high demand) a company decreases the sales price and increases the sales commission. 'hese changes 4ill not increase a. sales vol&me. %. total selling e/penses for the prod&ct. c. the prod&ct contri%&tion margin. d. the total varia%le cost per &nit. ANS: ?
DIF:
Easy
!": 1#-
$2. An increase in direct fi/ed costs co&ld red&ce all of the follo4ing except a. prod&ct line contri%&tion margin. %. prod&ct line segment margin. c. prod&ct line operating income. d. corporate net income. ANS: A
DIF:
Easy
!": 1#-
$3. 5hen a company discontin&es a segment) total corporate costs may decrease in all of the follo4ing categories except a. varia%le prod&ction costs. %. allocated common costs. c. direct fi/ed costs. d. varia%le period costs. ANS: !
DIF:
Easy
!": 1#-
(#. In eval&ating the profita%ility of a specific organi;ational segment) all >>>>>>>>>>>>>>> 4o&ld %e ignored. a. segment varia%le costs %. segment fi/ed costs c. costs allocated to the segment d. period costs ANS: ?
DIF:
Easy
!": 1#-
(1. Hno/ ?ompany &ses 1#)### &nits of a part in its prod&ction process. 'he costs to make a part are: direct material) 1$J direct la%or) $J varia%le overhead) 1(J and applied fi/ed overhead) (#. Hno/ has received a &ote of from a potential s&pplier for this part. If Hno/ %&ys the part) # percent of the applied fi/ed overhead 4o&ld contin&e. Hno/ ?ompany 4o&ld %e %etter off %y a. #)### to man&fact&re the part. %. 1#)### to %&y the part. c. *#)### to %&y the part. d. 1#)### to man&fact&re the part. ANS: ? ?ost to make: K&nit L 1#)### &nits M #)### ?ost to man&fact&re: @1$$1(3M 3K&nit Incremental difference in favor of %&ying: *K&nit L 1#)### &nits M $!"!!! DIF:
0oderate
!": 1#-(
($. 9a&lson ?ompany has only $)### ho&rs of machine time each month to man&fact&re its t4o prod&cts. 9rod&ct O has a contri%&tion margin of #) and 9rod&ct P has a contri%&tion margin of *. 9rod&ct O re&ires ho&rs of machine time) and 9rod&ct P re&ires 2 ho&rs of machine time. If 9a&lson ?ompany 4ants to dedicate 2# percent of its machine time to the prod&ct that 4ill provide the most income) the company 4ill have a total contri%&tion margin of a. $#)###. %. $*#)###. c. $1#)###. d. $##)###. ANS: ! Ass&me 2#Q of capacity applied to 9rod&ct O O: $#)### hrsK hrs per &nit P: )### hrsK2 hrs per &nit
DIF:
Diffic<
*)### &nits L # ?0K&nit $ &nits L * ?0K&nit 'otal
$##)### *#)### $#!"!!! MMMMMM
!": 1#-
((. Doyle ?ompany has ( divisions: 8) S) and '. Division 8Gs income statement sho4s the follo4ing for the year ended Decem%er (1: Sales ?ost of goods sold ross profit Selling e/penses Administrative e/penses Net loss
$1,000,000 (800,000) $ 200,000 $100,000 250,000
(350,000) $ (150,000)
?ost of goods sold is percent varia%le and $ percent fi/ed. f the fi/ed costs) # percent are avoida%le if the division is closed. All of the selling e/penses relate to the division and 4o&ld %e eliminated if Division 8 4ere eliminated. f the administrative e/penses) 3# percent are applied from corporate costs. If Division 8 4ere eliminated) Doyle7s income 4o&ld a. increase %y 1#)###.
%. decrease %y )###. c. decrease %y 1)###. d. decrease %y $1)###. ANS: ? Sales foregone ?S avoided aria%le Fi/ed Selling E/pense Avoided Administrative E/pense Avoided Decrease in income
DIF:
0oderate
@1)###)### ##)### 1$#)###
$#)### 1##)### $)### $ %&&"!!!' (((((((((
!": 1#-
(*. 'homas ?ompany is c&rrently operating at a loss of 1)###. 'he sales manager has received a special order for )### &nits of prod&ct) 4hich normally sells for ( per &nit. ?osts associated 4ith the prod&ct are: direct material) J direct la%or) 1#J varia%le overhead) (J applied fi/ed overhead) *J and varia%le selling e/penses) $. 'he special order 4o&ld allo4 the &se of a slightly lo4er grade of direct material) there%y lo4ering the price per &nit %y 1.# and selling e/penses 4o&ld %e decreased %y 1. If 'homas 4ants this special order to increase the total net income for the firm to 1#)###) 4hat sales price m&st %e &oted for each of the )### &nitsB a. $(.# %. $*.# c. $.# d. (*.## ANS: A In order to increase income to 1#)###) there m&st %e an increase of $)### or per &nit. Direct materials *.# Direct Ra%or 1#.## aria%le verhead (.## aria%le Selling E/p 1.## 9rod&ction ?osts 12.# Additional profit per &nit .## Sales price/)nit $#*+&! ((((( DIF:
0oderate
!": 1#-
(. &est ?ompany prod&ces a part that has the follo4ing costs per &nit: Direct material Direct la%or aria%le overhead Fi/ed overhead 'otal
$ 8 3 1 5 $17
Test ?orporation can provide the part to &est for 13 per &nit. &est ?ompany has determined that # percent of its fi/ed overhead 4o&ld contin&e if it p&rchased the part. Co4ever) if &est no longer prod&ces the part) it can rent that portion of the plant facilities for #)### per year. &est ?ompany c&rrently prod&ces 1#)### parts per year. 5hich alternative is prefera%le and %y 4hat marginB a. 0ake-$#)### %. 0ake-#)### c. !&y-1#)### d. !&y-*#)### ANS: ? 9&rchase price from Test 8ent 8even&e 8eceived aria%le ?osts Avoided Fi/ed verhead Avoided ,i--erence in Favor o- .)in0
DIF:
0oderate
@13#)### #)### 1$#)### $#)### $ %!"!!! (((((((
!": 1#-(
(. !ro4ning ?ompany has 1)### &nits in inventory that had a prod&ction cost of ( per &nit. 'hese &nits cannot %e sold thro&gh normal channels d&e to a significant technology change. 'hese &nits co&ld %e re4orked at a total cost of $()### and sold for $2)###. Another alternative is to sell the &nits to a 6&nk dealer for 2)##. 'he relevant cost for !ro4ning to consider in making its decision is a. *)### of original prod&ct costs. %. $()### for re4orking the &nits. c. 2)### for re4orking the &nits. d. $2)### for selling the &nits to the 6&nk dealer. ANS: ! nly the act&al re4orking costs are relevant. riginal p&rchase costs are irrelevant. DIF:
Easy
!": 1#-(
Ro1ertson Corporation
8o%ertson ?orporation sells a prod&ct for 12 per &nit) and the standard cost card for the prod&ct sho4s the follo4ing costs: Direct material Direct la%or verhead @2#Q fi/ed 'otal
$ 1 2 7 $10
(. 8efer to 8o%ertson ?orporation. 8o%ertson received a special order for 1)### &nits of the prod&ct. 'he only additional cost to 8o%ertson 4o&ld %e foreign import ta/es of 1 per &nit. If 8o%ertson is a%le to sell all of the c&rrent prod&ction domestically) 4hat 4o&ld %e the minim&m sales price that 8o%ertson 4o&ld consider for this special orderB a. 12.## %. 11.## c. .*# d. 13.##
ANS: D 'he company 4o&ld increase its minim&m sales price to reflect the foreign import ta/ of 1 per &nit. DIF:
Easy
!": 1#-
(2. 8efer to 8o%ertson ?orporation. Ass&me that 8o%ertson has s&fficient idle capacity to prod&ce the 1)### &nits. If 8o%ertson 4ants to increase its operating profit %y )##) 4hat 4o&ld it charge as a per-&nit selling priceB a. 12.## %. 1#.## c. 11.## d. 1.# ANS: ? 'he company 4o&ld 4ant to charge a price e&al to a per &nit profit of .# pl&s varia%le costs per &nit of *.*# and the import ta/ per &nit of 1.##. 'he total price is $%%+!!+ DIF:
0oderate
!": 1#-(
(3. lamoro&s rooming ?orporation makes and sells %r&shes and com%s. It can sell all of either prod&ct it can make. 'he follo4ing data are pertinent to each respective prod&ct:
nits of o&tp&t per machine ho&r Selling price per &nit 9rod&ct cost per &nit Direct material Direct la%or aria%le overhead
!r&shes
?om%s
8 $12.00
20 $4.00
$1.00 2.00 0.50
$1.20 0.10 0.05
'otal fi/ed overhead is (2#)###. 'he company has *#)### machine ho&rs availa%le for prod&ction. 5hat sales mi/ 4ill ma/imi;e profitsB a. ($#)### %r&shes and # com%s %. # %r&shes and 2##)### com%s c. 1#)### %r&shes and ##)### com%s d. $$)(# %r&shes and $$)(# com%s ANS: A !r&shes have a contri%&tion margin of 2.# per &nitJ com%s have a contri%&tion margin of $. per &nit. 'he com%ination of ($#)### %r&shes and # com%s provides a net profit of (*#)###. DIF:
Easy
!": 1#-
*#. Co&ston Foot4ear ?orporation has %een asked to s&%mit a %id on s&pplying 1)### pairs of military com%at %oots to the Armed Forces. 'he companyGs costs per pair of %oots are as follo4s:
Direct material Direct la%or aria%le overhead aria%le selling cost @commission Fi/ed overhead @allocated Fi/ed selling and administrative cost
$8 6 3 3 2 1
Ass&ming that there 4o&ld %e no commission on this potential sale) the lo4est price the firm can %id is some price greater than a. $(. %. $#. c. 1. d. 1*. ANS: ? 'he lo4est price 4o&ld have to %e greater than the s&m of all varia%le man&fact&ring costs. aria%le man&fact&ring costs total 1J therefore the price 4o&ld have to %e greater than 1 per pair. DIF:
Easy
!": 1#-
*1. Colt Ind&stries has t4o sales territories-East and 5est. Financial information for the t4o territories is presented %elo4:
Sales Direct costs: aria%le Fi/ed Allocated common costs Net income @loss
East
5est
$980,000
$750,000
(343,000) (450,000) (275,000) $(88,000)
(225,000) (325,000) (175,000) $ 25,000
!eca&se the company is in a start-&p stage) corporate management feels that the East sales territory is creating too m&ch of a cash drain on the company and it sho&ld %e eliminated. If the East territory is discontin&ed) one sales manager @4hose salary is *#)### per year 4ill %e relocated to the 5est territory. !y ho4 m&ch 4o&ld ColtGs income change if the East territory is eliminatedB a. increase %y 22)### %. increase %y *2)### c. decrease %y $)### d. decrease %y $$)### ANS: D Sales foregone in East aria%le costs avoided Fi/ed costs avoided ,ecrease in inco2e -ro2 eli2inatin0 East territor DIF:
0oderate
!": 1#-
@32#)### (*()### *1#)### $##3"!!!' ((((((((
4oo5ville Motors
5oodville 0otors is trying to decide 4hether it sho&ld keep its e/isting car 4ashing machine or p&rchase a ne4 one that has technological advantages @4hich translate into cost savings over the e/isting machine. Information on each machine follo4s: ld machine riginal cost Acc&m&lated depreciation Ann&al cash operating costs ?&rrent salvage val&e of old machine Salvage val&e in 1# years 8emaining life
Ne4 machine
$9,000 5,000 9,000 2,000 500 10 yrs.
$20,000 0 4,000 1,000 10 yrs.
*$. 8efer to 5oodville 0otors. 'he *)### of ann&al operating costs that are common to %oth the old and the ne4 machine are an e/ample of a@n a. s&nk cost. %. irrelevant cost. c. f&t&re avoida%le cost. d. opport&nity cost. ANS: !
DIF:
Easy
!": 1#-1
*(. 8efer to 5oodville 0otors. 'he 3)### cost of the original machine represents a@n a. s&nk cost. %. f&t&re relevant cost. c. historical relevant cost. d. opport&nity cost. ANS: A
DIF:
Easy
!": 1#-$
**. 8efer to 5oodville 0otors. 'he $#)### cost of the ne4 machine represents a@n a. s&nk cost. %. f&t&re relevant cost. c. f&t&re irrelevant cost. d. opport&nity cost. ANS: !
DIF:
Easy
!": 1#-(
*. 8efer to 5oodville 0otors. 'he estimated ## salvage val&e of the e/isting machine in 1# years represents a@n a. s&nk cost. %. opport&nity cost of selling the e/isting machine no4. c. opport&nity cost of keeping the e/isting machine for 1# years. d. opport&nity cost of keeping the e/isting machine and %&ying the ne4 machine. ANS: !
DIF:
Easy
!": 1#-(
*. 8efer to 5oodville 0otors. 'he incremental cost to p&rchase the ne4 machine is a. 11)###. %. $#)###. c. 1()###.
d. 12)###. ANS: D Incremental cost M 9&rchase price of ne4 machine - ?&rrent salvage val&e Incremental cost M @$#)### - $)### Incre2ental cost ( $%6"!!! DIF:
Easy
!": 1#-(
Entertain2ent Sol)tions Corporation
Entertainment Sol&tions ?orporation man&fact&res and sells F0 radios. Information on the prior yearGs operations @sales and prod&ction 0odel A1 is presented %elo4: Sales price per &nit ?osts per &nit: Direct material Direct la%or verhead @#Q varia%le Selling costs @*#Q varia%le 9rod&ction in &nits Sales in &nits
$30 7 4 6 10 10,000 9,500
*. 8efer to Entertainment Sol&tions ?orporation + 'he 0odel !$ radio is c&rrently in prod&ction and it renders the 0odel A1 radio o%solete. If the remaining ## &nits of the 0odel A1 radio are to %e sold thro&gh reg&lar channels) 4hat is the minim&m price the company 4o&ld accept for the radiosB a. (# %. $ c. 12 d. * ANS: D * 4o&ld cover the varia%le selling e/penses. DIF:
0oderate
!": 1#-
*2. 8efer to Entertainment Sol&tions ?orporation. Ass&me that the remaining 0odel A1 radios can %e sold thro&gh normal channels or to a foreign %&yer for per &nit. If sold thro&gh reg&lar channels) the minim&m accepta%le price 4ill %e a. (#. %. ((. c. 1#. d. *. ANS: ? 1# 4ill cover the price to the foreign %&yer pl&s the * in varia%le selling e/penses. DIF:
0oderate
!": 1#-
C7ip ,ivision o- Co2p)ter Sol)tions" Inc+
'he ?hip Division of ?omp&ter Sol&tions) Inc. prod&ces a high-&ality comp&ter chip. nit prod&ction costs @%ased on capacity prod&ction of 1##)### &nits per year follo4: Direct material Direct la%or verhead @$#Q varia%le ther information: Sales price SUA costs @*#Q varia%le
$50 20 10 100 15
*3. 8efer to ?hip Division of ?omp&ter Sol&tions) Inc. Ass&me) for this &estion only) that the ?hip Division is prod&cing and selling at capacity. 5hat is the minim&m selling price that the division 4o&ld consider on a Vspecial orderV of 1)### chips on 4hich no varia%le period costs 4o&ld %e inc&rredB a. 1## %. $ c. 21 d. 3* ANS: D aria%le period costs are @1 L *#Q varia%le 'he minim&m selling price 4o&ld have to %e greater than the man&fact&ring costs and fi/ed period costs. @1## - M $8 per )nit DIF:
0oderate
!": 1#-
#. 8efer to ?hip Division of ?omp&ter Sol&tions) Inc. Ass&me) for this &estion only) that the ?hip Division is operating at a level of #)### chips per year. 5hat is the minim&m price that the division 4o&ld consider on a Vspecial orderV of 1)### chips to %e distri%&ted thro&gh normal channelsB a. 2 %. 3 c. 1## d. 21 ANS: A 'he price 4o&ld have to cover all varia%le costs. @# $# $ M $36 per )nit DIF:
0oderate
!": 1#-
1. 8efer to ?hip Division of ?omp&ter Sol&tions) Inc. Ass&me) for this &estion only) that the ?hip Division is presently operating at a level of 2#)### chips per year. Accepting a Vspecial orderV on $)### chips at 22 4ill a. increase total corporate profits %y *)###. %. increase total corporate profits %y $#)###. c. decrease total corporate profits %y 1*)###. d. decrease total corporate profits %y $*)###. ANS: ! @22 - 2 M 1# profit per &nit L $)### &nits M $#!"!!! pro-it increase
DIF: 0oderate !": 1#- Ric72on5 Steel Corporation 'he capital %&dgeting committee of the 8ichmond Steel ?orporation is eval&ating the possi%ility of replacing its old pipe-%ending machine 4ith a more advanced model. Information on the e/isting machine and the ne4 model follo4s: E/isting machine riginal cost 0arket val&e no4 0arket val&e in year Ann&al cash operating costs 8emaining life
$200,000 80,000 0 40,000 5 yrs.
Ne4 machine $400,000 20,000 10,000 5 yrs.
$. 8efer to 8ichmond Steel ?orporation. 'he ma6or opport&nity cost associated 4ith the contin&ed &se of the e/isting machine is a. (#)### of ann&al savings in operating costs. %. $#)### of salvage in years on the ne4 machine. c. lost sales res<ing from the inefficient e/isting machine. d. *##)### cost of the ne4 machine. ANS: A
DIF:
Easy
!": 1#-1
(. 8efer to 8ichmond Steel ?orporation. 'he 2#)### market val&e of the e/isting machine is a. a s&nk cost. %. an opport&nity cost of keeping the old machine. c. irrelevant to the e&ipment replacement decision. d. a historical cost. ANS: !
DIF:
Easy
!": 1#-1
*. 8efer to 8ichmond Steel ?orporation. If the company %&ys the ne4 machine and disposes of the e/isting machine) corporate profit over the five-year life of the ne4 machine 4ill %e >>>>>>>>>>>>>>>>>>>> than the profit that 4o&ld have %een generated had the e/isting machine %een retained for five years. a. 1#)### lo4er %. 1#)### lo4er c. $(#)### lo4er d. 1#)### higher ANS: A Ann&al savings in operating costs 9&rchase of ne4 machine Disposal of e/isting machine Disposal of ne4 machine in years ,i--erence in pro-it
DIF:
0oderate
!": 1#-1
1#)### @*##)### 2#)### $#)### $%&!"!!!' ((((((((
. Emerald ?orporation has %een man&fact&ring )### &nits of 9art 1#*1) 4hich is &sed in the man&fact&re of one of its prod&cts. At this level of prod&ction) the cost per &nit of man&fact&ring 9art 1#*1 is as follo4s: Direct material Direct la%or aria%le overhead Fi/ed overhead applied 'otal
$ 2 8 4 6 $20
Camilton ?ompany has offered to sell Emerald )### &nits of 9art 1#*1 for 13 a &nit. Emerald has determined that it co&ld &se the facilities c&rrently &sed to man&fact&re 9art 1#*1 to man&fact&re 9art 8A? and generate an operating profit of *)###. Emerald has also determined that t4o-thirds of the fi/ed overhead applied 4ill contin&e even if 9art 1#*1 is p&rchased from Camilton. 'o determine 4hether to accept Camilton7s offer) the net relevant costs to make are a. #)###. %. 2*)###. c. 3#)###. d. 3)###. ANS: ! 'he relevant costs are the varia%le costs per &nit as 4ell as the portion of fi/ed overhead that 4ill %e avoided for 9art 1#*1. aria%le costs M 1* per &nit Fi/ed overhead M $ per &nit )### &nits L 1 per &nit M 2#)### 9rofit from 8A? M *)### Total Relevant Costs $6"!!! DIF:
0oderate
!": 1#-(
. Carding ?orporation man&fact&res %atons. Carding can man&fact&re (##)### %atons a year at a varia%le cost of #)### and a fi/ed cost of *#)###. !ased on CardingGs predictions) $*#)### %atons 4ill %e sold at the reg&lar price of .## each. In addition) a special order 4as placed for #)### %atons to %e sold at a *# percent disco&nt off the reg&lar price. 'he &nit relevant cost per &nit for CardingGs decision is a. 1.#. %. $.#. c. (.##. d. *.##. ANS: ! 'he relevant costs 4ill %e the varia%le costs per &nit. $3&!"!!!/*!!"!!! )nits ( $#+&!/)nit DIF:
0oderate
!": 1#-
. 'he o%6ective in solving the linear programming pro%lem is to determine the optimal levels of the a. coefficients. %. dependent varia%les. c. independent varia%les. d. slack varia%les.
ANS: ?
DIF:
Easy
!": 1#-2
2. A linear programming pro%lem can have a. no more than three reso&rce constraints. %. only one o%6ective f&nction. c. no more than t4o dependent varia%les for each constraint e&ation. d. no more than three independent varia%les. ANS: !
DIF:
Easy
!": 1#-2
3. A linear programming model m&st a. have only one o%6ective f&nction. %. have as many independent varia%les as it has constraint e&ations. c. have at least t4o dependent varia%les for each e&ation. d. consider only the constraints that can %e e/pressed as ine&alities. ANS: A
DIF:
Easy
!": 1#-2
#. In a linear programming pro%lem) constraints are indicated %y a. the independent varia%les. %. the dependent varia%les in the constraint e&ations. c. the coefficients of the o%6ective f&nction. d. iso-cost lines. ANS: !
DIF:
Easy
!": 1#-2
1. 'he feasi%le region for an R9 sol&tion is a. defined only %y %inding constraints on the optimal sol&tion. %. defined as the sol&tion space that satisfies all constraints. c. identified %y iso-cost and iso-profit lines. d. identified %y all of the a%ove. ANS: !
DIF:
Easy
!": 1#-2
$. A linear programming sol&tion a. al4ays involves more than one constraint. %. al4ays involves a corner point. c. is the one 4ith the highest verte/ coordinates. d. is provided %y the inp&t-o&tp&t coefficients. ANS: !
DIF:
Easy
!": 1#-2
(. 'he o%6ective f&nction and the reso&rce constraints have the same a. dependent varia%les. %. coefficients. c. independent varia%les. d. all of the a%ove. ANS: ?
DIF:
Easy
!": 1#-2
*. 5hich of the follo4ing items contin&o&sly checks for an improved sol&tion from the one previo&sly comp&tedB An algorithm
Simple/ method
yes yes no no
yes no no yes
a. %. c. d.
ANS: A
DIF:
Easy
!": 1#-2
. 5hich of the follo4ing varia%les is associated 4ith the Vless than or e&al toV constraintsB S&rpl&s a. %. c. d.
yes yes no no
ANS: ?
Slack yes no yes no
DIF:
Easy
!": 1#-2
. >>>>>>>>>>>>>>>>>>>> programming relates to a variety of techni&es that are &sed to allocate limited reso&rces among activities to achieve a specific o%6ective. a. Integer %. Inp&t-o&tp&t c. 0athematical d. 8egression ANS: ?
DIF:
Easy
!": 1#-2
. 'he graphical approach to solving a linear programming pro%lem %ecomes m&ch more comple/ 4hen there are more than t4o constraints a. %. c. d.
decision varia%les
yes no yes no
ANS: ?
no yes yes no
DIF:
Easy
!": 1#-2
2. 'he feasi%le region for a graphical sol&tion to a profit ma/imi;ation pro%lem incl&des a. all verte/ points. %. all points on every reso&rce constraint line. c. the origin. d. all of the a%ove. ANS: ?
DIF:
Easy
!": 1#-2
Unco22on Pro5)cts Corporation
In the t4o follo4ing constraint e&ations) O and P represent t4o prod&cts @in &nits prod&ced %y the ncommon 9rod&cts ?orporation. ?onstraint 1: (O P < *)$## ?onstraint $: O $P = ()### 3. 8efer to ncommon 9rod&cts ?orporation. 5hat is the ma/im&m n&m%er of &nits of 9rod&ct O that can %e prod&cedB a. *)$## %. ()### c. ## d. 1)*## ANS: D 1)*## &nits is the only amo&nt that 4ill not ca&se ?onstraint 1 to %e violated. DIF:
0oderate
!": 1#-2
#. 8efer to ncommon 9rod&cts ?orporation. 5hat is the feasi%le range for the prod&ction of PB a. 2*# to 1)## &nits %. # to 2*# &nits c. # to (1 &nits d. # to 1## &nits ANS: ! 2*# &nits is the most that can %e prod&ced 4itho&t violating ?onstraint 1. DIF:
0oderate
!": 1#-2
1. 8efer to ncommon 9rod&cts ?orporation. A sol&tion of O M ## and P M ## 4o&ld violate a. ?onstraint 1. %. ?onstraint $. c. %oth constraints. d. neither constraint. ANS: A 'his sol&tion 4o&ld yield a res< of *)##J this violates ?onstraint 1. DIF:
Easy
!": 1#-2
$. ne constraint in an R9 pro%lem is: 1$O P = *)###. If the optimal sol&tion is O M 1## and P M ##) this reso&rce has a. slack varia%le of ##. %. s&rpl&s varia%le of ##. c. o&tp&t coefficient of ##. d. none of the a%ove. ANS: ! 'he sol&tion to the constraint is *)##) a s&rpl&s varia%le of ##.
DIF:
Easy
!": 1#-2
(. ?onsider the follo4ing linear programming pro%lem and ass&me that non-negativity constraints apply to the independent varia%les: 0a/ ?0 M 1*O $(P S&%6ect to ?onstraint 1: *O P < ()$## ?onstraint $: $O P < $)*## 5hich of the follo4ing are feasi%le sol&tions to the linear programming pro%lemB a. O M ##) P M $*# %. O M 2##) P M *# c. O M #) P M *## d. O M 1)$##) P M # ANS: ? 'his is the only sol&tion that does not violate ?onstraints 1 or $. ?onstraint 1: *@# @*## M $)### < ()$## ?onstraint $: $@# @*## < $)*## < $)*## DIF:
0oderate
!": 1#-2
*. ?ontracting 4ith vendors o&tside the organi;ation to o%tain or ac&ire goods andKor services is called a. target costing. %. inso&rcing. c. o&tso&rcing. d. prod&ct harvesting. ANS: ?
DIF:
Easy
!": 1#-(
. 5hich of the follo4ing activities 4ithin an organi;ation 4o&ld %e least li9el to %e o&tso&rcedB a. acco&nting %. data processing c. transportation d. prod&ct design ANS: D
DIF:
Easy
!": 1#-(
. An o&tside firm selected to provide services to an organi;ation is called a a. contract vendor. %. lessee. c. net4ork organi;ation. d. centrali;ed inso&rcer. ANS: A
DIF:
Easy
!": 1#-(
. ?osts forgone 4hen an individ&al or organi;ation chooses one option over another are a. %&dgeted costs. %. s&nk costs. c. historical costs.
d. opport&nity costs. ANS: D
DIF:
Easy
!": 1#-1
2. 5hich of the follo4ing costs 4o&ld not %e acco&nted for in a companyGs recordkeeping systemB a. an &ne/pired cost %. an e/pired cost c. a prod&ct cost d. an opport&nity cost ANS: D
DIF:
Easy
!": 1#-1
SHORT ANS4ER
1. 5hat are three characteristics of relevant informationB ANS: 8elevant information m&st %e: @1 associated 4ith the decision &nder considerationJ @$ %e important to the decision makerJ and @( have a connection to or %earing on some f&t&re endeavor. DIF:
Easy
!": 1#-1
$. 5hy is depreciation e/pense irrelevant to most managerial decisions) even 4hen it is a f&t&re costB ANS: Depreciation e/pense is simply the systematic 4rite-off of a s&nk cost @the cost of a long-lived asset. Depreciation e/pense is therefore al4ays irrelevant &nless it pertains to an asset that is not yet ac&ired. DIF:
0oderate
!": 1#-$
(. 5hat is an opport&nity cost and 4hy is it a relevant costB ANS: An opport&nity cost is not a VcostV in the traditional o&t-of-pocket sense. pport&nity costs are %enefits that are sacrificed to p&rs&e one alternative rather than another. nce an alternative is selected) the opport&nity costs associated 4ith that alternative 4ill not appear directly in the acco&nting records of the firm as other costs of that alternative 4ill. 'hese costs are) ho4ever) relevant %eca&se the company is giving &p one set of %enefits to accept a second set. 8ational decision making ass&mes that the chosen alternative provides the greater %enefit. DIF:
0oderate
!": 1#-1
*. Define segment margin and e/plain 4hy it is a relevant meas&re of a segmentGs contri%&tion to overall organi;ational profita%ility. ANS: Segment margin is the amo&nt of income that remains after ded&cting all avoida%le @%oth varia%le and fi/ed costs from sales. 'his meas&re is the appropriate ga&ge of a segmentGs via%ility %eca&se it is a direct meas&re of ho4 total organi;ational profits 4o&ld change if the segment 4as discontin&ed. DIF:
0oderate
!": 1#-
. 5hat is the relationship %et4een scarce reso&rces and an organi;ationGs prod&ction capacityB ANS: In the long r&n) capacity is likely to %e constrained %y t4o f&ndamental reso&rces: la%or and machinery. Co4ever) in the short r&n) additional constraints can p&sh capacity to levels %elo4 la%or and machine capacity. ?onstraints can %e ind&ced %y ra4 material shortages) interr&ptions in distri%&tion channels) la%or strikes in the plants of s&ppliers of important components) or governmental restrictions on markets @gas rationing) &otas. DIF:
0oderate
!": 1#-*
. nder 4hat circ&mstances is the s&m of varia%le prod&ction and selling costs the appropriate minim&m price for special ordersB ANS: aria%le costs 4o&ld serve as the %ottom price for a special order only if the special order co&ld %e prod&ced on prod&ction capacity that 4o&ld other4ise %e idle. 5henever presently employed capacity is partially or 4holly s&rrendered to prod&ce a special order) the special order price 4o&ld %e %ased on %oth varia%le costs and the profit sacrificed on the %est alternative &se of the capacity. DIF:
0oderate
!": 1#-
. 5hy are fi/ed costs generally more relevant in long-r&n decisions than short-r&n decisionsB ANS: In the long r&n) all costs are relevant. In the short r&n) many costs that apply to the e/isting prod&ction technology are s&nk. In partic&lar) depreciation charges and lease payments on long-term assets are &navoida%le. In the long r&n) these assets are replaced and) th&s their associated costs are relevant in the replacement decision. DIF:
0oderate
!": 1#-$
2. Define and disc&ss o&tso&rcing. ANS: &tso&rcing occ&rs 4hen an organi;ation Vfarms o&tV some of its normal %&siness activities or processes. Several areas that are most fre&ently o&tso&rced %y an organi;ation incl&de payroll) acco&nting) transportation) and possi%ly legal. 5hen a company o&tso&rces some of its f&nctions) it is a%le to divert more energy to those areas that prod&ce a firmGs core competencies or have the a%ility to create reven&es for the firm. DIF:
0oderate
!": 1#-(
3. 5hat are some factors that a company m&st consider 4hen deciding to raise or lo4er sales prices on prod&ctsB ANS: &antitative factors incl&de the ne4 contri%&tion margin per &nit of the prod&ct) short-term and long-term changes in demand and prod&ction vol&me %eca&se of the price change) and the %est &se of a company7s scarce reso&rces. &alitative factors incl&de the impact of changes on c&stomer good4ill to4ard the company) c&stomer loyalty to4ard company prod&cts) and competitors7 responses to the firm7s ne4 pricing str&ct&re. DIF:
0oderate
!": 1#-
PRO.LEM A0ri:Ma0ic Corporation
Agri-0agic ?orporation gro4s corn in r&ral areas of the So&th. Agri-0agicGs costs per %&shel of corn @%ased on an average yield of 1(# %&shels per acre follo4: $1.10 0.40 0.30 0.60 0.10 0
Direct material Direct la%or aria%le overhead Fi/ed overhead aria%le selling costs Fi/ed selling costs
Agri-0agic defines direct material costs as seed) fertili;er) 4ater) and other chemicals. 'he varia%le overhead costs represent maintenance and repair costs of machinery. 'he fi/ed overhead costs are completely comprised of depreciation e/pense on machinery and real estate ta/es. 1. 8efer to Agri-0agic ?orporation. Ass&me that the c&rrent date is 0arch 1. n this date) Agri-0agic m&st make a decision as to 4hether it is financially %etter off to plant a certain farm 4ith corn or leave the land idle @no income is derived from idle land. ?orn prices have %een severely depressed in recent years and Agri-0agic7s %est g&ess is that corn prices 4ill %e aro&nd $.## per %&shel at the time the crop is ready for harvest. Sho&ld the company plant corn or leave the land idleB E/plain. ANS: 'he company sho&ld make their decision %y comparing the incremental income from planting the corn crop to the incremental e/penses that 4o&ld %e inc&rred to gro4) harvest) and market the crop. 'he incremental reven&e is simply the $.## per %&shel and the incremental costs are all varia%le costs @1.1# #.*# #.(# #.1# M 1.3#. !ased on this comparison) the company 4o&ld %e 1( per acre %etter off to plant than to let the land remain idle. DIF:
0oderate
!": 1#-(
$. 8efer to Agri-0agic ?orporation. Ass&me for this &estion only that the company decided to plant the corn. A local oil refiner has approached the company a%o&t converting the crop to grain alcohol @&sed to make gasohol rather than selling the grain to the local grain elevator. If Agri0agic converts the grain to alcohol) it 4ill inc&r additional costs of #.# per %&shel) and the company 4ill %e a%le to sell the crop to the oil refiner for the e&ivalent of $.# per %&shel. ther4ise) the
company can sell the corn crop to the local grain elevator for 1.2 per %&shel. If Agri-0agic elects to sell the grain to the refinery) the company 4ill not inc&r the varia%le selling costs. 5hat sho&ld the company doB S&pport yo&r ans4er 4ith calc&lations. ANS: 'he company7s alternatives are to sell the corn as a grain or as alcohol. 'his decision can %e made %y comparing the incremental costs to convert the grain to alcohol to the increase in price he can receive for marketing the crop as alcohol rather than grain. ! y converting the crop to alcohol) the company increases total reven&e %y #. per %&shel @$.# - 1.2 and it inc&rs additional costs of #.# @#.# for the additional processing) less the #.1# savings on the varia%le grain marketing costs. 'h&s) %y converting the grain to alcohol) the company co&ld increase net income %y #.$ per %&shel. DIF:
0oderate
!": 1#-
(. 8efer to Agri-0agic ?orporation. Ass&me that the c&rrent date is 0arch 1. n this date) Agri-0agic ?orporation m&st make a decision as to 4hether it is financially %etter off to plant a certain far m to corn) leave the land idle @no income is derived from idle land) or rent the land to another farmer for # per acre. ?orn prices have %een severely depressed in recent years and Agri-0agic ?orporationGs %est g&ess is that corn prices 4ill %e aro&nd $.## per %&shel at the time the crop is ready for harvest. 5hat sho&ld the company doB Sho4 calc&lations. ANS: It has already %een determined @ans4er to 9ro%lem W1 that planting corn is preferred to leaving the land idle @%y 1( per acre. !y renting the land) Agri-0agic ?orporation is even %etter off. nder the rental alternative) Agri-0agic ?orporation is ( per acre %etter off than if he plants corn @# - 1(. !y renting the land) the company avoids all costs e/cept the fi/ed prod&ction costs @#.# per %&shel or 2 per acre. DIF:
0oderate
!": 1#-
*. Ne4 I%eria ?orporation makes and sells the V'a%asco 0aiden,) a 4all hanging depicting a magical pepper plant. 'he 'a%asco 0aidens are sold at specialty shops for # each. 'he capacity of the plant is 1)### 0aidens per year. ?osts to man&fact&re and sell each 4all hanging are as follo4s: Direct material Direct la%or aria%le overhead Fi/ed overhead aria%le selling e/penses
$ 5.00 6.00 8.00 10.00 2.50
Ne4 I%eria ?orporation has %een approached %y an 'e/as company a%o&t p&rchasing $)## 'a%asco 0aidens. 'he company is c&rrently making and selling 1)### per year. 'he 'e/as company 4ants to attach its o4n Rone Star la%el) 4hich increases costs %y .# each. No selling e/penses 4o&ld %e inc&rred on this order. 'he corporation %elieves that it m&st make an additional 1 on each 'a%asco 0aiden to accept this offer. a. %.
5hat is the opport&nity cost per &nit of selling to the 'e/as companyB 5hat is the minim&m selling price that sho&ld %e setB
ANS:
a.
pport&nity cost M Selling price min&s total varia%le costs # - @ 2 $.# M $2.#
%.
Direct material @.## .# Direct la%or aria%le overhead Fi/ed overhead aria%le selling pport&nity cost Xfrom @a less fi/ed overhead incl&dedY E/tra amo&nt re&ired to accept offer 0inim&m price
DIF:
0oderate
$ 5.50 6.00 8.00 10.00 0 18.50 1.00 $49.00
!": 1#-1
. 0ighty 0ike7s Acco&nting Service provides t4o types of services: a&dit and ta/. All company personnel can perform either service. In efforts to market its services) 0ighty 0ike relies on radio and %ill%oards for advertising. Information on 0ighty 0ikeGs pro6ected operations for the coming year follo4s: A&dit 8even&e per %illa%le ho&r aria%le cost of professional la%or 0aterial cost per %illa%le ho&r Allocated fi/ed costs per year 9ro6ected %illa%le ho&rs a. %.
'a/es
$35 25 2 100,000 14,000
$30 20 3 200,000 10,000
5hat is 0ighty 0ike7s pro6ected profit or @lossB If 1 spent on advertising co&ld increase either a&dit services %illa%le time %y 1 ho&r or ta/ services %illa%le time %y 1 ho&r) on 4hich service sho&ld the advertising dollar %e spentB
ANS: a.
A&dit Reven)e; 1*)### × ( 1#)### × (#
'a/
$490,000
$ 490,000 $ 300,000
(350,000)
300,000
(350,000) (200,000)
(28,000)
(200,000) (28,000)
(30,000) $112,000 (100,000) $ 12,000
'otal
$
70,000 (200,000) $(130,000)
(30,000) $ 182,000 (300,000) $(118,000)
%.
Each %illa%le ho&r of a&dit services generates 2 of contri%&tion margin @( - $ - $) ta/ services generates of contri%&tion margin @(# - $# - (. 'he advertising sho&ld %e spent on the a&dit services.
DIF:
0oderate
!": 1#-)1#-
. 'he management of 5halen Ind&stries has %een eval&ating 4hether the company sho&ld contin&e man&fact&ring a component or %&y it from an o&tside s&pplier. A 1## cost per component 4as determined as follo4s: Direct material Direct la%or aria%le man&fact&ring overhead Fi/ed man&fact&ring overhead
$ 15 40 10 35 $100
5halen Ind&stries &ses *)### components per year. After 5ilfert ?orporation s&%mitted a %id of 2# per component) some mem%ers of management felt they co&ld red&ce costs %y %&ying from o&tside and discontin&ing prod&ction of the component. If the component is o%tained from 5ilfert ?orporation) 5halen Ind&striesG &n&sed prod&ction facilities co&ld %e leased to another company for #)### per year. Re=)ire5; a. Determine the ma/im&m amo&nt per &nit 5halen Ind&stries co&ld pay an o&tside s&pplier.
%.
Indicate if the company sho&ld make or %&y the component and the total dollar difference in favor of that alternative.
c.
Ass&me the company co&ld eliminate one prod&ction s&pervisor 4ith a salary of (#)### if the component is p&rchased from an o&tside s&pplier. Indicate if the company sho&ld make or %&y the component and the total dollar difference in favor of that alternative.
ANS: a.
?ost to make
M incremental man&fact&ring cost and opport&nity cost M D0 DR - FC 9 ?S' .# M 1 *# 1# @#)###K*)### &nits
%.
0ake: Save @2#.## - .# × *)### M 1#)###
c.
Incremental mfg. M @(#)###K*)### M opport&nity cost #)###K*)### M 'o make !&y: Save @2 - 2# × *)### &nits M $#)###
DIF:
0oderate
!": 1#-(
$.# 1$.# 2.##
. !a/ter ?orporation is 4orking at f&ll prod&ction capacity prod&cing 1#)### &nits of a &ni&e prod&ct) "HR. 0an&fact&ring costs per &nit for "HR follo4: Direct material Direct man&fact&ring la%or 0an&fact&ring overhead
$ 2 3 5 $10
'he &nit man&fact&ring overhead cost is %ased on a varia%le cost per &nit of $ and fi/ed costs of (#)### @at f&ll capacity of 1#)### &nits. 'he non-man&fact&ring costs) all varia%le) are * per &nit) and the selling price is $# per &nit. A c&stomer) "acksonville ?ompany) has asked !a/ter to prod&ce $)### &nits of a modification of "HR to %e called 8S'. 8S' 4o&ld re&ire the same man&fact&ring processes as "HR. "acksonville ?ompany has offered to share e&ally the non-man&fact&ring costs 4ith !a/ter. 8S' 4ill sell at 1 per &nit. Re=)ire5; a. 5hat is the opport&nity cost to !a/ter of prod&cing the $)### &nits of 8S' @ass&me that no overtime is 4orkedB
%.
'he raves ?ompany has offered to prod&ce $)### &nits of "HR for !ro4n) so !ro4n can accept the "acksonville offer. raves ?ompany 4o&ld charge !a/ter 1* per &nit for the "HR. Sho&ld !a/ter accept the raves ?ompany offerB
c.
S&ppose !a/ter had %een 4orking at less than f&ll capacity prod&cing 2)### &nits of "HR at the time the 8S' offer 4as made. 5hat is the minim&m price !a/ter sho&ld accept for 8S' &nder these conditions @ignoring the 1 price mentioned previo&slyB
ANS: a.
"HR S9 - ? M ?0 8S' S9 - ? M ?0
$20 (11) $ 9
$15 (9) $ 6
@$ ( $ * × $)### &nits M
$18,000
@$ ( $ $ / $)### &nits M pport&nity cost
12,000 $ 6,000
%.
0ake @1 - 1* M 1 × $)### &nits M $)### 4itho&t giving &p any c&rrent prod&ction M D I'.
c.
'he varia%le cost to make and sell M 11 @$ ( $ * 4o&ld %e the minim&m. Any price over 11 4o&ld increase the contri%&tion margin.
DIF:
0oderate
!": 1#-(
2. 'he Sam&els ?ompany normally prod&ces 1#)### &nits of 9rod&ct R0 per year. D&e to an economic do4nt&rn) the company has some idle capacity. 9rod&ct R0 sells for 1 per &nit. 'he firmGs prod&ction) marketing) and administration costs at its normal capacity are: 9er nit Direct material Direct la%or aria%le overhead Fi/ed overhead @*#)###K1#)### &nits aria%le marketing costs Fi/ed marketing and administrative costs @$1#)###K1#)### &nits 'otal
$1.00 2.00 1.50 3.00 1.05 1.40 $9.95
Re=)ire5; a. ?omp&te the firmGs operating income %efore income ta/es if the firm prod&ced and sold 11#)### &nits.
%.
For the c&rrent year) the firm e/pects to sell the same n&m%er of &nits as it sold in the prior year. Co4ever) in a trade ne4spaper) the firm noticed an invitation to %id on selling R0 to a state government. 'here are no marketing costs associated 4ith the order if Davis is a4arded the contract. 'he company 4ishes to prepare a %id for *#)### &nits at its f&ll man&fact&ring cost pl&s #.$ per &nit. Co4 m&ch sho&ld it %idB If Davis is s&ccessf&l at getting the contract) 4hat 4o&ld %e its effect on operating incomeB
c.
Ass&me that the company is a4arded the contract on "an&ary $) and in addition it also receives an order from a foreign vendor for *#)### &nits at the reg&lar price of 1 per &nit. 'he foreign shipment 4ill re&ire the firm to inc&r its normal marketing costs. 'he government contract contains a 1#-day escape cla&se @i.e.) the firm can re6ect the contract 4ithin 1# days 4itho&t any penalty. If the firm accepts the government contract) overtime pay at 1 1K$ times the straight time rate 4ill %e paid on the *#)### &nits. In addition) fi/ed overhead 4ill increase %y #)### and varia%le overhead 4ill %ehave in its normal pattern. 'he company has the capacity to prod&ce %oth orders. Decide the follo4ing: 1.
Sho&ld the firm accept the foreign offerB Sho4 the effect on operating income of accepting the order.
$.
Ass&ming the foreign order is accepted) sho&ld the firm accept the government orderB Sho4 the effect on operating income of accepting the government order.
ANS: a.
Sales @11#)### × 1 - ? @11#)### × . M ?0 - F? @*#)### $1#)###
$1,650,000 (610,500) $1,039,500 (660,000)
