Chapter 13 - 5e [PDF]

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Chapter 13—Short-Run Decision Making: Relevant Costing MULTIPLE CHOICE 1. Pasha Company produced 50 defective units last month at a unit manufacturing cost of $30. The defective units were discovered before leaving the plant. Pasha can sell them "as is" for $20 or can rework them at a cost of $15 and sell them at the regular price of $50. Which of the following is not relevant to the sell-or-rework decision? a. $15 for rework b. $20 selling price of defective units c. $30 manufacturing cost d. $50 regular selling price e. All of these are relevant. ANS: C PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 3 min. 2. Which of the following is not a step in the decision-making model? a. define the problem b. identify alternatives c. consider qualitative factors d. total relevant costs and benefits for each alternative e. determine costs and benefits for both feasible and unfeasible alternatives ANS: E PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 3. The act of choosing among alternatives with an immediate or limited end in view is termed a. assessing feasible alternative. b. strategic decision making. c. constructing a decision model. d. short-run decision making. e. None of these. ANS: D PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 4. Future costs that differ across alternatives are a. opportunity costs. b. sunk costs. c. relevant costs. d. variable costs. e. product costs. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 5. Depreciation of equipment is an example of a(n) a. relevant cost. b. opportunity cost.

c. sunk cost. d. variable cost. e. None of these. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 6. Resources that can be purchased in the amount needed and at the time of use are a. lumpy resources. b. flexible resources. c. committed resources. d. product resources. e. implicit resources. ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: BB-Resource Management |AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 7. A company is considering a special order for 1,000 units to be priced at $8.90 (the normal price would be $11.50). The order would require specialized materials costing $4.00 per unit. Direct labor and variable factory overhead would cost $2.15 per unit. Fixed factory overhead is $1.20 per unit. However, the company has excess capacity and acceptance of the order would not raise total fixed factory overhead. The warehouse, however, would have to add capacity costing $1,300. Which of the following is relevant to the special order? a. $11.50 normal selling price b. $1.20 fixed factory overhead per unit c. $7.35 spent on donuts and coffee d. $8.90 selling price per unit of special order e. None of these. ANS: D PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 3 min. 8. Walloon Company produced 150 defective units last month at a unit manufacturing cost of $30. The defective units were discovered before leaving the plant. Walloon can sell them as is for $20 or can rework them at a cost of $15 and sell them at the regular price of $50. The total relevant cost of reworking the defective units is a. $4,500. b. $6,750. c. $7,500. d. $3,000. e. $2,250. ANS: E Cost of reworking the defective units = 150($15) = $2,250 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 9. An important qualitative factor to consider regarding a special order is the a. variable costs associated with the special order. b. avoidable fixed costs associated with the special order. c. effect the sale of special-order units will have on the sale of regularly priced units.

d. incremental revenue from the special order. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 10. Qualitative factors that should be considered when evaluating a make-or-buy decision are a. the quality of the outside supplier's product. b. whether the outside supplier can provide the needed quantities. c. whether the outside supplier can provide the product when it is needed. d. All of these. ANS: D PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. 11. Abbott Company is considering purchasing a new machine to replace a machine purchased one year ago that is not achieving the expected results. The following information is available: Expected maintenance costs of new machine Purchase price of existing machine Expected cost savings of new machine Expected maintenance costs of existing machine Resale value of existing machine

$ 12,000 per year $150,000 $ 20,000 per year $ 8,000 per year $ 35,000

Which of these items is irrelevant? a. Expected maintenance costs of new machine b. Purchase cost of existing machine c. Expected maintenance costs of existing machine d. Expected resale value of existing machine ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. Figure 13-1. Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order. Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether or not the special order is accepted. Fuller's policy is to avoid layoffs to the extent possible. 12. Refer to Figure 13-1. Which costs of the special order relate to flexible resources? a. wood and glass b. wood, glass, and variable overhead c. depreciation on machinery d. wood, glass, and direct labor e. wood, glass, direct labor, and setup labor ANS: B PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: BB-Resource Management | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min.

13. Refer to Figure 13-1. Which of the following is a qualitative factor that Fuller would consider in making the decision to accept or reject the special order? a. cost of yarn and backing b. cost of setup labor c. the no-layoff policy d. the use of machinery e. the machining and electricity ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 14. Refer to Figure 13-1. Which of the following is irrelevant to the special order decision? a. cost of wood and glass b. direct labor cost c. machining and electricity cost d. $40 price e. All of these are relevant. ANS: B PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. 15. Refer to Figure 13-1. If Fuller accepts the special order, by how much will operating income increase or decrease? a. $14,400 increase b. $12,000 decrease c. $12,000 increase d. $21,600 increase e. There will be no effect on operating income. ANS: C Sales ($40 x 600) Less: wood and glass ($16 x 600) Variable overhead ($4 x 600) Increase in operating income

$24,000 $9,600 $2,400 $12,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 16. Which of the following costs is not relevant to a decision to sell a product at split-off or process the product further and then sell the product? a. joint costs allocated to the product b. the selling price of the product at split-off c. the additional processing costs after split-off d. the selling price of the product after further processing ANS: A PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1 | LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. 17. A decision involving a choice between internal and external production is what kind of decision? a. relevant

b. c. d. e.

keep-or-drop sell-or-process-further special-order make-or-buy

ANS: E PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 18. A decision that focuses on whether a specially priced order should be accepted or rejected is what kind of decision? a. relevant b. make-or-buy c. sell-or-process-further d. special-order e. keep-or-drop ANS: D PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 19. A decision in which a manager needs to determine whether a product line (or segment) should continue or be eliminated is what kind of decision? a. relevant b. make-or-buy c. sell-or-process-further d. special-order e. keep-or-drop ANS: E PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 20. Piersall Company makes a variety of paper products. One product is 20 lb copier paper, packaged 5,000 sheets to a box. One box normally sells for $18. A large bank offered to purchase 3,000 boxes at $14 per box. Costs per box are as follows: Direct materials Direct labor Variable overhead Fixed overhead

$8 3 1 5

No variable marketing costs would be incurred on the order. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. Should Piersall accept the order? a. Yes, income will increase by $6,000. b. Yes, income will increase by $9,000. c. No, income will decrease by $3,000. d. No, income will decrease by $6,000. e. It doesn't matter; there will be no impact on income. ANS: A Yes, Piersall will make $6,000 if the order is accepted. $6,000 = ($14  8  3  1)  3,000 PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic

OBJ: LO: 13-2

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 21. Aerotoy Company makes toy airplanes. One plane is an excellent replica of a 737; it sells for $5. Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying unaccompanied. Costs per plane are as follows: Direct materials Direct labor Variable overhead Fixed overhead

$1.00 0.50 0.10 0.90

No variable marketing costs would be incurred. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. However, Vacation Airlines wants its own logo and colors on the planes. The cost of the decals is $0.01 per plane and a special machine costing $1,500 would be required to affix the decals. After the order is complete, the machine would be scrapped. Should the special order be accepted? a. Yes, income will increase by $300. b. No, income will decrease by $180. c. No, income will decrease by $1,500. d. Yes, income will increase by $180. e. It doesn't matter; there will be no change in income. ANS: D Contribution margin [($1.75  1.61) 12,000] Less: cost of special machine Increased income

$1,680 1,500 $ 180

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 22. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labor Inspecting products Providing power Providing supervision Setting up equipment Moving materials Total

$150,000 240,000 60,000 30,000 40,000 60,000 20,000 $600,000

If the component is not produced by Foster, inspection of products and provision of power costs will only be 10% of the current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs; and supervision costs will amount to only 40% of the production amount. An outside supplier has offered to sell the component for $25.50. What is the effect on income if Foster Industries purchases the component from the outside supplier? a. $25,000 increase b. $45,000 increase c. $90,000 decrease d. $90,000 increase ANS: A SUPPORTING CALCULATIONS: Make: Direct materials Direct labor

$(150,000) (240,000)

Inspecting products (avoid 90%) Providing power (avoid 90%) Providing supervision (avoid 60%) Setting up equipment (avoid 50%) Moving materials (avoid 50%) Total Buy: Purchase price (20,000  $25.50)

(54,000) (27,000) (24,000) (30,000) (10,000) $(535,000) $(510,000)

$510,000  $535,000 = $25,000 increase in income Or Compare total “buy” cost to total “make” cost Buy cost = 6,000 + 3,000 + 16,000 + 40,000 + 510,000 = 575,000 Make cost = 600,000 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 5 min. 23. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 75,000 120,000 45,000 60,000 $300,000

An outside supplier has offered to sell the component for $12.75. Fixed costs will remain the same if the component is purchased from an outside supplier. What is the effect on income if Vest Industries purchases the component from the outside supplier? a. $270,000 decrease b. $270,000 increase c. $30,000 decrease d. $30,000 increase ANS: A SUPPORTING CALCULATIONS: Make: Direct materials Direct labor Variable overhead Total

$ (75,000) (120,000) (45,000) $(240,000)

Buy: Purchase price (40,000  $12.75)

$(510,000)

$510,000  $240,000 = $270,000 decrease in income PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min.

24. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 75,000 120,000 45,000 60,000 $300,000

An outside supplier has offered to sell the component for $12.75. Fixed cost will remain the same if the component is purchased from an outside supplier. Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier. What is the effect on income if Vest purchases the component from the outside supplier? a. $225,000 decrease b. $195,000 increase c. $165,000 decrease d. $135,000 increase ANS: A SUPPORTING CALCULATIONS: Make: Direct materials Direct labor Variable overhead Total

$ (75,000) (120,000) (45,000) $(240,000)

Buy: Purchase price (40,000  $12.75) Rental income Total

$(510,000) 45,000 $(465,000)

$465,000  $240,000 = $225,000 decrease in income PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 25. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows: Variable costs per unit: Direct materials Direct labor Factory overhead Distribution Total

Fixed costs per month: $ 9.00 Factory overhead 4.50 Selling and admin. 3.00 Total 1.50 $18.00

$120,000 60,000 $180,000

The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00 per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on profits if Miller Company buys from the Tennessee firm? a. decrease of $8,000 b. increase of $9,000 c. increase of $8,000 d. decrease of $6,000

ANS: C SUPPORTING CALCULATIONS: Cost to buy ($17  20,000) Cost to make: Variable costs ($16.50  20,000) Opportunity costs Profit will increase by

$340,000 $330,000 18,000

348,000 $ 8,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 26. Houston Corporation manufacturers a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 32 40 16 32 $120

Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If Houston Corporation accepts Johnson Company's offer, total fixed costs will be reduced to $60,000. What alternative is more desirable and by what amount is it more desirable?

a. b. c. d.

Alternative Amount Make $ 20,000 Make $120,000 Buy $ 40,000 Buy $100,000

ANS: A SUPPORTING CALCULATIONS: Make ($120  5,000) Buy [($112  5,000) + $60,000] Make increases profits by

$600,000 620,000 $ 20,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 27. The operations of Smits Corporation are divided into the Child Division and the Jackson Division. Projections for the next year are as follows:

Sales revenue Variable expenses Contribution margin Direct fixed expenses Segment margin Allocated common costs Total relevant benefit (loss)

Child Division $250,000 90,000 $160,000 75,000 $ 85,000 35,000 $ 50,000

Jackson Division $180,000 100,000 $ 80,000 62,500 $ 17,500 27,500 $(10,000)

Total $430,000 190,000 $240,000 137,500 $102,500 62,500 $ 40,000

Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be a. $22,500. b. $40,000. c. $50,000.

d. $60,000. ANS: A SUPPORTING CALCULATIONS: $85,000  $62,500 = $22,500 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 28. The operations of Knickers Corporation are divided into the Pacers Division and the Bulls Division. Projections for the next year are as follows:

Sales revenue Variable expenses Contribution margin Direct fixed expenses Segment margin Allocated common costs Total relevant benefit (loss)

Pacers Division $420,000 147,000 $273,000 126,000 $147,000 63,000 $ 84,000

Bulls Division $252,000 115,500 $136,500 105,000 $ 31,500 47,250 $(15,750)

Total $672,000 262,500 $409,500 231,000 $178,500 110,250 $ 68,250

Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be a. $99,750. b. $84,000. c. $68,250. d. $36,750. ANS: D SUPPORTING CALCULATIONS: $147,000  $110,250 = $36,750 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 29. The following information pertains to Dodge Company's three products: Unit sales per year Selling price per unit Variable costs per unit Unit contribution margin Contribution margin ratio

A 250

B 400

C 250

$9.00 3.60 $5.40 60%

$12.00 9.00 $ 3.00 25%

$ 9.00 9.90 $(0.90) (10)%

Assume that product C is discontinued and the extra space is rented for $300 per month. All other information remains the same as the original data. Annual profits will a. increase by $75. b. decrease by $75. c. increase by $525. d. remain the same. ANS: C SUPPORTING CALCULATIONS: (250  $0.90) + $300 = $525 PTS: 1

DIF: Difficulty: Moderate

OBJ: LO: 13-2

NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 30. The following information relates to a product produced by Creamer Company: Direct materials Direct labor Variable overhead Fixed overhead Unit cost

$24 15 30 18 $87

Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each. The incremental cost per unit associated with the special order is a. $84. b. $81. c. $69. d. $64. ANS: B SUPPORTING CALCULATIONS: Direct materials Direct labor Variable overhead Variable selling

$24 15 30 12 $81

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 31. Meco Company produces a product that has a regular selling price of $360 per unit. At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order. Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be a. $60,000 increase. b. $60,000 decrease. c. $30,000 increase. d. $30,000 decrease. ANS: C SUPPORTING CALCULATIONS: 1,000  [$240  ($270  $120,000/2,000)] = $30,000 increase PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 32. The following information relates to a product produced by Creamer Company:

Direct materials Direct labor Variable overhead Fixed overhead Unit cost

$24 15 30 18 $87

Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each. If the firm produces the special order, the effect on income would be a a. $360,000 increase. b. $360,000 decrease. c. $540,000 increase. d. $540,000 decrease. ANS: C SUPPORTING CALCULATIONS: Incremental revenue (60,000  $90) Less: Incremental costs (60,000  $81) Incremental profit

$5,400,000 4,860,000 $ 540,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 33. Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units: Direct materials Direct labor Variable overhead Fixed overhead

$ 4 12 6 8

The company has the capacity to produce 30,000 units. The product regularly sells for $40. A wholesaler has offered to pay $32 per unit for 2,000 units. If the firm chooses to accept the special order and reject some regular sales, the effect on operating income would be a. a $20,000 increase. b. a $16,000 decrease. c. a $4,000 increase. d. $-0-. ANS: B SUPPORTING CALCULATIONS: 2,000  ($40  $32) = $16,000 decrease PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 34. Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: Direct materials Direct labor

$12 36

Variable overhead Fixed overhead

18 24

The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered to pay $110 per unit for 7,500 units. If the special order is accepted, the effect on operating income would be a a. $75,000 decrease. b. $429,000 increase. c. $495,000 increase. d. $249,000 increase. ANS: D SUPPORTING CALCULATIONS: Incremental revenue (7,500  $110) Lost revenue from regular sales (1,500  $120) Incremental costs: Direct materials (6,000  $12) Direct labor (6,000  $36) Variable overhead (6,000  $18) Incremental profit

$ 825,000 (180,000) $ 72,000 216,000 108,000

(396,000) $ 249,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 35. Rose Manufacturing Company had the following unit costs: Direct materials Direct labor Variable overhead Fixed overhead (allocated)

$24 8 10 18

A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit or loss will be generated by accepting the special order? a. $12,000 profit b. $96,000 profit c. $84,000 loss d. $24,000 loss ANS: A SUPPORTING CALCULATIONS: 2,000  ($48  $42) = $12,000 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 36. Reggie Corporation manufactures a single product with the following unit costs for 1,000 units: Direct materials Direct labor Overhead (30% variable) Selling expenses (50% variable) Administrative expenses (10% variable) Total per unit

$2,400 960 1,800 900 840 $6,900

Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order. How much will income change if the special order is accepted? a. increase by $398,400 b. decrease by $180,000 c. increase by $111,600 d. no change ANS: C SUPPORTING CALCULATIONS: 100  ($5,100  $2,400  $960  ($1,800  0.30)  ($840  0.10)) = $111,600 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 37. Boone Products had the following unit costs: Direct materials Direct labor Variable overhead Fixed factory (allocated)

$24 10 8 18

A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is $8 per unit. How much additional profit or loss will be generated by accepting the special order? a. $30,000 loss b. $4,000 loss c. $24,000 loss d. $4,000 profit ANS: D SUPPORTING CALCULATIONS: 1,000  ($48  $42) = 1,000  ($48  $50) =

$6,000 (2,000) $4,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 38. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint process. The joint costs amount to $200,000.

Product A1 B2 C3 D4

Units Produced 3,000 5,000 4,000 6,000

If Product B2 is processed further, profits will a. increase by $30,000. b. decrease by $3,000. c. increase by $32,000. d. increase by $2,000.

Sales Value at Split-Off $10,000 30,000 20,000 40,000

If Processed Further Additional Sales Costs Value $2,500 $15,000 3,000 35,000 4,000 25,000 6,000 45,000

ANS: D SUPPORTING CALCULATIONS: $35,000  $30,000  $3,000 = $2,000 increase PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 39. Manning Company uses a joint process to produce products W, X, Y, and Z. Each product may be sold at its split-off point or processed further. Additional processing costs of specific products are entirely variable. Joint processing costs for a single batch of joint products are $120,000. Other relevant data are as follows:

Product W X Y Z

Sales Value at Split-Off $ 40,000 $ 12,000 $ 20,000 $ 28,000 $100,000

Additional Processing Costs $ 60,000 $ 4,000 $ 32,000 $ 20,000 $116,000

Sales Value of Final Product $ 80,000 $ 20,000 $120,000 $ 32,000 $252,000

Which products should Manning process further? a. All. b. All except Z. c. Y and X. d. None. ANS: C SUPPORTING CALCULATIONS: Product W X Y Z

Additional Revenues $ 40,000 $ 8,000 $100,000 $ 4,000

Additional Costs $60,000 $ 4,000 $32,000 $20,000

Differences ($20,000) $ 4,000 $68,000 ($16,000)

Decision Sell now Process on Process on Sell now

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 40. Information about three joint products follows:

Anticipated production Selling price/lb. at split-off Additional processing costs/lb. after split-off (all variable) Selling price/lb. after further processing

A 5,000 lbs. $10

B 1,000 lbs. $30

C 2,000 lbs. $16

$ 6 $20

$12 $40

$24 $50

The cost of the joint process is $60,000. Which of the joint products should be sold at split-off? a. A. b. B. c. C. d. Both A and B. ANS: B SUPPORTING CALCULATIONS: Split-Off Process Further A $10 $20  $ 6 = $14

B C

$30 $16

$40  $12 = $28 $50  $24 = $26

*Sell now

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 41. Information about three joint products follows:

Anticipated production Selling price/lb. at split-off Additional processing costs/lb. after split-off (all variable) Selling price/lb. after further processing

X 12,000 lbs. $16

Y 8,000 lbs. $26

Z 7,000 lbs. $48

$ 8 $20

$20 $40

$20 $70

The cost of the joint process is $140,000. Which of the joint products should be processed further? a. X. b. Y. c. Z. d. Both X and Y. ANS: C SUPPORTING CALCULATIONS: Split-Off Process Further X $16 $20  $ 8 = $12 Y $26 $40  $20 = $20 Z $48 $70  $20 = $50

*Process on

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. Figure 13-2. ColorPro uses part 87A in the production of color printers. Unit manufacturing costs for part 87A are: Direct materials Direct labor Variable overhead Fixed overhead

$8 2 1 4

ColorPro uses 100,000 units of 87A per year. Filbert Company has offered to sell ColorPro 100,000 units of 87A per year for $12. Fixed overhead is unavoidable. 42. Refer to Figure 13-2. Should ColorPro make or buy the part? a. Make the part because it will save $100,000 over buying it. b. Buy the part because it will save $100,000 over making it. c. Make the part because it will save $1,100,000 over buying it. d. Buy the part because it will save 1,100,000 over making it. e. Buy the part because it will save $300,000 over making it. ANS: A Direct materials Direct labor Variable overhead Purchase price Total relevant costs

Make $8 2 1 --$11

Buy ------$12 $12

It is cheaper to make the part in-house. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 43. Refer to Figure 13-2. Now suppose that ColorPro discovers that other costs will increase by $7,000 per year if the component is purchased rather than made internally. Should ColorPro make or buy the part? a. Make the part because it will save $100,000 over buying it. b. Buy the part because it will save $100,000 over making it. c. Make the part because it will save $107,000 over buying it. d. Buy the part because it will save $107,000 over making it. e. Make the part because it will save $10,000 over buying it. ANS: C Direct materials Direct labor Variable overhead Purchase price Materials handling cost Total costs

Make $ 800,000 200,000 100,000 ----$1,100,000

Buy ------$1,200,000 7,000 $1,207,000

It is cheaper by $107,000 to make the part in-house. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 44. Refer to Figure 13-2. Which of the following is a qualitative factor that might affect ColorPro's decision? a. Filbert has an outstanding reputation for quality. b. Ordering from Filbert would give ColorPro a chance to see how well Filbert could meet JIT standards for ColorPro's other products. c. Filbert is known for the reliability of its products. d. Making the part in-house would help ColorPro avoid layoffs of direct and indirect labor. e. All of these. ANS: E PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. Figure 13-6. Autry Company manufactures veterinary products. One joint process involves refining a chemical (dactylyte) into two chemicals  dac and tyl. One batch of 5,000 gallons of dactylyte can be converted to 2,000 gallons of dac and 3,000 gallons of tyl at a total joint processing cost of $12,000. At the splitoff point, dac can be sold for $3 per gallon and tyl can be sold for $4 per gallon. Autry has just learned of a new process to convert dac into prodac. The new process costs $4,000 and yields 1,700 gallons of prodac for every 2,000 gallons of dac. Prodac sells for $5 per gallon. 45. Refer to Figure 13-6. What is Autry's profit from refining one batch of dactylyte if both dac and tyl are sold at the split-off point? a. $6,000 b. $12,000 c. $7,000 d. $18,000 e. $15,000

ANS: A Revenue [(2,000  $3) + (3,000  $4)] Less: Joint processing cost Gross profit

$18,000 12,000 $ 6,000

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 46. Refer to Figure 13-6. Should Autry process dac further? a. No, income will be $1,500 lower. b. No, income will be $5,000 lower. c. Yes, income will be $1,500 higher. d. Yes, income will be $5,000 higher. e. It doesn't matter; income will be the same. ANS: A Revenue Less: further processing of dac Less: Joint processing cost Gross profit

Sell Dac & Tyl @ Split-off $18,000 12,000 $ 6,000

Process Dac Further $20,500* 4,000 12,000 $ 4,500

($3  2,000) = $6,000 Sales of Dac that would not occur if action taken. ($5  $1,700) = $8,500 Sales of Prodac that would occur if action taken. *Revenue 2nd option $18,000  $6,000 + $8,500 = $20,500. Gross profit is $1,500 less ($4,500  $6,000). PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. Figure 13-7. Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house. An outside company has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows: Direct materials Direct labor Variable overhead Fixed overhead

$3.00 $1.50 $2.75 $5.00

47. Refer to Figure 13-7. Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should Ring purchase the part from the outside supplier? a. No, income will decrease by $71,500. b. No, income will decrease by $15,000. c. Yes, income will increase by $74,500. d. No, income will decrease by $10,500. e. Yes, income will increase by $10,500. ANS: A Relevant cost per unit= $3.00 + $1.50 + $2.75 + $1.50 = $8.75 Fixed overhead = $5.00 - ($5.00 x 70%) = $1.50

Decrease in income if purchased = ($12.00 - $8.75) x 22,000 = $71,500 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 48. Refer to Figure 13-7. Assume that all of the fixed overhead is allocated and cannot be avoided. Should Ring purchase the part from the outside supplier? a. Yes, income will increase by $104,500. b. No, income will decrease by $104,500. c. Yes, income will increase by $78,500. d. Yes, income will increase by $95,500. e. Yes, income will increase by $137,500. ANS: B Relevant cost per unit = $3.00 + $1.50 + $2.75 = $7.25 Decrease in income if purchased = ($7.25 - $12.00) x 22,000 = $104,500 added cost if purchased PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. Figure 13-8. Kerrigan Lumber Yard receives 12,000 large trees each year that they process into rough logs. Currently, Kerrigan sells the rough logs for $75 each. Kerrigan is considering processing the logs further into refined lumber. Each log can be processed into 200 feet of refined lumber at an additional cost of $0.40 per foot. The refined lumber can be sold for $0.95 per foot. 49. Refer to Figure 13-8. Should Kerrigan process the rough logs into refined lumber? a. Yes, income will increase by $35 per log. b. Yes, income will increase by $110 per log. c. Yes, income will increase by $75 per log. d. No, income will decrease by $35 per log. e. No, income will decrease by $110 per log. ANS: A Sell at Split-Off Process Further Revenue $75.00 $190.00 Less: Processing cost $0.00 $80.00 Income $75.00 $110.00 Increase of $35.00 per log ($110.00 - $75.00) PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 50. Refer to Figure 13-8. Assume that the cost of getting the 12,000 large trees falls by half. Should Kerrigan sell the rough logs at split-off or process it further? a. Process further, the reduction in the cost of trees makes that option more profitable than it was before. b. Sell at split-off because the decrease in the cost of the trees makes that option more profitable than it was before. c. Sell at split-off, the reduction in the cost of the trees is irrelevant.

d. Process further, the reduction in the cost of the trees will lower further processing costs. e. Process further because the reduction in the cost of the trees is irrelevant. ANS: E PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 3 min. 51. A decision that involves potential further processing of joint products is which kind of decision? a. relevant b. make-or-buy c. sell-or-process-further d. special-order e. keep-or-drop ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 2 min. 52. When managers are considering the optimal product mix, they are most concerned with a. maximizing revenue. b. minimizing cost. c. maximizing profit. d. minimizing selling and administrative expense. e. balancing productive capacity. ANS: C PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management Functions KEY: Bloom's: Comprehension NOT: 2 min. 53. Limited resources and limited demand for a product are generally referred to as a. resources. b. problems. c. constraints. d. optima. e. contribution factors. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-25-Managerial Characteristics/Terminology KEY: Bloom's: Knowledge NOT: 2 min. 54. The solution of the product mix problem in the presence of multiple constraints requires the use of a. linear programming. b. relevant costing. c. differential costing. d. excel programming. e. contribution margin per unit of scarce resource. ANS: A PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-25-Managerial Characteristics/Terminology KEY: Bloom's: Knowledge NOT: 2 min. Figure 13-3.

Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed a line of sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and have variable costs of $80. The tubs sell for $600 and have variable costs of $450. The glass and ceramic sinks and tubs require the use of specialized molding equipment. The specialized molding equipment has 4,050 hours of capacity per year. A sink uses an average of 2 hours of specialized molding equipment time; a tub uses an average of 5 hours of specialized molding equipment time. 55. Refer to Figure 13-3. What is the contribution margin per hour of specialized molding equipment time for sinks? a. $35 b. $33.33 c. $70 d. $200 e. $68.33 ANS: A Contribution margin CM per hour of molding for sinks = $70/2 = $35 per hour of constrained resource (molding) PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 56. Refer to Figure 13-3. Assume that EBP can sell as many as 1,000 sinks and 500 tubs per year. How many tubs should EBP produce? a. 1,000 b. 500 c. 410 d. 675 e. 0 ANS: C Contribution Margin per molding hour for Sinks is ($150  $80)/2 or $35. Contribution Margin per molding hour for Tubs is ($600  $450)/2 or $30. To maximize profits, they should make as many sinks as will sell since the margin per molding hour is greater. Solving for the maximum sinks of 1,000, the number of tubs would be 410. Expressed mathematically the equation is: 2  sinks + 5  tubs = 4,050 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 4 min. 57. Refer to Figure 13-3. What is the contribution margin per hour of specialized molding time for tubs? a. $35 b. $68.33 c. $70 d. $200 e. $30 ANS: E Contribution margin per hour of molding for tubs = $150/5 = $30 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min.

58. Refer to Figure 13-3. Assuming that specialized molding equipment time is the only constrained resource, and that EBP can sell as many tubs and sinks as it can produce, how many sinks should be sold? a. 2,050 b. 2,025 c. 0 d. 4,050 e. 810 ANS: B Contribution margin per hour of molding for tubs = $150/5 = $30 Contribution margin CM per hour of molding for sinks = $70/2 = $35 Because the contribution margin per hour for sinks ($35) is higher than that of tubs ($30), EBP would prefer to use the molding equipment as much as possible to make sinks. EBP has capacity for 2,025 sinks (4,050 hours/2 hours). PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 4 min. Figure 13-4. Connolly Company produces two types of lamps, classic and fancy, with unit contribution margins of $13 and $21, respectively. Each lamp must spend time on a special machine. The firm owns four machines that together provide 18,000 hours of machine time per year. The classic lamp requires 0.20 hours of machine time, the fancy lamp requires 0.50 hours of machine time. 59. Refer to Figure 13-4. What is the contribution margin per hour of machine time for a classic lamp? a. $26 b. $104 c. $16 d. $65 e. $13 ANS: D Contribution margin per unit Hours of machine time Contribution margin per hour of machine time PTS: NAT: STA: KEY:

Classic lamp Fancy lamp $13.00 $21.00 0.2 0.5 $65.00 $42.00

1 DIF: Difficulty: Easy OBJ: LO: 13-3 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 3 min.

60. Refer to Figure 13-4. What is the contribution margin per hour of machine time for a fancy lamp? a. $21 b. $42 c. $13 d. $8 e. $6 ANS: B Contribution margin per unit Hours of machine time Contribution margin per hour of machine time PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic

Classic lamp Fancy lamp $13.00 $21.00 0.2 0.5 $65.00 $42.00 OBJ: LO: 13-3

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 61. Refer to Figure 13-4. How many of each type of lamp must be sold to optimize total contribution margin? a. 18,000 classic lamps; 0 fancy lamps b. 0 classic lamps; 30,000 fancy lamps c. 10,000 classic lamps; 10,000 fancy lamps d. 0 classic lamps; 9,000 fancy lamps e. 90,000 classic lamps; 0 fancy lamps ANS: E

Contribution margin per unit Hours of machine time Contribution margin per hour of machine time

Classic lamp Fancy lamp $13.00 $21.00 0.2 0.5 $65.00 $42.00

Since classic lamps have a contribution margin per hour of machine time of $65 (as opposed to fancy lamps $42), all machine time should go to the production of classic lamps. Number of classic lamps = 18,000/0.20 hours per unit = 90,000 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 62. Refer to Figure 13-4. What is the total contribution margin of the optimal mix of classic and fancy lamps? a. $1,280,000 b. $950,000 c. $1,000,000 d. $1,170,000 e. $90,000 ANS: D Since classic lamps have a contribution margin per hour of machine time of $65 (as opposed to fancy lamps $42), all machine time should go to the production of classic lamps. The optimal mix is 90,000 classic lamps and zero fancy lamps. Total contribution margin = 90,000 x $13 = $1,170,000 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. Figure 13-5. Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit contribution margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14. Each model must spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time. 63. Refer to Figure 13-5. What is the amount of machine time for model K-3 in terms of percent of a machine hour? a. 10% b. 20% c. 25% d. 40%

e. 50% ANS: C Model K-3 requires 15/60 or 25% machine hours. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 3 min. 64. Refer to Figure 13-5. What is the contribution margin per unit of scarce resource (machine time) for Model K-3? a. $24 b. $12 c. $6 d. $14 e. $28 ANS: A Model K-3 requires 15/60 or 25% machine hours. Model P-4 requires 30/60 or 50% machine hours.

Contribution margin per unit Hours of machine time Contribution margin per hour of machine time

Model K-3 $ 6.00 0.25 $24.00

Model P-4 $14.00 0.50 $28.00

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis |ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 65. Refer to Figure 13-5. What is the amount of machine time for model P-4 in terms of percent of a machine hour? a. 10% b. 20% c. 25% d. 30% e. 50% ANS: E Model P-4 requires 30.60 or 50% of machine hours. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 3 min. 66. Refer to Figure 13-5. What is the contribution margin per unit of scarce resource (machine time) for Model P-4? a. $6 b. $12 c. $24 d. $14 e. $28 ANS: E Model K-3 requires 15/60 or 0.25 machine hours. Model P-4 requires 30/60 or 0.50 machine hours.

Contribution margin per unit Hours of machine time Contribution margin per hour of machine time

Model K-3 $ 6.00 0.25 $24.00

Model P-4 $14.00 0.50 $28.00

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis |ACBSP: APC-30-Contribution Margin KEY: Bloom's: Application NOT: 3 min. 67. Refer to Figure 13-5. Now suppose that Santorino Company can sell only 5,500 units of each model. How many units of Model K-3 should be produced? a. 5,500 b. 312 c. 1,250 d. 2,750 e. 5,000 ANS: E Model K-3 requires 15/60 or 0.25 machine hours. Model P-4 requires 30/60 or 0.50 machine hours. Contribution margin per unit Hours of machine time Contribution margin per hour of machine time

Model K-3 $ 6.00 0.25 $24.00

Model P-4 $14.00 0.50 $28.00

Since P-4 has the higher contribution margin per hour of machine time, produce 5,500 units of P-4, which will take 2,750 hours of machine time. Remaining hours of machine time = 4,000  2,750 = 1,250 hours Model K-3 units = 1,250/0.25 = 5,000 units PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis |ACBSP: APC-30-Contribution Margin | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 4 min. 68. Refer to Figure 13-5. Now suppose that Santorino Company can sell only 5,500 units of each model. How many units of Model P-4 should be produced? a. 5,500 b. 5,000 c. 1,250 d. 2,750 e. 1,375 ANS: A Model K-3 requires 15/60 or 0.25 machine hours. Model P-4 requires 30/60 or 0.50 machine hours. Contribution margin per unit Hours of machine time Contribution margin per hour of machine time

Model K-3 $ 6.00 0.25 $24.00

Model P-4 $14.00 0.50 $28.00

Since P-4 has the higher contribution margin per hour of machine time, produce 5,500 units of P-4. (Any remaining machine time can be used to produce Model K-3.) PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-3 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis |ACBSP: APC-30-Contribution Margin | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application NOT: 4 min. Figure 13-9.

Sabor Inc. is a medical testing laboratory that performs several tests and analyses for hospitals in the area. Four of the tests that they perform require the use of a specialized machine that can supply 14,000 hours per year. Information on the four lab tests follows:

Charging rate Variable cost Machine hours

Test A $65 $25 3

Test B $51 $18 2

Test C $48 $13 1

Test D $32 $8 0.5

69. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test A? a. $40 b. $65 c. $25.50 d. $13.33 e. $15.67 ANS: D (1/3) completed x $40 CM = $13.33 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 13-3 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 3 min.

70. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test B? a. $20.50 b. $33 c. $16.25 d. $16.50 e. $18 ANS: D 0.5 completed in 1 hour x $33 CM = $16.50 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 13-3 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 3 min.

71. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test C? a. $48 b. $35 c. $13 d. $16 e. $24 ANS: B 1 completed in 1 hour x $35 CM = $35 PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 13-3 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 3 min.

72. Refer to Figure 13-9. What is the contribution margin per unit of machine time for Test D? a. $20 b. $32 c. $8 d. $48 e. $24 ANS: D 2 completed in 1 hour x $24 CM = $48

PTS: NAT: STA: KEY:

1 DIF: Difficulty: Moderate OBJ: LO: 13-3 BUSPROG: Analytic AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution Margin Bloom's: Application NOT: 3 min.

73. Raffles Company routinely bids on construction jobs. Raffles first determines the budgeted product cost of the job and then applies a markup of 50%. If a bid of $15,000 is submitted for a new job, which of the following is true? a. Budgeted product cost is $15,000. b. $5,000 is pure profit. c. All costs pertaining to the job total $15,000. d. $5,000 includes fixed overhead, selling and administrative expense, and profit. e. $5,000 includes selling and administrative expense, and profit. ANS: E PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 4 min. 74. The method of determining the cost of a product or service based on the price that customers are willing to pay is called a. relevant costing. b. differential costing. c. target costing. d. product costing. e. overall costing. ANS: C PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge NOT: 2 min. 75. Moss Company charges cost plus 35%. What is the price of an item with cost equal to $65? a. $73.25 b. $95.80 c. $87.75 d. $65.50 e. $22.75 ANS: C Price = $65 + ($65 x 35%) = $87.75 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 2 min. 76. Stadium Company charges cost plus 60%. If the price of an item is $260, what is the item's cost? a. $180 b. $162.50 c. $100 d. $125.50 e. $150.75 ANS: B Price = COGS + (markup  COGS) or Price = COGS  (1 + markup) thus COGS = price/(1 + markup) COGS

= $260/(1 + .60) = $260/1.60

= $162.50 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 77. Mattson Construction charges each customer a price equal to the cost of direct materials, direct labor, and overhead plus 40%. Job #1845 included the following costs: Direct materials Direct labor Overhead

$39,000 $67,000 $26,000

What is price charged for Job 1845? a. $86,000 b. $42,400 c. $106,000 d. $184,800 e. $166,154 ANS: D Price = ($39,000 + $67,000 + $26,000)  1.4 = $184,800 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 78. Super Pet Supplies sets prices at cost plus 70% of cost. The cost of an aquarium start-up kit is $110. What price does Super Pet Supplies charge for the aquarium start-up kit? a. $195 b. $200 c. $187 d. $77 e. $180 ANS: C Price = $110  1.7 = $187 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 79. Curtis Company sets price equal to cost plus 50%. Recently, Curtis charged a customer a price of $150 for an item. What was the cost of the item to Curtis? a. $50 b. $75 c. $100 d. $40 e. $80 ANS: C Cost = $150/1.50 = $100 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application

NOT: 3 min. 80. Wilson Custom Cabinetry makes cabinets to order and prices the completed jobs at product cost plus 40%. Recently, Wilson finished a job and billed the customer $560. If direct materials for the job cost $130, and direct labor cost $180, what was the applied overhead for the job? a. $250 b. $179 c. $350 d. $400 e. $90 ANS: E Applied overhead = $400*  $130  $180 = $90 *Cost = $560/1.4 = $400 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 81. Welker Company is designing an all-in-one grill and cooler aimed at sports fans. The company believes that the product can be sold for $180; and it requires a 30% profit on new products. What is the target cost of the all-in-one grill and cooler? a. $140 b. $54 c. $175 d. $126 e. $168 ANS: D Target cost = $180  $54* = $126 *Desired profit = 0.3  $180 = $54 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin of safety/sales target KEY: Bloom's: Application NOT: 3 min. 82. Shear-it, Inc., produces paper shredders. Shear-it is considering a new shredder design for home offices. The marketing vice president believes that a basic unit in a variety of attractive colors could be sold for $70. Shear-it requires that all new products yield 30% profit. What is the target cost of the new shredder? a. $21 b. $91 c. $49 d. $100 e. $63.70 ANS: C Target cost = $70  $21* = $49 *Desired profit = 0.3  $70 = $21 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 83. Brorsen, Inc., has just designed a new product with a target cost of $64. Brorsen requires new product to have a profit of 20%. What is the target price for the new product? a. $64

b. c. d. e.

$12.80 $320 $80 $53

ANS: D Target price  desired profit = Target cost Target price  0.2 (target price) = $64 Target price = $80 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 84. Teller Company has designed a caller ID machine with a large screen that can be seen easily from across the room. The Sales Department believes that this product can be sold for $30 each. Teller requires that all new products yield 15% profit. What is the target cost of the new product? a. $26 b. $4.50 c. $30 d. $25.50 e. $28.50 ANS: D Target cost = $30  $4.50* = $25.50 *Desired profit = 0.15  $30 = $4.50 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 85. Fester Company was making a product for $60 and selling it for $80. A competitor began selling the same product for $68. If Fester is to meet the competition's price, and maintain the same amount of profit per unit, what is target cost? a. $40 b. $60 c. $48 d. $17 e. $63 ANS: C Target cost = $68  20* = $48 *Profit = $80  60 = $20 PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 86. Victor's Detailing customers would be willing to pay $57 per detail. The company requires an 80% markup on each job. The average job would cost $30. Victor's Detailing uses markup pricing to set the price on each job. What is the price Victor should quote a new customer? a. $30 b. $24 c. $54 d. $84

e. $240 ANS: C Price = Cost + (Cost  Markup) or Price = Cost  (1 + markup) $54 = $30 + ($30  0.80) = $30 + $24 PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 87. Victor's Detailing customers would be willing to pay $57 per detail. The company requires a 40% profit on each job. The average job would cost $30. Victor's Detailing uses target-costing. What is the price they should quote a new customer? a. $30 b. $24 c. $57 d. $54 e. $84 ANS: C Target costing is a method of determining the cost of a product or service based on the price (target price) that customers are willing to pay. They would charge what the market could bear, which is $57. PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Application NOT: 3 min. 88. Victor's Detailing customers would be willing to pay $57 per detail. The company requires a 40% profit on each job. The average job would cost $30. Victor's uses target costing. Victor's Detailing should: a. sell their business. b. ask their customers to pay more. c. sell their services at the price customers are willing to pay. d. find a way to reduce costs. e. reduce their required percentage to stay in business. ANS: C Target cost = Price  (price  profit percent) = $57  ($57  0.40) = $57  $22.80 = $34.20 Victor's cost is below the target cost. He should sell at what the market will pay. PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-4 NAT: BUSPROG: Analytic STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension NOT: 3 min.