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Management Accounting, Cdn.

6e (Horngren/Sundem/Stratton/Beaulieu)
Chapter 9 Relevant Information and Decision Making: Production Decisions
1) Opportunity cost is the maximum available contribution to profit foregone by using limited resources
for a particular purpose.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 352
Objective: 1
2) An outlay cost is a cost that requires a cash disbursement.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 352
Objective: 1
3) All fixed costs are irrelevant and only variable costs are relevant to the decision-making process.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 352
Objective: 1
4) Make-or-buy decisions can apply to services as well as to products.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 352
Objective: 2
5) Separable costs are part of a joint process and can be exclusively identified with individual products.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 354
Objective: 3
6) The split-off point is the juncture in manufacturing where the joint products become individually
identifiable.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 354
Objective: 3
7) In a sell or process further decision, joint costs must be analyzed to determine maximum profitability.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 352
Objective: 2
8) Obsolete inventory costs are not relevant, because they are not an expected future cost but a past cost.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 531
Objective: 1

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9) Book value is defined as the cost of a depreciable asset.


Answer: FALSE
Diff: 1
Type: TF
Page Ref: 351
Objective: 1
10) A current or future action can always influence the long-run impact of a past outlay.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 351
Objective: 1
11) Amortization on old or new equipment is irrelevant information.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 351
Objective: 1
12) In practice, sunk costs often influence important decisions, especially when a decision maker doesn't
want to admit that a previous decision was a bad decision.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 351
Objective: 1
13) Unit costs not computed on the same volume basis should not be compared.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 361
14) Conflicts in the decision-making process can arise when superiors evaluate a manager's performance
using a model consistent with the decision model.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 361
15) Managers are often motivated to reject desirable economic decisions because of a conflict between the
measures used in decision making and those used in performance evaluation.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 361
16) The salary foregone by a person who quits a job to start a business is an example of a(n)
A) sunk cost.
B) opportunity cost.
C) amortizable cost.
D) outlay cost.
Answer: B
Diff: 1
Type: MC
Page Ref: 351
Objective: 1

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17) A cost that requires a cash disbursement is called a(n)


A) sunk cost.
B) opportunity cost.
C) outlay cost.
D) common cost.
Answer: C
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
18) Differential cost is a synonym for
A) detrimental cost.
B) opportunity cost.
C) accidental cost.
D) incremental cost.
Answer: D
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
19) Opportunity cost is
A) the contribution of the best alternative that is excluded from consideration.
B) the same as outlay cost.
C) never relevant to a decision.
D) always an experimental cost.
Answer: A
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
20) A homeowner has paid off the mortgage on his house and continues to live in the house. The interest
income foregone by NOT selling the house and investing the proceeds is an example of a(n)
A) sunk cost.
B) detrimental cost.
C) opportunity cost.
D) outlay cost.
Answer: C
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
21) A key factor in a make or buy decision is
A) whether or not there are idle facilities.
B) the amount of the sunk costs.
C) gain or loss on the disposal of equipment.
D) the total joint costs.
Answer: A
Diff: 1
Type: MC
Page Ref: 352
Objective: 2

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22) Fixed costs that may be avoided in the future are


A) unavoidable costs.
B) sunk costs.
C) relevant costs.
D) replacement costs.
Answer: C
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
23) Future costs are relevant in decision making when
A) they differ between alternatives.
B) they equal future revenues.
C) they are not based on an estimate.
D) they are the same between alternatives.
Answer: A
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
24) Which of the following would NOT be a consideration in a make or buy decision?
A) Excess capacity
B) Unavoidable fixed costs
C) Variable factory overhead
D) Rental income from unused facilities
Answer: B
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
25) If a company has excess capacity, the most it would pay for buying a product that it currently makes
would be the
A) total cost of producing the product.
B) market value of the product.
C) market value less usual markup on the product.
D) total variable cost of producing the product.
Answer: D
Diff: 1
Type: MC
Page Ref: 351
Objective: 1

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Speck Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this
part are as follows:
Direct materials
Direct labour
Variable factory overhead
Fixed factory overhead
Total costs

$ 6
10
8
4
$28

The fixed factory overhead costs are unavoidable.


26) Troxel Company has offered to sell 10,000 units of the same part to Speck for $26 a unit. Assuming no
other use for the facilities, Speck should
A) buy from Troxel as this would save $2 per unit.
B) make the part as this would save $2 per unit.
C) buy from Troxel as this would save $10 per unit.
D) make the part as this would save $10 per unit.
Answer: B
Diff: 2
Type: MC
Page Ref: 352
Objective: 2
27) Assuming no other use of their facilities, the highest price that Speck should be willing to pay for the
part is
A) $24.
B) $28.
C) $16.
D) $22.
Answer: A
Diff: 1
Type: MC
Page Ref: 352
Objective: 2
28) Assume that Speck can buy 10,000 units of the part from another producer for $30 each. The facilities
currently used to make the part could be rented out to another manufacturer for $40,000 a year. Speck
should
A) make the part as that would save $2 per unit.
B) buy the part as that would save $6 per unit.
C) buy the part as that would save $2 per unit.
D) make the part as that would save $6 per unit.
Answer: A
Diff: 2
Type: MC
Page Ref: 352
Objective: 2

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29) Assume that Speck can buy 10,000 units of the part from another producer for $28 each. The current
facilities could be used to make 10,000 units of a product that has a contribution margin of $10 per unit.
No additional fixed costs would be incurred. Speck should
A) make the new product and buy the part to earn an extra $6 per unit contribution to profit.
B) make the new product and buy the part to earn an extra $2 per unit contribution to profit.
C) continue to make the part to earn an extra $2 per unit contribution to profit.
D) continue to make the part to earn an extra $6 per unit contribution to profit.
Answer: A
Diff: 2
Type: MC
Page Ref: 352
Objective: 2
Bovee Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this
part are as follows:
Direct materials
Direct labour
Variable factory overhead
Fixed factory overhead
Total costs

$ 24
40
32
16
$112

The fixed factory overhead costs are unavoidable.


30) Clarke Company has offered to sell 10,000 units of the same part to Bovee for $104 a unit. Assuming
no other use for the facilities, Bovee should
A) make the part as this would save $8 per unit.
B) buy from Clarke as this would save $20 per unit.
C) make the part as this would save $20 per unit
D) buy from Clarke as this would save $8 per unit.
Answer: A
Diff: 2
Type: MC
Page Ref: 352
Objective: 2
31) Assuming no other use of their facilities, the highest price that Bovee should be willing to pay for the
part is
A) $112.
B) $64.
C) $88.
D) $96.
Answer: D
Diff: 2
Type: MC
Page Ref: 352
Objective: 2

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32) Assume that Bovee can buy 10,000 units of the part from another producer for $120 each. The facilities
currently used to make the part could be rented out to another manufacturer for $160,000 a year.
Bovee should
A) buy the part as that would save $24 per unit.
B) buy the part as that would save $4 per unit.
C) make the part as that would save $24 per unit.
D) make the part as that would save $8 per unit.
Answer: D
Diff: 2
Type: MC
Page Ref: 352
Objective: 2
33) Assume that Bovee can buy 10,000 units of the part from another producer for $112 each. The current
facilities could be used to make 10,000 units of a product that has a contribution margin of $40 per unit.
No additional fixed costs would be incurred. Bovee should
A) make the new product and buy the part to earn an extra $8 per unit contribution to profit.
B) continue to make the part to earn an extra $8 per unit contribution to profit.
C) continue to make the part to earn an extra $24 per unit contribution to profit.
D) make the new product and buy the part to earn an extra $24 per unit contribution to profit.
Answer: D
Diff: 2
Type: MC
Page Ref: 352
Objective: 2
Pett Company produces a part that is used in the manufacture of one of its products. The costs associated
with the production of 5,000 units of this part are as follows:
Direct materials
Direct labour
Variable factory overhead
Fixed factory overhead
Total costs

$ 22,500
32,500
15,000
35,000
$105,000

Of the fixed factory overhead costs, $15,000 is avoidable.


34) Titus Company has offered to sell 5,000 units of the same part to Pett for $18 per unit. Assuming there
is no other use for the facilities, Pett should
A) make the part as this would save $3 per unit.
B) buy the part as this would save $3 per unit.
C) buy the part as this would save the company $15,000.
D) make the part as this would save $1 per unit.
Answer: D
Diff: 2
Type: MC
Page Ref: 352
Objective: 2

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35) Assuming no other use of their facilities, the highest price that Pett should be willing to pay for 5,000
units of the part is
A) $105,000.
B) $70,000.
C) $85,000.
D) $60,000.
Answer: C
Diff: 2
Type: MC
Page Ref: 352
Objective: 2
36) Assume that Pett can buy 5,000 units of the part from another producer for $22 each. The facilities
currently used to make the part could be rented out to another manufacturer for $20,000 a year. Pett
should
A) make the part as that would save $4 per unit.
B) make the part as that would save the company $5,000.
C) buy the part as that would save $3 per unit.
D) buy the part as that would save the company $20,000.
Answer: B
Diff: 2
Type: MC
Page Ref: 352
Objective: 2
37) Assume that Pett can buy 5,000 units of the part from another producer for $21 each. The current
facilities could be used to make 5,000 units of a product that has a contribution margin of $5 per unit.
Fixed factory overhead costs to produce this new product would be exactly the same as for the currently
produced part. Pett should
A) continue to make the part and earn an extra $10,000 in profit.
B) buy the part and produce the new product and earn an extra $1 per unit contribution to profit.
C) continue to make the part and earn an extra $2 per unit contribution to profit.
D) buy the part and produce the new product and earn an extra $5 per unit contribution to profit.
Answer: B
Diff: 2
Type: MC
Page Ref: 352
Objective: 2

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Barker Company produces a part that is used in the manufacture of one of its products. The costs
associated with the production of 5,000 units of this part are as follows:
Direct materials
Direct labour
Variable factory overhead
Fixed factory overhead
Total costs

$ 90,000
130,000
60,000
140,000
$420,000

Of the fixed factory overhead costs, $60,000 is avoidable.


38) Blass Company has offered to sell 5,000 units of the same part to Barker for $72 per unit. Assuming
there is no other use for the facilities, Barker should
A) make the part as this would save $12 per unit.
B) buy the part as this would save $12 per unit.
C) buy the part as this would save the company $60,000.
D) make the part as this would save $4 per unit.
Answer: D
Diff: 2
Type: MC
Page Ref: 352
Objective: 2
39) Assuming no other use of their facilities, the highest price that Barker should be willing to pay for
5,000 units of the part is
A) $420,000.
B) $280,000.
C) $340,000.
D) $240,000.
Answer: C
Diff: 2
Type: MC
Page Ref: 352
Objective: 2
40) Assume that Barker can buy 5,000 units of the part from another producer for $88 each. The facilities
currently used to make the part could be rented out to another manufacturer for $80,000 a year. Barker
should
A) make the part as that would save $16 per unit.
B) make the part as that would save the company $20,000.
C) buy the part as that would save $12 per unit.
D) buy the part as that would save the company $80,000.
Answer: B
Diff: 2
Type: MC
Page Ref: 352
Objective: 2

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41) Assume that Barker can buy 5,000 units of the part from another producer for $84 each. The current
facilities could be used to make 5,000 units of a product that has a contribution margin of $20 per unit.
Fixed factory overhead costs to produce this new product would be exactly the same as for the currently
produced part. Barker should
A) continue to make the part and earn an extra $40,000 in profit.
B) buy the part and produce the new product and earn an extra $4 per unit contribution to profit.
C) continue to make the part and earn an extra $8 per unit contribution to profit.
D) buy the part and produce the new product and earn an extra $20 per unit contribution to profit.
Answer: B
Diff: 2
Type: MC
Page Ref: 352
Objective: 2
Mann Corporation has a joint process, which produces three products, A, B and C. Each product may be
sold at split-off or processed further and then sold. Joint processing costs for a year amount to $125,000.
Other relevant data are as follows:

Product
A
B
C

Sales Value
at Split-off
$160,000
62,500
32,000

Separable
Processing Costs
after Split-off
$20,000
32,500
25,000

Sales Value
at Completion
$200,000
95,000
50,000

42) Once product A is produced, processing it further will cause profits to


A) increase by $40,000.
B) decrease by $20,000.
C) decrease by $40,000.
D) increase by $20,000.
Answer: D
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
43) Product B
A) should be processed further to increase profits by $32,500.
B) should be sold at split-off since processing further would only reduce profits by $32,500.
C) should be processed further to increase profits by $95,000.
D) can be processed further or sold at split-off. There is no difference in profit.
Answer: D
Diff: 2
Type: MC
Page Ref: 354
Objective: 3

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44) To maximize profits, which products should Mann process further?


A) Product C only
B) Product B only
C) Product A only
D) Products A, B and C
Answer: C
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
45) In processing Product C further,
A) profits will decrease by $7,000.
B) incremental profits will exceed incremental costs.
C) profits will increase by $25,000.
D) the additional revenue produced will exceed the additional costs.
Answer: A
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
Avey Corporation has a joint process which produces three products, M, L and B. Each product may be
sold at split-off or processed further and then sold. Joint processing costs for a year amount to $500,000.
Other relevant data are as follows:

Product
M
L
B

Sales Value
at Split-off
$640,000
250,000
128,000

Separable
Processing Costs
after Split-off
$80,000
130,000
100,000

Sales Value
at Completion
$800,000
380,000
200,000

46) Once product M is produced, processing it further will cause profits to


A) increase by $160,000.
B) decrease by $ 80,000.
C) decrease by $160,000.
D) increase by $ 80,000.
Answer: D
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
47) Product L
A) should be processed further to increase profits by $130,000.
B) should be sold at split-off since processing further would only reduce profits by $130,000.
C) should be processed further to increase profits by $380,000.
D) can be processed further or sold at split-off. There is no difference in profit.
Answer: D
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
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48) To maximize profits, which products should Avey process further?


A) Product B only
B) Product L only
C) Product M only
D) Products M, L and B
Answer: C
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
49) In processing Product B further,
A) profits will decrease by $28,000.
B) incremental profits will exceed incremental costs.
C) profits will increase by $100,000.
D) the additional revenue produced will exceed the additional costs.
Answer: A
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
Hamilton, Inc. produces three products using a joint process which provides for $350,000 in joint costs.
The products X, Y and Z can be sold at split-off or processed further and then sold. The production level
for each product is 5,000 units. The following unit information is also available:

Product
X
Y
Z

Sales Value
at Split-off

Separable
Processing Costs
after Split-off
$24
$18
20
8
30
12

Sales Value
at Completion
$42
34
38

50) Once X is produced, processing it further will cause profits to


A) increase by $120,000.
B) stay the same.
C) decrease by $120,000.
D) increase by $24 per unit.
Answer: B
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
51) Product Y
A) should be processed further as this will increase profits by $30,000.
B) should be sold at split-off to maximize profits.
C) should be processed further to increase profits by $14 per unit.
D) can be processed further or sold at split-off, it makes no difference.
Answer: A
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
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52) To maximize profits, which products should Hamilton process further?


A) Product X only
B) Product Y only
C) Product Z only
D) Products X, Y and Z
Answer: B
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
53) In processing product Z further,
A) incremental revenues will exceed incremental costs.
B) profits will increase by $8 per unit.
C) profits will decrease by $20,000.
D) additional costs will be less than additional revenues.
Answer: C
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
54) Costs of manufacturing two or more products that are NOT separately identifiable as individual
products until their split-off point are known as
A) separable costs.
B) joint costs.
C) incremental costs.
D) sunk costs.
Answer: B
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
55) The juncture in manufacturing where the joint products become individually identifiable is known as
the
A) joint processing juncture.
B) split-off point.
C) common point.
D) significant juncture.
Answer: B
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
56) The costs of manufacturing joint products after the split-off point are referred to as
A) joint costs.
B) outlay costs.
C) opportunity costs.
D) separable costs.
Answer: D
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
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57) Which of the following is NOT an example of a joint product?


A) Sponges
B) Chemicals
C) Lumber
D) Meat packing
Answer: A
Diff: 2
Type: MC
Page Ref: 354
Objective: 3
58) Two or more manufactured products that have relatively significant sales values and are NOT
separately identifiable as individual products until their split-off point are called
A) separable products.
B) by-products.
C) distinct products.
D) joint products.
Answer: D
Diff: 1
Type: MC
Page Ref: 354
Objective: 3
59) It is profitable to extend processing or to incur additional distribution costs on a joint product if the
A) incremental expenses exceed incremental revenues.
B) sale of the product is guaranteed.
C) additional revenue exceeds the additional expenses.
D) joint products are inseparable.
Answer: C
Diff: 1
Type: MC
Page Ref: 354
Objective: 3
60) Which of the following is NOT likely to be relevant in a decision concerning the disposal of obsolete
inventory?
A) Inventory cost
B) Expected future revenues
C) Scrap value of inventory
D) Expected future costs
Answer: A
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
61) Which of the following is NOT likely to be relevant in a decision to replace equipment?
A) Cost of new equipment
B) Book value of old equipment
C) Selling price of old equipment
D) Maintenance costs of old equipment
Answer: B
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
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62) The periodic cost of equipment which is spread over the future periods in which the equipment is
expected to be used is called
A) net book value.
B) current cost.
C) operating cost.
D) depreciation.
Answer: D
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
63) Book value is defined as
A) disposal value.
B) disposal value less accumulated depreciation.
C) cost less accumulation depreciation.
D) disposal value less original cost.
Answer: C
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
Overland Company is considering replacing a machine that is presently used in the production of its
product. The following data are available:
Replacement

Original cost
Useful life in years
Current age in years
Book value
Disposal value now
Disposal value in 5 years
Annual cash operating costs

Old Machine
$90,000
10
5
$50,000
$16,000
0
$14,000

Machine
$70,000
5
0
0
$ 8,000

64) Which of the data provided in the table is irrelevant?


A) The annual operating cost of the old machine
B) The original cost of the replacement machine
C) The disposal value of the old machine
D) The book value of the old machine
Answer: D
Diff: 2
Type: MC
Page Ref: 351
Objective: 1

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65) Which of the data provided in the table is a sunk cost?


A) The annual cash operating costs of the old machine
B) The annual cash operating costs of the replacement machine
C) The disposal value of the old machine
D) The original cost of the old machine
Answer: D
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
66) The total relevant costs to consider if the old machine is kept are
A) $120,000.
B) $70,000.
C) $94,000.
D) $144,000.
Answer: B
Diff: 2
Type: MC
Page Ref: 351
Objective: 1
67) The difference in cost between keeping the old machine and replacing the old machine, ignoring
income taxes, is
A) $74,000 in favour of keeping the old machine.
B) $24,000 in favour of keeping the old machine.
C) $74,000 in favour of replacing the old machine.
D) $24,000 in favour of replacing the old machine.
Answer: B
Diff: 2
Type: MC
Page Ref: 357
Objective: 4

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Buckner Company is considering replacing a machine that is presently used in the production of its
product. The following data are available:
Replacement

Original cost
Useful life in years
Current age in years
Book value
Disposal value now
Disposal value in 5 years
Annual cash operating costs

Old Machine
$360,000
10
5
$200,000
$64,000
0
$56,000

Machine
$280,000
5
0
0
$ 32,000

68) Which of the data provided in the table is irrelevant?


A) The original cost of the replacement machine
B) The disposal value of the old machine
C) The book value of the old machine
D) The annual operating cost of the old machine
Answer: C
Diff: 2
Type: MC
Page Ref: 357
Objective: 4
69) Which of the data provided in the table is a sunk cost?
A) The disposal value of the old machine
B) The original cost of the old machine
C) The annual cash operating costs of the old machine
D) The annual cash operating costs of the replacement machine
Answer: B
Diff: 2
Type: MC
Page Ref: 357
Objective: 4
70) The total relevant costs to consider if the old machine is kept are
A) $480,000.
B) $280,000.
C) $376,000.
D) $576,000.
Answer: B
Diff: 2
Type: MC
Page Ref: 357
Objective: 4

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The Enger Company is contemplating replacing some old equipment. The pertinent information is as
follows:
Replacement

Original cost
Useful life in years
Current age in years
Book value
Disposal value now
Disposal value in 8 years
Annual cash operating costs

Old Machine
$50,000
20
12
$30,000
$7,500
0
$14,000

Machine
$36,000
8
0
0
$ 7,500

71) Which of the data provided in the table is a sunk cost?


A) The annual cash operating costs of the old equipment
B) The annual cash operating costs of the replacement equipment
C) The disposal value of the old equipment
D) The original cost of the old equipment
Answer: D
Diff: 2
Type: MC
Page Ref: 419
Objective: 4
72) The total relevant costs to consider if the old equipment is replaced are
A) $58,500.
B) $118,500.
C) $ 88,500.
D) $112,000.
Answer: D
Diff: 2
Type: MC
Page Ref: 357
Objective: 4
73) The difference in cost between keeping the old equipment and replacing the old equipment, ignoring
income taxes, is
A) $23,500 in favour of replacing the old equipment.
B) $23,500 in favour of keeping the old equipment.
C) $6,500 in favour of keeping the old equipment.
D) $6,500 in favour of replacing the old equipment.
Answer: A
Diff: 2
Type: MC
Page Ref: 357
Objective: 4

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74) A cost that has already been incurred and is irrelevant to the decision-making process is a(n)
A) opportunity cost.
B) replacement cost.
C) outlay cost.
D) sunk cost.
Answer: D
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
75) The gain or loss on the disposal of equipment is determined by
A) adding the book value of the old equipment to the cost of the new equipment.
B) adding the disposal value and the book value of the old equipment.
C) subtracting the book value from the disposal value of the old equipment.
D) subtracting the book value of the old equipment from the cost of the new equipment.
Answer: C
Diff: 1
Type: MC
Page Ref: 357
Objective: 4
76) Which of the following statements regarding a decision to keep existing equipment or replace it is
false?
A) The disposal value of the old equipment is irrelevant.
B) The book value of the old equipment is irrelevant.
C) The cost of the new equipment is relevant.
D) Depreciation on the new equipment is relevant.
Answer: A
Diff: 1
Type: MC
Page Ref: 357
Objective: 4
77) Which of the following would NOT be relevant to a decision to replace equipment?
A) Operating costs of old equipment
B) Cost of old equipment
C) Disposal value of old equipment
D) Acquisition cost of new equipment
Answer: B
Diff: 1
Type: MC
Page Ref: 357
Objective: 4
78) Variable costs are
A) irrelevant whenever they do not differ among alternatives.
B) always irrelevant.
C) always relevant.
D) relevant whenever they do not differ among alternatives.
Answer: A
Diff: 1
Type: MC
Page Ref: 351
Objective: 1

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79) Expected future fixed costs are


A) always relevant.
B) always irrelevant.
C) relevant whenever they differ among alternatives.
D) irrelevant whenever they differ among alternatives.
Answer: C
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
80) Which of the following statements is true?
A) Fixed costs should always be unitized as this would result in a better decision.
B) Unit costs need not be computed on the same volume basis.
C) Unit cost data are always more relevant than total cost data.
D) Unit cost changes with volume of activity, and therefore this fact must be considered in decision
making.
Answer: D
Diff: 1
Type: MC
Page Ref: 351
Objective: 1
Peters Company produces a product with the following unit cost.
Direct materials
Direct labour
Variable overhead
Fixed overhead
Unit cost

$ 2.75
1.25
4.00
2.50
$10.50

Fixed selling costs are $600,000 per year and variable selling costs are $1.50 per unit sold.
Production capacity is 500,000 units per year. However, the company expects to produce only 300,000
units next year. The product normally sells for $15 each. A customer has offered to buy 150,000 units for
$10 each. The units would be sold in an area outside the market area currently served.
81) The incremental cost per unit associated with the special order is
A) $8.00.
B) $9.25.
C) $9.50.
D) $10.00.
Answer: C
Diff: 2
Type: MC
Page Ref: 352
Objective: 2

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82) Total incremental cost associated with the special order is


A) $1,237,500.
B) $1,342,000.
C) $1,387,500.
D) $1,425,000.
Answer: D
Diff: 3
Type: MC
Page Ref: 352
Objective: 2
83) If the firm produces the special order, the effect on income would be
A) $75,000 increase.
B) $90,000 increase.
C) $2,500 decrease.
D) $12,500 decrease.
Answer: A
Diff: 3
Type: MC
Page Ref: 352
Objective: 2
84) A relevant costing analysis that focuses on whether a component should be made internally or
purchased externally.
Answer: Make-or-buy decision
Diff: 3
Type: SA Page Ref: 352
Objective: 2
85) A relevant costing analysis that focuses on whether a product should be processed beyond the splitoff point.
Answer: Sell or process further
Diff: 3
Type: SA Page Ref: 354
Objective: 3
86) The point where products become distinguishable after passing through a common process.
Answer: Split-off point
Diff: 3
Type: SA Page Ref: 354
Objective: 3
87) A relevant costing analysis that focuses on keeping or dropping a segment of a business.
Answer: Keep-or-drop decision
Diff: 1
Type: SA Page Ref: 352
Objective: 2
88) Future costs that differ between alternatives.
Answer: Relevant costs
Diff: 1
Type: SA Page Ref: 351
Objective: 1

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89) A cost for which the outlay has already been made and that cannot be affected by a future decision.
Answer: Sunk cost
Diff: 1
Type: SA Page Ref: 351
Objective: 1
90) The maximum available contribution to profit foregone by using limited resources for a particular
purpose.
Answer: Opportunity cost
Diff: 1
Type: SA Page Ref: 351
Objective: 1
91) A cost that requires a cash disbursement.
Answer: Outlay cost
Diff: 1
Type: SA Page Ref: 351
Objective: 1
92) The difference in total cost between two alternatives.
Answer: Differential cost
Diff: 1
Type: SA Page Ref: 351
Objective: 1
93) Two or more manufactured products that have relatively significant sales values and are not
separately identifiable as individual products until their split-off point.
Answer: Joint products
Diff: 1
Type: SA Page Ref: 354
Objective: 3
94) The juncture in manufacturing where the joint products become individually identifiable.
Answer: Split-off point
Diff: 1
Type: SA Page Ref: 354
Objective: 3
95) Any costs beyond the split-off point.
Answer: Separable costs
Diff: 1
Type: SA Page Ref: 354
Objective: 3
96) The costs of manufacturing joint products prior to the split-off point.
Answer: Joint costs
Diff: 1
Type: SA Page Ref: 354
Objective: 3
97) The periodic cost of equipment which is spread over the future periods in which the equipment is
expected to be used.
Answer: Depreciation
Diff: 1
Type: SA Page Ref: 357
Objective: 4
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98) The original cost of equipment less accumulated depreciation, which is the summation of depreciation
charged to past periods.
Answer: Book value
Diff: 1
Type: SA Page Ref: 357
Objective: 4
99) A cost that has already been incurred and is irrelevant to the decision-making process.
Answer: Sunk cost
Diff: 1
Type: SA Page Ref: 357
Objective: 4

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100) The management of Hillsboro Industries is evaluating whether the company should continue
manufacturing a component or buy it from an outside supplier. Based upon their accounting records, it
appears that it costs the company $80 per unit to make the component. The $80 cost per component was
determined as follows:
Direct material
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead

$16
30
12
22

Total

$80

Hillsboro Industries uses 10,000 components per year. After Ricardo Inc. submitted a bid of $70 per
component, some members of management felt they could reduce costs by buying from outside and
discontinuing production of the component.
If the component is obtained from Ricardo Inc., $5 of fixed manufacturing overhead per unit would be
avoided and Hillsboro's unused production facilities could be leased to another company for $30,000 per
year.
Based upon relevant cost differences, should Hillsboro Industries make or buy the component? Include
your supporting calculations.
Answer:
Outside supplier's price
BUY
MAKE
(10,000 x $70)
($700,000)
Direct materials
(10,000 x $16)
($160,000)
Direct labour
(10,000 x $30)
( 300,000)
Variable manufacturing overhead
(10,000 x $12)
( 120,000)
Fixed manufacturing overhead
(10,000 x $22)
(10,000 x $17)
( 170,000)
( 220,000)
Rental revenue
30,000
_________
Totals
($840,000)
($800,000)
There is a $40,000 difference in favour of manufacturing the component rather than buying it from the
outside supplier.
Diff: 3
Type: ES
Page Ref: 352
Objective: 2

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101) The Deerfield Company has annual productive capacity of 60,000 units per year. Budgeted operating
results for 2006 are as follows:
Revenues (50,000 units @ $10)
Variable costs:
Manufacturing (50,000 @ $3.20)
Selling (50,000 @ $0.80)
Contribution margin
Fixed costs:
Manufacturing
Selling and administrative
Operating income

$500,000
$160,000
40,000

100,000
80,000

200,000
$300,000

180,000
$120,000

A wholesaler from another country wants to buy 5,000 units at a price of $8 per unit. All fixed costs
would remain within the relevant range. Variable manufacturing costs would be the same per unit but
variable selling costs would increase by $2 per unit on the special order only.
a. Determine whether the company should produce the special order.
b. Assuming Deerfield's objective is to maximize profit, if the customer wants a special order of 20,000
units, should Deerfield accept or reject the special order?
Answer:
a.
Incremental revenue
(5,000 x $8)
Incremental costs:
Variable manufacturing (5,000 x $3.20)
Variable selling [5,000 x ($0.80 + $2.00)]
Incremental contribution margin

$40,000
(16,000)
(14,000)
$10,000

Since the company would still be operating within the relevant range, fixed costs would remain the same.
If the company produces the special order, contribution margin and operating income would increase by
$10,000.

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b.

Revenues
(50,000 x $10)
(40,000 x $10)
(20,000 x $8)
Less: Variable costs:
Manufacturing
(50,000 x $3.20)
(60,000 x $3.20)
Selling
(50,000 x $0.80)
(40,000 x $0.80)
(20,000 x $2.80)
Contribution Margin
Less: Fixed costs:
Manufacturing
Selling and administrative
Operating income

Without
Special Order

$500,000

(160,000)

(40,000)

With
Special Order

$400,000
160,000

(192,000)

$300,000

(32,000)
(56,000)
$280,000

(100,000)
(80,000)
$120,000

(100,000)
(80,000)
$100,000

If Deerfield accepts the 20,000 unit special order, they would have to forego 10,000 units in regular sales
because of capacity constraints. This would result in a $20,000 decrease in contribution margin and
operating income.
Diff: 3
Type: ES
Page Ref: 352
Objective: 2

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102) The Tippett Company manufactures two products, 12-07 and 19-01. Contribution margin per unit is
determined as follows:
12-07
$25
15
$10

Revenue
Variable costs
Contribution margin

19-01
$20
12
$ 8

Total demand for 12-07 is 5,000 units and for 19-01 is 10,000 units.
Direct labour is a scarce resource. 40,000 direct labour hours are available during the year. Product 12-07
requires 5 direct labour hours per unit while product 19-01 requires 2 labour hours per unit.
How many units of 12-07 and 19-01 should the Royer Company produce?
Answer: Since direct labour hours are limited, the company should first produce the product that has the
highest contribution margin per direct labour hour.

Contribution margin per unit


Divided by:
Direct labour hours required per unit
Contribution margin per DLH

12-07

19-01

$10

$8

5
$2

2
$4

To maximize contribution margin, the Royer Company should produce 10,000 units of 19-01 and 4,000
units of 12-07.
Product
19-01
12-07
Totals
Diff: 3
Type: ES
Objective: 1

Units

DLH Per Unit

10,000
4,000
14,000
Page Ref: 351

2
5

DLH
20,000
20,000
40,000

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103) Zahrt Company manufactures a part for its production cycle. The costs per unit for 10,000 units of
this part are as follows:
Direct materials
$20
Direct labour
34
Variable factory overhead
24
Unavoidable fixed factory overhead
32
Total cost
$55
The Company has been approached by a supplier who claims it can sell Zahrt 10,000 units of the same
part for $840,000.
Required:
a. Assuming there is no alternative use for the facilities, should Zahrt buy the part, and if so, how much
money would be saved?
b. Assuming the facilities can be rented out for $110,000 per year, should Zahrt buy the part, and if so,
how much money would be saved?
Answer:
a. $20 + $34 + $24 = $78 10,000 units = $780,000 variable costs to produce versus $840,000 to buy.
Continue to make the part for a savings of $60,000.
b. $840,000 - $110,000 = $730,000 net cost to buy versus $780,000 to make. Buy the part for a total
savings of $50,000.
Diff: 3
Type: ES
Page Ref: 352
Objective: 2
104) Swenson Company produces a part that is used in the manufacture of one of its products. The costs
associated with the production of 10,000 units of this part are as follows:
Direct materials
Direct labour
Variable factory overhead
Fixed factory overhead

$ 100,000
170,000
300,000
250,000
$820,000

Of the fixed factory overhead costs, $35,000 is avoidable.


Required:
a. Assuming there is no alternative use for the facilities, should Swenson take advantage of an offer
from a supplier who is willing to sell Swenson 10,000 units of the same part for $64 per unit?
b. Would your answer to Part (a) change if the facilities could be rented for $50,000 a year?
Answer:
a. $100,000 + $170,000 + $300,000 + $35,000 = $605,000 to make versus $64 10,000 units = $640,000 to
buy. Continue to make the part for a savings of $35,000.
b. $640,000 - $50,000 = $590,000 net cost to buy versus $605,000 to make. Recommend to buy the part
which will save the company $15,000.
Diff: 3
Type: ES
Page Ref: 352
Objective: 2

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105) Van Sickle Corporation has a joint process which produces three products, D, E and F. Each product
may be sold at split-off or processed further and then sold. Joint processing costs for a year amount to
$150,000. Other relevant data are as follows:

Sales Value
Product at Split-off
D
$ 42,500
E
82,500
F
120,000

Separable
Processing
Costs after
Split-off
$ 11,000
27,000
57,500

Sales Value
at Completion
$ 52,500
102,500
187,500

Required:
a. Which products should Van Sickle process further?
b. What will be the effect on profits of processing each product further?
Answer:
a. Van Sickle should process Product F further, as this will add to profits. Van Sickle would be
indifferent as far as Product D goes, since there is no additional profit in processing it further.
b.

Product D:
Additional revenue ($52,500 - $42,500)
Additional cost
Net loss
Product E:
Additional revenue ($102,500 - $ 82,500)
Additional cost
Net loss
Product F:
Additional revenue ($187,500 - $120,000)
Additional cost
Net profit
Diff: 3
Type: ES
Page Ref: 354
Objective: 3

= $10,000
= 11,000
$ 1,000
= $20,000
= 27,000
$(7,000)
= $67,500
= 57,500
$10,000

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106) Knight, Inc. produces three products using a joint process which requires $115,000 in joint costs. The
products A, B and C can be sold at split-off or processed further and then sold. The production level for
each product is 8,000 units. The following unit information is also available:
Separable
Processing
Sales Value
Costs after
Sales Value
Product
at Split-off
Split-off
at Completion
A
$11
$5
$19
B
7
3
9
C
6
2
7
Required:
a. Which products should be processed further?
b. Processing each product further will have what effect on profits?
Answer:
a. Knight should process Product A further, as this will add to profits.
b.

Product A:
Additional revenue ($19 - $11)
Additional costs
Net Profit

=$8
= 5
$ 3 8,000 = $24,000

Product B:
Additional revenue ($ 9 - $ 7)
Additional costs
Net Profit

=$2
3
$(1) 8,000 = $(8,000)

Product C:
Additional revenue ($ 7 - $ 6)
Additional costs
Net loss
Diff: 3
Type: ES
Page Ref: 354
Objective: 3

=$1
2
$(1) 8,000 = $(8,000)

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107) Abbey Company uses a joint process to produce products L, M and N. Each product may be sold at
split-off or processed further and then sold. Joint processing costs for the year amounted to $500,000.
Other information is presented below:

Product
L
M
N

Sales Value
at Split-off
$420,000
250,000
280,000

Separable
Processing
Costs after
Sales Value
Split-off at Completion
$140,000
$530,000
40,000
360,000
70,000
340,000

Required:
a. Which products, if any, should be processed further?
b. If all three products were processed further, what would be the effect on profits?
Answer:
a. Product M should be processed further, as this would result in an increase in profits. Abbey would be
indifferent as to the further production of N, as this would not add any profits to the company.
b. Product L:
$530,000 - $140,000 = $390,000 - $420,000 = $(30,000)
Product M:
$360,000 - $40,000 = $320,000 - $250,000 = $ 70,000
Product N:
$340,000 - $70,000 = $280,000 - $280,000 = $(10,000)
Net increase to profits
$ 30,000
Diff: 3
Type: ES
Page Ref: 354
Objective: 3

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108) Wykle Company purchases 10,000 units of a part that it needs for production of its product.
Notification has just been received from the supplier that a price increase will take effect shortly which
will bring the price of each part to $30. Wykle is considering using some idle facilities to produce the part.
The production costs to produce the needed 10,000 parts are as follows:
Direct materials
Direct labour
Variable factory overhead
Fixed factory overhead

$70,000
80,000
56,000
94,000

The idle facilities could also be rented out at an annual rent of $36,000. All the factory overhead costs are
avoidable.
Required: Determine if Wykle should continue to buy the part or produce it in house.
Answer: Wykle should continue to buy the part and should rent out the idle facilities. This would result
in a $36,000 benefit as follows:
Buy part:
$30 10,000 units = $300,000 - $36,000 rental income = $264,000
Make part:
$70,000 + $80,000 + $56,000 + $94,000 = $300,000
Diff: 3
Type: ES
Page Ref: 354
Objective: 3
109) The Martin Company is considering the replacement of a machine that is presently used in the
production of its product. The following data are available:

Original cost
Useful life in years
Current age in years
Book value
Disposal value now
Disposal value in 7 years
Annual cash operating costs

Old Machine
$200,000
15
8
$ 90,000
$ 56,000
0
$ 24,00

Replacement
Machine
$120,000
7
0
0
$ 18,000

Required: Ignoring income taxes, prepare a cost comparison of all relevant items for the next seven years
together. Indicate the best alternative for Martin Company.
Answer:
Keep
Replace
Difference
Cash operating costs
$168,000
$126,000
$ 42,000
Disposal value of old machine
( 56,000)
56,000
New machine, acquisition cost
120,000
(120,000)
Total relevant costs
$168,000
$190,000
$(22,000)
The cumulative effect over the seven years is $22,000 in favour of keeping the old machine.
Diff: 3
Type: ES
Page Ref: 357
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Objective: 4
110) The Malloy Corporation is contemplating the replacement of some old equipment. The pertinent
information is as follows:
Replacement
Original cost
Useful life in years
Current age in years
Book value
Disposal value now
Disposal value in 6 years
Annual cash operating costs

Old Equipment
$36,000
10
4
$24,000
$17,500
0
$ 9,000

Equipment
$30,000
6
0
0
$ 5,500

Required: Prepare a cost comparison of all relevant items for the next six years together. Ignore income
taxes. Comment on the best alternative for The Malloy Corporation.
Answer:
Keep
Replace
Difference
Cash operating costs
$54,000
$33,000
$21,000
Disposal value of old equipment
(17,500)
17,500
New equipment, acquisition cost
30,000
(30,000)
Total relevant costs
$54,000
$45,500
$ 8,500
The cumulative effect over the six years of $8,500 is in favour of replacing the old equipment.
Diff: 3
Type: ES
Page Ref: 357
Objective: 4
111) The Wamsley Company is thinking about replacing its existing fleet of delivery vans. The following
information relates to this decision:

Original cost
Useful life in years
Current age in years
Book value
Disposal value now
Disposal value in 4 years
Annual cash operating costs

Old Delivery
Vans
$90,000
6
2
$60,000
$62,000
0
$30,000

Replacement
Delivery Vans
$102,000
4
0
0
$ 20,000

Required: Ignoring income taxes, prepare a cost comparison of all relevant items for the next four years
together. Include in your analysis the best choice for Wamsley Company and explain your reasons.
Answer:
Keep
Replace
Difference
Cash operating costs
$120,000
$ 80,000
$ 40,000
Disposal value of old delivery vans
(62,000)
62,000
New delivery vans, acquisition cost
102,000
(102,000)
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Total relevant costs


Diff: 3
Type: ES
Page Ref: 357
Objective: 4

$120,000

$120,000

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