True/False Questions 1. Sunk costs are costs that have proven to be unproductive.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium 2. All costs are avoidable in a decision except sunk costs and future costs that do not differ between the alternatives at hand. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 3. Consistency demands that a cost that is relevant in one decision be regarded as relevant in other decisions as well. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium 4. A cost may be relevant for one decision making situation but irrelevant for another situation. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 5. A future cost that does not vary among alternatives under consideration is irrelevant. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 6. Opportunity costs represent economic benefits that are forgone as a result of pursuing some course of action. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 7. An existing asset should not be replaced until its original cost has been fully recovered. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium

8. Fixed costs are irrelevant in decisions about whether a product line should be dropped. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy 9. In a special order situation, any fixed cost associated with the order would be irrelevant. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium 10. When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the highest contribution margin per unit of the constrained resource. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy 11. Eliminating nonproductive time is particularly important in a bottleneck operation. Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium 12. One way to increase the effective utilization of a bottleneck is to reduce the number of defective units. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy 13. As a general guide, it is profitable to continue processing joint products after the splitoff point if their total revenues exceed the joint costs. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium 14. Joint costs are irrelevant in the decision of whether to sell a joint product at the splitoff point or process it further and then sell it. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy

15. A key advantage of using activity-based costing is that any cost that is assigned to a product is also a relevant cost in any decision involving that product. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy Multiple Choice Questions 16. Costs which can be eliminated in whole or in part if a particular business segment is discontinued are called: A) sunk costs. B) opportunity costs. C) avoidable costs. D) irrelevant costs. Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 17. Consider the following statements: I. II. III. Assemble all costs associated with each alternative being considered. Eliminate those costs that are sunk. Eliminate those costs that differ between alternatives.

Which of the above statements does not represent a step in identifying the relevant costs in a decision problem? A) Only I B) Only II C) Only III D) Only I and III Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

D) all of the above. III. Which of the following best describes an opportunity cost: A) it is a relevant cost in decision making. Reporting Source: CPA. A division's net operating income. but is not part of the traditional accounting records. is negative. C) a cash outflow that is avoided if Alternative X is accepted and is not avoided if Alternative Y is accepted. but is part of the traditional accounting records. after deducting both traceable and allocated common corporate costs. D) it is not a relevant cost in decision making. Ans: A AACSB: Reflective Thinking AICPA FN: Decision Making. and is part of the traditional accounting records. II. Reporting AICPA BB: Critical Thinking LO: 1 Level: Medium 19. Which of the above statements give an economic reason for eliminating the division? A) Only I B) Only II C) Only III D) Only I and II Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. Reporting LO: 2 Level: Easy AICPA BB: Critical Thinking LO: 1 Level: Medium . C) it is a relevant cost in decision making. B) a cash inflow that is lost if Alternative X is accepted and is not lost if Alternative Y is accepted. Consider the following statements: I. The division's avoidable fixed costs exceed its contribution margin.18. Which of the following cash flows is relevant in a decision about accepting Alternative X or Alternative Y? A) a cash inflow for Alternative X that is not a cash inflow for Alternative Y. and is not part of the traditional accounting records. The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin. B) it is not a relevant cost in decision making. adapted 20. Ans: D AACSB: Reflective Thinking AICPA FN: Decision Making.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. Kinsi Corporation manufactures five different products. Kinsi would make the most profit if it produces the product that: A) uses the lowest number of stamping machine hours. Reporting LO: 5 Level: Medium . D) the sunk costs associated with the order. The Jabba Company manufactures the “Snack Buster” which consists of a wooden snack chip bowl with an attached porcelain dip bowl. Which of the following would be relevant in Jabba's decision to make the dip bowls or buy them from an outside supplier? Fixed overhead cost The variable that can be eliminated if selling the bowls are purchased cost of the from the outside supplier Snack Buster Yes Yes Yes No No Yes No No A) B) C) D) Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. Reporting LO: 4 Level: Medium 23.21. C) generates the highest contribution margin ratio. D) generates the highest contribution margin per stamping machine hour. The acceptance of a special order will improve overall net operating income so long as the revenue from the special order exceeds: A) the contribution margin on the order. Reporting LO: 3 Level: Medium 22. All five of these products must pass through a stamping machine in its fabrication department. This machine is Kinsi's constrained resource. C) the variable costs associated with the order. B) generates the highest contribution margin per unit. Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. B) the incremental costs associated with the order.

000 C) $20. Gandy Company has 5. Reporting LO: 1 Level: Easy Source: CPA. Reporting LO: 6 Level: Easy 25. consider the following costs: I. II.000 B) $15.000 obsolete desk lamps that are carried in inventory at a manufacturing cost of $50. A variable production cost incurred prior to split-off. III.000 for scrap. A variable production cost incurred after split-off. the sunk cost would be: A) $8.000 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.000.24. adapted .000 D) $50.000. they could be sold for $35. In a sell or process further decision. Alternatively. If the lamps are reworked for $20. Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further? A) Only I B) Only III C) Only I and II D) Only I and III Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. An avoidable fixed production cost incurred after split-off. In a decision model analyzing these alternatives.000. the lamps could be sold for $8.

03 C) $4...500) 27.400.88 B) $3. it could be sold for $54..100 B) -$21...400 as is....... 4 kilograms of material R is required for every unit of product S88Y that is produced......600. what is the minimum acceptable selling price of material R to the company that could use material R in its own production process? A) $0..... adapted .. adapted Solution: Incremental revenue from reworking ($54... This raw material was purchased to use in a product line that has been discontinued..400 ($ 4..500 D) $52... $52.60 per kilogram.. Hodge Inc. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap? A) -$79. Material R can be sold as is for scrap for $3....500) Less incremental revenue from selling as scrap. Milford Corporation has now received a request from a company that could use material R in its production process....900 57.... after modification.26. S88Y..900 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..... but if reworked at a cost of $1. Reporting LO: 1 Level: Medium Source: CIMA. The material has a scrap value of $57..57 D) $3...100 kilograms of material R that it bought five years ago for $5.77 per kilogram so that it can be used as a substitute for this material in the production of product S88Y.. Reporting LO: 1 Level: Hard Source: CIMA.91 per kilogram. Net loss from reworking....... which currently requires 2 kilograms of a raw material that is available for $7. Material R can be modified at a cost of $0. However.. Milford Corporation has in stock 16.. Assuming that Milford Corporation could use all of its stock of material R to make product S88Y or the company could sell all of its stock of the material at the current scrap price of $3.91 per kilogram..500.400 − $1..75 per kilogram.....91 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making....700 C) -$4.. has some material that originally cost $74. An alternative would be to use material R in one of the company's current products...

. Relevant cost of 240 kilograms of raw material...25 per kilogram. What is the relevant cost of the 240 kilograms of the raw material when deciding whether to proceed with the special project? A) $1....933 B) $2.77].... $2.....112 in total......Solution: Product S88Y: Current cost (2 kg @ $7.. Less: delivery cost................... 4 kilograms would be needed.220 D) $2.112 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.. material R would need to cost $3.....20 for Product S88Y.20 If material R were used....91 per kilogram.. The company should sell material R for $3....933 ..35 × 240)....................60): $15.... Reporting LO: 1 Level: Hard Source: CIMA... adapted Solution: Opportunity cost of sales foregone if special project is undertaken ($8... It currently costs $15.. However.........20 ÷ 4 kg) − $0... The sale of the raw material would involve delivery to the purchaser at a total cost of $71.....004 71 $1....... 28....004 C) $2... The special project would require all 240 kilograms of the raw material that are in stock and that originally cost the company $2.. the company has no other use for this raw material and would sell it at the discounted price of $8...... to maintain this same cost..03 per kilogram [($15... Otool Inc..00 for all 240 kilograms. If the company were to buy new supplies of this raw material on the open market.......35 per kilogram if it were not used in the special project... it would cost $9. is considering using stocks of an old raw material in a special project..

If this were to be sold as is on the open market as surplus material. The relevant cost of the 760 liters of material B39U is: A) $4. it would fetch $5.35 per liter × 780 liters = $6.45 per liter × 760 liters = $4.95 per liter.000 liters. adapted Solution: Relevant cost = $8. adapted Solution: Relevant cost = $6. What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order? A) $6. New stocks of the material can be readily purchased for $8.450 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.672 C) $4. Schickel Inc. regularly uses material B39U and currently has in stock 460 liters of the material for which it paid $3.29.481 B) $6. The company already has 640 liters of this raw material in stock that originally cost $8. The resale value of the existing stock of the material is $7.928 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.35 per liter.376 C) $6.513 D) $5.513 30. You have been asked to determine the relevant cost of 760 liters of the material to be used in a job for a customer. Reporting LO: 1 Level: Hard Source: CIMA. New stocks of the material can be purchased on the open market for $6. Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C.902 .45 per liter.522 D) $6.60 per liter.128 several weeks ago. Material W34C is used in the company's main product and is replenished on a periodic basis.30 per liter. but it must be purchased in lots of 1.902 B) $4. Reporting LO: 1 Level: Hard Source: CIMA.

What would be the relevant cost of the materials.90 per unit × 6. Each unit of VGI requires 1 unit of material I57 and 5 units of material M97.850 B) $213.... 2.....850 ....95 M97..... Munafo Corporation is a specialty component manufacturer with idle capacity.850 D) $171..500 units = $174.. Data concerning these two materials follow: Current Original Market Disposal Units in Cost Per Price Value Material Stock Unit Per Unit Per Unit I57..40 17...90 Minimum acceptable price for 6.. A potential customer has offered to buy 6. in total... adapted Solution: # Required Relevant Material per unit price I57..960 $4.....130 C) $213...50 = Total per unit relevant cost.70 $4..50 $26....40 $8... Reporting LO: 1 Level: Hard Source: CIMA.....70 $3.925 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...500 units of component VGI..500 units of VGI = $26...10 $9..40 = M97...50 Material I57 is in use in many of the company's products and is routinely replenished.400 $9. 1× $9. 33..... 5× $3. Management would like to use its extra capacity to generate additional profits...31. for purposes of determining a minimum acceptable price for the order for product VGI? A) $174..... Total $ 9. Material M97 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

..............000 (15....... Winder Corporation is a specialty component manufacturer with idle capacity........702 $4.....680 $3.....248 $126...... Total needed (3......... .....000 (3.. Reporting LO: 1 Level: Hard Source: CIMA.........70 13...000 × 5) = 15.................32...00 $4...............965 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. adapted Solution: # of units to purchase on market 15.. Material E71 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. A potential customer has offered to buy 3.680 $5.... in total..000 Inventory Total cost $ 71....750 C) $126....... Data concerning these two materials follow: Original Current Disposal Units in Cost Per Market Price Value Per Material Stock Unit Per Unit Unit F85...75 $4.000 units of component QEA.. 740 $4...... What would be the relevant cost of the materials...000 units of QEA ........ 13.. ........680) = 1.75 F85........20 E71.60 Minimum acceptable price for 3.... E71.320 Relevant price $4....204 49...295 D) $145......000 − 13..702 B) $141.250 6........90 $4.......... Each unit of QEA requires 5 units of material F85 and 5 units of material E71........000 × 5) = 15................70 $3....60 Material F85 is in use in many of the company's products and is routinely replenished. for purposes of determining a minimum acceptable price for the order for product QEA? A) $126. Management would like to use its extra capacity to generate additional profits....

..............000 100...000 less without the segment margin contributed by the Troy Division...................000 90............. Troy Division's traceable fixed costs could be avoided if the division were eliminated......000 $ 90...000 Rice Corporation’s operating income would have been $30..... $100...000 ($ 15........000 200...............000 $ 30.............000 lower D) $60...................... Net operating income (loss)..000 Troy Division $300...... Variable costs..........000 higher B) $30...........................000 110........ Reporting LO: 2 Level: Medium Source: CPA.... Allocated common corporate costs.... .........................000 lower C) $45..... Segment margin of Troy Division.. Traceable fixed costs.........000 310... adapted Solution: Troy Division: Contribution margin... Rice's president is considering the elimination of this division........ Rice Corporation currently operates two divisions which had operating results last year as follows: West Division $600........000 45................. If the Troy Division had been eliminated at the beginning of last year....000 70. Since the Troy Division also sustained an operating loss in the prior year........ Less: traceable fixed costs.....................000 higher Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. The total common corporate costs would be unaffected by the decision..000 70............... Rice Corporation's operating income for last year would have been: A) $15............000 290........33....000) Sales............................... Contribution margin.......

000 of fixed overhead would be eliminated......000 C) $25... the company's overall operating income would: A) decrease by $25.000 $25............000 D) $30..000 25..... Less: contribution margin lost if division is eliminated.000) 35......000 D) increase by $7. Less: contribution margin lost if Product X is discontinued ($5 × 5....000..... $45...000 20.000 cannot be eliminated.......000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.. adapted Solution: Fixed overhead savings if division is discontinued.... Increase in operating income if division is eliminated...... Decrease in overall operating income if Product X is eliminated.000 C) decrease by $7.......000 ...... of which $5.....000 per year........ Reporting LO: 2 Level: Medium Solution: Fixed overhead savings if Product X is eliminated.000 B) $20.............000 units of Product X each year... $18..... $18....... The effect of this discontinuance on Milli's operating income would be an increase of: A) $5.....000)....000 ($ 7.... As a result of discontinuing Product X....34. Milli Company plans to discontinue a division that generates a total contribution margin of $20. Each unit of Product X sells for $8 and has a contribution margin of $5.........000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making............... Beaver Company (a multi-product firm) produces 5.. If Product X is discontinued.. Fixed overhead associated with this division is $50.......000 B) increase by $43... Reporting LO: 2 Level: Medium Source: CPA.

..36.000 + $1. Y B) W. Y C) X. Y D) X Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..200 of common corporate expenses that have been allocated to the apartment complexes based on rental income. Expenses...400 1...065 1..00 0 800 V W $2. $1.... X..347 2.. The apartment complex(es) that ABD Realty should consider dropping is (are): A) V.600 X $1.. W...347 $1.878 $1. These common corporate expenses would have to be incurred regardless of how many apartment complexes ABD Realty manages.... Operating income...400 Y $1..210 Less expenses...065 = $7....500) × $1.878 2. X....300 ($ 90) ($ 253) ($ 522) ($ 235) Included in the expenses is $1..600 2. ABD Realty manages five apartment complexes in its region.200]* 160 194 Apartment complex margin $ 360 $ 104 *expenses rounded to nearest whole dollar 376 $ 123 300 ($222) 170 ($ 65) Since complexes X and Y have negative margins...300 Add back proportional share of common expenses [(Rental income in each column ÷ Total rental income of $7.210 + $2..300 Rental income...00 0 800 $ 200 V W X Y Rental income.......210 $2. ..300 2..065 1. Shown below are summary income statements for each apartment complex: U $1.... Reporting LO: 2 Level: Hard Source: CMA. ABD Realty should consider dropping those two divisions..878 + $1.. 1.347 + $1... adapted Solution: Total rental income = $1.. $1..500 U $1..

.

.. Reporting LO: 2 Level: Medium Solution: Keep the Division Contribution margin....000 250......000 ($250....000 increase C) $250.000 increase B) $250...000) ($ 50...... The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation: Contribution margin...37.... Net operating loss... .. $200.........000) Difference ($200...... $200.....000 ) If Children's Division is dropped....000 ($300...... the division should be dropped..000 decrease D) $550..................000 if the Children’s Division were dropped.000 $ 0 ) 250........ Fixed expenses....000 500..... Net operating income (loss)......000 increase Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.000 500..... What will be the effect on Grunge's profit next year if Children's Division is dropped instead of being kept? A) $50....000) Drop the Division Net operating income would increase by $50. Fixed expenses.000 ($300... Therefore.. half of the fixed costs above can be eliminated...

000) Net operating income would decline by $173.... $830.........000 166............000 165. Net operating income (loss)... Contribution margin...000 ......... Total fixed expenses... Reporting LO: 2 Level: Easy Solution: Keep the Product Sales................000 106.000......38. B) Overall net operating income would decrease by $173.............000 291............000 **60......... Variable expenses.... D) Overall net operating income would increase by $173. The management of Furrow Corporation is considering dropping product L07E...... Fixed selling and administrative expenses....000....... C) Overall net operating income would decrease by $8.00 0 $365...000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued.......000 292... *$291......... Variable expenses......... $830..........00 0 $166....................... Fixed expenses: Fixed manufacturing expenses.........000 $ 8...000 − $186...000 465........00 0 In the company's accounting system all fixed expenses of the company are fully allocated to products...... What would be the effect on the company's overall net operating income if product L07E were dropped? A) Overall net operating income would increase by $8............000 = $105... Further investigation has revealed that $186............000 ) *105..................................... Data from the company's accounting system appear below: Sales...... Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making........000 ) 365....... Therefore....000 Drop the Product $ 0 0 0 Difference ($830.......000 ($173..000) 186.........000 of the fixed manufacturing expenses and $106..000..........000 365...00 0 $291....000 ($165... the product should not be dropped.. Fixed manufacturing expenses........000...... Fixed selling and administrative expenses...000 if product L07E were dropped...000 457.000 (465.......

000 .000 = $60.000 − $106.**$166.

............ C) Overall net operating income would decrease by $143...............................39......000 350................. Fixed selling and administrative expenses. Therefore. Fixed manufacturing expenses.........000 if product U23N were dropped........000 Drop the Product $ 0 0 0 *90........000 of the fixed manufacturing expenses and $93........000 **68......000....... B) Overall net operating income would increase by $143............000 ) 350. Contribution margin...000 161..... Variable expenses. Total fixed expenses........... Fixed selling and administrative expenses...............000 Difference ($730..... Fixed expenses: Fixed manufacturing expenses. $730..000...000....000 237.... the product should not be dropped.000) ($ 158... D) Overall net operating income would decrease by $15.... $730....................... Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making......000 93..............000) 144..000 395..000 158....000 234.....000 ) ($ 15.. Variable expenses..... Data from the company's accounting system appear below: Sales......000) Net operating income would decline by $143...............00 0 $350........... Reporting LO: 2 Level: Easy Solution: Keep the Product Sales..... Further investigation has revealed that $144. Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether.............. Net operating income (loss).000 ( 380.. ................00 0 $161...000 380.... What would be the effect on the company's overall net operating income if product U23N were dropped? A) Overall net operating income would increase by $15...000 of the fixed selling and administrative expenses are avoidable if product U23N is discontinued............00 0 In the company's accounting system all fixed expenses of the company are fully allocated to products......00 0 $234.............000 ($143...000.....

000 − $144.000 .000 − $93.000 **$161.000 = $68.*$234.000 = $90.

.............. Fixed manufacturing overhead............................................. Reporting LO: 3 Level: Medium Solution: Relevant cost per unit: Direct materials................ Less: cost from outside supplier..... Direct labor.. Based on these data................................................. Fixed manufacturing overhead ($5 × 0..... Net advantage...000 of the parts for only $14 each......... Supler Company produces a part used in the manufacture of one of its products.................. $8 4 1 5 $1 8 An outside supplier has offered to provide the annual requirement of 4...........................60)........ Relevant manufacturing cost............... Direct labor... $ 8 4 1 3 $16 $16 14 $ 2 .......................... Unit product cost............ The unit product cost is $18......................................... the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be: A) $1 disadvantage B) $1 advantage C) $2 advantage D) $4 disadvantage Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...... Net advantage (disadvantage): Relevant manufacturing cost savings....... It is estimated that 60 percent of the fixed overhead cost above could be eliminated if the parts are purchased from the outside supplier..... computed as follows: Direct materials......................................................... Variable manufacturing overhead.... Variable manufacturing overhead...........40.....

.. ........... which are used in the production of one of its products... Relevant manufacturing cost.......000 increase B) $24...000)......... Unit product cost.41........ computed as follows: Variable production costs.......... the annual impact on the company's operating income will be: A) $24... Fixed manufacturing overhead ($20 × 0...25).. Reporting LO: 3 Level: Medium Solution: Relevant cost per unit: Variable production costs...000 decrease Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.... Sharp Company produces 8...000 increase D) $56.. Fixed production costs..000).000 224.000 ($ 56....... The unit product cost of a part is $36.. $16 5 $21 $168....000) Relevant manufacturing cost savings ($21 × 8. Less: cost to purchase from outside supplier ($28 × 8......000 decrease C) $56..... The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth.............000 parts each year.................... If the parts are purchased from the outside supplier.... $1 6 20 $3 6 The parts can be purchased from an outside supplier for only $28 each. Net disadvantage of purchasing from outside supplier.....

000 40.000 cheaper to make the part...... Additionally... Motor Company manufactures 10. Net advantage (disadvantage): Relevant manufacturing cost savings.....000 45................000 cheaper to buy the part. D) Yes.. some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of $15......... Annual rental of manufacturing facilities given up if manufacture Part M-1..........000 55. because it would be $5.. Total manufacturing cost.. Relevant manufacturing cost.........42.............000 $190..000)............000 cheaper to make the part. The following total costs were reported last year: Direct materials. because it would be $10....... B) Yes........ Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.........000) ... because it would be $25............................000 70......... $ 20...000 15... adapted Solution: Relevant cost of manufacturing: Direct materials...000 $160....000 units of Part M-l each year for use in its production..000 $160............. Variable manufacturing overhead.. Direct labor...... Fixed manufacturing overhead ($4 × 10.. because it would be $15............................000 ( 180.......... Fixed manufacturing overhead... Cost of purchasing the part ($18 × 10..... $4 per unit of the fixed overhead applied to Part M-l would be totally eliminated............ If Motor accepts the offer.. Should Motor Company accept Valve Company's offer.000 cheaper to buy the part....... Reporting LO: 3 Level: Hard Source: CPA.........000).........000....00 0 Valve Company has offered to sell Motor 10.... and why? A) No.......000 55........000 45.......................000) ($ 5............. Variable manufacturing overhead.. Direct labor...... .......... C) No.......000 units of Part M-l for $18 per unit........... $ 20. Net disadvantage of purchasing part M-1.....................

............ Variable manufacturing overhead.... Unit product cost............. Direct labor.................................. $6 24 12 15 $5 7 Utica Company has offered to supply Kingston's entire annual requirements of the part for $53 each............ Fixed manufacturing overhead ($15 × 0..... adapted Solution: Relevant cost per unit: Direct materials............... The following information is available concerning Kingston's unit product cost: Direct materials............................... the total relevant costs to make the part internally are: A) $342..... $ 6 24 12 6 $48 Total relevant costs to make the part internally ($48 × 10.......... Relevant manufacturing cost.........000 .000 B) $480.........43..... If Kingston buys the part from Utica instead of making it.......................000 units of a certain part to be used in its production cycle...............000) = $480...... Kingston would have no other use for the facilities and 60 percent of the fixed manufacturing overhead would continue. Direct labor...... Reporting LO: 3 Level: Medium Source: CPA...000 C) $530.....................................000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.....000 D) $570............. Variable manufacturing overhead........40)......... Fixed manufacturing overhead................... In deciding whether to make or buy the part................ Kingston Company needs 10.......

............44.......................” what is the relevant unit cost to make the part internally? A) $54 B) $38 C) $30 D) $5 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. Standard cost per unit........ In the decision to “make or buy............................. Manufacturing overhead.........40).......... adapted Solution: Relevant cost per unit: Direct materials................................. Manufacturing overhead ($40 × 0.. $ 4 10 16 $30 ...... Relevant manufacturing cost............. Direct labor... The following standard costs pertain to a component part manufactured by Bor Company: Direct materials......... $4 10 40 $5 4 An outside supplier has offered to supply all of the parts needed by Bor Company for $50 each................ Direct labor.................... The 60% of the manufacturing overhead cost that is fixed would be unaffected by this decision........... Reporting LO: 3 Level: Medium Source: CPA.

Reporting LO: 3 Level: Medium Solution: Relevant cost per unit: Variable production costs.... Total = $3 × 1...................45.............000 decrease C) $7.000 decrease Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making............. $1 5 12 $2 7 The part can be purchased from an outside supplier at $20 per unit.... The unit cost of producing these parts is: Variable manufacturing cost.. Net advantage (disadvantage)................. Fixed manufacturing cost.................................... Total manufacturing cost... Gordon Company produces 1...... two thirds of the total fixed costs incurred in producing the part can be eliminated.000 increase B) $1.000 units = $3000 increase $23 20 $ 3 $15 8 $23 ...... Cost of purchasing the part.............. If the part is purchased from the outside supplier... Fixed manufacturing overhead ($12 × 2/3)... Relevant manufacturing cost..........000 units of a part per year which are used in the assembly of one of its products..........000 increase D) $5............. The annual increase or decrease on the company's operating incomes as a result of buying the part from the outside supplier would be: A) $3.. Net advantage (disadvantage) per unit: Manufacturing cost savings...

....... Relevant manufacturing cost................000 better to buy B) $48.............. Variable manufacturing overhead... would Quikcook be better off to make the doors or buy the doors and by how much? A) $48................................. Cost of purchasing the part ($14 × 40....000 Delilah Glass Corporation has offered to provide Quikcook with all of its annual door needs for $14 per door....................000 $448..................000 128... Fixed manufacturing overhead ($320...........46.............. Quikcook has no alternative use for the idle facilities if the decision was made to go with Delilah's offer... Variable manufacturing overhead....... Total Cost $200.................000 40..000 320...... only 40% of the fixed overhead above could be totally eliminated..........000 better to make Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making......000)..............000 better to buy D) $112.. ..... Total..... Net advantage (disadvantage) of buying.000 doors needed each year are as follows: Direct material........ Based on this information.......000 40....... The annual costs to manufacture the 40............ Also..000 80..........000) ................. If Quikcook accepts this offer. Direct labor.... Fixed manufacturing overhead.40)................. $200....000 × 0....... Quikcook Microwave Company currently manufactures the doors that it uses for its microwave ovens.......................... Reporting LO: 3 Level: Medium Solution: Relevant cost: Direct materials...... Direct labor..000 80.000 ( 560.......000 $448................000) ($112.............000 better to make C) $112.......... Net advantage (disadvantage): Manufacturing cost savings....000 $640.............

....... Variable manufacturing overhead.......... The company uses 17.........00 per unit...21 B) $25............30 $22.........20 4...... is considering whether to continue to make a component or to buy it from an outside supplier................................000 of the components each year..... If the component were bought... Unit product cost....30 1..... Of the fixed manufacturing overhead..........................................0 0 Assume that direct labor is a variable cost...........5 0 $24......30 × 0....... Reporting LO: 3 Level: Hard Source: CIMA.......30 1.......71 D) $22..............70)..20 8. When deciding whether to make or buy the component....00 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.......2 1 ...... Direct labor.......... Fixed manufacturing overhead...... this machine time would be freed up for use on another product that requires 4 minutes on the constraining machine and that has a contribution margin of $7....7 1 3................. adapted Solution: Relevant cost per unit: Direct materials....................20 3.. making the component uses 2 minutes on the machine that is the company's current constraint.47... 70% is avoidable if the component were bought from the outside supplier....... The unit product cost of the component according to the company's cost accounting system is given as follows: Direct materials. what cost of making the component should be compared to the price of buying the component? A) $24............. Sardi Inc. Direct labor............................. Fixed manufacturing overhead ($4....... Variable manufacturing overhead......... Add contribution margin lost*...... Relevant manufacturing cost......... $ 8.....20 8........... $ 8..01 $20.50 C) $20.... In addition.

75 per minute × 2 minutes = $3.50 .*$7.00 ÷ 4 minutes = $1.75 per minute. $1.

only $17. Allocated general overhead...000 of these allocated general overhead costs would be avoided.. the supervisor's salary and all of the variable costs. If management decides to buy part S51 from the outside supplier rather than to continue making the part... The company makes 12.. including direct labor........................800 per year...800 per year..... The special equipment used to make the part was purchased many years ago and has no salvage value or other use..........60 $7.. can be avoided...30 $5..... Per Unit $6...800 per year. Supervisor’s salary..............80 $7..800 per year............... what would be the annual impact on the company's overall net operating income? A) Net operating income would decline by $5..........00 $8. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.... The allocated general overhead represents fixed costs of the entire company..... Part S51 is used in one of Haberkorn Corporation's products............... C) Net operating income would decline by $149. Direct labor......... Depreciation of special equipment......70 $4......... Variable manufacturing overhead.... Reporting LO: 3 Level: Easy ..... If this offer is accepted. If the outside supplier's offer were accepted.48.. B) Net operating income would decline by $22.........20 An outside supplier has offered to produce this part and sell it to the company for $37.......... D) Net operating income would decline by $39...70 each.........000 units of this part each year.... The company's Accounting Department reports the following costs of producing the part at this level of activity: Direct materials...

........... $ 75........... net operating income would decline by $149... Thus...............30 per unit)..70 per unit).70 per unit)....000 units @ $4...... Therefore.........000 units @ $37...... Allocated general overhead (avoidable only). Outside purchase price (12....................80 per unit)...000 units @ $7.. Direct labor (12....800 ($302....000 units @ $5....600 − $452.800 if the offer from the supplier were accepted.000 units @ $6.....600 84........... Total cost............... Supervisor’s salary (12..400 $302..................000 0 17..400 Buy The total cost of the make alternative is lower by $149.400 57..60 0 $452..400).600 68...........000 $452..Solution: Make Direct materials (12........... ..00 per unit) Depreciation of special equipment (not relevant)... Variable overhead (12.. the company should continue to make the part itself...

......400 per year....10 $2. generating an additional segment margin of $16.. If this offer is accepted.... Direct labor....000 per year.10 An outside supplier has offered to make and sell the part to the company for $21...... Allocated general overhead. Variable manufacturing overhead.........000 units of part G25 each year.. Supervisor’s salary... Per Unit $6...........70 $8.. can be avoided.....10 $1........ the supervisor's salary and all of the variable costs........49..... This part is used in one of the company's products. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. In addition... including direct labor.. Norgaard Corporation makes 8.... The company's Accounting Department reports the following costs of producing the part at this level of activity: Direct materials.. What would be the impact on the company's overall net operating income of buying part G25 from the outside supplier? A) Net operating income would decline by $8.............. Reporting LO: 3 Level: Medium .....000 per year......00 $4...... Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..... C) Net operating income would decline by $8.. B) Net operating income would increase by $16...000 of these allocated general overhead costs would be avoided.................... the space used to produce part G25 would be used to make more of one of the company's other products. The allocated general overhead represents fixed costs of the entire company...............20 each.. If the outside supplier's offer were accepted.......... Depreciation of special equipment..... only $2.......20 $2.. D) Net operating income would decline by $40.............000 per year.000 per year for that product.

20 per unit)........400 ($145........ .600 64...... Depreciation of special equipment (not relevant)..........800 8..000 0 2..............600 ( 16............000 $169....70 per unit)......000 units @ $8... net operating income would decline by $8. Therefore.. ...400 if the offer from the supplier were accepted.600 Buy The total cost of the make alternative is lower by $8... Total cost.. Opportunity cost....... Thus.000 units @ $1..............00 per unit).....200 − $153....800 16.000 units @ $21............................................. the company should continue to make the part itself..... Direct labor (8......................600)..000 units @ $2..000) $153....... $145...................20 0 $ 53.Solution: Make Direct materials (8......10 per unit).000 units @ $6... Variable overhead (8........ Outside purchase price (8...... Allocated general overhead (avoidable only)........ Supervisor’s salary (8.....10 per unit)........

...........10 $2....... A total of 17............. the supervisor's salary and all of the variable costs can be avoided........ Variable manufacturing overhead.......40 $8.60 An outside supplier has offered to make and sell the part to the company for $20.........200 per year.....50. The allocated general overhead represents fixed costs of the entire company........50 $1...............200 per year. Supervisor’s salary....... If management decides to buy part E07 from the outside supplier rather than to continue making the part..... Depreciation of special equipment. Per Unit $3... none of which would be avoided if the part were purchased instead of produced internally.......... what would be the annual impact on the company's overall net operating income? A) Net operating income would decline by $6... Reporting LO: 3 Level: Easy ...... D) Net operating income would increase by $6.......80 $3.. Direct labor..... Allocated general overhead.........800 per year.............. The special equipment used to make the part was purchased many years ago and has no salvage value or other use...... Rebelo Corporation is presently making part E07 that is used in one of its products.... The company's Accounting Department reports the following costs of producing the part at this level of activity: Direct materials...... Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..80 $1........... B) Net operating income would decline by $163..800 per year...000 units of this part are produced and used every year. C) Net operating income would increase by $163......80 each...... If this offer is accepted.

.. Depreciation of special equipment (not relevant)...... Allocated general overhead (not relevant).600 − $190..80 per unit).40 0 Buy $353....10 per unit).700 42.....600 The total cost of the make alternative is lower by $163.........200 if the offer from the supplier were accepted.... Thus.80 per unit)..... Total cost.......600 $353.............. Supervisor’s salary (17.......200 ($353.......000 units @ $1. Make $ 64...000 units @ $3......600 18....400)....600 64..500 0 0 $190.........000 units @ $20............. net operating income would decline by $163..............000 units @ $3..............000 units @ $2....... ... the company should continue to make the part itself........80 per unit)............50 per unit)..... Outside purchase price (17............Solution: Direct materials (17........ Variable overhead (17......... Direct labor (17..... Therefore.

....... Depreciation of special equipment... The allocated general overhead represents fixed costs of the entire company. the supervisor's salary and all of the variable costs.... Reporting LO: 3 Level: Medium .... none of which would be avoided if the part were purchased instead of produced internally.. Variable manufacturing overhead..00 $3. A total of 13... The company's Accounting Department reports the following costs of producing the part at this level of activity: Direct materials........000 per year for that product.............. In addition.90 $7..... can be avoided... generating an additional segment margin of $25..... B) Net operating income would decline by $79.000 units of this part are produced and used every year.... Direct labor.000 per year....... including the direct labor.........80 $7....600 per year.. Part U16 is used by Mcvean Corporation to make one of its products. Per Unit $2.. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making........... the space used to make part U16 could be used to make more of one of the company's other products....400 per year.....51........ The special equipment used to make the part was purchased many years ago and has no salvage value or other use........ If this offer is accepted.40 $1...........50 $8..80 each.. C) Net operating income would decline by $35......... Supervisor’s salary.......000 per year.......... What would be the impact on the company's overall net operating income of buying part U16 from the outside supplier? A) Net operating income would increase by $25..................00 An outside supplier has offered to make the part and sell it to the company for $29.......... D) Net operating income would increase by $14.... Allocated general overhead.......

......500 104.... Direct labor....000 units @ $3............... 52.....000 units @ $8...000 if the offer from the supplier were accepted.. net operating income would decline by $79..700 97............Solution: Direct materials (13................................. Total cost....... $8 $9 $1 0 A special order has been received by Landor for a sale of 25...... $283............................000 units @ $29.......000 units @ $7.... Landor Appliance Company makes and sells electric fans...000 fans produced each period. Direct materials.......00 per unit).........200 0 0 Buy $387........ Outside purchase price (13..000 ($283.000 units @ $2..... Each fan regularly sells for $42. Therefore. The only selling costs that would be incurred on this order would be $4 per fan for shipping......90 per unit). Variable overhead (13............000 44............. Landor is now selling 120.. the company should continue to make the part itself... The following cost data per fan is based on a full capacity of 150.... Allocated general overhead (not relevant).. Thus..50 per unit)...40 per unit) Depreciation of special equipment (not relevant)... Manufacturing overhead (70% variable and 30% unavoidable fixed)..400)... Reporting LO: 4 Level: Medium ....... Opportunity cost (segment margin)............. Supervisor’s salary (13.......40 0 Make $ 37..........................000 fans to an overseas customer......400 − $362............400 The total cost of the make alternative is lower by $79.........................................400 ( 25.........000) $362....80 per unit)........ What should Landor use as a minimum selling price per fan in negotiating a price for this special order? A) $28 B) $27 C) $31 D) $24 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. Direct labor (13..000 fans through regular channels each period.......................

... Ignace has the capacity to manufacture and sell 20........... $ 8 9 7 4 $28 53.................000 watches: Variable manufacturing cost.00 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.............. Divided by 15............00 B) $13.. Total relevant costs............. Minimum selling price.000 watches.........000 $120............... A discount chain is interesting in purchasing Ignace's excess capacity of 5......000 $16 ........................50 C) $16.......... Direct labor.. Reporting LO: 4 Level: Medium Solution: Total relevant costs: Variable manufacturing cost............ manufactures and sells wrist watches...............000 $90......00 0 $240...........000 watches..........00 0 90.........70) Variable selling cost.......... Fixed manufacturing cost...................Solution: Direct materials............. Minimum selling price for special order............ $150...................000 Ignace normally sells its watches for $42 each.... The following costs relate to annual operations at 15........ Ignace Timekeepers...000 $180............ Variable selling and administrative cost...............00 D) $31...................... Fixed selling and administrative cost............000 watches each year but is currently only manufacturing and selling 15.... This special order would not affect regular sales or the cost structure above.000....... Ignace's profits for the year will increase as long as the price on this special order exceeds: A) $12.00 0 ÷ 15................. Total Cost $150............ Inc..... Variable manufacturing overhead ($10 × 0....... Variable selling and administrative cost.............

This special order would have no effect on the company's other sales...... Variable manufacturing overhead.......... The company has ample spare capacity for producing the special order....................... Less incremental costs: Direct materials (6. Special molds....................200 13..20.10 4.000 121...............000 units of product A90 for $21. Product A90's unit product cost is $16..54..... $127...000 units @ $4........ The special order would have no effect on the company's total fixed manufacturing overhead costs..000 in special molds that would have no salvage value.........000 units @ $6.................000 units @ $2....20 per unit).20 per unit and that would require an investment of $21................ the company's overall net operating income would increase (decrease) by: A) ($18. Gallerani Corporation has received a request for a special order of 6............20 per unit)...400 Answer: D Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making............. Total incremental cost..................800 25................000 units @ $21.............20 2..... Unit product cost...30 3..........600 25.........................000 D) $5......20 per unit)....60 $16.............................600) B) ($16........400 ....200 21.............20 0 36....20 each.... The customer would like modifications made to product A90 that would increase the variable costs by $4.. Direct labor. If the special order is accepted............... Direct labor (6...800 $ 5..200) C) $30......................... Reporting LO: 4 Level: Easy Solution: Incremental revenue (6................2 0 Direct labor is a variable cost...........30 per unit) Modifications (6................................................ $ 6.........000 units @ $4....... Fixed manufacturing overhead........... determined as follows: Direct materials..................... Variable manufacturing overhead (6.10 per unit)................ Incremental net operating income.

.. Direct labor............. $184. The customer would like modifications made to product S47 that would increase the variable costs by $5.....00 per unit).................................. This special order would have no effect on the company's other sales............000 units of product S47 for $20.50 0 27.......10 1.....50 a unit.....................40 per unit) Modifications (9... Variable manufacturing overhead..000 units @ $3.......... Less incremental costs: Direct materials (9......... A customer has requested that Lewelling Corporation fill a special order for 9....000 units @ $5....900 13............ product S47's normal unit product cost is $14...000 36....900) B) $4.............. Reporting LO: 4 Level: Easy Solution: Incremental revenue (9. the company's overall net operating income would increase (decrease) by: A) ($9. $ 3. The special order would have no effect on the company's total fixed manufacturing overhead costs.500 .........55......... Unit product cost...40 3............... Direct labor (9...............00 per unit and that would require an investment of $36..................100) Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.... Special molds.......40 $14...................... If the special order is accepted.. Variable manufacturing overhead (9....50 per unit)............................4 0 Direct labor is a variable cost...................................000 $ 4..500 C) $54....000 units @ $20.........................................10 per unit).....000 180.... Fixed manufacturing overhead........500 57............900 D) ($26...000 in special molds that would have no salvage value.................. Incremental net operating income....................................000 units @ $1.40: Direct materials..... Total incremental cost..600 45..............000 units @ $6........... While the product would be modified slightly for the special order.......50 per unit)...50 6..... The company has ample spare capacity for producing the special order.....

....... B C) B...... Contribution margin per hour..56..... A D) The order of production doesn't matter.. Holden Company produces three products........ In which order should it produce its products? A) C.. with costs and selling prices as follows: Selling price per unit.... and 2 hours are required to produce each unit of Product C..... Machine-hours per unit. Contribution margin per unit....... B B) A......... Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.............50 2 Contribution margin per unit. Variable costs per unit.. Reporting LO: 5 Level: Medium Solution: Product A $12 3 $4..00 3 Product B $5 1 $5....... 3 machine hours are required to produce each unit of Product A.......... C.. On that machine........ . Rank in terms of profitability. C... 1 hour is required to produce each unit of Product B..00 1 Product C $9 2 $4..... A... Product A $30 100% 18 60% $12 40% Product B $20 100% 15 75% $ 5 25% Product C $15 100% 6 40% $ 9 60% A particular machine is a bottleneck.

Variable costs..000 C) $19....... Because of a recent lack of skilled wood carvers. .. the corporation has had a shortage of available labor hours. Also assume that Wood Carving can only sell 800 units of each product in a given month.... .. Labor hours required.800 labor hours available next month..... The following per unit data relates to the three products of the corporation: Sales price....... Letter Openers Elvis Statues Candle Holders $30 $80 $42 $20 $40 $20 1 6 2 Assume that Wood Carving only has 1.000 B) $19....800 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.. What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage? A) $12. Wood Carving Corporation manufactures three products.....600 D) $19.57... Reporting LO: 5 Level: Hard .

........................00 1 6 2 $10......... Variable cost per unit........ Optimal production........00 $22................000 $19............. 800 4............ Maximum contribution margin: Candle Holders (800 × $22).......... .............800 1. Maximum contribution margin...........00 2 200 3 0 1..............Solution: Demand for wood carvers: Letter Openers Elvis Statues Candle Holders Labor-hours per unit...................................00 $20.00 $6...............................................00 $20............ Contribution margin per hour..............00 $42............600 Total time required for all products: 7.....800 1........... Hours remaining......600 200 ÷ 1 200 $17.......... Number of Letter Openers to produce.................................................................. Letter Openers Elvis Statues Candle Holders $30....... Contribution margin per unit............ Rank in terms of profitability..........00 $10.00 $40...........................00 $80... Divided by hours required per Letter Opener........ 800 800 800 Total hours required................................ Letter Openers (200 × $10)...........00 $40.....................600 2................................................. Less: hours required for 800 Candle Holders (800 × 2)................. Labor-hours per unit...............................................600 1 800 Total hours available.. 1 6 2 Monthly demand in units..200 Optimal production plan: Selling price per unit................67 $11......

...... VP.40 1 WX $505.. Rank in terms of profitability.58.6 6 $172.7 1 3........................90 $14. A) WX..........40 3 .......8 0 8..... rank the products in the order in which they should be emphasized.................. YI B) YI.... the current constrained resource..... Data concerning those products appear below: VP $248. VP D) VP.80 WX $505......4 4 $388... Reporting LO: 5 Level: Easy Solution: Optimal production plan: Selling price per unit.......52 3...............71 $57... Variable cost per unit..04 190...80 $116.14 $58.. VP.10 $14.....90 YI $230.. YI... YI Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making....44 388...70 2 YI $230... WX C) WX.0 4 $190......... Rank the products in order of their current profitability from most profitable to least profitable.... In other words..64 8.......... Banfield Corporation makes three products that use compound W..33 3...... VP $248....... Contribution margin per centiliter. Centiliters of compound W..10 Selling price per unit... Variable cost per unit. WX..66 172. Contribution margin per unit.1 4 3...80 $15............ Centiliters per unit.

...50 3 . Machine minutes per unit..11 239.00 2 RQ $494..... JQ..60 JQ $313. rank the products in the order in which they should be emphasized.. Reporting LO: 5 Level: Easy Solution: Optimal production plan: Selling price per unit...90 RQ $494... RQ B) RQ... LN $165. Rank the products in order of their current profitability from most profitable to least profitable.......... LN Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. LN....58 2... Variable cost per unit........ JQ C) RQ.... JQ..88 118... Contribution margin per unit........... An automated turning machine is the current constraint at Jordison Corporation.....60 $18...61 $73.. Data concerning those products appear below: LN $165.42 $113....90 $15....50 4.3 0 2. Variable selling cost per unit..................4 2 7... Minutes on the constraint..80 $14....................8 8 $118. Contribution margin per minute.....80 Selling price per unit.........10 7...30 1 JQ $313.6 1 4..... In other words... Three products use this constrained resource. LN D) JQ... A) LN........... Rank in terms of profitability.. RQ...1 1 $239.59...30 $47............52 381.5 2 $381..

. Data concerning those products appear below: WX $192..12 per unit D) $15. Contribution margin per minute.5 4 8... Rank in terms of profitability..00 158........20 2 FS $222... Contribution margin per unit.60 $15......... Variable cost per unit.. The company should be willing to pay up to the contribution margin per minute for the least profitable job.28 3.76 $55....84 167.........60 FS $222.. Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product.08 3..... The company makes three products that use this machine...... The constraint at Rauchwerger Corporation is time on a particular machine.......... Minutes on the constraint.........6 6 $420.. Variable cost per unit..66 420.....28 per unit B) $10. which is $10..................72 $33...20 $10........30 1 Selling price per unit.40 per minute C) $122.....40 3 KD $542.....40...60 Selling price per unit......60 $14......7 2 3.........7 6 3........ .... Up to how much should the company be willing to pay to acquire more of the constrained resource? A) $33...12 8........20 KD $542...0 0 $158.........60...... Reporting LO: 5 Level: Medium Solution: WX $192.... Machine minutes per unit.54 $122..8 4 $167.......30 per minute Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..

..000 50.... rather than processed further..000 52... Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.. Reporting LO: 6 Level: Easy Solution: Sales value after further processing... B) would increase the company's overall net operating income by $18...... Costs of further processing.....000..000... Product Y: A) should be sold at the split-off point.... Z....000 and then sold for $68............... Y.. from a single raw material input...000 $ 2.000 if processed further and then sold. or it can be processed further at a total cost of $16.........61..000 if processed further and then sold.... D) would increase the company's overall net operating income by $2.........000 . X...... Net advantage... Benefit of further processing......... C) would increase the company's overall net operating income by $68............ Product Y can be sold at the splitoff point for total revenues of $50... Less: Sales value at split-off point..000 if processed further and then sold.. Product Y $68. The Freed Company produces three products............000 16..

....... Benefit of further processing.000 3.........000 from further processing....000 and sold for $5 per unit... Net advantage.. Dee can be sold at the splitoff point for $3 per unit.............00 0 1........000 $1..62... the result would be: A) A break-even situation..... B) An additional gain of $1.. .. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.00 0 4..... If Dee is processed further and sold...500 of the $20.000 units each of Dee and Eff each year......000 from further processing........000)....... Product Dee has been allocated $2.. or it can be processed further with additional costs of $1.........000 from further processing..... C) A loss of $1.. Reporting LO: 6 Level: Medium Source: CPA....... D) An additional gain of $2..... Less: Sales value at split-off point ($3 × 1....... Pendall Company manufactures products Dee and Eff from a joint process..... adapted Solution: Dee $5.................. Costs of further processing..000 in total joint costs associated with the production of 1.00 0 Sales value after further processing ($5 × 1..000).

.... They can either be sold at that point or processed further into premium grade...000 3.... Incremental income (loss)............000 $ 3.........000 KS63 $5....000 5..... Sales value after further processing....... The three chemicals are in industrial grade form at the split-off point..............00 0 $9... Sales value at split-off... For which product(s) above would it be more profitable for Faustina to sell at the splitoff point rather than process further? A) TX14 only B) KS63 only C) TX14 and KS63 only D) NJ35 and KS63 only Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.....000) NJ35 $18.........000 NJ35 $12....000 $2........63..........000 4... Products NJ35 and KS63 should be sold after further processing beyond the split-off point....000 16........00 0 $3......... . Faustina Chemical Company manufactures three chemicals (TX14............00 0 $2... Allocated joint costs.....000 12. Further processing costs..... and KS63) from a joint process.....000 5.00 0 $6. NJ35......000 ($1.. Incremental revenue.000 KS63 $9...000 2. Costs related to each batch of this chemical process is as follows: TX14 $16.....000 $20.... Cost of further processing..000 4.000 Product TX14 should be sold at the split-off point without any further processing............. TX14 $20...... Reporting LO: 6 Level: Hard Solution: Sales value after further processing.....000 $18..000 6....00 0 $6.....00 0 Sales value at split-off point.....00 0 $5..00 0 $6.....

....... Khiem would be better off by: A) $2.......... D) $5.800 to repair the gloves and sell them at the normal price.... emerge from a joint process........ A total of 9.... Repair costs ($25 × 400)...... Incremental revenue.. or it can be processed further for an additional total cost of $54.000 $ 4.... Sales value at split-off ($18 × 400).....200 14.. Reporting LO: 6 Level: Medium Solution: Sales value after repairing ($55 × 400)........ QI and VH... Two products. what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point? A) $18.....000 less profit Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.... adapted ..........000 7......000 more profit C) $600 more profit D) $9..600 less profit B) $108.. manufactures baseball gloves that normally sell for $55 each.. Khiem currently has 400 defective gloves in inventory that have $35 of materials....800 10..800 65.....64.800 to sell the gloves at the reduced price.... Product QI has been allocated $9. Khiem... B) $2...... and overhead assigned to each glove.. Incremental income from further processing....000 to sell the gloves at the reduced price... Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.000 units of product QI are produced from the joint process.... labor... Inc.000 and then sold for $18 per unit.. $22.200 to sell the gloves at the reduced price.. Reporting LO: 6 Level: Medium Source: CIMA... C) $4...600 of the total joint costs of $12.... The defective gloves can either be completely repaired at a cost of $25 per glove or sold as is at a reduced price of $18 per glove.. Product QI can be sold at the split-off point for $13 per unit..... If product QI is processed further and sold............000.

.000 less profit D) $90.......000 units of product UG are produced from the joint process.....Solution: Product QI $162.000 117...000 54.400 less profit B) $15......... Less: Sales value at split-off point ($15 × 9............000) ..... or it can be processed further for an additional total cost of $63..000.....400 of the total joint costs of $42...000).. Costs of further processing................000). Net advantage (disadvantage).......000)........000)..................000 ($ 9.. emerge from a joint process... Product UG can be sold at the split-off point for $15 per unit....... Benefit of further processing.........600 less profit C) $45.. A total of 9..000) Sales value after further processing ($18 × 9..........................000 108. 66... Costs of further processing............000 more profit Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.... Less: Sales value at split-off point ($13 × 9.. Product UG has been allocated $29.. what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point? A) $74.............000 63. Net advantage (disadvantage)....000 90......... Two products..... Product HG $153.... Reporting LO: 6 Level: Medium Source: CIMA..... adapted Solution: Sales value after further processing ($17 × 9. UG and BC....000 and then sold for $17 per unit......................000 135.........000 ($ 45. If product UG is processed further and sold.............. Benefit of further processing.

. Cane juice should be processed into molasses D) Cane fiber should NOT be processed into industrial fiber........ Less: Sales value at split-off point............. Cane juice should be processed into molasses B) Cane fiber should be processed into industrial fiber........... Priddy Corporation processes sugar cane in batches...... Costs of further processing.. Which of the intermediate products should be processed further? A) Cane fiber should NOT be processed into industrial fiber....... The cane fiber can be sold as is for $28 or processed further for $13 to make the end product industrial fiber that is sold for $36.. Two intermediate products.. Net advantage (disadvantage)........ Cane juice should NOT be processed into molasses C) Cane fiber should be processed into industrial fiber..... Benefit of further processing.. Cane juice should NOT be processed into molasses Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making... cane fiber and cane juice... The cane juice can be sold as is for $43 or processed further for $23 to make the end product molasses that is sold for $85.... emerge from the crushing process.... The company purchases a batch of sugar cane for $62 from farmers and then crushes the cane in the company's plant at the cost of $18...... Reporting LO: 6 Level: Easy Solution: Sales value after further processing...67.. Cane Fiber $36 13 23 28 ($ 5) Cane Juice $85 23 62 43 $19 ...........

........................... The beet juice can be sold as is for $39 or processed further for $22 to make the end product refined sugar that is sold for $84..................................................... Net advantage (disadvantage)........... beet fiber and beet juice............................ The beet fiber can be sold as is for $25 or processed further for $16 to make the end product industrial fiber that is sold for $57................... Revenue: Industrial fiber............. A batch of sugar beets costs $78 to buy from farmers and $18 to crush in the company's plant............... Net profit from one batch. Vannorman Corporation processes sugar beets in batches........................................... Processing fiber further.. Processing juice further............. $5 7 8 4 $14 1 78 18 16 2 2 13 4 $ 7 Beet Fiber $57 16 41 25 $16 Beet Juice $84 22 62 39 $23 .............. Less expenses: Purchase from farmers............................................................. Less: Sales value at split-off point.................. Total expenses.......... Total revenue... Reporting LO: 6 Level: Easy Solution: Sales value after further processing.. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar? A) ($134) B) ($32) C) $7 D) $39 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.............................. Crushing costs................ emerge from the crushing process...... Refined sugar................... Two intermediate products................................ Benefit of further processing.... Costs of further processing..................68...................................

beet fiber and beet juice.. Net advantage (disadvantage).. The beet juice can be sold as is for $43 or processed further for $29 to make the end product refined sugar that is sold for $91....... Stinehelfer Beet Processors.. Beet Juice $91 29 62 43 $19 ..... Two intermediate products... Reporting LO: 6 Level: Easy Solution: Sales value after further processing...... Benefit of further processing......... The beet fiber can be sold as is for $24 or processed further for $12 to make the end product industrial fiber that is sold for $31. A batch of sugar beets costs $56 to buy from farmers and $13 to crush in the company's plant. emerge from the crushing process............69..... processes sugar beets in batches........ Inc.............................. Less: Sales value at split-off point...... Costs of further processing. How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is? A) $19 B) $6 C) ($50) D) ($16) Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..

.........000 $37............. beet juice should NOT be processed into refined sugar C) beet fiber should be processed into industrial fiber....... beet fiber and beet juice... A batch of sugar beets costs $11 to crush in the company's plant........000 $22........ Less: Sales value at split-off point....... Two intermediate products....70..000 $37. Use the following to answer questions 71-72: Ouzts Corporation is considering two alternatives: A and B... Net advantage (disadvantage)..................... beet juice should NOT be processed into refined sugar D) beet fiber should be processed into industrial fiber.000 $56.... Benefit of further processing....000 $15.. The beet fiber can be sold as is for $27 or processed further for $16 to make the end product industrial fiber that is sold for $40......... Paine Corporation processes sugar beets in batches that it purchases from farmers for $72 a batch.... emerge from the crushing process.. Occupancy costs....... Reporting LO: 6 Level: Easy Solution: Sales value after further processing....... beet juice should be processed into refined sugar B) beet fiber should NOT be processed into industrial fiber.. The beet juice can be sold as is for $43 or processed further for $28 to make the end product refined sugar that is sold for $100. Processing costs.....000 Beet Fiber $40 16 24 27 ($ 3) Beet Juice $100 28 72 43 $ 29 .......... Which of the intermediate products should be processed further? A) beet fiber should NOT be processed into industrial fiber. Alternative A Alternative B $40. Equipment rental......... Costs of further processing..........000 $13.000 $13..... beet juice should be processed into refined sugar Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. Costs associated with the alternatives are listed below: Materials costs.........

71. Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question.) A) Both materials costs and processing costs are relevant B) Neither materials costs nor processing costs are relevant C) Only processing costs are relevant D) Only materials costs are relevant Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 72. What is the differential cost of Alternative B over Alternative A, including all of the relevant costs? A) $105,000 B) $23,000 C) $128,000 D) $116,500 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy Solution: Alternative A Alternative B Materials costs................... $40,000 $56,000 Occupancy costs................. $15,000 $22,000 Differential cost.............. Use the following to answer questions 73-74: Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below. Materials costs................... Processing costs................. Equipment rental................ Occupancy costs................. Alternative X Alternative Y $41,000 $59,000 $45,000 $45,000 $17,000 $17,000 $16,000 $24,000 Differential Costs $16,000 7,000 $23,000

73. Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question.) A) Neither materials costs nor processing costs are relevant B) Only processing costs are relevant C) Only materials costs are relevant D) Both materials costs and processing costs are relevant Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 74. What is the differential cost of Alternative Y over Alternative X, including all of the relevant costs? A) $132,000 B) $119,000 C) $145,000 D) $26,000 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy Solution: Alternative X Alternative Y Materials costs................... $41,000 $59,000 Occupancy costs................. $16,000 $24,000 Differential cost.............. Use the following to answer questions 75-78: The Draper Company is considering dropping its Doombug toy due to continuing losses. Revenue and cost data on the toy for the past year follow: Sales of 15,000 units.......... Variable expenses.............. Contribution margin........... Fixed expenses................... Net operating loss.............. $150,000 120,000 30,000 40,000 ($ 10,000) Differential Costs $18,000 8,000 $26,000

If the toy were discontinued, then Draper could avoid $8,000 per year in fixed costs.

75. Under the given conditions, the change in annual operating income from discontinuing the production and sale of Doombugs would be: A) $30,000 decrease B) $10,000 increase C) $22,000 decrease D) $18,000 increase Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy Solution: Keep Doombugs Drop Doombugs Difference ($150,000 $150,000 $ 0 ) 120,000 0 120,000 ( 30,000 30,000 0 ) 40,000 32,000 8,000 ($ ($ 10,000) ($32,000) 22,000)

Sales............................................... Variable expenses.......................... Contribution margin....................... Avoidable fixed expenses.............. Product margin...............................

Net operating income would decline by $22,000 if Doombugs were dropped. Therefore, Doombugs should not be dropped. 76. Assuming all other conditions stay the same, at what level of annual sales of Doombugs (in units) should Draper be indifferent to discontinuing Doombugs or continuing the production and sale of Doombugs? A) 20,000 units B) 18,000 units C) 6,000 units D) 4,000 units Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium Solution: Total contribution margin............. $30,000 Divided by 15,000 units............... ÷15,000 Contribution margin per unit........ $2 Breakeven point in units = Avoidable fixed expenses ÷ Unit contribution margin = $8,000 ÷ $2 = 4,000 units

.

000 increase Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. .... Less Doombug product margin..77.... If all other conditions are the same.. At what selling price per Doombug should Draper be indifferent (on economic grounds) between dropping the Doombug or continuing its production and sale? (All other conditions remain the same.000 increase C) $2..000 decrease D) $28.000 increase in the contribution margin received from these other toys. Suppose again that if the Doombug toy is dropped.000 120..000) $16.. Reporting LO: 2 Level: Medium Solution: Sales..000 ($ 22..70 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..000 units of the Doombug toy..33 B) $9. the production and sale of other Draper toys would increase so as to generate a $16..000 ( 22. Variable expenses...25 C) $9. 78. ...000 8. Doombug product margin.........000 30.) A) $8... including annual sales of 15... Suppose that if the Doombug toy is dropped.........60 D) $10. Contribution margin. $150.... .... Decrease in net operating income.....000) Additional contribution margin.........000 increase in the contribution margin received from these other toys....000 decrease B) $14.. Avoidable fixed expenses.. the production and sale of other Draper toys would increase so as to generate a $16. . the change in annual operating income from discontinuing the production and sale of Doombugs would be: A) $6.. Reporting LO: 2 Level: Hard ...000) ($ 6....

.000 + $16......000 units.......000 Divided by 15............000 = $24....... Variable expenses...... ÷ 15................. $120........... Fixed selling and administrative expenses...000 15.....000 × (Selling price − Variable expense per unit) 15..............000 × (Selling price − $8) = $8. $830.............000 Variable expense per unit....00 0 All fixed expenses of the company are fully allocated to products in the company's accounting system..........000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued........... Fixed manufacturing expenses............... $8 Total contribution margin = Fixed expenses plus increase in contribution margin from other toys Total contribution margin = 15....00 0 $390.......60 Use the following to answer questions 79-80: The management of Bonga Corporation is considering dropping product D74F..............000 15...000 × Selling price − $120...000 of the fixed manufacturing expenses and $103......000 Selling price = $9.00 0 $266...Solution: Total variable expenses..............000 × Selling price = $144... Further investigation has revealed that $111............. Data from the company's accounting system appear below: Sales.....00 0 $232...... .......

. D) Overall net operating income would decrease by $58................. Reporting LO: 2 Level: Easy ..............000 ($ 58... What would be the effect on the company's overall net operating income if product D74F were dropped? A) Overall net operating income would increase by $226...000 D) $440. $830.....................000 232..................000 266.............................. what is the net operating income earned by product D74F? A) ($58....000) B) ($440...........000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: Sales.. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making....... Fixed selling and administrative expenses...... B) Overall net operating income would increase by $58...000..... According to the company's accounting system...................000.. C) Overall net operating income would decrease by $226.......000....................000....... Variable expenses....000 440...000 498....... Total fixed expenses.........79..... Contribution margin..000) C) $58.......000) 80. Net operating income (loss)..... Fixed expenses: Fixed manufacturing expenses................................000 390....

000 In the company's accounting system all fixed expenses of the company are fully allocated to products..000 440...000 of the fixed selling and administrative expenses are avoidable if product V86O is discontinued...........00 0 $72....000) Difference ($830......000 ( 440.000 232......000 266............. Therefore...... Fixed manufacturing expenses....... Further investigation has revealed that $30......000 $33.Solution: Keep the Product Sales......... Net operating income (loss)................... the product should not be dropped....000 $50..000 if product D74F were dropped......... $830..000 of the fixed manufacturing expenses and $13.... Fixed selling and administrative expenses............000 ) Net operating income would decline by $226.... Variable expenses....................000 ($226...000 ($ 58.......000) 111......... Use the following to answer questions 81-82: The management of Woznick Corporation has been concerned for some time with the financial performance of its product V86O and has considered discontinuing it on several occasions......... Fixed expenses: Fixed manufacturing expenses....................000 103.000 390..000) Drop the Product $ 0 0 0 155...000 284.................... Total fixed expenses.......................000 129..............000 214............. Contribution margin..................................000 ($284........ Data from the company's accounting system appear below: Sales. Fixed selling and administrative expenses. Variable expenses..........000 498.........................000 ) 390....... $150..... ................

..........................000) 82. Fixed expenses: Fixed manufacturing expenses......000 33........................000 50....... Contribution margin........000.... Fixed selling and administrative expenses......... what is the net operating income earned by product V86O? A) $78.......000 78. $150. Reporting LO: 2 Level: Easy ..... Total fixed expenses....000 83........ Net operating income (loss). D) Overall net operating income would increase by $5.81..................000......... What would be the effect on the company's overall net operating income if product V86O were dropped? A) Overall net operating income would decrease by $35..........000) C) ($78............. B) Overall net operating income would decrease by $5..........000.............. Variable expenses... According to the company's accounting system.........000 ($ 5...000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: Sales. Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.......................000 72..000........000 B) ($5..... C) Overall net operating income would increase by $35..........................000) D) $5..

....000 in fixed manufacturing overhead costs for the salary of a new supervisor.........000 ($ 35....... For some time now there has been idle capacity in the factory that could be utilized to make this part.... Fixed manufacturing overhead....Solution: Keep the Product Sales... there would be an increase of $12.......... this part is purchased from an outside supplier at $12 per unit..000 units of a certain part in production each year....... Contribution margin.. Variable expenses........000) Difference ($150................000) Drop the Product $ 0 0 0 20...000 50............ the product should not be dropped......000 43...... However............000 40........ Fixed expenses: Fixed manufacturing expenses.....000 20....... Therefore.........................000 83.......... The following information has been assembled on the unit costs of making this part internally: Direct materials...... Variable manufacturing overhead..000 13..000 72.7 5 $2....000 33.... $3..2 5 $2.. Fixed selling and administrative expenses...000 ( 78....000 if product V86O were dropped............000 ) 72............000 ($ 40...... Presently...... Use the following to answer questions 83-85: Smithtone Company uses 8..............0 0 The fixed manufacturing overhead listed above represents an allocation of existing costs to this part............000) Net operating income would decline by $35..000 78....000) 30..... Net operating income (loss).............0 0 $5.. $150............... Direct labor............ Total fixed expenses.. .......000 ($ 5.

. at what price per unit from the outside supplier should Smithtone be indifferent (on economic grounds) to buying or making the part? A) $8...000 decrease.00 B) $8.......000 decrease....000 22.................... Net savings from making part ....000 increase...000 12..... the change in the company's operating income per year would be: A) $20........ Direct labor ($2.00 × 8.50 C) $9..83....... D) $8.....75 × 8....... $96... Total cost to make............ Fixed manufacturing overhead............ Assuming other things stay the same........... C) $8............ B) $20. Variable manufacturing overhead ($2.50 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...000)......................00 D) $9. Total cost to make........... Reporting LO: 3 Level: Medium ........000 16......000 $20..000)......000)...000 76..... Reporting LO: 3 Level: Medium Solution: Relevant cost of manufacturing: Direct materials ($3.......000 $76........... Net advantage (disadvantage): Cost of purchasing part ($12 × 8. If Smithtone chooses to make the part instead of buying it outside....000 increase...000 84..... Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.......25 × 8....000 $26.000)..............

........000 16...........000 ..25 × 8...... Variable manufacturing overhead ($2.........75 × 8...000)........000 per year................. D) $10..000 Price per unit from outside supplier................ Suppose that the idle capacity (floor space and machinery) is presently being rented to another company for $32.............000 disadvantage..000 $76.. Total cost to make.... Direct labor ($2....................000 $76..00 × 8...... Total cost to make..000)....... the net advantage or disadvantage (per year) would be: A) $15...........000 16. Net advantage (disadvantage): Cost of purchasing part ($12 × 8.........000 Divided by 8................. $9.... Fixed manufacturing overhead.....000) ( 32......000 disadvantage.. $26....00 × 8. $76............25 × 8. Direct labor ($2................ Variable manufacturing overhead ($2........000 $26.. All the other conditions are still the same........ Opportunity cost of rental income......... Total cost to make...000 12.........000 advantage.....000 12. Net disadvantage of making part.75 × 8......000)..000 22................. B) $4.............50 85...000)........000). Fixed manufacturing overhead...... Total cost to make. ÷ 8.....................................000) $12......000)....000 advantage..000 units......000 $96.................................. Reporting LO: 3 Level: Medium Solution: Relevant cost of manufacturing: Direct materials ($3......Solution: Relevant cost of manufacturing: Direct materials ($3....000 ( 76... Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making....... If Smithtone chooses to make the part instead of buying it outside. C) $12................................000 22......000)........

... Relevant fixed cost per unit....000 units of Part MR24 each month for use in production.......000 units....... $90......000 units D) 22.60).... The variable production costs of Part MR24 are $11 per unit.... it would realize a net benefit by purchasing Part MR24 from an outside supplier only if the supplier's unit price is less than: A) $14. Reporting LO: 3 Level: Hard Source: CMA.000 $3 11 $14 87.....00 D) $13...... If Elly were to buy part MR24 from an outside supplier.000 and a capacity to produce 35. Add variable production costs per unit...... the facilities would be idle... Outside supplier price.. If Elly Industries continues to use 30.00 B) $11.00 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.000 units of Part MR24 each month.... adapted Solution: Avoidable fixed costs ($150..000 × 0.. 86.. adapted ....000 ÷30.000 units C) 35. Reporting LO: 3 Level: Hard Source: CMA...500 units Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.....Use the following to answer questions 86-87: Elly Industries is a multi-product company that currently manufactures 30.. but its fixed costs would continue at 40% of their present amount..... the monthly usage at which it will be indifferent between purchasing and making Part MR24 is: A) 30..000 units B) 32................ Divided by 30..000 units per month. If Elly industries is able to obtain Part MR24 from an outside supplier at a unit purchase price of $15..00 C) $16. The facilities now being used to produce Part MR24 have a fixed monthly cost of $150.....

..Solution: A company will be indifferent between purchasing and making a part when the outside purchase price is equal to the total relevant cost per unit of making the part. Direct labor. Since the total cost must be equal to $15.... $13.50 1.......... This fixed manufacturing overhead cost would be applied to the company's remaining products........90 21...... The fixed cost per unit is calculated as: Fixed cost per unit = Total relevant fixed costs ÷ Units to be produced Substituting: $4 = $90........... The unit product cost of this part is computed as follows: Direct materials...60 a unit.........000 units per year of a part it uses in the products it manufactures..500 Use the following to answer questions 88-90: Ahron Company makes 80......... all of the direct labor cost of the part would be avoided....... If the company accepts this offer..000 per year...10 $55..... Variable manufacturing overhead.....000 ÷ Units to be produced Units to be produced = 22.......................60 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier.......... .. The total relevant cost per unit of making the part is composed of the variable production cost per unit ($11) plus the fixed cost per unit. Fixed manufacturing overhead...... $14..9 0 17. then the fixed cost per unit must be $4 ($15 − $11)......... Unit product cost................. If the part were purchased from the outside supplier......... the facilities now being used to make the part could be used to make more units of a product that is in high demand...4 0 An outside supplier has offered to sell the company all of these parts it needs for $46.. However........... The additional contribution margin on this other product would be $560...

.... How much of the unit product cost of $55.... Relevant manufacturing cost....... Direct labor..88..000 C) $176......... What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? A) $560......50 1.....................10 − $13.........9 0 17... Fixed manufacturing overhead ($21...60)..8 0 89...40 D) $41...........000) Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..90 7...... Reporting LO: 3 Level: Medium ...........30 B) $17.......80 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.. Reporting LO: 3 Level: Easy Solution: Relevant cost per unit: Direct materials....................................50 C) $55.. Variable manufacturing overhead............. $14..................000 D) ($384...50 $41....40 is relevant in the decision of whether to make or buy the part? A) $34...........000 B) $704.......

.......000) $ 176...............344........000).........60 × 80........000)....344.50 $41.. Additional contribution margin...................000 560............. Variable manufacturing overhead.....9 0 17..... Cost of purchasing the part ($46.........40 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making................................ Fixed manufacturing overhead ($21.. Reporting LO: 3 Level: Hard Solution: Relevant cost per unit: Direct materials.....................60) Relevant manufacturing cost...8 0 $3....... Direct labor.. Net advantage (disadvantage): Manufacturing cost savings ($41....... Net advantage (disadvantage).........50 1.......000)........50 $41...... Direct labor.............000 ( 3..9 0 17... $14............. Maximum acceptable purchase price: Manufacturing cost savings ($41....10 − $13......80 D) $55.........................80 × 80........00 B) $62....80 × 80.............728........8 0 .......50 1...............Solution: Relevant cost per unit: Direct materials.................. Variable manufacturing overhead......40 C) $48.90 7..................10 − $13.............000 units required each year? A) $7............ What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 80............ Fixed manufacturing overhead ($21.000 90................60) Relevant manufacturing cost...............90 7.. $3...............00 0 $14..........

. Number of units..................... Total benefit...904............................................. 560...................00 0 $3..Additional contribution margin.....................00 0 80...................................80 .... Benefit per unit..............000 $48....................................

Use the following to answer questions 91-92: Penagos Corporation is presently making part Z43 that is used in one of its products. A total of 5,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: Direct materials.......................................... Direct labor................................................ Variable overhead...................................... Supervisor’s salary.................................... Depreciation of special equipment............ Allocated general overhead....................... Per Unit $1.10 $3.10 $6.90 $5.80 $5.20 $5.60

An outside supplier has offered to produce and sell the part to the company for $20.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $4,000 of these allocated general overhead costs would be avoided.

91. If management decides to buy part Z43 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? A) Net operating income would decline by $34,500 per year. B) Net operating income would decline by $30,500 per year. C) Net operating income would decline by $15,500 per year. D) Net operating income would decline by $38,500 per year. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Easy Solution: Direct materials (5,000 units @ $1.10 per unit).......... Direct labor (5,000 units @ $3.10 per unit)................. Variable overhead (5,000 units @ $6.90 per unit)...... Supervisor’s salary (5,000 units @ $5.80 per unit)..... Depreciation of special equipment (not relevant)........ Allocated general overhead (avoidable only).............. Outside purchase price (5,000 units @ $20.80 per unit).......................................................................... Total cost..................................................................... Make $ 5,500 15,500 34,500 29,000 0 4,000 $88,500 Buy

$104,000 $104,000

The total cost of the make alternative is lower by $15,500. Thus, net operating income would decline by $15,500 if the offer from the supplier were accepted.

92. In addition to the facts given above, assume that the space used to produce part Z43 could be used to make more of one of the company's other products, generating an additional segment margin of $24,000 per year for that product. What would be the impact on the company's overall net operating income of buying part Z43 from the outside supplier and using the freed space to make more of the other product? A) Net operating income would decline by $10,500 per year. B) Net operating income would decline by $58,500 per year. C) Net operating income would increase by $24,000 per year. D) Net operating income would increase by $8,500 per year. Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Solution: Direct materials (5,000 units @ $1.10 per unit).... Direct labor (5,000 units @ $3.10 per unit)........... Variable overhead (5,000 units @ $6.90 per unit). Supervisor’s salary (5,000 units @ $5.80 per unit) Depreciation of special equipment (not relevant). . Allocated general overhead (avoidable only)........ Outside purchase price (5,000 units @ $20.80 per unit).................................................................... Opportunity cost..................................................... Total cost................................................................ Make $ 5,500 15,500 34,500 29,000 0 4,000 Buy

$88,500

$104,000 ( 24,000) $ 80,000

The total cost of the make alternative is higher by $8,500. Thus, net operating income would increase by $8,500 if the offer from the supplier were accepted.

.. can be avoided........... Depreciation of special equipment.... The allocated general overhead represents fixed costs of the entire company.. ......................... The special equipment used to make the part was purchased many years ago and has no salvage value or other use................ Per Unit $3......... including direct labor.. none of which would be avoided if the part were purchased instead of produced internally....................10 each...................10 An outside supplier has offered to produce and sell the part to the company for $17.. Supervisor’s salary........000 units of this part are produced and used every year......... the supervisor's salary and all of the variable costs. The company's Accounting Department reports the following costs of producing the part at this level of activity: Direct materials.....Use the following to answer questions 93-94: Mcfarlain Corporation is presently making part U98 that is used in one of its products... If this offer is accepted.90 $4.......60 $1............ Allocated general overhead.... A total of 7...70 $3...................... Direct labor..00 $3......40 $4..... Variable overhead.....................

......000 units @ $3...... what would be the annual impact on the company's overall net operating income? A) Net operating income would decline by $30...... C) Net operating income would increase by $24.000 units @ $1..........200 per year..000 per year for that product..... Thus.200 per year.. ...... Direct labor (7.............00 per unit) Depreciation of special equipment (not relevant).................... assume that the space used to produce part U98 could be used to make more of one of the company's other products.....800 if the offer from the supplier were accepted... B) Net operating income would increase by $25.200 per year.... Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.10 per unit).800 per year..800 per year..000 units @ $3..900 25.......... Reporting LO: 3 Level: Medium ... C) Net operating income would increase by $30..800.70 per unit).000 0 0 $88. Make $ 25..60 per unit).. Allocated general overhead (not relevant)....... generating an additional segment margin of $24. D) Net operating income would decline by $49.....800 28......000 units @ $4..900 Buy $119..000 per year. What would be the impact on the company's overall net operating income of buying part U98 from the outside supplier and using the freed space to make more of the other product? A) Net operating income would decline by $6. Reporting LO: 3 Level: Easy Solution: Direct materials (7.... Supervisor’s salary (7. D) Net operating income would decline by $25. 94... Outside purchase price (7. B) Net operating income would decline by $1.93..000 units @ $17.....200 9... Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.. Variable overhead (7.. In addition to the facts given above..... net operating income would decline by $30..... If management decides to buy part U98 from the outside supplier rather than to continue making the part....700 The total cost of the make alternative is lower by $30.700 $119............40 per unit)....800 per year.. Total cost......200 per year.

........800................................. manufactures industrial components...........000 units @ $1............. Outside purchase price (7..200 9.................... net operating income would decline by $6.......900 25. Allocated general overhead (not relevant)............... Per Unit $220 $38 $1 $8 $16 $4 $16 The above per unit data are based on annual production of 4. Direct materials... Opportunity cost................ Direct labor can be considered to be a variable cost.Solution: Direct materials (7.....70 per unit).. which is used in the construction of industrial air conditioners............................................. ........000 units @ $4.... Variable selling expense...............10 per unit)........... Fixed manufacturing overhead......................... Fixed selling and administrative expense.. Data concerning this product are given below: Selling price...........000) $95........................................ One of its products...........................000 0 0 ( $88....... ...00 per unit) Depreciation of special equipment (not relevant)................000 units @ $3... Direct labor (7......... Total cost................... Direct labor.700 The total cost of the make alternative is less by $6..... Supervisor’s salary (7...800 28..000 units @ $17....000 units @ $3......................... Make $ 25..........900 Buy $119..000 units of the component.. Variable manufacturing overhead.......800 if the offer from the supplier were accepted.........60 per unit).....40 per unit)...... is known as P06... Use the following to answer questions 95-97: Younes Inc......700 24... Variable overhead (7........ Thus.....

............. Reporting LO: 4 Level: Medium Source: CMA.......... adapted Solution: Variable cost per unit on normal sales: Direct materials.. Variable cost per unit on normal sales................. Assuming that Younes has excess capacity and can fill the order without cutting back on the production of any product........................................... Variable manufacturing overhead.................... Reduction in variable selling expense........................................ Variable selling expense............................ There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order..... Variable cost per unit on special order.... Direct labor.......... Variable cost per unit on special order: Normal variable cost per unit.................................... one-time-only order for 400 units of component P06... what is the minimum price per unit on the special order below which the company should not go? A) $47 B) $83 C) $63 D) $220 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making................ $38 1 8 4 $51 $51 ( 4) $47 .......95.............. The company has received a special..........

......... There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order....96........... Opportunity cost of sales given up $10..000. Variable cost per unit on special order: Normal variable cost per unit.................. Variable manufacturing overhead................ which could be used instead to produce products with a total contribution margin of $10.............. Variable cost per unit on normal sales...........000 ÷ 500)........ Direct labor.......................................................... one-time-only order for 500 units of component P06. Variable cost per unit on special order........ adapted Solution: Variable cost per unit on normal sales: Direct materials................................................. assume that Younes has no excess capacity and this special order would require 30 minutes of the constraining resource..............5 Level: Hard Source: CMA.... What is the minimum price per unit on the special order below which the company should not go? A) $67 B) $103 C) $20 D) $83 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making............. Reporting LO: 4.... Reduction in variable selling expense.............................................. However........................... The company has received a special................. $38 1 8 4 $51 $51 ( 4) 20 $67 ........ Variable selling expense......

. Variable manufacturing overhead....................... Variable cost per unit.... Contribution margin per unit: Selling price...................................................................... adapted Solution: Variable cost per unit: Direct materials... $38 1 8 4 $51 $220 51 $169 ........................................................................................................ Contribution margin.................... Refer to the original data in the problem.......................... Variable selling expense............................ Variable cost per unit..................................... What is the current contribution margin per unit for component P06 based on its selling price of $220 and its annual production of 4............................................000 units? A) $51 B) $137 C) $169 D) $173 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy Source: CMA...97................ Direct labor..

........000 decrease D) $8..........000 units per month.... If the company accepts the special order....000 units per month (which represents the company's capacity): Manufacturing: Direct materials.................000 increase B) $9.......000 units per month. An order has been received from a customer in a foreign market for 1... 98. are constant within the relevant range between 6............ the effect on total operating income will be a: A) $1............... The order would not affect regular sales...........000 units at a price of $20 per unit. both manufacturing and selling and administrative. Fixed.......... Reporting LO: 4 Level: Medium ... Fixed costs......000 increase Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...... Direct labor......... The variable selling and administrative costs would have to be incurred for this special order as well as all other sales..........000 increase C) $6.................Use the following to answer questions 98-99: The following are Silver Company's unit costs of making and selling an item at a volume of 8............. Fixed overhead. Selling and administrative: Variable.. $ 4 $ 5 $ 2 $ 8 $ 1 $ 6 Present sales amount to 7............................ Variable overhead........000 and 8..

.000 $8. . Variable selling & administrative expense.......... The company has 100 defective units of Product X left over from last year which will have to be sold as scrap at reduced prices.............. Selling price for special order.............. Variable cost per unit on special order..................000 99.................... all other expenses associated with theses 100 defective units are sunk (already incurred) and therefore irrelevant......Solution: Variable cost per unit on normal sales: Direct materials................... The sale of these units would have no effect on the company's other sales..... Reporting LO: 4 Level: Hard Solution: Except for variable selling and administrative expenses ($1).................. Direct labor................................. $ 4 5 2 1 $12 $20 12 $ 8 1.... Variable cost per unit on normal sales. Variable manufacturing overhead.................................... Increase (decrease) in net operating income................................. The cost figure that is relevant as a guide for setting a minimum price on these units is: A) $7 B) $1 C) $19 D) $12 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.............. Unit contribution margin on special order................................ Number of units in special order.

.................Use the following to answer questions 100-102: Elfving Company produces a single product............................ The cost of producing and selling a single unit of this product at the company's normal activity level of 80.......... Fixed manufacturing overhead.80 $8.. $37.................... Direct labor is a variable cost in this company............ An order has been received from an overseas customer for 1.................50 less per unit on this order than on normal sales.......... This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs............. Variable manufacturing overhead.......00 The normal selling price of the product is $71........... The variable selling and administrative expense would be $1.....5 0 $6. ..5 0 $1. Direct labor.00 $1.....10 per unit.....000 units per month is as follows: Direct materials.......000 units to be delivered this month at a special discounted price..00 $11...... Fixed selling & administrative expense.... Variable selling & administrative expense.............................

...80 $63...........000 $18..................... Number of units in special order...................... By how much would this special order increase (decrease) the company's net operating income for the month? A) $7..............70 per unit................................................................................. Variable cost per unit on special order: Normal variable cost per unit.......... Variable cost per unit on special order..3 0 $46...900) C) $18.90 0 ..30 ( 1............00 1...........100....70 44. Reduction in variable selling and administrative expense................. Increase (decrease) in net operating income... Variable cost per unit on normal sales...................80 $46.....................50) $44..............00 1...900 D) ($2.. Variable selling & administrative expense...................5 0 6............. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $63......400 B) ($5.......... $37.......... Selling price for special order. Reporting LO: 4 Level: Medium Solution: Variable cost per unit on normal sales: Direct materials.....80 $18.... Variable cost per unit on special order.....100) Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making....................................... Unit contribution margin on special order.. Variable manufacturing overhead....... Direct labor....90 1......

.... The minimum acceptable price per unit for the special order is closest to: A) $56..................00 1...............................80 C) $7.......... $37............... Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 400 units for regular customers... Reporting LO: 4 Level: Hard Solution: Variable cost per unit on normal sales: Direct materials....00 1. Suppose the company is already operating at capacity when the special order is received from the overseas customer........... Variable selling & administrative expense.80 102....72 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making....80 $46..5 0 6....................................... Unit contribution margin.....3 0 $71.........40 D) $5....80 B) $6.... Variable cost per unit....80 C) $71..10 46.101...00 B) $65............ What would be the opportunity cost of each unit delivered to the overseas customer? A) $24......... Variable manufacturing overhead...30 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making........... Direct labor....30 $24.............................. Variable cost per unit on normal sales............. Reporting LO: 4 Level: Hard ....... Selling price for normal sales..........10 D) $54.................................

......... Number of units in special order.... Direct labor................ Variable manufacturing overhead................30 9......3 0 Variable cost per unit on special order: Normal variable cost per unit.... Total lost contribution margin................. Variable selling & administrative expense............... Lost contribution margin: Selling price for normal sales......3 0 $24...........80 $46...8 0 400 $9.00 1....... Variable cost per unit on normal sales...92 0 1..........5 0 6..72 $37................00 1....92 (1.................... Lost contribution margin per unit.................. Variable cost per unit on special order. $71..........Solution: Variable cost per unit on normal sales: Direct materials. Add opportunity cost for lost contribution margin......... Reduction in variable selling and administrative expense......................50) $54........ Number of units cut back in production.. ..............92 $46....................1 0 46..................................................................................................................... Variable cost per unit on normal sales........................................ Contribution margin per unit.................000 $9...

.....000 .. If the special order from Woolgar Symphony Orchestra is accepted... Per Violin $600 $130 $270 $20 $40 Woolgar Symphony Orchestra is interested in purchasing Bharu's excess capacity of 200 units but only if they can get the violins for $350 each... $70.................... Manufacturing costs: Variable..........................000 B) decrease by $10.......................................000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making....000 ( 26... Net advantage of accepting the order.......800................... The following per unit numbers relate to annual operations at 4.............. Bharu's profits for the year will: A) increase by $40.................................. 103......000 violins each year but is currently only manufacturing and selling 4.000 C) decrease by $22...Use the following to answer questions 103-104: The Bharu Violin Company has the capacity to manufacture and sell 5..... This special order would not affect regular sales or the cost structure above.800 units: Selling price........... Less incremental costs: Variable manufacturing (200 units @ $130)............................000 D) decrease by $28....... Selling and administrative costs: Variable..............................000) $ 40............ Variable selling (200 units @ $20)..... Fixed.......... Fixed.......000) ( 4.............. Reporting LO: 4 Level: Medium Solution: Incremental revenues (200 units @ $350)..................

........000 B) $22..........................104....000 units)........000) ($50.000) ( 4........................ Incremental revenues (200 units @ $350). Variable manufacturing costs.........000) ( 90.................... Assume that Bharu is manufacturing and selling at capacity (5.............. Total lost contribution margin....... Variable selling (200 units @ $20)........... Net disadvantage of accepting special order...... Under these conditions if the special order from Woolgar Symphony Orchestra is accepted...........000 C) $28..... Variable selling costs............. Any special order will mean a loss of regular sales...... Reporting LO: 4 Level: Medium Solution: Contribution margin per unit of regular sales: Selling price...................... Number of units of lost sales................ $600 130 20 $450 200 $90.............000) .000 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...........................000 D) $50........000 ( 26... Bharu's profits for the year will decrease by: A) $20............. Less lost contribution margin.............. Less incremental costs: Variable manufacturing (200 units @ $130).........000 $70.... Contribution margin per unit.

.. 11... $10....50 $2..........000 Product D 1.60 4....40 4....70 $40.. Monthly demand in units..... Variable selling cost per unit.....80 8....100 C) 13..40 Variable manufacturing overhead...60 1.. Product Product Product A B C 2..............10 5..000 2.....60 34....10 $3......40 $59... Reporting LO: 5 Level: Easy ....40 16..30 Unit product cost.. 24..........60 $3..........40 21. These products have the following unit product costs: Product Product Product Product A B C D Direct materials.........60 $7..........Use the following to answer questions 105-108: Browning Company makes four products in a single facility....20 $41. The grinding machines are potentially the constraint in the production facility.........90 $6.50 19.. $50.....500 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..10 Fixed manufacturing overhead..500 minutes are available per month on these machines..000 D) 24..60 Additional data concerning these products are listed below.50 $1..80 2.........000 3..80 $59....30 $63....40 6. A total of 24. 3...50 $69. 105.50 $74..........000 Grinding minutes per unit... How many minutes of grinding machine time would be required to satisfy demand for all four products? A) 21.80 Direct labor..........60 $1.... Direct labor is a variable cost in this company....70 11..... Selling price per unit......500 B) 27.70 4..

600 = 27...80 4.000 3. Rank in terms of profitability. Product Product Product A B C 2.000 10...... Variable manufacturing overhead per unit Variable selling cost per unit....000 5.... Which product makes the LEAST profitable use of the grinding machines? A) Product A B) Product B C) Product C D) Product D Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making........40 3..500 + 5......... Monthly demand in units....600 + 7.100 106...... Contribution margin per unit.... Direct labor per unit.90 1......60 $36..60 $16......80 7......50 10.....80 2....600 Total time required for all products = 10......50 $44.60 3...... Grinding minutes per unit....400 3.....400 + 3. Product A $69.80 $24.... Reporting LO: 5 Level: Hard Solution: Optimal production plan: Selling price per unit......Solution: Demand on the grinding machine: Grinding minutes per unit...000 2..............60 $42.....90 16.80 11............70 2......70 1.10 1...40 6......500 Product D 1... Total minutes required......23 3 Product B $74..40 4..............10 8....20 2...... Contribution margin per minute.40 $24.600 7.72 2 Product C $59......... Direct materials per unit.....10 3.....50 1.70 5.50 $14......40 $34.50 6...........93 1 ....60 11.40 2.....50 4..68 4 Product D $59...60 1...

.80 7... Rank in terms of profitability..60 11....70 5............20 2..40 6... Reporting LO: 5 Level: Hard Solution: Optimal production plan: Selling price per unit.. Grinding minutes per unit.40 2...68 4 Product D $59.....60 $16..........60 $42.40 $34.10 8.107..... Direct materials per unit.....90 1.....80 4..... Variable manufacturing overhead per unit Variable selling cost per unit..50 $14. Which product makes the MOST profitable use of the grinding machines? A) Product A B) Product B C) Product C D) Product D Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making....80 11.. Direct labor per unit... Product A $69......93 1 .50 6....50 1.. Contribution margin per minute.10 1..60 $36..70 2..70 1..23 3 Product B $74.60 3.50 10.50 $44.80 $24... Contribution margin per unit....40 3..72 2 Product C $59..10 3..40 $24......90 16...

.......40 2..80 11... Grinding minutes per unit....68...50 $14.. ...80 $24...72 2 Product C $59......80 7........70 2..........20 2..... Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent. Product A $69.50 6.... Direct materials per unit.50 1..... Rank in terms of profitability.....108...70 1......50 $44.. Direct labor per unit..70 5. Contribution margin per minute.....93 1 The company should be willing to pay up to the contribution margin per minute for the marginal job... Contribution margin per unit.68 4 Product D $59......90 D) $11........60 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making......40 $24.. Reporting LO: 5 Level: Hard Solution: Optimal production plan: Selling price per unit...60 $42.................90 16..80 4...50 10..10 3...00 B) $14. which is $14.. Variable manufacturing overhead per unit Variable selling cost per unit......40 3..60 3....10 1.60 $36...68 C) $34...60 11.....40 $34...90 1.23 3 Product B $74..40 6..10 8..60 $16......) A) $0........

..........000 3....20 3...00 2.20 3..900 B) 17....00 2.10 Milling machine minutes per unit..50 $33.00 Monthly demand in units..... 2.000 Total minutes required 6.... How many minutes of milling machine time would be required to satisfy demand for all four products? A) 19..900 ... 2..000 C) 14... $22. A total of 17..000 1....70 $38.Use the following to answer questions 109-112: Crawshan Company makes four products in a single facility.000 Total time required for all products = 6....400 + 3.50 3..500 3..90 $3....20 $25... Reporting LO: 5 Level: Easy Solution: Demand on the milling machine: Product Product Product Product A B C D Milling machine minutes per unit.000 The milling machines are potentially the constraint in the production facility....500 + 3............ Data concerning these products appear below: Product Product Product Product A B C D Selling price per unit..00 Monthly demand in units...000 + 7.....50 $23.000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.50 $1.000 1. $38...50 3...70 Variable selling cost per unit.00 $2.. 109.80 $37.600 D) 7...10 $19... 3......000 minutes are available per month on these machines.000 3..000 7. ...60 Variable manufacturing cost per unit..000 1.....000 1.400 3.....000 = 19. $3.. 3.

70 3............80 $4. Which product makes the LEAST profitable use of the milling machines? A) Product A B) Product B C) Product C D) Product D Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..10 19..70 $38...90 3.50 23.00 $4.93 2 4 1 3 ..............20 25... Rank in terms of profitability.... Milling machine minutes per unit...50 $33....... . Variable manufacturing cost per unit..10 $13.20 3... Contribution margin per minute... Variable selling cost per unit...60 22... Product Product Product Product A B C D $38.80 $37.......110...40 $11.... Reporting LO: 5 Level: Medium Solution: Optimal production plan: Selling price per unit.80 3..00 2.50 1..19 $3.00 $11..... Contribution margin per unit......00 2......40 $3.50 3....40 $11.....

...70 $38.40 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making... Reporting LO: 5 Level: Medium ...60 22.40 $11..10 $13.) A) $11...... Product Product Product Product A B C D $38.80 3.00 2... Contribution margin per unit.. Up to how much should the company be willing to pay for one additional minute of milling machine time if the company has made the best use of the existing milling machine capacity? (Round off to the nearest whole cent.93 2 4 1 3 112...50 23.....40 $3......80 $4.80 D) $13..... Which product makes the MOST profitable use of the milling machines? A) Product A B) Product B C) Product C D) Product D Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making... Variable selling cost per unit......... ..50 $33.50 3...00 $11.. Milling machine minutes per unit...40 $11..50 1....10 19..80 $37.......19 $3...70 3..... Contribution margin per minute....00 $4.20 25. Reporting LO: 5 Level: Medium Solution: Optimal production plan: Selling price per unit......90 3...20 3.00 B) $0...00 2.111..... Variable manufacturing cost per unit..00 C) $3.... Rank in terms of profitability.

10 19.............9 2 7... Milling machine minutes per unit.4 3 $320..........50 $33......00 2.80 $37..20 25.40 $11..... Minutes on the constraint.... Contribution margin per minute.50 3....... Variable selling cost per unit......80.... Product Product Product Product A B C D $38.....40 $11.. .... Variable manufacturing cost per unit..4 0 $395......2 1 7...80 $4...... ..70 3...80 3.50 1.20 3... Data concerning those products appear below: TC $494..2 0 8.50 23. Use the following to answer questions 113-114: Bertucci Corporation makes three products that use the current constraint-a particular type of machine....00 $11. Contribution margin per unit.00 GL $449.....60 Selling price per unit. Variable cost per unit.10 $13..70 $38.19 $3.93 2 4 1 3 The company should be willing to pay up to the contribution margin per minute for the least profitable job.00 $4........Solution: Optimal production plan: Selling price per unit..00 2.. Rank in terms of profitability....60 22...... which is $3.6 8 $373.......10 NG $469.90 3....40 $3..

....6 8 373. rank the products in the order in which they should be emphasized.....60 2 Selling price per unit.............. Reporting LO: 5 Level: Easy Solution: TC $494... TC C) GL.... NG Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making........ Rank the products in order of their current profitability from most profitable to least profitable.... A) TC.10 $18.9 2 $ 95...60 $12............. TC 114..00 $12................40 3 GL $449......2 0 $ 99........76 per unit Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.....20 1 NG $469.... NG D) TC............... Up to how much should the company be willing to pay to acquire more of the constrained resource? A) $12. GL.................... NG... NG...20 per minute C) $129......22 per unit D) $95............... GL B) GL..... Contribution margin per unit.........113.40 per minute B) $18...... Variable cost per unit...7 6 7....... Resulting ranking of products: GL...... Contribution margin per unit of the constrained resource. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. NG.. Minutes on the constraint....... Reporting LO: 5 Level: Medium ...20 8.2 1 $129.2 2 7.4 0 395......... TC. In other words.......4 3 320. Ranking.

..4 3 320....7 6 7. Contribution margin per unit Minutes on the constraint. TC $494...Solution: Selling price per unit..40 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product TC.. By assumption....00 $12.......2 1 $129.2 0 $ 99.........2 0 8.9 2 $ 95..10 $18. Use the following to answer questions 115-116: The constraint at Pickrel Corporation is time on a particular machine.......20 1 NG $469. Variable cost per unit....8 8 6......4 0 395........2 2 7.60 2 The company should be willing to pay up to $12... The company makes three products that use this machine..4 0 $310..40 3 GL $449.70 JT $415. Data concerning those products appear below: VD $344...... ..8 5 $270...3 2 $91...... Minutes on the constraint...90 Selling price per unit...... Contribution margin per unit of the constrained resource Ranking...... Variable cost per unit.......1 8 5...6 8 373.96 1..60 $12...70 SM $119. the other products will already have been produced up to demand.

115. Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. A) JT, SM, VD B) JT, VD, SM C) VD, SM, JT D) SM, VD, JT Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy Solution: Selling price per unit......................... Variable cost per unit......................... Contribution margin per unit............. Time on the constraint (minutes)....... Contribution margin per unit of the constrained resource....................... Ranking.............................................. VD $344.8 5 270.1 8 $ 74.6 7 5.70 $13.10 3 JT $415.4 0 310.8 8 $104.5 2 6.70 $15.60 1 SM $119.3 2 91.9 6 $ 27.3 6 1.90 $14.40 2

116. Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of this constrained resource? A) $15.60 per minute B) $13.10 per minute C) $104.52 per unit D) $27.36 per unit Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium Solution: Selling price per unit......................... Variable cost per unit......................... Contribution margin per unit............. Time on the constraint (minutes)....... Contribution margin per unit of the constrained resource....................... Ranking.............................................. VD $344.8 5 270.1 8 $ 74.6 7 5.70 $13.10 3 JT $415.4 0 310.8 8 $104.5 2 6.70 $15.60 1 SM $119.3 2 91.9 6 $ 27.3 6 1.90 $14.40 2

Resulting ranking of products: JT, SM, VD The company should be willing to pay up to $13.10 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product VD. By assumption, the other products will already have been produced up to demand. Use the following to answer questions 117-118: The Anthony Company makes two products, X and Y, in a joint process. At the split-off point, 60,000 units of product X and 70,000 units of product Y are available each month. Monthly joint production costs total $200,000. Product X can be sold at the split-off point for $3.20 per unit. Product Y can be either sold at the split-off point for $2.60 per unit or it can be processed further and sold for $5.80 per unit. If product Y is processed further, additional processing costs of $2.30 per unit will be incurred.

117. If product Y is processed further, rather than being sold at the split-off point, the impact on monthly operating income should be: A) $137,000 decrease B) $245,000 increase C) $63,000 increase D) $244,000 increase Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Solution: Analysis of sell or process further: Final sales value after further processing............ Less sales value at split-off point........................ Incremental revenue from further processing..... Less cost of further processing........................... Profit (loss) from further processing................... Product Y $5.80 2.60 3.20 2.30 $ 0.90

Total increase in monthly operating income: 70,000 units × $0.90 = $63,000 118. What would the unit selling price of product Y need to be at the split-off point in order for Anthony to be economically indifferent between selling Y at split-off or processing Y further before sale? A) $3.80 B) $3.50 C) $3.20 D) $2.90 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Solution: For Anthony to be economically indifferent between selling Y at the split-off or processing Y further, the incremental revenue from further processing would need to be equal to the cost of further processing, or: $5.80 − Sales value at split-off point = $2.30 Sales value at split-off point = $3.50

....500 23.000 $ 2..000 ..... Each product may be sold at the splitoff point or processed further...................00 0 $40...Use the following to answer questions 119-121: Dodd Company makes two products from a common input....... Sales value at split-off point..000 D) $2. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? A) $22.... Sales value after further processing.. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point.......... Net advantage (disadvantage).000 20.00 0 $50.........500 Total $35...... Benefit of further processing. Reporting LO: 6 Level: Medium Solution: Sales value after further processing.........000 $30..... Joint processing costs up to the split-off point total $35.......000 $23....000 a year.....500 Product Y $21.900 $47........ Costs of further processing.500 22.....000 $16............000 C) $28.....40 0 $93.. Costs of further processing.. $14................000 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...00 0 119. Less: Sales value at split-off point..........500 $45...... Data concerning these products appear below: Product X Allocated joint processing costs....000 B) $8.....000 $20. Product X $45..

500 16...120........600 30. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? A) $45................500 23. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? A) $30... Product X $45...... Product Y $47..... Benefit of processing Product X further... Net advantage (disadvantage).... ...600 D) $600 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.....000 C) $22... Reporting LO: 6 Level: Medium Solution: Sales value after further processing...500 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making....000 D) $37...........500 $22...000 represents the minimum that the company should accept for Product X if it is sold at the split-off point.................... Less: Sales value at split-off point......000 Since the company could earn $22.. Costs of further processing. Benefit of further processing.. Reporting LO: 6 Level: Hard Solution: Sales value after further processing.... Costs of further processing.....500 B) $14.......900 30......600 C) $39.....000 $ 600 121. the $22.600 B) $9......000 in incremental benefits from processing Product X further...

$6 1 6 7 $12 8 60 13 13 2 8 11 4 $ 14 Cane Fiber $61 13 48 29 $19 Cane Juice $67 28 39 40 ($1) ..................... Crushing costs...... Two intermediate products..... emerge from the crushing process.................. How much profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses? A) ($4) B) ($114) C) $18 D) $14 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...... A batch of sugar cane costs $60 to buy from farmers and $13 to crush in the company's plant.. Processing fiber further... Refined sugar. Costs of further processing....... Less expenses: Purchase from farmers.......... Net profit from one batch.........Use the following to answer questions 122-124: Mae Refiners....... Revenue: Industrial fiber....................... processes sugar cane that it purchases from farmers.. cane fiber and cane juice................ Processing juice further........... The cane juice can be sold as is for $40 or processed further for $28 to make the end product molasses that is sold for $67.. Total expenses.................. Sugar cane is processed in batches.... Reporting LO: 6 Level: Easy Solution: Sales value after further processing...... The cane fiber can be sold as is for $29 or processed further for $13 to make the end product industrial fiber that is sold for $61....... Benefit of further processing. Less: Sales value at split-off point..... Inc...................... Total revenue............ Net advantage (disadvantage).... 122............

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Cane juice should be processed into molasses B) Cane fiber should be processed into industrial fiber....... Cane juice should NOT be processed into molasses D) Cane fiber should NOT be processed into industrial fiber.......... Costs of further processing..... Benefit of further processing....... How much profit (loss) does the company make by processing the intermediate product cane juice into molasses rather than selling it as is? A) ($74) B) ($14) C) ($1) D) ($38) Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.................. Benefit of further processing... Cane Juice $67 28 39 40 ($1) 124... Less: Sales value at split-off point................... Cane Fiber $61 13 48 29 $19 Cane Juice $67 28 39 40 ($1) .. Cane juice should be processed into molasses Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making........................................123.................................. Reporting LO: 6 Level: Easy Solution: Sales value after further processing. Net advantage (disadvantage).......... Which of the intermediate products should be processed further? A) Cane fiber should be processed into industrial fiber. Net advantage (disadvantage)..... Cane juice should NOT be processed into molasses C) Cane fiber should NOT be processed into industrial fiber.......... Reporting LO: 6 Level: Easy Solution: Sales value after further processing..... Costs of further processing... Less: Sales value at split-off point....

........ Less: Sales value at split-off point..... Total expenses........ Net advantage (disadvantage)..... Refined sugar........... Less expenses: Purchase from farmers.............. Two intermediate products..................... Total revenue....... The beet juice can be sold as is for $32 or processed further for $28 to make the end product refined sugar that is sold for $79................................. $3 9 7 9 $11 8 53 18 18 2 8 11 7 $ 1 Beet Fiber $39 18 21 25 ($4) Beet Juice $79 28 51 32 $19 ..... The beet fiber can be sold as is for $25 or processed further for $18 to make the end product industrial fiber that is sold for $39..... Processing juice further................................. Sugar beets are processed in batches................. Net profit from one batch...............Use the following to answer questions 125-127: Boney Corporation processes sugar beets that it purchases from farmers.............................. emerge from the crushing process..... Revenue: Industrial fiber.... A batch of sugar beets costs $53 to buy from farmers and $18 to crush in the company's plant. Crushing costs..... beet fiber and beet juice....... Costs of further processing....... Benefit of further processing........... Reporting LO: 6 Level: Easy Solution: Sales value after further processing...................................... How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar? A) $15 B) ($14) C) ($117) D) $1 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..................... 125............. Processing fiber further................

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..... Reporting LO: 6 Level: Easy Solution: Sales value after further processing........ How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is? A) $1 B) ($17) C) $19 D) ($52) Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making............. Which of the intermediate products should be processed further? A) beet fiber should be processed into industrial fiber............ Benefit of further processing....... Beet Fiber $39 18 21 25 ($4) Beet Juice $79 28 51 32 $19 ........ Reporting LO: 6 Level: Easy Solution: Sales value after further processing........... beet juice should be processed into refined sugar B) beet fiber should NOT be processed into industrial fiber.........126............................................ Less: Sales value at split-off point........... Costs of further processing.................. Beet Juice $79 28 51 32 $19 127..... beet juice should be processed into refined sugar D) beet fiber should be processed into industrial fiber........ beet juice should NOT be processed into refined sugar Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..... beet juice should NOT be processed into refined sugar C) beet fiber should NOT be processed into industrial fiber. Benefit of further processing.. Costs of further processing.......... Net advantage (disadvantage).. Net advantage (disadvantage). Less: Sales value at split-off point.......

Which costs are relevant and which are not relevant in the choice between these two alternatives? b. Alternative M Alternative N Differential $ 43...000 $30....... since costs differ between alternatives Relevant.000 $131.. Costs associated with the alternatives are listed below: Supplies costs.000 $56.. Required: a......000 7... since costs differ between alternatives Not relevant since the costs do not differ between alternatives Relevant...........000 $161..000 $ 53....000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making... What is the differential cost between the two alternatives? Ans: a....... Inspection costs. Assembly costs..000 43.. Supplies costs Assembly costs Power costs Inspection costs b.. Inspection costs.000 $53.000 $26.Essay Questions 128....000 $10.000 $43.......000 0 19..000 $26...000 $26. Reporting LO: 1 Level: Easy ...000 26...000 13... Power costs. Power costs.......000 Relevant....... Total.. Supplies costs.....000 26. since costs differ between alternatives Alternative M Alternative N $43..000 26.... Saalfrank Corporation is considering two alternatives that are code-named M and N.. Assembly costs.000 $19.000 56.

000 Alternative R Differential $ 65..000 11..000 $18..000 (1. Which costs are relevant and which are not relevant in the choice between these two alternatives? b...000 $10. Supplies costs...000 0 $156. since costs differ between alternatives Relevant. Assembly costs...000) 29....000 $ 0 29....000 $65.. Total. What is the differential cost between the two alternatives? Ans: a........... Reporting LO: 1 Level: Easy .......... Required: a..... Inspection costs....000 $30.. Supplies costs Power costs Inspection costs Assembly costs b. Assembly costs... Power costs.... Alternative Q $ 65.000 $146........ code-named Q and R..000 33.....000 33..000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..000 Not relevant since the costs do not differ between alternatives Relevant. Inspection costs. Costs associated with two alternatives.. since costs differ between alternatives Not relevant since the costs do not differ between alternatives Alternative Q Alternative R $65.000 $29...000 30....129.000 $33.000 $33.000 18...... being considered by Albiston Corporation are listed below: Supplies costs... Power costs.......000 $29..

.....000. Ans: Loss in contribution margin if Store B is closed: Store B loss............000 50....000 ($ 50..00 0 Store B $600.... The company allocates common fixed expenses to the stores on the basis of sales dollars........000 ($ 54.....000 (20.......000 ) ( 24.. Fixed costs avoided if Store B is closed (75% × $200........ The studies also show that closing Store B would result in a 10 percent decrease in sales in Store A..............000 420. consideration is being given to closing Store B. Contribution margin....................... Store segment margin....000 140........000 240.. Required: Compute the overall increase or decrease in the company's operating income if Store B is closed.......... Store A loss (10% × $240...... Traceable fixed expenses.......... one-fourth of its traceable fixed expenses will continue unchanged....000 $ 70...000) 150.. Variable expenses................... Reporting LO: 2 Level: Medium .......130.000 ) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.....000 100............. Net operating income. The most recent monthly income statement for Benner Stores is given below: Total $1..............000)..... ($180....000).......000 300...000 120..000 180...... Studies show that if Store B is closed.......000) ( 204............... Total lost contribution margin.000) 30.... Net disadvantage of closing Store B..000) Sales....000 200................. Due to its poor showing...00 0 $120........00 0 160...............000 20......00 0 580...000 Store A $400. Common fixed expenses..000 420.....

..........00 0 $132. Reporting LO: 2 Level: Medium 132.........00 0 $215.........000 of the fixed manufacturing expenses and $79... AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.... Required: What dangers are there in allocating common fixed costs to segments when involved in a decision to possibly drop a segment such as a product or a division? Ans: A segment such as a product or a division may show a net loss only because of the allocated common fixed cost.. For example...... common fixed corporate costs are often allocated to divisions and appear as part of the divisional performance reports..... it may be beneficial to retain the segment if it has positive effects on other segments. Fixed manufacturing expenses.... However............. a “losing” product may be important in luring customers into a store where they will buy other products.... What is the net operating income earned by product M12C according to the company's accounting system? Show your work! b...131. What would be the effect on the company's overall net operating income of ...... Required: a.... Fixed selling and administrative expenses...... Companies often allocate common fixed costs among segments. Further investigation has revealed that $137............00 0 All fixed expenses of the company are fully allocated to products in the company's accounting system...000 of the fixed selling and administrative expenses are avoidable if product M12C is discontinued... The management of Schmader Corporation is considering dropping product M12C........... Variable expenses..00 0 $242. Data from the company's accounting system appear below: Sales. For example..... $550..... And even in cases where a segment does not cover its own costs.. if the segment is dropped................ the common fixed expense will continue. A segment should be dropped only if its contribution margin does not cover its own avoidable fixed costs..............

dropping product M12C? Should the product be dropped? Show your work! .

........000) a................000 53........ Fixed expenses: Fixed manufacturing expenses..... Reporting LO: 2 Level: Easy 133..000 215.................. What would be the effect on the company's overall net operating income of ...00 0 $75..000 ($92...000 216............00 0 $156..000 ) 242......000 79.00 0 $116. $340.. the product’s net operating loss is $39..........000 of the fixed selling and administrative expenses are avoidable if product D14E is discontinued............. Total fixed expenses... Contribution margin........... Fixed selling and administrative expenses....... Variable expenses....... Net operating income would decline by $92.000) Drop the Product $ 0 0 0 78.000) Difference ($550.... Further investigation has revealed that $72..... Variable expenses.......Ans: Keep the Product Sales.000...000 ( 308.....000 131...000 132.....000) 137... Therefore........ Suire Corporation is considering dropping product D14E........000 of the fixed manufacturing expenses and $48............... b...000 242........... Fixed selling and administrative expenses.. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making............ the product should not be dropped....000 if product M12C were dropped............. $550...... According to the company's accounting system..........000 All fixed expenses of the company are fully allocated to products in the company's accounting system.............. Required: a........................ Data from the company's accounting system appear below: Sales.............000 ($131. Fixed manufacturing expenses............ According to the company’s accounting system.. what is the net operating income earned by product D14E? Show your work! b.. Net operating income (loss)..000 347.....000 ($ 39..000 308...

dropping product D14E? Should the product be dropped? Show your work! .

.000 ($ 7........00 0 $374...........00 0 $209....... the product’s net operating loss is $7........ Variable expenses...Ans: Keep the Product Sales... Fixed selling and administrative expenses............ According to the company’s accounting system...... b.......000 ($ 64. Further investigation has revealed that $173.........................000 of the fixed manufacturing expenses and $150.000 191............. $340......000 71..........000 27.......000) 44. Data from the company's accounting system appear below: Sales. Fixed selling and administrative expenses...........000 of the fixed selling and administrative expenses are avoidable if product B90D is discontinued.....000 ( 184. The management of Wengel Corporation is considering dropping product B90D.....000 184...000 156............00 0 All fixed expenses of the company are fully allocated to products in the company's accounting system..... Required: What would be the effect on the company's overall net operating income if product B90D were dropped? Should the product be dropped? Show your work! ..... Net operating income (loss)..........000 ) 156.... Variable expenses.......000) 72................ Total fixed expenses............000) Drop the Product $ 0 0 0 Difference ($340..................000 ($71.000 48................. Therefore.000 120................ $720............................... Contribution margin.....000 if product D14E were dropped..000 116..... Fixed manufacturing expenses......... Reporting LO: 2 Level: Easy 134......00 0 $245... the product should not be dropped..000 75.. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making... Fixed expenses: Fixed manufacturing expenses....000. Net operating income would decline by $64......000) a.

the product should not be dropped.000 ($131.000 209.................000 ($108.. Total fixed expenses.000 ) 374..000 323............ Therefore...... $720......... Reporting LO: 2 Level: Easy .............Ans: Keep the Product Sales...000) Difference ($720...000 150............ Contribution margin....000 ( 346........ Fixed selling and administrative expenses.......000 346. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...000) 173.................000 374...000 if product B90D were dropped............000 131.000 245.......000) Drop the Product $ 0 0 0 72. Variable expenses....................... Net operating income (loss).... Fixed expenses: Fixed manufacturing expenses..................000 454..000) Net operating income would decline by $23.....000 ($ 23.....000 59.

. If the part were purchased from the outside supplier........ the facilities now being used to make the part could be used to make more units of a product that is in high demand.60 $60.00 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier..... However.....10 4....... Variable manufacturing overhead. Foubert Company makes 40.000 per year. all of the direct labor cost of the part would be avoided....80 a unit.............. This fixed manufacturing overhead cost would be applied to the company's remaining products...................80 is relevant in the decision of whether to make or buy the part? b... Required: a.. Direct labor. Fixed manufacturing overhead. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40............... $17.8 0 An outside supplier has offered to sell the company all of these parts it needs for $51.......... Unit product cost..... $13............ If the company accepts this offer.......... How much of the unit product cost of $60... What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? c.30 24........000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials...... The additional contribution margin on this other product would be $268..135...000 units required each year? ....8 0 18..

.........000) ($ 52..Ans: a... b.10 4.072.60 $43.......... c......... $1. Cost of purchasing the part.......752.............................................020..000 $50...... Total benefit......................................... Fixed manufacturing overhead. Variable manufacturing overhead...........................00 0 40. Additional contribution margin..00 0 268..........000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making............ Direct labor.........8 0 18.. Relevant manufacturing cost................000 ( 2............... Maximum acceptable purchase price: Manufacturing cost savings..000 268... Net advantage (disadvantage): Manufacturing cost savings....... Reporting LO: 3 Level: Hard .30 7............50 $13........ Net advantage (disadvantage)........... Additional contribution margin................... Benefit per unit......................8 0 $1.................................................. Number of units...00 0 $2............752........... Relevant cost per unit: Direct materials.............................

. Fixed manufacturing overhead....136.. $0.......1 5 0....000 units per year of a part called a B345 gasket for use in one of its products.........6 2 An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires.................... 25% of the above fixed manufacturing overhead costs could be avoided. Direct labor........ Required: a.. Data concerning the unit production costs of the B345 gasket follow: Direct materials.... Variable manufacturing overhead.. Kirsten Corporation makes 100.. If the outside supplier offers to sell the gaskets for $0. should Kirsten Corporation accept the offer? Fully support your answer with appropriate calculations..... What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B345 gaskets? ................13 0. Total manufacturing cost per unit..... Assume that Kirsten Corporation could use the facilities presently devoted to production of the B345 gaskets to expand production of another product that would yield an additional contribution margin of $10. Assume Kirsten Corporation has no alternative use for the facilities presently devoted to production of the B345 gaskets.46 each........... If Kirsten Corporation decided to discontinue making the B345 gaskets....000 annually.....24 $0.......10 0.. b.

.......24 The company should make the part rather than buy it from the outside supplier since it costs $0...10 $0.. Direct labor....... b.............Ans: a.. Opportunity cost per unit ($10.........10 0...54 since that is the cost to the company of making the part itself when the opportunity cost is included: Total cost of making the part internally.............................. Fixed manufacturing overhead*.4 6 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...02 less under that alternative...... Total......................... The maximum acceptable price is $0. Total cost...... Reporting LO: 3 Level: Hard ......................000 ÷ 100..........................5 4 $0..... The analysis of the alternatives follows below: Make Purchase cost....... *25% × $0............44 $0..000)..15 0........................4 6 Buy $0..4 4 0..13 0........ Variable manufacturing overhead......... $0..06 $0................................... Direct materials.

........... The company is presently producing Part X internally at a total cost of $100....................................................00 0 ...000 10.000 = $15.............000...00 0 30........ Variable manufacturing overhead........000 $100. Fixed manufacturing overhead.000 units of Part X each year as a component in the assembly of one of its products............... If McGraw Company stops producing the part internally.. Direct labor.................. Fixed manufacturing overhead*... Ans: Cost of Making Outside purchase....00 0 Cost of Buying $90................................................. Direct labor............. computed as follows: Direct materials.....................000 15..00 0 $90...000 30.... *1/3 × $45..... Total cost.... $ 15.. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making................. one-third of the fixed manufacturing overhead would be eliminated..................000 45.........000 Therefore.............. Direct materials...00 0 An outside supplier has offered to provide Part X at a price of $18 per unit.......137....000 $70. Total costs... the annual advantage to make the parts is $20. Variable manufacturing overhead.. McGraw Company uses 5..000 10.000...... Required: Prepare an analysis showing the annual dollar advantage or disadvantage of accepting the outside supplier's offer.......... Reporting LO: 3 Level: Easy $15..

138. Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data: Variable manufacturing overhead........ Fixed manufacturing overhead............ Direct labor-hours................................ $225,00 0 $630,00 0 45,000

Component P0 is used in one of the company’s products. The unit cost of the component according to the company’s cost accounting system is determined as follows: Direct materials.......................................... Direct labor................................................ Manufacturing overhead applied............... Unit product cost........................................ $21.0 0 40.80 32.30 $94.1 0

An outside supplier has offered to supply component P0 for $78 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Gottshall chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why?

Ans: Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The variable portion of the manufacturing overhead rate is computed as follows: Variable portion of the predetermined overhead rate = Variable manufacturing overhead ÷ Direct labor-hours = $225,000 ÷ 45,000 DLHs = $5.00 per DLH The direct-labor hours per unit for the special order can be determined as follows: Direct labor-hours = Manufacturing overhead applied ÷ Predetermined overhead rate = $32.30 ÷ $19.00 per DLH = 1.70 DLHs Consequently, the variable manufacturing overhead for the special order would be: Variable manufacturing overhead = Variable portion of the predetermined overhead rate × Direct labor-hours = $5.00 per DLH × 1.70 DLHs = $8.50 Putting this all together: Direct materials.......................................... Direct labor................................................ Variable manufacturing overhead.............. Total variable cost...................................... $21.0 0 40.80 8.5 0 $70.3 0

Since the outside supplier has offered to sell the component for $78.00 each, but it only costs the company $70.30 to make the component internally, this is not a financially attractive offer. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Source: CIMA, adapted

139. Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 8,000 units of the part that are needed every year. Per Unit Direct materials.......................................... $8.10 Direct labor................................................ $4.40 Variable overhead...................................... $8.60 Supervisor’s salary..................................... $3.20 Depreciation of special equipment............. $2.60 Allocated general overhead........................ $1.30 An outside supplier has offered to make the part and sell it to the company for $27.60 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $3,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part Q89 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose?

.... ................. Opportunity cost.....000 units @ $8... Direct labor (8... Variable overhead (8..800 b........000 units @ $4.40 per unit).....400 if the offer from the supplier were accepted...............40 0 Buy $220.. Make $ 64..... the company should continue to make the part itself.......000 units @ $8...... net operating income would decline by $7.000 units @ $3.. Allocated general overhead (avoidable only)....10 per unit).... The total cost of the make alternative is lower by $7............ Thus.. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. Direct materials (8...800 16.. Reporting LO: 3 Level: Medium .................000 ( $197............. Total cost.....000) $204.......60 per unit)........60 per unit).. Therefore.800 35.......... Outside purchase price (8.20 per unit) Depreciation of special equipment (not relevant)................200 68.000 units @ $27................. Supervisor’s salary (8............800 25......600 0 3...Ans: a..400......

.600 if the offer from the supplier were accepted..90 0 18..000 units @ $2.70 per unit)...000 of these allocated general overhead costs would be avoided... If the outside supplier's offer were accepted....... If this offer is accepted. Allocated general overhead (avoidable only).... Per Unit Direct materials...... including direct labor. $1.. The allocated general overhead represents fixed costs of the entire company........... Supervisor’s salary (7.. only $6...... $3..000 units of the part that are needed every year....................... Depreciation of special equipment (not relevant)...600....... The total cost of the make alternative is lower by $27.......80 0 b.......30 Supervisor’s salary....80 0 $149.......70 Variable overhead. The company's Accounting Department reports the following costs of producing the 7........80 Allocated general overhead.70 per unit)..000 Buy $149.000 units @ $8... $1..... Required: a. Variable overhead (7.............90 Depreciation of special equipment........... Direct labor (7........000 units @ $3............ Prepare a report that shows the effect on the company's total net operating income of buying part U67 from the supplier rather than continuing to make it inside the company....... can be avoided..................900 23.................300 0 6.....40 per unit) Total cost....90 per unit)... net operating income would decline by $27.... The special equipment used to make the part was purchased many years ago and has no salvage value or other use.. Direct materials (7.100 13.. Thus. Therefore. $8............... the company should continue to make the part itself..30 per unit).........50 An outside supplier has offered to make the part and sell it to the company for $21...... Which alternative should the company choose? Ans: a............ Part U67 is used in one of Broce Corporation's products.......000 units @ $21......... $5...40 each...000 units @ $1............. the supervisor's salary and all of the variable costs....70 Direct labor......................20 0 Make $ 60.... $2........... b..... .................. $122......... Outside purchase price (7.....140......

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. Reporting LO: 3 Level: Easy .

.. Juline Company produces a single product.......6 0 $5... Direct labor is a variable cost in this company.00 less per unit on this order than on normal sales...60 $9........60 per unit..................141.............. By how much would this special order increase (decrease) the company's net operating income for the month? b...........30 $1........... Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $81.000 units to be delivered this month at a special discounted price.................. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs....000 units per month is as follows: Direct materials.......100 units for regular customers... Fixed manufacturing overhead.... The cost of producing and selling a single unit of this product at the company's normal activity level of 40.10 The normal selling price of the product is $91.................. The variable selling and administrative expense would be $1........... An order has been received from an overseas customer for 3.. Required: a................. Fixed selling and administrative expense...... $53....... Direct labor.... Variable manufacturing overhead........... Variable selling and administrative expense....... What would be the minimum acceptable price per unit for the special order? .. Suppose the company is already operating at capacity when the special order is received from the overseas customer... Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 2.90 per unit.2 0 $1.... What would be the opportunity cost of each unit delivered to the overseas customer? c..40 $13......

............................ Direct labor.......... Minimum acceptable price on special order..000 $63....69 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making..... Selling price for special order.. Variable selling & administrative expense.......00 3.....................................60 $61....... Number of units in special order. 0 c.9 0 $61.....6 0 5...........90 $29........... Unit contribution margin on special order................................. Reporting LO: 4 Level: Hard ............ $53..........................700 $245.......... 0 Variable cost per unit on normal sales..............90 1................... Lost contribution margin displaced sales....7 Unit contribution margin on normal sales.........70 2... Displaced normal sales.......000 $81....................... Variable cost per unit on normal sales: Direct materials....... Variable cost per unit on special order....... The opportunity cost is just the contribution margin on normal sales: $91... Number of units in special order....30 1.........6 Normal selling price per unit...........................07 0 3................................40 1...... Variable cost per unit on special order............. Variable cost per unit on special order: Normal variable cost per unit...... Variable cost per unit on normal sales............ Reduction in variable selling and administrative expense.....00 $60........ $29...........90 60.................Ans: b.100 $ 62..90 $81............. Total variable cost on special order............................................... Minimum acceptable price: Unit contribution margin on normal sales...... 61....90 21..... Variable manufacturing overhead......00 0 b............................ Increase (decrease) in net operating income......................370 182..................

. A special order has been received from a distributor who wants to purchase 3...000 units @ $12)... $12 per unit $90...... Fixed (annual cost).... the order should be accepted............. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. Net advantage of accepting the order.................00 0 $3 per unit $60.............000 ....000 units @ $20). Required: Determine whether the company should accept the special order.. Reporting LO: 4 Level: Medium $60........ The costs associated with production and sale of the company's product are given below: Manufacturing costs: Variable...000 units.......... Fixed (annual cost)............ Sales commissions on the special order would be reduced by one-third........000 units annually at a selling price of $28 each... Selling and administrative costs: Variable (sales commissions).. Regular sales would not be affected by this order and the order could be filled without any impact on total fixed costs.....................000) $ 18.................000) ( 6.....00 0 The company presently is selling 12...... Yes......000 ( 36. Variable selling (3........... Ans: Incremental revenues (3.142........... Marsdon Company has an annual production capacity of 15...... Less incremental costs: Variable manufacturing (3.000 units at a special price of $20 each...............000 units @ $2).

......00 0 $380...... Manufacturing overhead applied..... Unit product cost.. Required: If the special order were accepted. and total fixed manufacturing overhead would not be affected by the special order..... The company's predetermined overhead rate is $28 per direct labor-hour...............00 0 20....... Assume that direct labor is a variable cost... $ 67.......... The normal selling price of product O96S is $149 and the unit product cost is determined as follows: Direct materials............. Fixed manufacturing overhead is not relevant since it would not be affected by the decision........................ The variable portion of the manufacturing overhead rate is computed as follows: Variable portion of the predetermined overhead rate = Variable manufacturing overhead ÷ Direct labor-hours = $180..... direct labor..00 32.......00 per direct labor-hour ...... The company has ample excess capacity to produce the additional units...8 0 If the special order were accepted........ variable manufacturing overhead is really driven by direct labor-hours....00 44.......143.... Mcniff Corporation makes a range of products............. Direct labor-hours.....................000 direct labor-hours = $9........000 ÷ 20..........000 Management is considering a special order for 200 units of product O96S at $122 each.. which was calculated using the following budgeted data: Variable manufacturing overhead. and variable manufacturing overhead are relevant in this decision. Direct labor.... Fixed manufacturing overhead...... normal sales of this and other products would not be affected...80 $143... $180.................... what would be the impact on the company's overall profit? Ans: Direct materials.....

.............00 per direct labor-hour × 1.....................................0 0 67......... Total variable cost........ Reporting LO: 4 Level: Hard Source: CIMA........................ the variable manufacturing overhead for the special order would be: Variable manufacturing overhead = Variable portion of the predetermined overhead rate × Direct labor-hours = $9......720 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making........... Variable manufacturing overhead.............00 14.............................00 32...... = Total increase in profit from the special order............ Contribution margin. × Units ordered.................................................40 $ 8..........................................60 direct labor-hours Consequently....00 per direct labor-hour = 1................................................80 ÷ $28..40 Putting this all together: Special order price.........................................60 200 $1..........40 113... Variable costs: Direct materials... adapted ............The direct-labor hours per unit for the special order can be determined as follows: Direct labor-hours = Manufacturing overhead applied ÷ Predetermined overhead rate = $44....... Direct labor.....60 direct labor-hours = $14............. $122................

....144..000 medals each month........ Kneller Co........ Direct labor............60 0 $24........................ Cost data for the current level of production are shown below: Variable costs: Direct materials........00 0 $78..00 0 $153.............. manufactures and sells medals for winners of athletic and other events..... Direct materials............. Current monthly production. Its manufacturing plant has the capacity to produce 12... Fixed costs: Manufacturing................... To make the decision...... no variable selling and administrative costs would be incurred................ $480......... we must compute the average direct materials and direct labor cost per unit................................. Required: Should the company accept this special order? Why? Ans: Only the direct materials and direct labor costs are relevant in this decision.. This order would also have no effect on fixed costs.............600 $66 Since price on the special order is $89 per medal and the relevant cost is only $66........... The company normally charges $99 per medal.... Selling and administrative..................... the special order should be accepted........00 0 153... Selling and administrative.....960 $144......600 medals................ ........................ Therefore........ For this particular order...............600 $633...60 0 9..... $480.... AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making......720 The company has just received a special one-time order for 500 medals at $89 each... the company would earn a profit of $23 per medal.......... Total........ Average direct materials and direct labor cost per unit.. Direct labor............ current monthly production is 9.......... Reporting LO: 4 Level: Medium ...........

adapted .Source: CMA.

...........145.............. Reporting LO: 4 Level: Medium ....... AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making................ the company would suffer a loss of $6 per trophy............... The company normally charges $103 per trophy. Anglen Co......400 $54 Because price on the special order is $48 per trophy and the relevant cost is $54........................... Selling and administrative...880 The company has just received a special one-time order for 900 trophies at $48 each...... Its manufacturing plant has the capacity to produce 18......60 0 14....... ................... the special order should not be accepted............. This order would also have no effect on fixed costs........................ Direct labor......... For this particular order...80 0 $15... Direct labor..... Fixed costs: Manufacturing..... no variable selling and administrative costs would be incurred...840 $404......000 trophies each month......... Therefore.........800 $777......80 0 $316....... Selling and administrative... $460............... Cost data for the current level of production are shown below: Variable costs: Direct materials............... Total......... Current monthly production..... manufactures and sells trophies for winners of athletic and other events.. Average direct materials and direct labor cost per unit.. Required: Should the company accept this special order? Why? Ans: Only the direct materials and direct labor costs are relevant in this decision... current monthly production is 14................64 0 $74............80 0 316................... To make the decision...........400 trophies........ $460.............. Direct materials.................... we must compute the average direct materials and direct labor cost per unit...

Source: CMA. adapted .

.........40 per unit) Modifications (6. Total incremental cost....000 in special molds that would have no salvage value..........0 0 3...800 8..... The customer would like some modifications made to product K19 that would increase the variable costs by $4......30 per unit). Fixed manufacturing overhead...146......45 each.................................80 0 90.400 23...000 units @ $3...600 $ 20..90 per unit)..10 $22.... Variable manufacturing overhead (6..... The normal unit product cost of product K19 is computed as follows: Direct materials..80 per unit)....40 2......... Direct labor (6.200 ................ Direct labor. Show your work! Ans: Incremental revenue (6....000 units @ $15.............. Less incremental costs: Direct materials (6.00 per unit)........000 units @ $1. The company has ample spare capacity for producing the special order............90 per unit and that would require a one-time investment of $23.000 units of product K19 for $32............. $15.. Unit product cost.... Reporting LO: 4 Level: Easy $193......... The normal selling price of this product is $33...80 1.......................................................... but the units would need to be modified slightly for the customer. This special order would have no effect on the company's other sales......................................................000 units @ $32..... Required: Determine the effect on the company's total net operating income of accepting the special order.................. Incremental net operating income....................30 each...............000 units @ $4.000 22........... Special molds....... Wehrs Corporation has received a request for a special order of 6.................. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making........3 0 Direct labor is a variable cost......................000 173....400 29..... The special order would have no effect on the company's total fixed manufacturing overhead costs......... Variable manufacturing overhead............................................................

. Show your work! Ans: Incremental revenue (3............... This special order would have no effect on the company's other sales...............00 7... The company has ample spare capacity for producing the special order.......................... Fixed manufacturing overhead..... $14............ Direct labor (3......80 per unit)....... The customer would like some modifications made to product H60 that would increase the variable costs by $3.... Reporting LO: 4 Level: Easy .................70 per unit). A customer has asked Lalka Corporation to supply 3..........000 units @ $1.... The normal unit product cost of product H60 is computed as follows: Direct materials.. for $34.........80 per unit and that would require a one-time investment of $24..........100 3.........9 0 $30..... Less incremental costs: Direct materials (3. with some modifications.......00 per unit)...........70 per unit)...000 units @ $14..........30 per unit)................... Required: Determine the effect on the company's total net operating income of accepting the special order......... Variable manufacturing overhead....000 11............. Total incremental cost...000 units @ $7. Special molds......100 44...............30 7.......000 104.000 units of product H60............35 each.........400 24............... The special order would have no effect on the company's total fixed manufacturing overhead costs..........................................................70 each..........000 in special molds that would have no salvage value..... Variable manufacturing overhead (3.....7 0 1....147..........000 units @ $34.... Modifications (3.9 0 Direct labor is a variable cost..400 ($ 300) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...... $104.................... Direct labor.......... Unit product cost..........900 21......... Incremental net operating income....000 units @ $3...... The normal selling price of this product is $46...........

Variable manufacturing overhead..............40 Direct materials. Direct labor.70 1.. Monthly demand in units..60 $71..... Additional data concerning these products are listed below.....70 21.000 Mixing minutes per unit. Variable selling cost per unit....800 minutes are available per month on these machines...80 27...00 $60.............80 3.......90 $3. Product A Product B Product C 2.....80 1..50 1... A total of 10.......000 3..........50 $73.) .10 15.. Fixed manufacturing overhead..00 $2..000 3.60 13.. The mixing machines are potentially the constraint in the production facility............ How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit..50 $87........ Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent....30 17................90 $83.70 2.30 $1..... These products have the following unit product costs: Product A Product B Product C $24....30 $66... Unit product cost...) c.. Gloddy Company makes three products in a single facility.... How many minutes of mixing machine time would be required to satisfy demand for all four products? b........50 2..........10 19.. Required: a...... Selling price per unit.....90 $25....... Direct labor is a variable cost in this company...............148........70 $26.....

000 3......60 $21...40 3 360 $25...10 3........800 Total time required for all products: 12..90 $47..70 3......50 2.. Demand on the mixing machine: Mixing minutes per unit....30 $43..........90 13... AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making....... Direct materials.......13 2 3. Variable manufacturing overhead...........Ans: a......000 $26....60 1...... Product A Product B Product C 2....... Direct labor..... Contribution margin per unit.80 $49.400 b....500 5......50 1.20 $33......70 $23. Total minutes required..80 1....50 $11...100 4................... Variable selling cost per unit....40...........30 2...... Optimal production. Contribution margin per minute..90 $83....50 2....40 1....... Rank in terms of profitability........70 1......... Mixing minutes per unit...00 $28...........10 2...60 15........ Monthly demand in units...........50 $87....00 $24...... Product A Product B Product C $71..50 $40............... which is $11... Optimal production plan: Selling price per unit..76 1 3...70 17...000 3.... Reporting LO: 5 Level: Hard .. The company should be willing to pay up to the contribution margin per minute for the marginal job. Total variable cost per unit.000 c.80 1..000 2...........

.......) c... Variable selling cost per unit.80 $33........... Data concerning these products follow: Product A Product B Product C $64..10 $1..........50 4.50 3.10 3....00 $3. The mixing machines are potentially the constraint in the production facility.50 $18..000 4...... How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.. Monthly demand in units....00 $1..149..............90 $2.. How many minutes of mixing machine time would be required to satisfy demand for all four products? b........) ..40 $1.....000 2....... Required: a.400 minutes are available per month on these machines..... Mixing minutes per unit... Direct materials........................50 3...50 $64..80 $63..90 $14.. A total of 32..30 $30...........000 Selling price per unit....... Variable manufacturing overhead. Holzmeyer Company makes three products in a single facility...... Direct labor...... Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.30 $20...... Direct labor is a variable cost in this company.60 $1..40 $26....

.... Demand on the mixing machine: Mixing minutes per unit...40 1 4...40 1. Mixing minutes per unit...........90 30....000 Product A Product B Product C 3.20 3..40 $53.. Direct materials...50 $4....30 $10..........20 0 c....50 4...Ans: a....000 4...000 Total 34........ which is $2........ Product A Product B Product C $ 64...... Optimal production..... Variable selling cost per unit.000 2.... Reporting LO: 5 Level: Medium .... b.. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.....20 $11.50 33....50 3......90 3...00 2.50 $ 64.......50 $2.00 $54. Variable manufacturing overhead......40 3..000 $18........... Total minutes required. Contribution margin per unit.000 14. Rank in terms of profitability.................80 1....... Direct labor.. Optimal production plan: Selling price per unit..486 $14........91 3 3.10 3..10 1...90 $15...10 $3..60 1........200 14.80 $ 63.............. The company should be willing to pay up to the contribution margin per minute for the marginal job....000 6......30 $20. Total variable cost per unit....91......... Monthly demand in units.50 $47........30 26...74 2 2..60 3. Contribution margin per minute...........

Variable costs..........00 Product H $70 55 $15 5 $3... Product G should be emphasized because it has the greatest contribution margin per unit of the scarce resource.......... b....00 Selling price... produces three products......... Product F $50 40 $10 4 $2...... which in this case is milling machine time... Variable costs...... up to how much should the company be willing to pay for an additional hour of milling machine time? Ans: a........ Milling machine time (minutes)........... which product should be emphasized? Support your answer with appropriate calculations........ The milling machine is the constraint......... Garson.................. The product to emphasize can be determined by computing the contribution margin per unit of the scarce resource..............400 minutes of milling machine time available this week.......... Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above.50 Product G $80 50 $30 2 $15.... Data concerning the selling prices and unit costs of the three products appear below: Product F $50 $40 $15 4 Product G $80 $50 $20 2 Product H $70 $55 $12 5 Selling price.......... Demand for the three products exceeds the company's productive capacity.. . Given the milling machine constraint.150........... Inc.......... the time would be worth 60 minutes per hour × $15 per minute = $900 per hour.. If additional milling machine time would be used to produce more of Product G..... with only 2....... Fixed costs............... Required: a........ Contribution margin.......... Milling machine time (minutes)..... b......... Fixed costs are applied to the products on the basis of direct labor hours.. Contribution margin per minute.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making. Reporting LO: 5 Level: Hard .

9 2 3.................86 $ 49. Up to how much should the company be willing to pay to acquire more of the constrained resource? Ans: a..0 7 176.70 $13. the other products will already have been produced up to demand...87 1....... XK...... By assumption.....60 1 LQ $226............. Selling price per unit.. rank the products in the order in which they should be emphasized. which is a particular type of machine.92 $ 50..60 Selling price per unit................. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product... Show your work! b.... The company should be willing to pay up to $13. LQ b......30 3 XK $228........21 3............ Required: a.. Variable cost per unit.0 7 $176. Reporting LO: 5 Level: Easy .70 XK $228.8 6 3...... Time on the constraint (minutes).. In other words........... Brissett Corporation makes three products that use the current constraint.. Data concerning those products appear below: GK $119.........5 1 $89.90 $15...... Contribution margin per unit.90 LQ $226.6 4 1........ GK $119....5 1 89.......... Time on the constraint (minutes).... AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making.90 2 Resulting ranking of products: GK...... Ranking.87 $ 29.. Variable cost per unit......30 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product LQ...151.....04 3.. Rank the products in order of their current profitability from the most profitable to the least profitable......9 6 178.9 6 $178..... Contribution margin per unit of the constrained resource.....60 $13.

.....64 2...5 9 331... Resulting ranking of products: AM...90 $13... is an expensive milling machine... Variable cost per unit.... Variable cost per unit.. Time on the constraint (minutes)............ Show your work! b...5 9 $331. The company should be willing to pay up to $12..40 $16.. rank the products in the order in which they should be emphasized...2 0 6..30 QX $421.......................5 0 3 QX $421........6 5 62.50 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product VY.............2 8 2.... Contribution margin per unit.. Reporting LO: 5 Level: Easy VY $78.... Up to how much should the company be willing to pay to acquire more of the constrained resource? Ans: a...20 $ 90... Required: a..60 1 ...... The three products listed below use this constrained resource.............. Rank the products in order of their current profitability from the most profitable to the least profitable.....9 2 $113.. VY b.. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making... Ranking...............40 $13...90 AM $145......4 0 1.6 5 $62......28 $ 32.....9 2 113.............2 5 1......... Contribution margin per unit of the constrained resource.............10 2 AM $145....30 $12..... VY $78. enough of the other two products will already have been produced to fully satisfy demand..... QX.. Selling price per unit.......... Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product....152.. Time on the constraint (minutes)...39 6. By assumption......40 Selling price per unit.. In other words........... The constraint at Dreyfus Inc.

...100 Product Y $17........000 $15... Costs of further processing.. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? c......200) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making...100 28.. & d....... c. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d.......600 a year........... Benefit of further processing.. What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point? Ans: a. Sales value at split-off point.. Iaria Corporation makes two products from a common input.. Sales value after further processing..600 $28.000 $20...400 31. Each product may be sold at the split-off point or processed further...500 22....500 Allocated joint processing costs.... Joint processing costs up to the split-off point total $33.. & b......... Product X $31...........700 $33....153....500 Product Y $14..........100 Product Y $33.000 $ 3.... Minimum selling price at split-off..800 Product X $53.... Required: a..500 15..000 ($ 2.... Reporting LO: 6 Level: Hard ... Sales value after further processing.... Net advantage (disadvantage)......... Costs of further processing... The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? b...000 $22.. Data concerning these products appear below: Product X $19..800 20...700 17............. Less: Sales value at split-off point.......400 $53.

.. Ans: Product D $534...000 $135..000 ($ 35.. Prosner Corp.000 234....000 $360.. manufactures three products from a common input in a joint processing operation.. $275.......... $195.....000 195.......000 210......000 275. Joint processing costs up to the split-off point total $500.. Required: Which product or products should be sold at the split-off point..... Product F should be sold at the split-off point without any further processing. and which product or products should be processed further? Show computations...000 165..........000 per year..000 300......000) Product G $360...000 $ 30..... Sales value at split-off..000 175.. Further processing costs.000 125... Each product may be sold at the split-off point or processed further..000 Product F $450.....000 $109. Incremental income (loss)..000 Product F.. Incremental revenue...000 The “Further Processing Costs” consist of variable and avoidable fixed costs...000 $210. The additional processing costs and sales value after further processing for each product (on an annual basis) are: Further Sales Value Sales Value Processing After Further at Split-Off Costs Processing Product D.....000 Sales value after further processing... AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making... Reporting LO: 6 Level: Medium ........000 $534.000 $125.000 Product G.. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point.000 $450..... $300........ Products D and G should be sold after further processing beyond the split-off point...000 135..154.......

.......... Required: a.............. Should each of the intermediate products....... .155............ Incremental revenue from further processing.... The potatoes are then peeled..................... The peels produced from a batch can be sold as is for animal feed for $29 or processed further for $15 to make the cocktail of nutrients that are sold for $41.......... Profit (loss)..... Less sales value at split-off point. peels and depeeled spuds.. Profit (loss) from further processing...... A batch of potatoes costs $63 to buy from farmers and $12 to peel in the company's plant................ producing two intermediate products-peels and depeeled spuds.... The peels can then be processed further to make a cocktail of organic nutrients... . Analysis of the profitability of the overall operation: Combined final sales value ($41 + $77).......... b...... Cost of further processing depeeled spuds...... ............ Cost of further processing peels........ Assuming that no other costs are involved in processing potatoes or in selling products............ be sold as is or processed further into an end product? Explain...... Cost of peeling.............. Ans: a.......... AACSB: Analytic AICPA BB: Critical Thinking ....... Analysis of sell or process further: Cocktail of Organic Nutrients $41 29 12 15 ($ 3) Don’t process further Frozen French Fries $77 40 37 22 $15 Process further $6 3 12 15 22 $11 8 112 $ 6 Final sales value after further processing......... Less cost of further processing.. The depeeled spuds can be sold as is for $40 or processed further for $22 to make frozen french fries that are sold for $77................... Swagger Corporation purchases potatoes from farmers................ Less costs of producing the end products: Cost of potatoes........ And the depeeled spuds can be processed further to make frozen french fries. how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries? Show your work! b.....

Reporting LO: 6 Level: Easy .AICPA FN: Decision Making.

........... Analysis of the profitability of the overall operation: Combined final sales value ($32 + $64).. Ans: a. Assuming that no other costs are involved in processing potatoes or in selling products........ Product X $32 21 11 14 ($ 3) Don’t process further Product Y $64 44 20 28 ($ 8) Don’t process further $3 6 15 14 28 $9 6 93 $3 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making............... The common input is purchased in batches that cost $36 each and the cost of processing a batch to produce intermediate products A and B is $15..................... Intermediate product A can be sold as is for $21 or processed further for $14 to make end product X that is sold for $32.... Reporting LO: 6 Level: Easy ......................... Profit (loss) from further processing..... Less sales value at split-off point........... Less costs of producing the end products: Cost of common input... Intermediate product B can be sold as is for $44 or processed further for $28 to make end product Y that is sold for $64... Required: a... Cost of further processing product B.... b.... Analysis of sell or process further: Final sales value after further processing.. A and B.......... Intermediate product B can be further processed into end product Y........ how much money does the company make from processing one batch of the common input into the end products X and Y? Show your work! b... Should each of the intermediate products............ Cost of processing common input....... from a common input.. A and B.... be sold as is or processed further into an end product? Explain....156.. Farrugia Corporation produces two intermediate products................ Cost of further processing product A............................ Incremental revenue from further processing...... Less cost of further processing.......... Profit (loss). Intermediate product A can be further processed into end product X...........

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