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PART 4A

DECISION THEORY AND
INFORMATION SYSTEMS
261 QUESTIONS
[Fact Pattern #1]
Stewart Industries has been producing two bearings,
components B12 and B18, for use in production
B12 B18
!!!!!! !!!!!!
"achine hours re#uired per unit 2$ %&
Standard cost per unit'
(irect materia) * 22$ * %+$
(irect )abor ,&& ,$&
"anufacturing o-erhead'
.ariab)e /See 0ote 11 2&& 22$
Fi2ed /See 0ote 21 %+$ ,$&
!!!!!! !!!!!!
*12&& *1$&&
333333 333333
Stewart4s annua) re#uirement for these components is
8,&&& units of B12 and 11,&&& units of B18 5ecent)6,
Stewart4s management decided to de-ote additiona)
machine time to other product )ines resu)ting in on)6 ,1,&&&
machine hours per 6ear that can be dedicated to the
production of the bearings 7n outside compan6 has
offered to se)) Stewart the annua) supp)6 of the bearings at
prices of *112$ for B12 and *1%$& for B18 Stewart
wants to schedu)e the otherwise id)e ,1,&&& machine hours
to produce bearings so that the compan6 can minimi8e its
costs /ma2imi8e its net benefits1
0ote 1 .ariab)e manufacturing o-erhead is app)ied on the
basis of direct )abor hours
0ote 2 Fi2ed manufacturing o-erhead is app)ied on the
basis of machine hours
[1] Source' 9"7 &:8: $!2:
/5efers to Fact Pattern #11
;he net benefit /)oss1 per machine hour that wou)d resu)t if
Stewart accepts the supp)ier4s offer of *1%$& per unit for
9omponent B18 is
7 *$&
B */1&&1
9 */1+$1
( Some amount other than those gi-en
[2] Source' 9"7 &:8: $!2+
/5efers to Fact Pattern #11
Stewart wi)) ma2imi8e its net benefits b6
7 Purchasing ,,8&& units of B12 and manufacturing
the remaining bearings
B Purchasing 8,&&& units of B12 and manufacturing
11,&&& units of B18
9 Purchasing 11,&&& units of B18 and manufacturing
8,&&& units of B12
( Purchasing ,,&&& units of B18 and manufacturing
the remaining bearings
[%] Source' 9"7 &:8: $!28
/5efers to Fact Pattern #11
7ssume that Stewart4s id)e capacit6 of ,1,&&& machine
hours has a traceab)e a-oidab)e annua) fi2ed cost of
*,,,&&& that wi)) continue if the capacit6 is not used ;he
ma2imum price Stewart wou)d be wi))ing to pa6 a supp)ier
for component B18 is
7 *1&$&
B *1,&&
9 *1,$&
( Some amount other than those gi-en
[Fact Pattern #2]
<ermo 9ompan6 has =ust comp)eted a h6dro!e)ectric p)ant
at a cost of *21,&&&,&&& ;he p)ant wi)) pro-ide the
compan64s power needs for the ne2t 2& 6ears <ermo wi))
use on)6 :&> of the power output annua))6 7t this )e-e) of
capacit6, <ermo4s annua) operating costs wi)) amount to
*1,8&&,&&&, of which 8&> are fi2ed
?uig)e6 9ompan6 current)6 purchases its power from "P
@)ectric at an annua) cost of *1,2&&,&&& <ermo cou)d
supp)6 this power, thus increasing output of the p)ant to
A&> of capacit6 ;his wou)d reduce the estimated )ife of
the p)ant to 1, 6ears
[,] Source' 9"7 128: $!1+
/5efers to Fact Pattern #21
If <ermo decides to supp)6 power to ?uig)e6, it wants to
be compensated for the decrease in the )ife of the p)ant and
the appropriate -ariab)e costs <ermo has decided that the
charge for the decreased )ife shou)d be based on the
origina) cost of the p)ant ca)cu)ated on a straight!)ine basis
;he minimum annua) amount that <ermo wou)d charge
?uig)e6 wou)d be
7 *,$&,&&&
B *:%&,&&&
9 *AA&,&&&
( Some amount other than those gi-en
[$] Source' 9"7 128: $!18
/5efers to Fact Pattern #21
;he ma2imum amount ?uig)e6 wou)d be wi))ing to pa6
<ermo annua))6 for the power is
7 *:&&,&&&
B *1,&$&,&&&
9 *1,2&&,&&&
( Some amount other than those gi-en
[:] Source' 9"7 &:8+ $!2&
9ohasset 9ompan6 current)6 manufactures a)) component
parts used in the manufacture of -arious hand too)s 7
hand)e is used in three different too)s ;he unit cost budget
for 2&,&&& hand)es is
(irect materia) * :&
(irect )abor ,&
.ariab)e o-erhead 1&
Fi2ed o-erhead 2&
!!!!!
;ota) unit cost *1%&
33333
5B" Stee) has offered to supp)6 2&,&&& hand)es to
9ohasset for *12$ each, de)i-ered If 9ohasset current)6
has id)e capacit6 that cannot be used, accepting the offer
wi))
7 (ecrease the hand)e unit cost b6 *&$
B Increase the hand)e unit cost b6 *1$
9 (ecrease the hand)e unit cost b6 *1$
( Increase the hand)e unit cost b6 *&$
[Fact Pattern #%]
C)eason 9o has two products, a fro8en dessert and
read6!to!baDe breaDfast ro))s, read6 for introduction
<owe-er, p)ant capacit6 is )imited, and on)6 one product
can be introduced at present ;herefore, C)eason has
conducted a marDet stud6, at a cost of *2:,&&&, to
determine which product wi)) be more profitab)e ;he
resu)ts of the stud6 fo))ow
Sa)es of (esserts Sa)es of 5o))s
at *18&Eunit at *12&Eunit
!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!!!
.o)ume Probabi)it6 .o)ume Probabi)it6
!!!!!!!!! !!!!!!!!!!!! !!!!!!!!! !!!!!!!!!!!!
2$&,&&& %& 2&&,&&& 2&
%&&,&&& ,& 2$&,&&& $&
%$&,&&& 2& %&&,&&& 2&
,&&,&&& 1& %$&,&&& 1&
;he costs associated with the two products ha-e been
estimated b6 C)eason4s cost accounting department and are
shown as fo))ows
(essert 5o))s
!!!!!!! !!!!!!!
Ingredients per unit * ,& * 2$
(irect )abor per unit %$ %&
.ariab)e o-erhead per unit ,& 2&
Production too)ingF ,8,&&& 2$,&&&
7d-ertising %&,&&& 2&,&&&
FC)eason treats production too)ing as a current operating
e2pense rather than capita)i8ing it as a fi2ed asset
[+] Source' 9"7 &:8+ $!21
/5efers to Fact Pattern #%1
7ccording to C)eason4s marDet stud6, the e2pected -a)ue
of the sa)es -o)ume of the breaDfast ro))s is
7 12$,&&& units
B 2:&,&&& units
9 2+$,&&& units
( Some amount other than those gi-en
[8] Source' 9"7 &:8+ $!22
/5efers to Fact Pattern #%1
7pp)6ing a deterministic approach, C)eason4s re-enue from
sa)es of fro8en desserts wou)d be
7 *$,A,&&&
B *$,&,&&&
9 *21:,&&&
( Some amount other than those gi-en
[A] Source' 9"7 &:8+ $!2%
/5efers to Fact Pattern #%1
;he e2pected -a)ue of C)eason4s operating profit direct)6
traceab)e to the sa)e of fro8en desserts is
7 *1A8,2$&
B *1$&,2$&
9 *12&,2$&
( Some amount other than those gi-en
[1&] Source' 9"7 &:8+ $!2,
/5efers to Fact Pattern #%1
In order to reco-er the costs of production too)ing and
ad-ertising for the breaDfast ro))s, C)eason4s sa)es of the
breaDfast ro))s wou)d ha-e to be
7 %+,$&& units
B 1&&,&&& units
9 :&,&&& units
( Some amount other than those gi-en
[11] Source' 9"7 &:8+ $!2$
/5efers to Fact Pattern #%1
;he cost incurred b6 C)eason for the marDet stud6 is a/n1
7 Incrementa) cost
B Prime cost
9 Gpportunit6 cost
( SunD cost
[12] Source' 9"7 &:8+ $!2:
/5efers to Fact Pattern #%1
;he ad-ertising e2pense estimated b6 C)eason for the
introduction of the new products is an e2amp)e of a/n1
7 9on-ersion cost
B (iscretionar6 cost
9 9ommitted cost
( Gpportunit6 cost
[1%] Source' 9"7 &:8+ $!2+
/5efers to Fact Pattern #%1
7ssuming that C)eason e)ects to produce the fro8en
dessert, the profit that wou)d ha-e been earned on the
breaDfast ro))s is a/n1
7 (eferrab)e cost
B SunD cost
9 7-oidab)e cost
( Gpportunit6 cost
[Fact Pattern #,]
"anagement accountants are fre#uent)6 asDed to ana)68e
-arious decision situations inc)uding the fo))owing
1 7)ternati-e uses of p)ant space, to be considered in a
maDeEbu6
decision
2 Hoint production costs incurred, to be considered in a se))!
at!sp)it
-ersus a process!further decision
% 5esearch and de-e)opment costs incurred in prior
months, to be
considered in a product!introduction decision
, ;he cost of a specia) de-ice that is necessar6 if a specia)
order
is accepted
$ ;he cost of obso)ete in-entor6 ac#uired se-era) 6ears
ago, to be
considered in a Deep!-ersus!disposa) decision
[1,] Source' 9"7 1288 $!12
/5efers to Fact Pattern #,1
;he costs described in situations 1 and , are
7 Prime costs
B SunD costs
9 (iscretionar6 costs
( 5e)e-ant costs
[1$] Source' 9"7 1288 $!1%
/5efers to Fact Pattern #,1
;he costs described in situations 2, %, and $ are
7 SunD costs
B (iscretionar6 costs
9 5e)e-ant costs
( (ifferentia) costs
[1:] Source' 9"7 12A& ,!%
5e)e-ant or differentia) cost ana)6sis
7 ;aDes a)) -ariab)e and fi2ed costs into account to
ana)68e decision a)ternati-es
B 9onsiders on)6 -ariab)e costs as the6 change with
each decision a)ternati-e
9 9onsiders a)) -ariab)e and fi2ed costs as the6
change with each decision a)ternati-e
( 7))ows the decision maDer to group a)) t6pes of
costs together to faci)itate decision maDing
[1+] Source' 9"7 12A& ,!12
Gpportunit6 costs are
7 0ot used for decision maDing
B ;he same as -ariab)e costs
9 @#ua) to historica) costs
( 5e)e-ant to decision maDing
[Fact Pattern #$]
5egis 9ompan6 manufactures p)ugs used in its
manufacturing c6c)e at a cost of *%: per unit that inc)udes
*8 of fi2ed o-erhead 5egis needs %&,&&& of these p)ugs
annua))6, and Gr)an 9ompan6 has offered to se)) these units
to 5egis at *%% per unit If 5egis decides to purchase the
p)ugs, *:&,&&& of the annua) fi2ed o-erhead app)ied wi)) be
e)iminated, and the compan6 ma6 be ab)e to rent the faci)it6
pre-ious)6 used for manufacturing the p)ugs
[18] Source' 9"7 &:A1 ,!1,
/5efers to Fact Pattern #$1
If 5egis 9ompan6 purchases the p)ugs but does not rent
the unused faci)it6, the compan6 wou)d
7 Sa-e *%&& per unit
B Iose *:&& per unit
9 Sa-e *2&& per unit
( Iose *%&& per unit
[1A] Source' 9"7 &:A1 ,!1$
/5efers to Fact Pattern #$1
If the p)ugs are purchased and the faci)it6 rented, 5egis
9ompan6 wishes to rea)i8e *1&&,&&& in sa-ings annua))6
;o achie-e this goa), the minimum annua) rent on the faci)it6
must be
7 *1&,&&&
B *,&,&&&
9 *+&,&&&
( *1A&,&&&
[2&] Source' 9"7 12A2 ,!2
Jhat is the opportunit6 cost of maDing a component part in
a factor6 gi-en no a)ternati-e use of the capacit6K
7 ;he -ariab)e manufacturing cost of the component
B ;he tota) manufacturing cost of the component
9 ;he tota) -ariab)e cost of the component
( Lero
[21] Source' 9"7 12A% ,!1
9ope)and, Inc produces M!$,+ in a =oint manufacturing
process ;he compan6 is stud6ing whether to se)) M!$,+ at
the sp)it!off point or upgrade the product to become
M6)ene ;he fo))owing information has been gathered
1 Se))ing price per pound of M!$,+
2 .ariab)e manufacturing costs of the upgrade process
% 7-oidab)e fi2ed costs of the upgrade process
, Se))ing price per pound of M6)ene
$ Hoint manufacturing costs to produce M!$,+
Jhich of these items shou)d be re-iewed when maDing the
upgrade decisionK
7 1, 2, and ,
B 1, 2, %, and ,
9 1, 2, %, ,, and $
( 1, 2, ,, and $
[22] Source' 9"7 128$ $!2A
;he opportunit6 cost of maDing a component part in a
factor6 with no e2cess capacit6 is the
7 .ariab)e manufacturing cost of the component
B ;ota) manufacturing cost of the component
9 9ost of the production gi-en up in order to
manufacture the component
( 0et benefit forgone from the best a)ternati-e use
of the capacit6 re#uired
[Fact Pattern #:]
Ie)and "anufacturing, uses 1& units of Part 0umber NH%+
each month in the production of radar e#uipment ;he unit
cost to manufacture 1 unit of NH%+ is presented be)ow
(irect materia)s * 1,&&&
"ateria)s hand)ing /2&> of direct
materia) cost1 2&&
(irect )abor 8,&&&
"anufacturing o-erhead
/1$&> of direct )abor1 12,&&&
!!!!!!!
;ota) manufacturing cost *21,2&&
3333333
"ateria) hand)ing represents the direct -ariab)e costs of the
5ecei-ing (epartment that are app)ied to direct materia)s
and purchased components on the basis of their cost ;his
is a separate charge in addition to manufacturing o-erhead
Ie)and4s annua) manufacturing o-erhead budget is one!third
-ariab)e and two!thirds fi2ed Scott Supp)6, one of
Ie)and4s re)iab)e -endors, has offered to supp)6 Part
0umber NH%+ at a unit price of *1$,&&&
[2%] Source' 9"7 128+ $!28
/5efers to Fact Pattern #:1
If Ie)and purchases the NH%+ units from Scott, the capacit6
Ie)and used to manufacture these parts wou)d be id)e
Shou)d Ie)and decide to purchase the parts from Scott, the
unit cost of NH%+ wou)d
7 Increase b6 *,,8&&
B (ecrease b6 *:,2&&
9 (ecrease b6 *%,2&&
( 9hange b6 some amount other than those gi-en
[2,] Source' 9"7 128+ $!2A
/5efers to Fact Pattern #:1
7ssume Ie)and "anufacturing is ab)e to rent a)) id)e
capacit6 for *2$,&&& per month If Ie)and decides to
purchase the 1& units from Scott Supp)6, Ie)and4s month)6
cost for NH%+ wou)d
7 Increase *,8,&&&
B Increase *2%,&&&
9 (ecrease *+,&&&
( 9hange b6 some amount other than those gi-en
[2$] Source' 9"7 128+ $!%&
/5efers to Fact Pattern #:1
7ssume that Ie)and "anufacturing does not wish to
commit to a renta) agreement but cou)d use id)e capacit6 to
manufacture another product that wou)d contribute
*$2,&&& per month If Ie)and e)ects to manufacture NH%+
in order to maintain #ua)it6 contro), Ie)and4s opportunit6
cost is
7 *18,&&&
B */2&,&&&1
9 *,,&&&
( Some amount other than those gi-en
[2:] Source' 9"7 &:A& $!2%
Jhen a decision is made in an organi8ation, it is se)ected
from a group of a)ternati-e courses of action ;he )oss
associated with choosing the a)ternati-e that does not
ma2imi8e the benefit is the
7 0et rea)i8ab)e -a)ue
B @2pected -a)ue
9 Gpportunit6 cost
( Incrementa) cost
[2+] Source' 9"7 &:A& $!2,
5e)e-ant costs refer to
7 7)) fi2ed costs
B 9osts that wou)d be incurred within the re)e-ant
range of production
9 Past costs that are e2pected to be different in the
future
( 7nticipated future costs that wi)) differ among
-arious a)ternati-es
[28] Source' 9"7 &:A& $!2:
Jhich one of the fo))owing costs wou)d be re)e-ant in
short!term decision maDingK
7 Incrementa) fi2ed costs
B 7)) costs of in-entor6
9 ;ota) -ariab)e costs that are the same in the
considered a)ternati-es
( Gpportunit6 costs that are the same in the
considered a)ternati-es
[2A] Source' 9"7 12A& ,!11
;he re)e-ance of a particu)ar cost to a decision is
determined b6 the
7 Si8e of the cost
B 5isDiness of the decision
9 Potentia) effect on the decision
( 7ccurac6 and -erifiabi)it6 of the cost
[%&] Source' Pub)isher
In a maDe!or!bu6 situation, which of the fo))owing
#ua)itati-e factors is usua))6 consideredK
7 Specia) techno)og6
B SDi))ed )abor
9 Specia) materia)s re#uirements
( 7)) of the answers are correct
[%1] Source' Pub)isher
In a maDe!or!bu6 decision, the decision process fa-ors the
use of tota) costs rather than unit costs ;he reason is that
7 Onit cost ma6 be ca)cu)ated based on different
-o)umes
B Irre)e-ant costs ma6 be inc)uded in the unit
amounts
9 Fi2ed costs ma6 be inc)uded in the unit amounts
( 7)) of the answers are correct
[%2] Source' Pub)isher
Jhich of the fo))owing #ua)itati-e factors fa-ors the bu6
choice in a maDe!or!bu6 decisionK
7 "aintaining a )ong!run re)ationship with supp)iers
B ?ua)it6 contro) is critica)
9 ;he a-ai)abi)it6 of id)e capacit6
( 7)) of the answers are correct
[%%] Source' 9I7 11A2 I.!18
7 manufacturer has been approached b6 a new customer
who wants to p)ace a one!time order for a component
simi)ar to one that the manufacturer maDes for another
customer @2isting sa)es wi)) not be affected b6 acceptance
of this order ;he manufacturer has a po)ic6 of setting its
targeted se))ing price at :&> o-er fu)) manufacturing cost
;he manufacturing costs and the targeted se))ing price for
the e2isting product are presented as fo))ows
(irect materia)s *2%&
(irect )abor %:&
.ariab)e manufacturing o-erhead /app)ied at
+$> of direct )abor cost1 2+&
Fi2ed manufacturing o-erhead /app)ied at
1$&> of direct )abor cost1 $,&
!!!!!!
;ota) manufacturing cost *1,&&
"arDup /:&> of fu)) manufacturing cost1 8,&
!!!!!!
;argeted se))ing price *22,&
333333
;he manufacturer has e2cess capacit6 to produce the
#uantit6 of the component desired b6 the new customer
;he direct materia)s used in the component for the new
customer wou)d cost the manufacturer *&2$ )ess than the
component current)6 being made ;he -ariab)e se))ing
e2penses /pacDaging and shipping1 wou)d be the same, or
*&A& per unit
Onder these circumstances, the minimum unit price at which
the manufacturer wou)d accept the specia) order is one
e2ceeding
7 *8%$
B *A2$
9 *1,&&
( *1,8&
[%,] Source' 9I7 &$A% I.!1A
;he 7B9 9ompan6 manufactures components for use in
producing one of its finished products Jhen 12,&&& units
are produced, the fu)) cost per unit is *%$, separated as
fo))ows'
(irect materia)s * $
(irect )abor *1$
.ariab)e o-erhead *1&
Fi2ed o-erhead * $
;he MPL 9ompan6 has offered to se)) 12,&&& components
to 7B9 for *%+ each If 7B9 accepts the offer, some of
the faci)ities current)6 being used to manufacture the
components can be rented as warehouse space for
*,&,&&& <owe-er, *% of the fi2ed o-erhead current)6
app)ied to each component wou)d ha-e to be co-ered b6
7B94s other products Jhat is the differentia) cost to the
7B9 9ompan6 of purchasing the components from the
MPL 9ompan6K
7 *8,&&&
B *2&,&&&
9 *2,,&&&
( *,,,&&&
[%$] Source' 9I7 11A% I.!1$
7 printing compan6 is considering rep)acing an o)d printing
press ;he o)d printing press has a booD -a)ue of *2,,&&&
and a trade!in -a)ue of *1,,&&& 7 new printing press
wou)d cost *8$,&&& after trade!in of the o)d press It is
estimated that the new printing press wou)d reduce
operating costs b6 *2&,&&& per 6ear If the compan6
decides not to purchase the new press, the *8$,&&& cou)d
instead be used to retire debt that is current)6 costing
*A,&&& per 6ear in interest Jhich of the gi-en is an
e2amp)e of a sunD costK
7 ;he booD -a)ue of the o)d printing press
B ;he trade!in -a)ue of the o)d printing press
9 ;he estimated reduction in operating costs
( ;he interest on the e2isting debt
[%:] Source' 9I7 11A% I.!2,
;here is a marDet for both product M and product P
Jhich of the fo))owing costs and re-enues wou)d be most
re)e-ant in deciding whether to se)) product M or process it
further to maDe product PK
7 ;ota) cost of maDing M and the re-enue from sa)e
of M and P
B ;ota) cost of maDing P and the re-enue from sa)e
of P
9 7dditiona) cost of maDing P, gi-en the cost of
maDing M, and additiona) re-enue from P
( 7dditiona) cost of maDing M, gi-en the cost of
maDing P, and additiona) re-enue from P
[%+] Source' 9I7 &$A, III!,$
7 compan6 has +,&&& obso)ete to6s carried in in-entor6 at
a manufacturing cost of *: per unit If the to6s are
reworDed for *2 per unit, the6 cou)d be so)d for *% per
unit If the to6s are scrapped, the6 cou)d be so)d for *18$
per unit Jhich a)ternati-e is more desirab)e /reworD or
scrap1 and what is the tota) do))ar amount of the ad-antage
of that a)ternati-eK
7 Scrap, *$,A$&
B 5eworD, *%:,&$&
9 Scrap, *,+,A$&
( 5eworD, *8,&$&
[%8] Source' 9"7 &:A& $!2%
Jhen a decision is made in an organi8ation, it is se)ected
from a group of a)ternati-e courses of action ;he )oss
associated with choosing the a)ternati-e that does not
ma2imi8e the benefit is the
7 0et rea)i8ab)e -a)ue
B @2pected -a)ue
9 Gpportunit6 cost
( (ifferentia) cost
[%A] Source' 9"7 128$ $!%&
;he opportunit6 cost of maDing a component part in a
factor6 with e2cess capacit6 for which there is no
a)ternati-e use is
7 ;he tota) manufacturing cost of the component
B ;he tota) -ariab)e cost of the component
9 ;he fi2ed manufacturing cost of the component
( Lero
[,&] Source' 9"7 12++ $!1
;he term incrementa) cost refers to
7 ;he difference in tota) costs that resu)ts from
se)ecting one choice instead of another
B ;he profit forgone b6 se)ecting one choice instead
of another
9 7 cost that continues to be incurred in the absence
of acti-it6
( 7 cost common to a)) choices in #uestion and not
c)ear)6 or feasib)6 a))ocab)e to an6 of them
[,1] Source' 9I7 118A I.!2$
Jhich costs are re)e-ant to the decision to further process
a product be6ond its current stateK
7 Hoint costs
B Incrementa) costs
9 7bsorption costs
( Fi2ed factor6 o-erhead
[Fact Pattern #+]
"anagement accountants are fre#uent)6 asDed to ana)68e
-arious decision situations, inc)uding the fo))owing'
I ;he cost of a specia) de-ice that is necessar6 if a specia)
order
is accepted
II ;he cost proposed annua))6 for the p)ant ser-ice for the
grounds
at corporate head#uarters
III Hoint production costs incurred, to be considered in a
se))!at!
sp)it -ersus a process!further decision
I. ;he costs associated with a)ternati-e uses of p)ant
space, to be
considered in a maDeEbu6 decision
. ;he cost of obso)ete in-entor6 ac#uired se-era) 6ears
ago, to be
considered in a Deep!-ersus!disposa) decision
[,2] Source' 9"7 &:A, ,!1A
/5efers to Fact Pattern #+1
;he costs described in situations I and I. are
7 Prime costs
B SunD costs
9 (iscretionar6 costs
( 5e)e-ant costs
[,%] Source' 9"7 &:A, ,!2&
/5efers to Fact Pattern #+1
;he costs described in situations III and . are
7 Prime costs
B SunD costs
9 (iscretionar6 costs
( Imputed costs
[,,] Source' 9"7 &:A, ,!21
/5efers to Fact Pattern #+1
;he cost described in situation II is a
7 Prime cost
B (iscretionar6 cost
9 5e)e-ant cost
( Imputed cost
[,$] Source' 9"7 &:A1 ,!+
;ota) unit costs are
7 5e)e-ant for cost!-o)ume!profit ana)6sis
B 0eeded for determining sunD costs
9 Irre)e-ant in margina) ana)6sis
( Independent of the cost s6stem used to generate
them
[,:] Source' 9"7 &:A1 ,!12
;he term re)e-ant cost app)ies to a)) the fo))owing decision
situations e2cept the
7 7cceptance of a specia) order
B "anufacture or purchase of component parts
9 (etermination of a product price
( 5ep)acement of e#uipment
[,+] Source' 9"7 &:A1 ,!1&
SunD costs
7 7re substitutes for opportunit6 costs
B In and of themse)-es are not re)e-ant to decision
maDing
9 7re re)e-ant to decision maDing
( 7re fi2ed costs
[,8] Source' 9"7 &:A1 ,!1%
7merican 9oat 9ompan6 estimates that :&,&&& specia)
8ippers wi)) be used in the manufacture of men4s =acDets
during the ne2t 6ear 5eese Lipper 9ompan6 has #uoted a
price of *:& per 8ipper 7merican wou)d prefer to
purchase $,&&& units per month, but 5eese is unab)e to
guarantee this de)i-er6 schedu)e In order to ensure
a-ai)abi)it6 of these 8ippers, 7merican is considering the
purchase of a)) :&,&&& units at the beginning of the 6ear
7ssuming 7merican can in-est cash at 8>, the compan64s
opportunit6 cost of purchasing the :&,&&& units at the
beginning of the 6ear is
7 *1,%2&
B *1,,,&
9 *1,$&&
( *2,:,&
[Fact Pattern #8]
9ondensed month)6 operating income data for Norbin Inc
for "a6 fo))ows'
Orban Suburban
Store Store ;ota)
!!!!!!! !!!!!!!! !!!!!!!!
Sa)es *8&,&&& *12&,&&& *2&&,&&&
.ariab)e costs %2,&&& 8,,&&& 11:,&&&
!!!!!!! !!!!!!!! !!!!!!!!
9ontribution margin *,8,&&& *%:,&&& *8,,&&&
(irect fi2ed costs 2&,&&& ,&,&&& :&,&&&
!!!!!!! !!!!!!!! !!!!!!!!
Store segment margin *28,&&& */,,&&&1 *2,,&&&
9ommon fi2ed cost ,,&&& :,&&& 1&,&&&
!!!!!!! !!!!!!!! !!!!!!!!
Gperating income *2,,&&& */1&,&&&1 *1,,&&&
3333333 33333333 33333333
7dditiona) information regarding Norbin4s operations fo))ows'
F Gne!fourth of each store4s direct fi2ed costs wou)d
continue if
either store is c)osed
F Norbin a))ocates common fi2ed costs to each store on the
basis of
sa)es do))ars
F "anagement estimates that c)osing the Suburban Store
wou)d resu)t in
a 1&> decrease in the Orban Store4s sa)es, whi)e c)osing
the Orban
Store wou)d not affect the Suburban Store4s sa)es
F ;he operating resu)ts for "a6 are representati-e of a))
months
[,A] Source' 9"7 &:A, ,!2$
/5efers to Fact Pattern #81
7 decision b6 Norbin to c)ose the Suburban Store wou)d
resu)t in a month)6 increase /decrease1 in Norbin4s
operating income of
7 */1&,8&&1
B */:,&&&1
9 */1,2&&1
( *,,&&&
[$&] Source' 9"7 &:A, ,!2:
/5efers to Fact Pattern #81
Norbin is considering a promotiona) campaign at the
Suburban Store that wou)d not affect the Orban Store
Increasing annua) promotiona) e2pense at the Suburban
Store b6 *:&,&&& in order to increase this store4s sa)es b6
1&> wou)d resu)t in a month)6 increase /decrease1 in
Norbin4s operating income during the 6ear /rounded1 of
7 */$,&&&1
B */1,,&&1
9 *,8+
( *+,&&&
[$1] Source' 9"7 &:A, ,!2+
/5efers to Fact Pattern #81
Gne!ha)f of the Suburban Store4s do))ar sa)es are from
items so)d at -ariab)e cost to attract customers to the store
Norbin is considering the de)etion of these items, a mo-e
that wou)d reduce the Suburban Store4s direct fi2ed
e2penses b6 1$> and resu)t in a 2&> )oss of Suburban
Store4s remaining sa)es -o)ume ;his change wou)d not
affect the Orban Store 7 decision b6 Norbin to e)iminate
the items so)d at cost wou)d resu)t in a month)6 increase
/decrease1 in Norbin4s operating income of
7 */$,2&&1
B */1,2&&1
9 */+,2&&1
( *2,&&&
[Fact Pattern #A]
Cear6 "anufacturing has assemb)ed the data pertaining to
two popu)ar products as fo))ows Past e2perience has
shown that the fi2ed manufacturing o-erhead component
inc)uded in the cost per machine hour a-erages *1& Cear6
has a po)ic6 of fi))ing a)) sa)es orders, e-en if it means
purchasing units from outside supp)iers
@)ectric
B)ender "i2er
!!!!!!!!! !!!!!!!!!
(irect materia)s * : *11
(irect )abor , A
Factor6 o-erhead at *1: per hour 1: %2
9ost if purchased from an
outside supp)ier 2& %8
7nnua) demand /units1 2&,&&& 28,&&&
[$2] Source' 9"7 1288 $!1$
/5efers to Fact Pattern #A1
If $&,&&& machine hours are a-ai)ab)e, and Cear6
"anufacturing desires to fo))ow an optima) strateg6, it
shou)d
7 Produce 2$,&&& e)ectric mi2ers and purchase a))
other units as needed
B Produce 2&,&&& b)enders and 1$,&&& e)ectric
mi2ers, and purchase a)) other units as needed
9 Produce 2&,&&& b)enders and purchase a)) other
units as needed
( Purchase a)) units as needed
[$%] Source' 9"7 1288 $!1:
/5efers to Fact Pattern #A1
Jith a)) other things constant, if Cear6 "anufacturing is
ab)e to reduce the direct materia)s for an e)ectric mi2er to
*: per unit, the compan6 shou)d
7 Produce 2$,&&& e)ectric mi2ers and purchase a))
other units as needed
B Produce 2&,&&& b)enders and 1$,&&& e)ectric
mi2ers, and purchase a)) other units as needed
9 Produce 2&,&&& b)enders and purchase a)) other
units as needed
( Purchase a)) units as needed
[$,] Source' 9"7 12A& ,!1&
9osts re)e-ant to a maDe!or!bu6 decision inc)ude -ariab)e
manufacturing costs as we)) as
7 7-oidab)e fi2ed costs
B Factor6 depreciation
9 Ona-oidab)e costs
( Propert6 ta2es
[$$] Source' 9"7 &:A1 ,!A
7 compan64s approach to a maDe!or!bu6 decision
7 (epends on whether the compan6 is operating at
or be)ow breaDe-en
B (epends on whether the compan6 is operating at
or be)ow norma) -o)ume
9 In-o)-es an ana)6sis of a-oidab)e costs
( Shou)d use absorption /fu))1 costing
[$:] Source' 9"7 &:A1 ,!8
In a manufacturing en-ironment, the best short!term profit
ma2imi8ing approach wou)d be to
7 "a2imi8e unit gross profit times the number of
units so)d
B "inimi8e -ariab)e costs per unit times the number
of units produced
9 "inimi8e fi2ed o-erhead cost per unit b6
producing at fu)) capacit6
( "a2imi8e contribution per unit times the number
of units so)d
[$+] Source' 9"7 &:A2 ,!2$
Iaure) 9orporation has its own cafeteria with the fo))owing
annua) costs'
Food *1&&,&&&
Iabor +$,&&&
G-erhead 11&,&&&
!!!!!!!!
;ota) *28$,&&&
33333333
;he o-erhead is ,&> fi2ed Gf the fi2ed o-erhead,
*2$,&&& is the sa)ar6 of the cafeteria super-isor ;he
remainder of the fi2ed o-erhead has been a))ocated from
tota) compan6 o-erhead 7ssuming the cafeteria super-isor
wi)) remain and the Iaure) wi)) continue to pa6 hisEher
sa)ar6, the ma2imum cost Iaure) wi)) be wi))ing to pa6 an
outside firm to ser-ice the cafeteria is
7 *28$,&&&
B *1+$,&&&
9 *21A,&&&
( *2,1,&&&
[$8] Source' 9"7 &:A2 ,!2:
H H "otors, Inc emp)o6s ,$ sa)es personne) to marDet its
)ine of )u2ur6 automobi)es ;he a-erage car se))s for
*2%,&&&, and a :> commission is paid to the sa)esperson
H H "otors is considering a change to a commission
arrangement that wou)d pa6 each sa)esperson a sa)ar6 of
*2,&&& per month p)us a commission of 2> of the sa)es
made b6 that sa)esperson ;he amount of tota) month)6 car
sa)es at which H H "otors wou)d be indifferent as to which
p)an to se)ect is
7 *2,2$&,&&&
B *%,&&&&&&
9 *1,$&&,&&&
( *1,2$&,&&&
[$A] Source' 9"7 12A2 ,!1
;he opportunit6 cost of maDing a component part in a
factor6 with no e2cess capacit6 is the
7 .ariab)e manufacturing cost of the component
B Fi2ed manufacturing cost of the component
9 9ost of the production gi-en up in order to
manufacture the component
( 0et benefit gi-en up from the best a)ternati-e use
of the capacit6
[:1] Source' 9"7 12A2 ,!,
/5efers to Fact Pattern #1&1
7ssume 5ichardson "otors is ab)e to rent a)) id)e capacit6
for *$&,&&& per month If 5ichardson decides to purchase
the 1& units from Simpson 9astings, 5ichardson4s month)6
cost for ;%&$ wou)d
7 (ecrease *1,,&&&
B Increase *,:,&&&
9 (ecrease *:,,&&&
( Increase *A:,&&&
[:2] Source' 9"7 12A2 ,!$
/5efers to Fact Pattern #1&1
7ssume the renta) opportunit6 does not e2ist and
5ichardson "otors cou)d use the id)e capacit6 to
manufacture another product that wou)d contribute
*1&,,&&& per month If 5ichardson chooses to
manufacture the ten ;%&$ units in order to maintain #ua)it6
contro), 5ichardson4s opportunit6 cost is
7 *:8,&&&
B *88,&&&
9 *8,&&&
( */A:,&&&1
[:%] Source' 9"7 12A, ,!1
9ope)and Inc produces M!$,+ in a =oint manufacturing
process ;he compan6 is stud6ing whether to se)) M!$,+ at
the sp)it!off point or upgrade the product to become
M6)ene ;he fo))owing information has been gathered'
I Se))ing price per pound of M!$,+
II .ariab)e manufacturing costs of upgrade process
III 7-oidab)e fi2ed costs of upgrade process
I. Se))ing price per pound of M6)ene
. Hoint manufacturing costs to produce M!$,+
Jhich items shou)d be re-iewed when maDing the upgrade
decisionK
7 I, II, and I.
B I, II, III, and I.
9 7)) items
( I, II, I., and .
[:,] Source' 9"7 12+, %!22
;he 9ost 7ccounting Standards Board /97SB1 was
estab)ished b6
7 ;he Financia) 7ccounting Standards Board
/F7SB1
B ;he Cenera) 7ccounting Gffice /C7G1
9 ;he OS 9ongress
( ;he Securities and @2change 9ommission /S@91
[:$] Source' 9"7 12+, %!2%
;he 9ost 7ccounting Standards Board4s /97SB1 purpose
is to
7 (e-e)op accounting princip)es and standard
practices for industr6
B 7chie-e uniformit6 and consistenc6 in cost
accounting standards for contracts and subcontracts
with the OS go-ernment
9 JorD in con=unction with the Securities and
@2change 9ommission /S@91 in e2amining
registration forms and statements fi)ed b6
corporations
( 7dminister a)) contracts and subcontracts with
federa) agencies
[::] Source' 9"7 12A$ ,!21
7 decision!maDing concept, described as Qthe contribution
to income that is forgone b6 not using a )imited resource for
its best a)ternati-e use,Q is ca))ed
7 "argina) cost
B Incrementa) cost
9 Potentia) cost
( Gpportunit6 cost
[:+] Source' 9"7 &:A2 ,!2+
7B( 5ea)t6 manages fi-e apartment comp)e2es in a
three!state area Summar6 income statements for each
apartment comp)e2 are shown as fo))ows
7B( 5ea)t6
Summar6 Income Statements
/in thousands1
Gne ;wo ;hree Four Fi-e
!!!!!! !!!!!! !!!!!! !!!!!! !!!!!!
5enta)
income *1,&&& *1,21& *2,%,+ *1,8+8 *1,&:$
@2penses 8&& 1,%&& 2,:&& 2,,&& 1,%&&
!!!!!! !!!!!! !!!!!! !!!!!! !!!!!!
Profit * 2&& * /A&1 * /2$%1 * /$221 * /2%$1
333333 333333 333333 333333 333333
Inc)uded in the e2penses is *1,2&&,&&& of corporate
o-erhead a))ocated to the apartment comp)e2es based on
renta) income ;he apartment comp)e2/es1 that 7B(
shou)d consider se))ing is /are1
7 7partment comp)e2es ;wo, ;hree, Four, and
Fi-e
B 7partment comp)e2es ;hree, Four, and Fi-e
9 7partment comp)e2es Four and Fi-e
( 7partment comp)e2 Four
[:8] Source' 9"7 &:A2 ,!28
Power S6stems, Inc manufactures =et engines for the
Onited States armed forces on a cost!p)us basis ;he cost
of a particu)ar =et engine the compan6 manufactures is
shown as fo))ows
(irect materia)s *2&&,&&&
(irect )abor 1$&,&&&
G-erhead'
Super-isor4s sa)ar6 2&,&&&
Fringe benefits on direct )abor 1$,&&&
(epreciation 12,&&&
5ent 11,&&&
!!!!!!!!
;ota) cost *,&8,&&&
33333333
If production of this engine were discontinued, the
production capacit6 wou)d be id)e, and the super-isor
wou)d be )aid off Jhen asDed to bid on the ne2t contract
for this engine, the minimum unit price that Power S6stems
shou)d bid is
7 *,&8,&&&
B *%:$,&&&
9 *%A+,&&&
( *%8$,&&&
[:A] Source' 9I7 &$A2 III!21
7s part of the decision!maDing process, a)ternati-e
so)utions ordinari)6 shou)d be screened for the most
appea)ing ba)ance of effecti-eness and efficienc6 in -iew of
re)e-ant constraints and intangib)es Jhen a prob)em is
reso)-ed b6 se)ecting a course of action that meets the
minimum constraints, a manager is said to be
7 Satisficing
B Gptimi8ing
9 Idea)i8ing
( "a2imi8ing
[+&] Source' 9I7 &$A2 III!A&
7 compan6 is about to introduce a new ser-ice and wishes
to de-e)op a new s)ogan and )ogo to be used in ad-ertising
and on compan6 pub)ications Pou ha-e been chosen to
participate in this process and to )ooD at past s)ogans,
)ogos, and suggestions gi-en b6 the ad-ertising agenc6
Pou are not )imited to the suggested ideas and ha-e been
encouraged to suggest origina) ideas of 6our own Jhich of
the fo))owing techni#ues is most appropriate to useK
7 Brainstorming
B .a)ue ana)6sis
9 Free association
( 7ttribute )isting
[+1] Source' 9I7 &$A2 III!A1
7 compan6 has a computer that it no )onger needs because
of a discontinued operation 9urrent)6, there are se-era)
computer pro=ects that ma6 be ab)e to use the machine but
some modification wi)) be necessar6 if such new app)ication
is to be successfu) Jhich of the fo))owing techni#ues is
most appropriate to useK
7 7ttribute )isting
B Gperations research
9 "orpho)ogica) matri2 ana)6sis
( S6nectics
[+2] Source' 9I7 &$A2 III!A2
7 compan6 has e2perienced numerous comp)aints because
a passenger door has not opened smooth)6 7)) attempts to
repair the door ha-e fai)ed ;he item is no )onger under
warrant6 and the manufacturer has informed the compan6
that a -er6 e2pensi-e new door must be purchased and
insta))ed to so)-e the prob)em Pou ha-e been asDed to
super-ise an attempt b6 6our engineering department to
come up with )ess e2pensi-e a)ternati-e so)utions Jhich of
the fo))owing techni#ues is most appropriate to useK
7 Free association
B Gperations research
9 B)astR then refine
( @disonian
[+%] Source' 9I7 &$A2 III!A%
7 compan6 is concerned that spare parts in-entories are
too )arge It has attempted to Deep critica) parts for its f)eet
in stocD so that e#uipment wi)) ha-e minima) downtime
"anagement wants to Dnow what the optima) spare parts
in-entor6 shou)d be if downtime is estimated to cost *1$&
per da6 9arr6ing cost and order cost ha-e not been
measured Pou ha-e been asDed to maDe a forma)
recommendation on spare parts stocDing )e-e)s Jhich of
the fo))owing techni#ues is most appropriate to useK
7 Gperations research
B .a)ue ana)6sis
9 7ttribute )isting
( Brainstorming
[+,] Source' 9I7 &$A: II!2
7n organi8ation4s e2ecuti-e committee, meeting to so)-e an
important prob)em, spent %& minutes ana)68ing data and
debating the cause of the prob)em Fina))6, the6 agreed and
cou)d mo-e on to the ne2t step Possib)e steps in the
creati-e prob)em!so)-ing process are )isted be)ow Jhich
step shou)d the committee perform ne2tK
7 Se)ect a so)ution
B Cenerate a)ternati-e so)utions
9 Identif6 the prob)em
( 9onsider the reaction of competitors to -arious
courses of action
[+$] Source' 9I7 &$A, II!$
Jhich of the fo))owing is deducti-e reasoningK
7 5easoning from one or more particu)ar facts to
reach a genera) conc)usion
B 5easoning on a post hoc basis
9 5easoning from the genera) to the particu)ar
( 5easoning through the de-e)opment of a carefu))6
constructed h6pothesis
[+:] Source' 9I7 11A, II!,
In maDing management decisions, the concept of
probabi)it6 is most c)ose)6 re)ated to which of the
fo))owingK
7 "anagement4s confidence in its contro) s6stems
B Jhether a gi-en e-ent wi)) occur
9 ;he a-ai)abi)it6 of factua) information about
a)ternati-es
( "anagement4s abi)it6 to cope with sub=ecti-e
information
[++] Source' 9I7 11A, II!$
Beha-iora) scientists ha-e identified human tendencies that
can erode the #ua)it6 of decision maDing Jhich of the
fo))owing best describes a beha-iora) decision error
referred to as Qframing errorQK
7 @-a)uating positi-e information fa-orab)6 and
negati-e information unfa-orab)6
B Cetting )ocDed into )osing courses of action
because of persona) commitment
9 @-a)uating the probabi)ities of outcomes as point
estimates instead of ranges
( Becoming o-erconfident because of past
successes
[+8] Source' 9I7 11A, II!:
Interna) auditors often participate as members of
management tasD force groups Jhich of the fo))owing can
be a )imiting factor associated with group!aided decision
maDing in a matri2 organi8ationK
7 Croups genera))6 do not ana)68e prob)ems in
enough depth
B It is -er6 difficu)t to get indi-idua)s to accept
decisions made b6 groups
9 Identif6ing the important components of decision
situations becomes e2treme)6 difficu)t in a group
setting
( ;here are negati-e ramifications concerning
accountabi)it6 associated with audit decisions made
b6 groups
[+A] Source' 9I7 &$A$ II!:
7uditors must use both inducti-e and deducti-e reasoning
when gathering audit e-idence and reaching audit
conc)usions 7uditors must a)so understand the differences
between the two t6pes of reasoning in order to assess the
strengths and weaDnesses of each Jhich of the fo))owing
audit procedures uses deducti-e reasoningK
7 ;he interna) auditor uses genera)i8ed audit
software to se)ect a samp)e of items for confirmation
Based on the confirmation responses, the auditor
conc)udes that accounts recei-ab)e as recorded e2ist
B ;he interna) auditor performs ana)6tica)
procedures to estimate the accurac6 of the sa)es
account ba)ance 0o materia) differences are noted
Based on this, the auditor assumes that the under)6ing
record!Deeping must be correct
9 ;he auditor obser-es the c)ient4s ph6sica)
in-entor6 process and records test counts of
in-entor6 ;hose test counts are traced to the
6ear!end in-entor6 compi)ation and no e2ceptions are
noted ;he auditor conc)udes that the compi)ed
in-entor6 e2ists
( ;he auditor e2amines sa)es transactions recorded
during Hanuar6 1AA$ and finds that none of those
sa)es represent 1AA, sa)es ;he auditor conc)udes
that 1AA, sa)es are recorded proper)6
[8&] Source' 9I7 &$A$ II!12
5esearch into human performance and auditing indicate that
humans tend to o-eremphasi8e information that confirms
their initia) e2pectations and to discount information that is
contradictor6 to their e2pectations Jhich of the fo))owing
techni#ues wou)d not he)p reduce the effect of confirmation
biasK
7 5e#uire audit re-iew and super-ision to determine
if the audit resu)ts =ustif6 the conc)usions reached
B 5e#uire audit groups to generate a wide set of
potentia) e2p)anations for the pre)iminar6 obser-ed
resu)ts
9 5eiterate the need for audit independence in a))
training
( 5e#uire auditors to document their thought
processes in reaching conc)usions whene-er a
substantia) amount of e-idence is e-a)uated
[81] Source' 9I7 &$A$ II!%%
Interna) auditors are often -er6 good at identif6ing
prob)ems that ha-e occurred in an organi8ationa) unit
<owe-er, the auditee ma6 not a)wa6s react to the
suggestions made b6 the auditor in a positi-e manner Gne
beha-iora) approach that has been documented has been
termed Qesca)ation of commitmentQ ;he term Qesca)ation of
commitmentQ refers to
7 ;he process of continuing to fund o)d pro=ects
because of inade#uate information or time to forma))6
ana)68e the costs and benefits associated with
continued in-estment
B ;he decision maDer increasing the resources to a
new course of action if the auditor can recommend
a)ternati-es such that the decision maDer wi)) -iew the
new course of action as hisEher own initiati-e
9 9ommitting to pro=ects that ha-e been shown to
be successfu) and )imiting the additiona) commitment
of resources to pro=ects that ha-e been unsuccessfu)
( ;he decision maDer increasing the resources to the
pre-ious course of action in an effort to demonstrate
that the pre-ious course of action was appropriate
[82] Source' 9I7 &$A$ II!%+
7uditors often maDe reasonab)e recommendations to
auditees on)6 to find that the recommendations seem to be
ignored b6 the auditee ;his ma6 occur because the auditor
assumes rationa)it6 on the part of the manager !! but the
organi8ation or manager ma6 not e2hibit such rationa)it6
Jhich of the fo))owing is not an assumption that is made
when the auditor assumes rationa)it6 on the part of the
auditeeK
7 ;he auditee chooses the decision that resu)ts in the
ma2imum economic pa6off
B ;he criteria and a)ternati-es can be ranDed
according to their importance
9 Specific decision criteria are constant and the
weights assigned to them are stab)e o-er time
( ;he auditee seeDs so)utions that minimi8e conf)ict
[8%] Source' 9I7 11A$ II!,
In an operationa) audit of the finance department, the
auditor obser-ed that the department a)wa6s used proper
#uantitati-e techni#ues based on sound economic
assumptions to e-a)uate proposed a)ternati-e capita)
in-estments <owe-er, management did not a)wa6s choose
the in-estment option with the most fa-orab)e #uantitati-e
assessment In fact, sometimes management opted for what
appeared to be the third or fourth most fa-orab)e
in-estment ;he chief financia) officer indicated that
management u)timate)6 maDes a sub=ecti-e decision as to
which in-estment is best regard)ess of which in-estment
option )ooDs best according to the #uantitati-e ana)6sis
Jhich of the fo))owing statements is most accurateK
7 ;he approach is =ustifiab)e if the economic resu)ts
of capita) in-estments are high)6 uncertain
B ;he approach is an irrationa), intuiti-e decision
process
9 ;he approach resu)ts in the organi8ation not
ma2imi8ing its profits
( ;he approach is an e2amp)e of the bounded
rationa)it6 mode) of decision maDing whereb6
managers simp)if6 prob)ems
[8,] Source' 9I7 &$A$ I.!+,
Jhich of the fo))owing pricing po)icies in-o)-es the se))ing
compan6 setting freight charges to customers at the actua)
a-erage freight costK
7 Freight absorption pricing
B Oniform de)i-ered pricing
9 Lone pricing
( FGB ! origin pricing
[8$] Source' 9I7 11A, I.!+8
Bu6er!based pricing in-o)-es
7 7dding a standard marDup to the cost of the
product
B (etermining the price at which the product wi))
earn a target profit
9 Basing prices on the product4s percei-ed -a)ue
( Basing prices on competitors4 prices
[8:] Source' 9I7 11A, I.!+A
"arDet!sDimming pricing strategies cou)d be appropriate
when
7 0o bu6ers want the product at a high price
B ;he costs of producing a sma)) -o)ume are )ow
9 9ompetitors can easi)6 enter the marDet
( ;he product is of poor #ua)it6
[8+] Source' 9I7 11A$ I.!+$
Jhich of the fo))owing price ad=ustment strategies is
designed to stabi)i8e production for the se))ing firmK
7 9ash discounts
B ?uantit6 discounts
9 Functiona) discounts
( Seasona) discounts
[88] Source' 9I7 11A$ I.!+:
In which product!mi2 pricing strateg6 is it appropriate for
the se))er to accept an6 price that e2ceeds the storage and
de)i-er6 costs for the productK
7 B6!product pricing
B Gptiona)!product pricing
9 9apti-e!product pricing
( Product!bund)e pricing
[A&] Source' 9"7 &:8: $!%&
/5efers to Fact Pattern #111
;he annua) carr6ing cost, stated as a percentage, that
wou)d be used in the @G? mode) is
7 ,2>
B %+>
9 %,>
( 22>
[A1] Source' 9"7 &:8, $!2$
7 change from the FIFG /first!in, first!out1 in-entor6
-a)uation method to the IIFG /)ast!in, first!out1 method
wou)d
7 Increase the @G? in times of rising prices
B (ecrease the @G? in times of rising prices
9 Increase the @G? in times of fa))ing prices
( 0ot affect the @G?
[A2] Source' 9"7 128: $!1&
In production management, product breaDdown into
component parts and )ead times for procuring these parts is
necessar6 for
7 7 critica) path method /9P"1 s6stem
B 7 materia)s re#uirements p)anning /"5P1 s6stem
9 7 =ob ba)ancing s6stem
( 7n economic order #uantit6 /@G?1 s6stem
[A%] Source' 9"7 128: $!11
;he in-entor6 mode) that fo))ows the concept that 8&> of
the -a)ue of an in-entor6 is in 2&> of the in-entor6 items is
the
7 7B9 s6stem
B @conomic order #uantit6 /@G?1 mode)
9 Hust!in!time in-entor6 s6stem
( "ateria) re#uirements p)anning /"5P1 s6stem
[A,] Source' 9"7 &:88 $!22
Jhen a specified )e-e) of safet6 stocD is carried for an item
in in-entor6, the a-erage in-entor6 )e-e) for that item
7 (ecreases b6 the amount of the safet6 stocD
B Is one!ha)f the )e-e) of the safet6 stocD
9 Increases b6 one!ha)f the amount of the safet6
stocD
( Increases b6 the amount of the safet6 stocD
[A$] Source' 9"7 &:88 $!2,
;he simp)e economic production )ot si8e mode) wi)) on)6
app)6 to situations in which the production
7 5ate e#ua)s the demand rate
B 5ate is )ess than the demand rate
9 5ate is greater than the demand rate
( For the period co-ered e#ua)s the pro=ected sa)es
for the period
[A:] Source' 9"7 1288 $!22
7rno)d @nterprises uses the @G? mode) for in-entor6
contro) ;he compan6 has an annua) demand of $&,&&&
units for part number 1A1 and has computed an optima) )ot
si8e of :,2$& units Per!unit carr6ing costs and stocDout
costs are *1% and *%, respecti-e)6 ;he fo))owing data
ha-e been gathered in an attempt to determine an
appropriate safet6 stocD )e-e)'
Onits Short Because of 0umber of ;imes Short
@2cess (emand (uring in the Iast ,&
the Iead ;ime Period 5eorder 96c)es
!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!!!!!
2&& :
%&& 12
,&& :
;he annua) cost of estab)ishing a 2&&!unit safet6 stocD is
e2pected to be
7 *2,:&&
B *,,&,&
9 *,,2:&
( *$,2&&
[A+] Source' 9"7 12A& ,!A
;he ca)cu)ation of an economic order #uantit6 /@G?1
considers
7 ;he purchasing manager4s sa)ar6
B 7 corporate charge for ad-ertising e2penses
9 ;he shipping costs to de)i-er the product to the
customer
( 9apita) costs
[A8] Source' 9"7 &:A1 ,!,
7 decrease in in-entor6 order costs wi))
7 (ecrease the economic order #uantit6
B Increase the reorder point
9 <a-e no effect on the economic order #uantit6
( Increase the economic order #uantit6
[AA] Source' 9"7 &:A1 ,!$
7n increase in in-entor6 ho)ding costs wi))
7 (ecrease the economic order #uantit6
B Increase the safet6 stocD re#uired
9 <a-e no effect on the economic order #uantit6
( Increase the economic order #uantit6
[Fact Pattern #12]
;horan @)ectronics 9ompan6 began producing pacemaDers
)ast 6ear 7t that time, the compan6 forecasted the need for
1&,&&& integrated circuits /I9s1 annua))6 (uring the first
6ear, the compan6 p)aced orders for the I9s when the
in-entor6 dropped to :&& units so that it wou)d ha-e
enough to produce pacemaDers continuous)6 during a
%!weeD )ead time before de)i-er6 of new I9s
Onfortunate)6, the compan6 ran out of this I9 component
on se-era) occasions causing cost)6 production de)a6s
9arefu) stud6 of )ast 6ear4s e2perience resu)ted in the
fo))owing e2pectations for the coming 6ear
5e)ated 5e)ated
Probabi)it6 Probabi)it6
JeeD)6 Osage of Osage Iead ;ime of Iead ;ime
!!!!!!!!!!!!!! !!!!!!!!! !!!!!!!!! !!!!!!!!!!!!!
28& units 2 % weeDs 1
18& units 8 2 weeDs A
!!! !!!
1& 1&
333 333
;he stud6 a)so suggested that usage during a gi-en weeD
was statistica))6 independent of usage during an6 other
weeD, and usage was a)so statistica))6 independent of )ead
time
[1&&] Source' 9"7 12A1 ,!28
/5efers to Fact Pattern #121
;he e2pected a-erage usage during a regu)ar production
weeD is
7 18& units
B 1A& units
9 2&& units
( 28& units
[1&1] Source' 9"7 12A1 ,!2A
/5efers to Fact Pattern #121
7ssuming the e2pected a-erage usage during a regu)ar
production weeD is %&& units, the e2pected usage during
)ead time is
7 %&& units
B :&& units
9 :%& units
( +$& units
[1&2] Source' 9"7 12A1 ,!%&
/5efers to Fact Pattern #121
If the compan6 reorders integrated circuits when the
in-entor6 has dropped to a )e-e) of +&& units, the
probabi)it6 that it wi)) run out of this component before the
order is recei-ed is
7 &&&8
B &&,&
9 &1&,
( &,&&
[1&%] Source' 9"7 &:A2 ,!2%
@ach stocDout of a product so)d b6 7J Inn 9o costs
*1,+$& per occurrence ;he carr6ing cost per unit of
in-entor6 is *$ per 6ear, and the compan6 orders 1,$&&
units of product 2, times a 6ear at a cost of *1&& per
order ;he probabi)it6 of a stocDout at -arious )e-e)s of
safet6 stocD is
Onits of Probabi)it6
Safet6 StocD of a StocDout
!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!
& $&
1&& %&
2&& 1,
%&& &$
,&& &1
;he optima) safet6 stocD )e-e) for the compan6 is
7 & units
B 1&& units
9 %&& units
( ,&& units
[1&,] Source' 9"7 12A% ,!:
"idwest Fabricators is bui)ding a corporate p)anning mode)
to predict cash f)ows ;he compan6 maintains
end!of!month in-entories that co-er 2&> of the fo))owing
month4s sa)es "erchandise costs a-erage $$> of se))ing
prices, and pa6ment is made at the time of purchase 7n
appropriate formu)a for tota) cash pa6ments in Hune for
merchandise purchases is
7 11 percent of sa)es in Hu)6
B 11 percent of sa)es in "a6
9 ,, percent of sa)es in Hune S 11 percent of sa)es
in Hu)6
( ,, percent of sa)es in Hune S 11 percent of sa)es
in "a6
[Fact Pattern #1%]
;he <uron 9orporation purchases :&,&&& headbands per
6ear ;he a-erage purchase )ead time is 2& worDing da6s
"a2imum )ead time is 2+ worDing da6s ;he corporation
worDs 2,& da6s per 6ear
[1&$] Source' 9"7 12A% ,!8
/5efers to Fact Pattern #1%1
<uron 9orporation shou)d carr6 safet6 stocD of
7 $,&&& units
B :,+$& units
9 1,+$& units
( 2$& units
[1&:] Source' 9"7 12A% ,!A
/5efers to Fact Pattern #1%1
<uron 9orporation shou)d reorder headbands when the
#uantit6 in in-entor6 reaches
7 $,&&& units
B :,+$& units
9 1,+$& units
( $,2$& units
[Fact Pattern #1,]
56erson 9omputer Furniture Inc /59F1 manufactures a
)ine of office computer chairs ;he annua) demand for the
chairs is estimated to be $,&&& units ;he annua) cost to
ho)d one unit in in-entor6 is *1& per 6ear, and the cost to
initiate a production run is *1,&&& ;here are no computer
chairs on hand, and 59F has schedu)ed four e#ua)
production runs of computer chairs for the coming 6ear, the
first of which is to be run immediate)6 59F has 2$&
business da6s per 6ear, sa)es occur uniform)6 throughout
the 6ear, and production start!up is within one da6 59F is
considering using the fo))owing formu)a for determining the
economic order #uantit6 /@G?1
レ ソス
ウ 27( ウ
@G?3 ウ!!!!!!!!!ウ
ウ N ウ
タ ル
If 7 3 cost to initiate a production run per purchase order
( 3 annua) unit demand
N 3 cost of carr6ing one unit per 6ear
[1&+] Source' 9"7 &:A, ,!22
/5efers to Fact Pattern #1,1
If 59F does not maintain a safet6 stocD, the estimated tota)
carr6ing costs for the computer chairs for the coming 6ear
based on their current schedu)e is
7 *,,&&&
B *$,&&&
9 *:,2$&
( *1&,2$&
[1&8] Source' 9"7 &:A, ,!2%
/5efers to Fact Pattern #1,1
;he number of production runs per 6ear of computer chairs
that wou)d minimi8e the sum of carr6ing and set!up costs
for the coming 6ear is
7 1
B 2
9 ,
( $
[1&A] Source' 9"7 &:A, ,!2,
/5efers to Fact Pattern #1,1
7 safet6 stocD of a $!da6 supp)6 of computer chairs wou)d
increase 59F4s p)anned a-erage in-entor6 in units
/rounded1 b6
7 Lero units
B 2& units
9 $& units
( 1&& units
[11&] Source' 9"7 12A, ,!:
9ompanies that adopt =ust!in!time purchasing s6stems
often e2perience
7 7n increase in carr6ing costs
B 7 reduction in the number of supp)iers
9 Fewer de)i-eries from supp)iers
( 7 greater need for inspection of goods as the
goods arri-e
[111] Source' 9"7 12A, ,!+
Jhich one of the fo))owing items is not direct)6 ref)ected in
the basic economic order #uantit6 /@G?1 mode)K
7 Interest on in-ested capita)
B In-entor6 obso)escence
9 Pub)ic warehouse renta) charges
( ?uantit6 discounts )ost on in-entor6 purchases
[112] Source' 9"7 12A, ,!8
7 characteristic of the basic economic order #uantit6
/@G?1 mode) is that it
7 Is re)ati-e)6 insensiti-e to error
B Shou)d not be used when carr6ing costs are )arge
in re)ation to procurement costs
9 Is used when product demand, )ead!time, and
ordering costs are uncertain
( Shou)d not be used in con=unction with
computeri8ed perpetua) in-entor6 s6stems
[11%] Source' 9"7 12A, ,!A
9anseco @nterprises uses 8,,&&& units of Part 2$: in
manufacturing acti-ities o-er a %&&!da6 worD 6ear ;he
usua) )ead!time for the part is si2 da6sT occasiona))6,
howe-er, the )ead!time has gone as high as eight da6s ;he
compan6 now desires to ad=ust its safet6 stocD po)ic6 ;he
increase in safet6 stocD si8e and the )iDe)6 effect on
stocDout costs and carr6ing costs, respecti-e)6, wou)d be
7 $:& units, decrease, increase
B $:& units, decrease, decrease
9 1,:8& units, decrease, increase
( 1,:8& units, increase, no change
[11,] Source' 9"7 &:A: ,!11
Iisted be)ow are a compan64s month)6 unit costs to
manufacture and marDet a particu)ar product
"anufacturing costs'
(irect materia)s *2&&
(irect )abor 2,&
.ariab)e indirect 1:&
Fi2ed indirect 1&&
"arDeting costs'
.ariab)e 2$&
Fi2ed 1$&
;he compan6 must decide to continue maDing the product
or bu6 it from an outside supp)ier ;he supp)ier has offered
to maDe the product at the same )e-e) of #ua)it6 that the
compan6 can maDe it Fi2ed marDeting costs wou)d be
unaffected, but -ariab)e marDeting costs wou)d be reduced
b6 %&> if the compan6 were to accept the proposa) Jhat
is the ma2imum amount per unit that the compan6 can pa6
the supp)ier without decreasing operating incomeK
7 *8$&
B *:+$
9 *++$
( *$2$
[11$] Source' 9"7 &:A: ,!1$
In a decision ana)6sis situation, which one of the fo))owing
costs is not )iDe)6 to contain a -ariab)e cost componentK
7 Iabor
B G-erhead
9 (epreciation
( Se))ing
[11:] Source' 9"7 &:A: ,!1:
In a decision ana)6sis situation, which one of the fo))owing
costs is genera))6 not re)e-ant to the decisionK
7 Incrementa) cost
B (ifferentia) cost
9 7-oidab)e cost
( <istorica) cost
[11+] Source' 9"7 &:A: ,!1+
Jhen management must decide to accept or re=ect a
one!time!on)6 specia) order, gi-en sufficient id)e capacit6,
which one of the fo))owing is not re)e-ant to the decisionK
7 7bsorption costs
B (ifferentia) costs
9 (irect costs
( .ariab)e costs
[118] Source' 9"7 &:A: ,!18
Jhich one of the fo))owing is most re)e-ant to a
manufacturing e#uipment rep)acement decisionK
7 Grigina) cost of the o)d e#uipment
B (isposa) price of the o)d e#uipment
9 Cain or )oss on the disposa) of the o)d e#uipment
( 7 )ump!sum write!off amount from the disposa) of
the o)d e#uipment
[11A] Source' 9"7 &:A: ,!1A
Jhen an organi8ation decides on a course of action that is
se)ected from a group of a)ternati-e courses of action, the
benefit )ost b6 not choosing the best a)ternati-e course of
action is the
7 @2pected -a)ue
B Incrementa) cost
9 0et rea)i8ab)e -a)ue
( Gpportunit6 cost
[12&] Source' 9"7 &:A: ,!21
9osts re)e-ant to a maDe!or!bu6 decision inc)ude -ariab)e
)abor and -ariab)e materia)s as we)) as
7 Ona-oidab)e fi2ed costs
B (epreciation
9 7-oidab)e fi2ed costs
( Propert6 ta2es
[121] Source' 9"7 &:A: ,!22
Jhen a mu)tiproduct p)ant operates at fu)) capacit6, #uite
often decisions must be made as to which products to
emphasi8e ;hese decisions are fre#uent)6 made with a
short!run focus In maDing such decisions, managers shou)d
se)ect products with the
7 <ighest sa)es price per unit
B <ighest indi-idua) unit contribution margin
9 <ighest sa)es -o)ume potentia)
( <ighest contribution margin per unit of the
constraining resource
[122] Source' 9"7 12A: ,!1
;he term that best refers to past costs that ha-e been
incurred and are not re)e-ant to an6 future decisions is
7 (iscretionar6 costs
B Fu)) absorption costs
9 Incurred margina) costs
( SunD costs
[12,] Source' 9"7 12A: ,!%
/5efers to Fact Pattern #1$1
(uring the ne2t 6ear, NB!A: sa)es are e2pected to be
1&,&&& units 7)) of the costs wi)) remain the same e2cept
that fi2ed manufacturing o-erhead wi)) increase b6 2&> and
direct materia)s wi)) increase b6 1&> ;he se))ing price per
unit for ne2t 6ear wi)) be *1:& Based on this data, the
contribution margin from NB!A: for ne2t 6ear wi)) be
7 *:2&,&&&
B *+$&,&&&
9 *1,&8&,&&&
( *1,11&,&&&
[12$] Source' 9"7 12A: ,!,
/5efers to Fact Pattern #1$1
Nator 9o has recei-ed a specia), one!time, order for
1,&&& NB!A: parts 7ssume that Nator is operating at fu))
capacit6 and that the contribution margin of the output that
wou)d be disp)aced b6 the specia) order is *1&,&&& ;he
minimum price that is acceptab)e, using the origina) data, for
this one!time specia) order is in e2cess of
7 *:&
B *+&
9 *8+
( *1&&
[12:] Source' 9"7 12A: ,!$
7n important concept in decision maDing is described as
Qthe contribution to income that is forgone b6 not using a
)imited resource in its best a)ternati-e useQ ;his concept is
ca))ed
7 "argina) cost
B Incrementa) cost
9 Potentia) cost
( Gpportunit6 cost
[12+] Source' 9"7 12A: ,!:
Se-era) sur-e6s point out that most managers use fu))
product costs, inc)uding unit fi2ed costs and unit -ariab)e
costs, in de-e)oping cost!based pricing Jhich one of the
fo))owing is )east associated with cost!based pricingK
7 Price stabi)it6
B Price =ustification
9 ;arget pricing
( Fi2ed!cost reco-er6
[Fact Pattern #1:]
Jhiteha)) 9orporation produces chemica)s used in the
c)eaning industr6 (uring the pre-ious month, Jhiteha))
incurred *%&&,&&& of =oint costs in producing :&,&&& units
of 7"!12 and ,&,&&& units of B"!%: Jhiteha)) uses the
units!of!production method to a))ocate =oint costs
9urrent)6, 7"!12 is so)d at sp)it!off for *%$& per unit
F)anD 9orporation has approached Jhiteha)) to purchase
a)) of the production of 7"!12 after further processing
;he further processing wi)) cost Jhiteha)) *A&,&&&
[128] Source' 9"7 12A: ,!+
/5efers to Fact Pattern #1:1
9oncerning 7"!12, which one of the fo))owing a)ternati-es
is most ad-antageousK
7 Jhiteha)) shou)d process further and se)) to F)anD
if the tota) se))ing price per unit after further
processing is greater than *%&&, which co-ers the
=oint costs
B Jhiteha)) shou)d continue to se)) at sp)it!off un)ess
F)anD offers at )east *,$& per unit after further
processing, which co-ers Jhiteha))4s tota) costs
9 Jhiteha)) shou)d process further and se)) to F)anD
if the tota) se))ing price per unit after further
processing is greater than *$&&
( Jhiteha)) shou)d process further and se)) to F)anD
if the tota) se))ing price per unit after further
processing is greater than *$2$, which maintains the
same gross profit percentage
[12A] Source' 9"7 12A: ,!8
/5efers to Fact Pattern #1:1
7ssume that Jhiteha)) 9orporation agreed to se)) 7"!12
to F)anD 9orporation for *$$& per unit after further
processing (uring the first month of production, Jhiteha))
so)d $&,&&& units with 1&,&&& units remaining in in-entor6
at the end of the month Jith respect to 7"!12, which
one of the fo))owing statements is correctK
7 ;he operating profit )ast month was *$&,&&&, and
the in-entor6 -a)ue is *1$,&&&
B ;he operating profit )ast month was *$&,&&&, and
the in-entor6 -a)ue is *,$,&&&
9 ;he operating profit )ast month was *12$,&&&,
and the in-entor6 -a)ue is *%&,&&&
( ;he operating profit )ast month was *2&&,&&&,
and the in-entor6 -a)ue is *%&,&&&
[1%&] Source' 9"7 12A: ,!22
In a maDe!-ersus!bu6 decision, the re)e-ant costs inc)ude
-ariab)e manufacturing costs as we)) as
7 Factor6 management costs
B Cenera) office costs
9 7-oidab)e fi2ed costs
( (epreciation costs
[1%1] Source' Pub)isher
Iisted be)ow are a compan64s month)6 unit costs to
manufacture and marDet a particu)ar product
"anufacturing 9osts'
(irect materia)s *,&&
(irect )abor ,8&
.ariab)e indirect %2&
Fi2ed indirect 2&&
"arDeting 9osts'
.ariab)e *$&&
Fi2ed %&&
;he compan6 must decide whether to continue maDing the
product or to bu6 it from an outside supp)ier ;he supp)ier
has offered to maDe a product of the same #ua)it6 as that
manufactured in!house If the compan6 were to accept the
proposa), fi2ed marDeting costs wou)d be unaffected, but
-ariab)e marDeting costs wou)d be reduced b6 %&>
"oreo-er, if the compan6 outsources the product, the
capacit6 former)6 used for its manufacture wi)) be id)e
Jhat is the ma2imum amount per unit that the compan6
can pa6 the supp)ier without decreasing its operating
incomeK
7 *1+&&
B *1%$&
9 *1$$&
( *1&$&
[Fact Pattern #1+]
Pontotoc Industries manufactures a product that is used as
a subcomponent b6 other manufacturers It has the
fo))owing price and cost structure'
Se))ing price *%&&
9osts
(irect materia)s ,&
(irect )abor %&
.ariab)e manufacturing o-erhead 2,
Fi2ed manufacturing o-erhead :&
.ariab)e se))ing :
Fi2ed se))ing and administrati-e 2& /18&1
!!!!
Gperating margin *12&
3333
[1%2] Source' Pub)isher
/5efers to Fact Pattern #1+1
Pontotoc recei-ed a specia), one!time order for 1,&&& of
the abo-e parts 7ssuming Pontotoc has e2cess capacit6,
the minimum unit price for this specia), one!time order is in
e2cess of
7 *18&
B *12&
9 *1&&
( *1:&
[1%%] Source' Pub)isher
/5efers to Fact Pattern #1+1
Pontotoc recei-ed a specia), one!time order for 1,&&& units
of its product <owe-er, Pontotoc has an a)ternati-e use
for this capacit6 that wi)) resu)t in a contribution of *2&,&&&
;he minimum unit price for this specia), one time order is in
e2cess of
7 *2&&
B *18&
9 *1,&
( *12&
[1%,] Source' Pub)isher
If a OS manufacturer4s price in the OS marDet is be)ow
an appropriate measure of costs and the se))er has a
reasonab)e prospect of reco-ering the resu)ting )oss in the
future through higher prices or a greater marDet share, the
se))er has engaged in
7 9o))usi-e pricing
B (umping
9 Predator6 pricing
( Price discrimination
[1%$] Source' Pub)isher
7 compan64s product has an e2pected ,!6ear )ife c6c)e
from research, de-e)opment, and design through its
withdrawa) from the marDet Budgeted costs are
Opstream costs /5B(, design1 *2,&&&,&&&
"anufacturing costs %,&&&,&&&
(ownstream costs /marDeting,
distribution, customer ser-ice1 1,2&&,&&&
7fter!purchase costs 1,&&&,&&&
;he compan6 p)ans to produce 2&&,&&& units and price the
product at 12$> of the who)e!)ife unit cost ;hus, the
budgeted unit se))ing price is
7 *1$
B *%1
9 *%:
( *,$
[1%:] Source' 9I7 &$A: III!%$
7 ma=or =ustification for in-estments in computer!integrated
manufacturing /9I"1 pro=ects is
7 5eduction in the costs of spoi)age, reworDed units,
and scrap
B Iower booD -a)ue and depreciation e2pense for
factor6 e#uipment
9 Increased worDing capita)
( Stabi)i8ation of marDet share
[1%+] Source' 9I7 11A$ III!AA
Increased competition, techno)ogica) inno-ation, and a shift
from mass production of standardi8ed products to
custom!produced products in man6 industries ha-e
increased the need for producti-it6 impro-ement and
f)e2ibi)it6 of production s6stems In response to these
demands, organi8ations ha-e increased their re)iance on
automation and the use of ad-anced techno)ogies in their
operations Jhich of the fo))owing is an e2amp)e of the use
of automation and ad-anced techno)ogiesK
7 F)e2ib)e manufacturing s6stem /F"S1
B Hust!in!time /HI;1 s6stem
9 "aster budgeting s6stem /"BS1
( @conomic order #uantit6 /@G?1
[1%8] Source' 9I7 &$A$ III!2A
;raditiona))6, )arge manufacturers ha-e be)ie-ed that
economies of sca)e gained through )arge production runs of
)iDe, or simi)ar, products are the best wa6 to Deep
production costs down and remain competiti-e Se)ect the
most appropriate response to whether this theor6 is sti))
-a)id
7 Pes, )arger economies of sca)e continue to accrue
from e-er )arger production runs
B Pes, )ower!per!unit costs for standard products
continue to guarantee a competiti-e ad-antage
9 0o, economies of sca)e can no )onger be gained
from )ong production runs
( 0o, production f)e2ibi)it6 and di-ersit6 of products
are needed to remain competiti-e
[1%A] Source' 9"7 Samp ?,!2
7)) of the fo))owing costs are re)e-ant to a decision to
accept or re=ect an order e2cept
7 (ifferentia) costs
B Gut!of!pocDet costs
9 5ep)acement costs
( SunD costs
[1,&] Source' 9"7 Samp ?,!%
Po)ar 9ompan6 se))s refrigeration components both in the
OS and to a subsidiar6 )ocated in France Gne of the
components, Part 0o ,$:, has a -ariab)e manufacturing
cost of *%& ;he part can be so)d domestica))6 or shipped
to the French subsidiar6 for use in the manufacture of a
residentia) subassemb)6 5e)e-ant data with regard to Part
0o ,$: are shown be)ow
Part 0o ,$:
!!!!!!!!!!!!
(omestic se))ing price * :$
Shipping charges to France 1$
9ost of ac#uiring Part 0o ,$:
in France +$
French residentia) subassemb)6'
Sa)es price 1+&
Gther additiona) manufacturing costs $$
Onits shipped to France 1$&,&&&F
FIf deemed preferab)e, these units cou)d be so)d
in the OS
Po)ar4s app)icab)e income ta2 rates are ,&> in the OS
and +&> in France
Po)ar wi)) transfer Part 0o ,$: to the French subsidiar6 at
either -ariab)e manufacturing cost or the domestic marDet
price Gn the basis of this information, which one of the
fo))owing strategies shou)d be recommended to Po)ar4s
managementK
7 ;ransfer 1$&,&&& units at *%& and the French
subsidiar6 pa6s the shipping costs
B ;ransfer 1$&,&&& units at *:$ and the French
subsidiar6 pa6s the shipping costs
9 Se)) 1$&,&&& units in the OS and the French
subsidiar6 obtains Part 0o ,$: in France
( ;ransfer 1$&,&&& units at *:$ and ha-e the OS
compan6 absorb the shipping costs
[1,1] Source' 9I7 &$A: I.!+8
/5efer to Figures 1 through ,1 Jhich one of the graphs
depicts the demand cur-e for prestige goodsK
7 Figure 1
B Figure 2
9 Figure %
( Figure ,
[1,2] Source' 9"7 128A $!1:
/5efer to Figure $1 ;he diagram represents the economic
order #uantit6 /@G?1 mode) Jhich )ine segment
represents the reorder )ead timeK
7 7B
B 7@
9 7F
( B9
[1,%] Source' 9"7 128A $!1+
/5efer to Figure $1 ;he diagram represents the economic
order #uantit6 /@G?1 mode) Jhich )ine segment identifies
the #uantit6 of safet6 stocD maintainedK
7 7B
B 7@
9 79
( B9
[1,,] Source' 9"7 128A $!18
/5efer to Figure $1 ;he diagram represents the economic
order #uantit6 /@G?1 mode) Jhich )ine segment
represents the )ength of time to consume the tota) #uantit6
of materia)s orderedK
7 (@
B B9
9 79
( 7@
[1,$] Source' 9"7 &:A& ,!2+
Jhen a fi2ed p)ant asset with a $!6ear estimated usefu) )ife
is so)d during the second 6ear, how wou)d the use of an
acce)erated depreciation method instead of the straight!)ine
method affect the gain or )oss on the sa)e of the fi2ed p)ant
assetK
Cain Ioss
!!!!!!!! !!!!!!!!
7
Increase Increase
B
Increase (ecrease
9
(ecrease Increase
(
(ecrease (ecrease
[1,:] Source' Pub)isher
Jhat is the economic order #uantit6 for Hared 7utomoti-e
if the6 se)) %,&&& automobi)es per 6ear, at a cost of *+&&
per order, and a carr6ing cost of *12$ per automobi)eK
7 1%& automobi)es
B 2, automobi)es
9 18% automobi)es
( 2A: automobi)es
[Fact Pattern #18]
"adengrad 9ompan6 manufactures a sing)e e)ectronic
product ca))ed Precisionmi2 ;his unit is a batch!densit6
monitoring de-ice attached to )arge industria) mi2ing
machines used in f)our, rubber, petro)eum, and chemica)
manufacturing Precisionmi2 se))s for *A&& per unit ;he
fo))owing -ariab)e costs are incurred to produce each
Precisionmi2 de-ice'
(irect )abor *18&
(irect materia)s 2,&
Factor6 o-erhead 1&$
!!!!
;ota) -ariab)e production costs $2$
"arDeting costs +$
!!!!
;ota) -ariab)e costs *:&&
3333
"adengrad4s income ta2 rate is ,&>, and annua) fi2ed
costs are *:,:&&,&&& @2cept for an operating )oss
incurred in the 6ear of incorporation, the firm has been
profitab)e o-er the )ast $ 6ears
[1,+] Source' 9"7 &:A& $!12
/5efers to Fact Pattern #181
If "adengrad 9ompan6 achie-es a sa)es and production
-o)ume of 8,&&& units, the annua) before!ta2 income /)oss1
wi)) be
7 */,,2&&,&&&1
B *1,+8&,&&&
9 */2,$2&,&&&1
( */,2&,&&&1
[1,8] Source' 9"7 &:A& $!1%
/5efers to Fact Pattern #181
;he annua) sa)es -o)ume re#uired for "adengrad 9ompan6
to breaD e-en is
7 22,&&& units
B 11,&&& units
9 8,,&& units
( 1%,888 units
[1,A] Source' 9"7 &:A& $!1,
/5efers to Fact Pattern #181
For "adengrad 9ompan6 to achie-e an after!ta2 net
income of *$,&,&&&, annua) sa)es re-enue must be
7 *2%,8$&,&&&
B *22,$&&,&&&
9 *2,+&&,&&&
( *21,,2&,&&&
[1$&] Source' 9"7 &:A& $!1$
/5efers to Fact Pattern #181
7ssume a 1&> increase in annua) fi2ed costs, a 2&> unit
cost increase for direct )abor, and a reduction in unit
materia) costs of 2$>, with no change in se))ing price 7fter
incorporating these changes, "adengrad 9ompan64s
contribution margin wou)d be
7 %,>
B :A>
9 %:>
( :,>
[1$1] Source' 9"7 &:A& $!1:
/5efers to Fact Pattern #181
7ssume a 1&> increase in annua) fi2ed costs, a 2&> unit
cost increase for direct )abor, and a reduction in unit
materia) costs of 2$>, with no change in se))ing price
"adengrad 9ompan64s breaDe-en point wou)d increase
/decrease1 /rounded to the nearest who)e unit1 b6
7 %,A:& units
B /1,:2&1 units
9 1,:&, units
( ,&+ units
[1$%] Source' 9"7 &:A% ,!2
/5efers to Fact Pattern #1A1
;he ma2imum after!ta2 profit that can be earned b6 (e)phi
9ompan6 from sa)es of the new product during the ne2t
fisca) 6ear is
7 *%&,&&&
B *$&,&&&
9 *11&,&&&
( *::,&&&
[1$,] Source' 9"7 &:A% ,!%
/5efers to Fact Pattern #1A1
(e)phi 9ompan64s management has stipu)ated that it wi))
not appro-e the continued manufacture of the new product
after the ne2t fisca) 6ear un)ess the after!ta2 profit is at )east
*+$,&&& the first 6ear ;he unit se))ing price to achie-e this
target profit must be at )east
7 *%+&&
B *%::&
9 *%,:&
( *%A&&
[Fact Pattern #2&]
(onne))6 9orporation manufactures and se))s ;!shirts
imprinted with co))ege names and s)ogans Iast 6ear, the
shirts so)d for *+$& each, and the -ariab)e cost to
manufacture them was *22$ per unit ;he compan6
needed to se)) 2&,&&& shirts to breaD e-en ;he net income
)ast 6ear was *$,&,& (onne))64s e2pectations for the
coming 6ear inc)ude the fo))owing'
キ ;he sa)es price of the ;!shirts wi)) be *A
キ .ariab)e cost to manufacture wi)) increase b6 one!third
キ Fi2ed costs wi)) increase b6 1&>
キ ;he income ta2 rate of ,&> wi)) be unchanged
[1$$] Source' 9"7 &:8+ ,!1&
/5efers to Fact Pattern #2&1
;he se))ing price that wou)d maintain the same contribution
margin rate as )ast 6ear is
7 *A&&
B *82$
9 *1&&&
( Some amount other than those gi-en
[1$:] Source' 9"7 &:8+ ,!11
/5efers to Fact Pattern #2&1
;he number of ;!shirts (onne))6 9orporation must se)) to
breaD e-en in the coming 6ear is
7 1+,$&&
B 1A,2$&
9 2&,&&&
( Some amount other than those gi-en
[1$+] Source' 9"7 &:8+ ,!12
/5efers to Fact Pattern #2&1
Sa)es for the coming 6ear are e2pected to e2ceed )ast
6ear4s b6 1,&&& units If this occurs, (onne))64s sa)es
-o)ume in the coming 6ear wi)) be
7 22,:&& units
B 21,A:& units
9 2%,,&& units
( Some amount other than those gi-en
[1$8] Source' 9"7 &:8+ ,!1%
/5efers to Fact Pattern #2&1
If (onne))6 9orporation wishes to earn *22,$&& in net
income for the coming 6ear, the compan64s sa)es -o)ume in
do))ars must be
7 *21%,+$&
B *2$+,:2$
9 *22A,$&&
( Some amount other than those gi-en
[1$A] Source' HB 5oma)
.on Stutgatt Internationa)4s breaDe-en point is 8,&&& racing
bic6c)es and 12,&&& $!speed bic6c)es If the se))ing price
and -ariab)e costs are *$+& and *2&& for a racer, and
*18& and *A& for a $!speed respecti-e)6, what is the
weighted!a-erage contribution marginK
7 *1&&
B *1,$
9 *1+A
( *2&2
[Fact Pattern #21]
7 compan6 se))s two products, M and P ;he sa)es mi2
consists of a composite unit of 2 units of M for e-er6 $ units
of P /2'$1 Fi2ed costs are *,A,$&& ;he unit contribution
margins for M and P are *2$& and *12&, respecti-e)6
[1:&] Source' 9I7 &$8: I.!8
/5efers to Fact Pattern #211
9onsidering the compan6 as a who)e, the number of
composite units to breaD e-en is
7 1,:$&
B ,,$&&
9 8,2$&
( 22,$&&
[1:1] Source' 9I7 &$8: I.!A
/5efers to Fact Pattern #211
If the compan6 had a profit of *22,&&&, the unit sa)es must
ha-e been
Product M Product P
!!!!!!!!! !!!!!!!!!
7
$,&&& 12,$&&
B
1%,&&& %2,$&&
9
2%,8&& $A,$&&
(
%2,$&& 1%,&&&
[1:2] Source' Pub)isher
7 manufacturing concern se))s its so)e product for *1& per
unit, with a unit contribution margin of *: ;he fi2ed
manufacturing cost rate per unit is *2 based on a
denominator capacit6 of 1 mi))ion units, and fi2ed marDeting
costs are *1$ mi))ion If A&&,&&& units are produced, the
absorption!costing breaDe-en point in units so)d is
7 ,2$,&&& units
B $8%,%%% units
9 A&&,&&& units
( 1,&&&,&&& units
[1:%] Source' Pub)isher
7 not!for!profit socia) agenc6 pro-ides home hea)th care
assistance to as man6 patients as possib)e Its budgeted
appropriation /M1 for ne2t 6ear must co-er fi2ed costs of
*$ mi))ion, and the annua) per!patient cost /P1 of its
ser-ices <owe-er, the agenc6 is preparing for a possib)e
1&> reduction in its appropriation that wi)) )ower the
number of patients ser-ed from $,&&& to ,,&&& ;he
reduced appropriation and the annua) per!patient cost e#ua)
5educed Per!Patient
7ppropriation 7nnua) 9ost
!!!!!!!!!!!!! !!!!!!!!!!!
7
*$,&&&,&&& *,,&&&
B
*8,%%%,%%% *8%%
9
*A,&&&,&&& *1,&&&
(
*1&,&&&,&&& *$,&&&
[1:,] Source' 9I7 &$A% I.!11
7 compan6 has sa)es of *$&&,&&&, -ariab)e costs of
*%&&,&&&, and preta2 profit of *1$&,&&& If the compan6
increased the sa)es price per unit b6 1&>, reduced fi2ed
costs b6 2&>, and )eft -ariab)e cost per unit unchanged,
what wou)d be the new breaDe-en point in sa)es do))arsK
7 *88,&&&
B *1&&,&&&
9 *11&,&&&
( *12$,&&&
[1:$] Source' 9I7 &$A% I.!1+
7 compan6 with *28&,&&& of fi2ed costs has the fo))owing
data'
Product 7 Product B
!!!!!!!!! !!!!!!!!!
Sa)es price per unit *$ *:
.ariab)e costs per unit *% *$
7ssume three units of 7 are so)d for each unit of B so)d
<ow much wi)) sa)es be in do))ars of product B at the
breaDe-en pointK
7 *2&&,&&&
B *2,&,&&&
9 *28&,&&&
( *8,&,&&&
[1::] Source' 9I7 11A% I.!11
7 retai) compan6 determines its se))ing price b6 marDing up
-ariab)e costs :&> In addition, the compan6 uses fre#uent
se))ing price marDdowns to stimu)ate sa)es If the
marDdowns a-erage 1&>, what is the compan64s
contribution margin ratioK
7 2+$>
B %&:>
9 %+$>
( ,1+>
[Fact Pattern #22]
;his data pertains to a compan6
;ota) 9ost Onit 9ost
!!!!!!!!!! !!!!!!!!!
Sa)es /,&,&&& units1 *1,&&&,&&& *2$
5aw materia)s 1:&,&&& ,
(irect )abor 28&,&&& +
Factor6 o-erhead'
.ariab)e 8&,&&& 2
Fi2ed %:&,&&&
Se))ing and genera)
e2penses
.ariab)e 12&,&&& %
Fi2ed 22$,&&&
[1:+] Source' 9I7 &$A, III!,2
/5efers to Fact Pattern #221
<ow man6 units does the compan6 need to produce and
se)) to maDe a before!ta2 profit of 1&> of sa)esK
7 :$,&&& units
B %:,$:2 units
9 A&,&&& units
( 2$,&&& units
[1:8] Source' 9I7 &$A, III!,%
/5efers to Fact Pattern #221
7ssuming that the compan6 se))s 8&,&&& units, what is the
ma2imum that can be paid for an ad-ertising campaign
whi)e sti)) breaDing e-enK
7 *1%$,&&&
B *1,&1$,&&&
9 *$%$,&&&
( *:A$,&&&
[1:A] Source' 9I7 11A% I.!12
;ota) production costs of prior periods for a compan6 are
)isted as fo))ows 7ssume that the same cost beha-ior
patterns can be e2tended )inear)6 o-er the range of %,&&&
to %$,&&& units and that the cost dri-er for each cost is the
number of units produced
Production
in units
per month %,&&& A,&&& 1:,&&& %$,&&&
!!!!!!!!!! !!!!!!! !!!!!!! !!!!!!! !!!!!!!!
9ost M *2%,+&& *$2,:8& *8:,,A& *1+8,2:&
9ost P ,+,28& 1,1,8,& 2$2,1:& $$1,:&&
;he compan6 is concerned about its current operating
performance that is summari8ed as fo))ows
Sa)es /*12$& per unit1 *%&&,&&&
.ariab)e costs 18&,&&&
0et operating )oss /,&,&&&1
<ow man6 additiona) units shou)d ha-e been so)d in order
for the compan6 to breaD e-enK
7 %2,&&&
B 1:,&&&
9 12,8&&
( 8,&&&
[1+&] Source' 9"7 128: $!12
9ost!-o)ume!profit /9.P1 ana)6sis is a De6 factor in man6
decisions, inc)uding choice of product )ines, pricing of
products, marDeting strateg6, and use of producti-e
faci)ities 7 ca)cu)ation used in a 9.P ana)6sis is the
breaDe-en point Gnce the breaDe-en point has been
reached, operating income wi)) increase b6 the
7 Cross margin per unit for each additiona) unit so)d
B 9ontribution margin per unit for each additiona)
unit so)d
9 Fi2ed costs per unit for each additiona) unit so)d
( .ariab)e costs per unit for each additiona) unit
so)d
[1+1] Source' 9"7 &:8+ ,!1,
For a profitab)e compan6, the amount b6 which sa)es can
dec)ine before )osses occur is Dnown as the
7 Sa)es -o)ume -ariance
B <urd)e rate
9 "argina) income rate
( "argin of safet6
[1+2] Source' 9"7 12A& ,!2
Gne of the ma=or assumptions )imiting the re)iabi)it6 of
breaDe-en ana)6sis is that
7 @fficienc6 and producti-it6 wi)) continua))6
increase
B ;ota) -ariab)e costs wi)) remain unchanged o-er
the re)e-ant range
9 ;ota) fi2ed costs wi)) remain unchanged o-er the
re)e-ant range
( ;he cost of production factors -aries with changes
in techno)og6
[1+%] Source' 9"7 &:A1 ,!11
If in-entories are e2pected to change, the t6pe of costing
that pro-ides the best information for breaDe-en ana)6sis is
7 Hob order costing
B .ariab)e /direct1 costing
9 Hoint costing
( 7bsorption /fu))1 costing
[1+,] Source' 9"7 12A, ,!%
"arston @nterprises se))s three chemica)s' petro), septine,
and trido) Petro) is the compan64s most profitab)e productT
trido) is the )east profitab)e Jhich one of the fo))owing
e-ents wi)) definite)6 decrease the firm4s o-era)) breaDe-en
point for the upcoming accounting periodK
7 ;he insta))ation of new computer!contro))ed
machiner6 and subse#uent )a6off of assemb)6!)ine
worDers
B 7 decrease in trido)4s se))ing price
9 7n increase in the o-era)) marDet for septine
( 7n increase in anticipated sa)es of petro) re)ati-e
to sa)es of septine and trido)
[1+$] Source' 9"7 128: $!1%
;he margin of safet6 is a De6 concept of 9.P ana)6sis ;he
margin of safet6 is
7 ;he contribution margin rate
B ;he difference between budgeted contribution
margin and breaDe-en contribution margin
9 ;he difference between budgeted sa)es and
breaDe-en sa)es
( ;he difference between the breaDe-en point in
sa)es and cash f)ow breaDe-en
[1+:] Source' Pub)isher
In worDing on a 9.P ana)6sis, the accountant is unsure of
the e2act resu)ts andEor assumptions under which to
operate Jhat can the accountant do to he)p management
in this 9.P decisionK
7 0othing It is not the responsibi)it6 of the
accountant to be concerned with the ambiguit6 of the
resu)ts andEor assumptions
B 7scertain the probabi)ities of -arious outcomes
and worD with management on understanding those
probabi)ities in reference to the 9.P decision
9 9a)cu)ate the probabi)ities of -arious outcomes
and maDe the decision for management
( Ose a random number tab)e to generate a decision
mode) and maDe the decision for management
[1++] Source' 9"7 12A& ,!1
Jhen used in cost!-o)ume!profit ana)6sis, sensiti-it6
ana)6sis
7 (etermines the most profitab)e mi2 of products to
be so)d
B 7))ows the decision maDer to introduce
probabi)ities in the e-a)uation of decision a)ternati-es
9 Is done through -arious possib)e scenarios and
computes the impact on profit of -arious predictions
of future e-ents
( Is )imited because in cost!-o)ume!profit ana)6sis,
costs are not separated into fi2ed and -ariab)e
components
[1+8] Source' 9I7 1188 I.!1+
Jhich of the fo))owing is a characteristic of a contribution
income statementK
7 Fi2ed and -ariab)e e2penses are combined as one
)ine
B Fi2ed e2penses are )isted separate)6 from -ariab)e
e2penses
9 Fi2ed and -ariab)e manufacturing costs are
combined as one )ine item, but fi2ed operating
e2penses are shown separate)6 from -ariab)e
operating e2penses
( Fi2ed and -ariab)e operating e2penses are
combined as one )ine item, but fi2ed manufacturing
e2penses are shown separate)6 from -ariab)e
manufacturing e2penses
[Fact Pattern #2%]
Siberian SDi 9ompan6 recent)6 e2panded its manufacturing
capacit6, which wi)) a))ow it to produce up to 1$,&&& pairs
of cross!countr6 sDis of the mountaineering mode) or the
touring mode) ;he Sa)es (epartment assures management
that it can se)) between A,&&& pairs and 1%,&&& pairs of
either product this 6ear Because the mode)s are -er6
simi)ar, Siberian SDi wi)) produce on)6 one of the two
mode)s
;he fo))owing information was compi)ed b6 the 7ccounting
(epartment
Per Onit /Pair1 (ata
!!!!!!!!!!!!!!!!!!!!
"ountaineering ;ouring
!!!!!!!!!!!!!! !!!!!!!
Se))ing price *88&& *8&&&
.ariab)e costs $28& $28&
Fi2ed costs wi)) tota) *%:A,:&& if the mountaineering mode)
is produced but wi)) be on)6 *%1:,8&& if the touring mode)
is produced Siberian SDi is sub=ect to a ,&> income ta2
rate
[1+A] Source' 9"7 12A1 ,!1%
/5efers to Fact Pattern #2%1
If Siberian SDi 9ompan6 desires an after!ta2 net income of
*2,,&&&, how man6 pairs of touring mode) sDis wi)) the
compan6 ha-e to se))K
7 1%,118 pairs
B 12,$2A pairs
9 1%,8$% pairs
( ,,,:& pairs
[18&] Source' 9"7 12A1 ,!1,
/5efers to Fact Pattern #2%1
;he tota) sa)es re-enue at which Siberian SDi 9ompan6
wou)d maDe the same profit or )oss regard)ess of the sDi
mode) it decided to produce is
7 *88&,&&&
B *,22,,&&
9 *A2,,&&&
( *:8:,,&&
[181] Source' 9"7 12A1 ,!1$
/5efers to Fact Pattern #2%1
If the Siberian SDi 9ompan6 Sa)es (epartment cou)d
guarantee the annua) sa)e of 12,&&& pairs of either mode),
Siberian SDi wou)d
7 Produce 12,&&& pairs of touring sDis because the6
ha-e a )ower fi2ed cost
B Be indifferent as to which mode) is so)d because
each mode) has the same -ariab)e cost per unit
9 Produce 12,&&& pairs of mountaineering sDis
because the6 ha-e a )ower breaDe-en point
( Produce 12,&&& pairs of mountaineering sDis
because the6 are more profitab)e
[Fact Pattern #2,]
Brue)) @)ectronics 9o is de-e)oping a new product, surge
protectors for high!-o)tage e)ectrica) f)ows ;he fo))owing
cost information re)ates to the product'
Onit 9osts
!!!!!!!!!!
(irect materia)s *%2$
(irect )abor ,&&
(istribution +$
;he compan6 wi)) a)so be absorbing *12&,&&& of
additiona) fi2ed costs associated with this new product 7
corporate fi2ed charge of *2&,&&& current)6 absorbed b6
other products wi)) be a))ocated to this new product
[182] Source' 9"7 &:A, ,!28
/5efers to Fact Pattern #2,1
If the se))ing price is *1, per unit, the breaDe-en point in
units /rounded to the nearest hundred1 for surge protectors
is
7 8,$&& units
B 1&,&&& units
9 1$,&&& units
( 2&,&&& units
[18%] Source' 9"7 &:A, ,!2A
/5efers to Fact Pattern #2,1
<ow man6 surge protectors /rounded to the nearest
hundred1 must Brue)) @)ectronics se)) at a se))ing price of
*1, per unit to gain *%&,&&& additiona) income before
ta2esK
7 1&,+&& units
B 12,1&& units
9 2&,&&& units
( 2$,&&& units
[18,] Source' 9"7 &:A, ,!%&
/5efers to Fact Pattern #2,1
<ow man6 surge protectors /rounded to the nearest
hundred1 must Brue)) @)ectronics se)) at a se))ing price of
*1, per unit to increase after!ta2 income b6 *%&,&&&K
Brue)) @)ectronics4 effecti-e income ta2 rate is ,&>
7 1&,+&& units
B 12,1&& units
9 2&,&&& units
( 28,%&& units
[18$] Source' 9"7 12A, ,!$
7ustin "anufacturing, which is sub=ect to a ,&> income
ta2 rate, had the fo))owing operating data for the period =ust
ended
Se))ing price per unit * :&
.ariab)e cost per unit 22
Fi2ed costs $&,,&&&
"anagement p)ans to impro-e the #ua)it6 of its so)e
product b6 /11 rep)acing a component that costs *%$&
with a higher!grade unit that costs *$$&, and /21 ac#uiring
a *18&,&&& pacDing machine 7ustin wi)) depreciate the
machine o-er a 1&!6ear )ife with no estimated sa)-age -a)ue
b6 the straight!)ine method of depreciation If the compan6
wants to earn after!ta2 income of *1+2,8&& in the
upcoming period, it must se))
7 1A,%&& units
B 21,%1: units
9 22,$&& units
( 2%,8&& units
[Fact Pattern #2$]
"u)tiFrame 9ompan6 has the fo))owing re-enue and cost
budgets for the two products it se))s
P)astic C)ass
Frames Frames
!!!!!!!! !!!!!!!!
Budgeted unit sa)es 1&&,&&& %&&,&&&
Sa)es price *1&&& *1$&&
(irect materia)s /2&&1 /%&&1
(irect )abor /%&&1 /$&&1
Fi2ed o-erhead /%&&1 /,&&1
!!!!!!!! !!!!!!!!
0et income per unit *2&& *%&&
33333333 33333333
;he budgeted unit sa)es e#ua) the current unit demand, and
tota) fi2ed o-erhead for the 6ear is budgeted at *A+$,&&&
7ssume that the compan6 p)ans to maintain the same
proportiona) mi2 In numerica) ca)cu)ations, "u)tiFrame
rounds to the nearest cent and unit
[18:] Source' 9"7 12A& ,!,
/5efers to Fact Pattern #2$1
;he tota) number of units "u)tiFrame needs to produce
and se)) to breaD e-en is
7 1$&,&&& units
B %$,,$,$ units
9 1++,2+% units
( %&&,&&& units
[18+] Source' 9"7 12A& ,!$
/5efers to Fact Pattern #2$1
;he tota) number of units needed to breaD e-en if the
budgeted direct )abor costs were *2 for p)astic frames
instead of *% is
7 1$,,&28 units
B 1,,,,,, units
9 1$:,&&& units
( 1,:,1++ units
[188] Source' 9"7 12A& ,!:
/5efers to Fact Pattern #2$1
;he tota) number of units needed to breaD e-en if sa)es
were budgeted at 1$&,&&& units of p)astic frames and
%&&,&&& units of g)ass frames with a)) other costs remaining
constant is
7 1+1,A$8 units
B ,18,,$$ units
9 1$%,A,+ units
( %:$,1:8 units
[18A] Source' 9"7 &:A2 ,!22
"ason @nterprises has prepared the fo))owing budget for
the month of Hu)6
Se))ing Price .ariab)e 9ost Onit
Per Onit Per Onit Sa)es
!!!!!!!!!!!!! !!!!!!!!!!!!! !!!!!!
Product 7 *1&&& *,&& 1$,&&&
Product B 1$&& 8&& 2&,&&&
Product 9 18&& A&& $,&&&
7ssuming that tota) fi2ed costs wi)) be *1$&,&&& and the
mi2 remains constant, the breaDe-en point /rounded to the
ne2t higher who)e unit1 wi)) be
7 2&,,$$ units
B 21,,2A units
9 21,81A units
( :,818 units
[1A1] Source' 9"7 &:A2 ,!%&
/5efers to Fact Pattern #2:1
For the coming 6ear, the management of Barnes
9orporation anticipates a 1&> increase in sa)es, a 12>
increase in -ariab)e costs, and a *,$,&&& increase in fi2ed
e2penses ;he breaDe-en point for ne2t 6ear wi)) be
7 *+2A,&2+
B *8:2,1&%
9 *21,,&18
( *,+,,&&&
[1A2] Source' 9"7 12A, ,!,
;he fo))owing information re)ates to 9)6de 9orporation,
which produced and so)d $&,&&& units during a recent
accounting period
Sa)es *8$&,&&&
"anufacturing costs
Fi2ed 21&,&&&
.ariab)e 1,&,&&&
Se))ing and administrati-e costs
Fi2ed %&&,&&&
.ariab)e ,$,&&&
Income ta2 rate ,&>
For the ne2t accounting period, if production and sa)es are
e2pected to be ,&,&&& units, the compan6 shou)d
anticipate a contribution margin per unit of
7 *18:
B *%1&
9 *+%&
( *1%%&
[1A%] Source' 9"7 &:+A $!1%
B@B< "anufacturing is considering dropping a product
)ine It current)6 produces a mu)ti!purpose woodworDing
c)amp in a simp)e manufacturing process that uses specia)
e#uipment .ariab)e costs amount to *:&& per unit Fi2ed
o-erhead costs, e2c)usi-e of depreciation, ha-e been
a))ocated to this product at a rate of *%$& a unit and wi))
continue whether or not production ceases (epreciation
on the specia) e#uipment amounts to *2&,&&& a 6ear If
production of the c)amp is stopped, the specia) e#uipment
can be so)d for *18,&&&T if production continues, howe-er,
the e#uipment wi)) be use)ess for further production at the
end of 1 6ear and wi)) ha-e no sa)-age -a)ue ;he c)amp
has a se))ing price of *1& a unit Ignoring ta2 effects, the
minimum number of units that wou)d ha-e to be so)d in the
current 6ear to breaD e-en on a cash f)ow basis is
7 ,,$&&
B $,&&&
9 2&,&&&
( %:,&&&
[1A,] Source' 9H SDender
;on6Dinn 9ompan6 is contemp)ating marDeting a new
product Fi2ed costs wi)) be *8&&,&&& for production of
+$,&&& units or )ess and *1,2&&,&&& if production e2ceeds
+$,&&& units ;he -ariab)e cost ratio is :&> for the first
+$,&&& units ;ota) -ariab)e costs wi)) decrease to $&> for
units in e2cess of +$,&&& If the product is e2pected to se))
for *2$ per unit, how man6 units must ;on6Dinn se)) to
breaD e-enK
7 12&,&&&
B 111,&&&
9 A:,&&&
( 8&,&&&
[1A$] Source' 9I7 11A: III!A&
;wo companies produce and se)) the same product in a
competiti-e industr6 ;hus, the se))ing price of the product
for each compan6 is the same 9ompan6 1 has a
contribution margin ratio of ,&> and fi2ed costs of *2$
mi))ion 9ompan6 2 is more automated, maDing its fi2ed
costs ,&> higher than those of 9ompan6 1 9ompan6 2
a)so has a contribution margin ratio that is %&> greater than
that of 9ompan6 1 B6 comparison, 9ompan6 1 wi)) ha-e
the UIist 7V breaDe-en point in terms of do))ar sa)es
-o)ume and wi)) ha-e the UIist BV do))ar profit potentia)
once the indifference point in do))ar sa)es -o)ume is
e2ceeded
Iist 7 Iist B
!!!!!! !!!!!!!
7 Iower Iesser
B Iower Creater
9 <igher Iesser
( <igher Creater
[1A:] Source' 9I7 11A: III!A1
7 compan6 manufactures a sing)e product @stimated cost
data regarding this product and other information for the
product and the compan6 are as fo))ows'
Sa)es price per unit *,&
;ota) -ariab)e production cost per unit *22
Sa)es commission /on sa)es1 $>
Fi2ed costs and e2penses'
"anufacturing o-erhead *$,$A8,+2&
Cenera) and administrati-e *%,+%2,,8&
@ffecti-e income ta2 rate ,&>
;he number of units the compan6 must se)) in the coming
6ear in order to reach its breaDe-en point is
7 %88,8&& units
B $18,,&& units
9 $8%,2&& units
( A+2,&&& units
[Fact Pattern #2+]
7 compan6 that se))s its sing)e product for *,& per unit
uses cost!-o)ume!profit ana)6sis in its p)anning ;he
compan64s after!ta2 net income for the past 6ear was
*1,188,&&& after app)6ing an effecti-e ta2 rate of ,&>
;he pro=ected costs for manufacturing and se))ing its sing)e
product in the coming 6ear are shown be)ow
.ariab)e costs per unit'
(irect materia) *$&&
(irect )abor ,&&
"anufacturing o-erhead :&&
Se))ing and administrati-e costs %&&
!!!!!!
;ota) -ariab)e cost per unit *18&&
333333
7nnua) fi2ed operating costs'
"anufacturing o-erhead *:,2&&,&&&
Se))ing and administrati-e costs %,+&&,&&&
;ota) annua) fi2ed cost *A,A&&,&&&
[1A+] Source' 9I7 &$A: III!8,
/5efers to Fact Pattern #2+1
;he do))ar sa)es -o)ume re#uired in the coming 6ear to earn
the same after!ta2 net income as the past 6ear is
7 *2&,1:&,&&&
B *21,:&&,&&&
9 *2%,,&&,&&&
( *2:,,&&,&&&
[1A8] Source' 9I7 &$A: III!8$
/5efers to Fact Pattern #2+1
;he compan6 has )earned that a new direct materia) is
a-ai)ab)e that wi)) increase the #ua)it6 of its product ;he
new materia) wi)) increase the direct materia) costs b6 *%
per unit ;he compan6 wi)) increase the se))ing price of the
product to *$& per unit and increase its marDeting costs b6
*1,$+$,&&& to ad-ertise the higher!#ua)it6 product ;he
number of units the compan6 has to se)) in order to earn a
1&> before!ta2 return on sa)es wou)d be
.ariab)e costs per unit'
(irect materia) * $&&
(irect )abor ,&&
"anufacturing o-erhead :&&
Se))ing and administrati-e coats %&&
!!!!!!
;ota) -ariab)e costs per unit *18&&
333333
7nnua) fi2ed operating costs'
"anufacturing o-erhead *:,2&&,&&&
Se))ing and administrati-e costs %,+&&,&&&
!!!!!!!!!!
;ota) annua) fi2ed costs *A,A&&,&&&
3333333333
7 %%+,$&& units
B %,:,8+$ units
9 ,2$,&&& units
( ,+8,12$ units
[Fact Pattern #28]
;ota) production costs of prior periods for a compan6 are
)isted as fo))ows 7ssume that the same cost beha-ior
patterns can be e2tended )inear)6 o-er the range of %,&&&
to %$,&&& units and that the cost dri-er for each cost is the
number of units produced
Production
in units
per month %,&&& A,&&& 1:,&&& %$,&&&
!!!!!!!!!! !!!!!!! !!!!!!! !!!!!!! !!!!!!!!
9ost M *2%,+&& *$2,:8& *8:,,A& *1+8,2:&
9ost P ,+,28& 1,1,8,& 2$2,1:& $$1,:&&
[1AA] Source' 9I7 &$A, III!AA
/5efers to Fact Pattern #281
Jhat is the a-erage cost per unit at a production )e-e) of
8,&&& units for cost MK
7 *$A8
B *$8$
9 *+A&
( *,8%
[2&&] Source' 9I7 1188 I.!1:
Positi-e net income is shown on a cost!-o)ume!profit chart
when the
7 ;ota) -ariab)e e2pense )ine e2ceeds the tota) fi2ed
e2pense )ine
B ;ota) e2pense )ine e2ceeds the tota) sa)es re-enue
)ine
9 ;ota) sa)es re-enue )ine e2ceeds the tota) fi2ed
e2pense )ine
( ;ota) sa)es re-enue )ine e2ceeds the tota) e2pense
)ine
[2&1] Source' 9I7 &$82 I.!2%
7 compan64s breaDe-en point in sa)es do))ars ma6 be
affected b6 e#ua) percentage increases in both se))ing price
and -ariab)e cost per unit /assume a)) other factors are
constant within the re)e-ant range1 ;he e#ua) percentage
changes in se))ing price and -ariab)e cost per unit wi)) cause
the breaDe-en point in sa)es do))ars to
7 (ecrease b6 )ess than the percentage increase in
se))ing price
B (ecrease b6 more than the percentage increase in
the se))ing price
9 Increase b6 the percentage change in -ariab)e cost
per unit
( 5emain unchanged
[2&2] Source' 9"7 12+% ,!,
Jhich of the fo))owing wou)d decrease unit contribution
margin the mostK
7 7 1$> decrease in se))ing price
B 7 1$> increase in -ariab)e e2penses
9 7 1$> decrease in -ariab)e e2penses
( 7 1$> decrease in fi2ed e2penses
[2&%] Source' 9I7 &$++ I.!11
Jhich of the fo))owing wi)) resu)t in raising the breaDe-en
pointK
7 7 decrease in the -ariab)e cost per unit
B 7n increase in the semi-ariab)e cost per unit
9 7n increase in the contribution margin per unit
( 7 decrease in income ta2 rates
[2&,] Source' Pub)isher
7 compan6 wants to open a new store in one of two
nearb6 shopping ma))s In "a)) 7, the rent wi)) be
*2$&,&&& per 6ear In "a)) B, the rent wi)) be ,> of gross
re-enues 7ssuming that re-enues and a)) other e)ements
under consideration are the same for both ma))s, at what
)e-e) of re-enues wi)) the compan6 be indifferent between
the two ma))sK
7 *1,&&&,&&&
B *,,&&&,&&&
9 *:,2$&,&&&
( *12,$&&,&&&
[2&$] Source' 9I7 &$8% I.!$
7 compan6 a))ocates its -ariab)e factor6 o-erhead based
on direct )abor hours (uring the past % months, the actua)
direct )abor hours and the tota) factor6 o-erhead a))ocated
were as fo))ows'
Hanuar6 Februar6 "arch
!!!!!!! !!!!!!!! !!!!!!!!
(irect )abor hours 1,&&& %,&&& $,&&&
;ota) factor6 o-erhead a))ocated *8&,&&& *1,&,&&&
*2&&,&&&
Based upon this information, month)6 fi2ed factor6
o-erhead was
7 *$&,&&&
B *,:,::+
9 *%%,%%%
( *%&,&&&
[2&:] Source' 9I7 &$8$ I.!:
Creen 9ompan6 produces Product 7 and se))s it for
*18&& ;he fo))owing cost data app)6'
;6pe of 9ost Per Onit
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!
(irect materia)s /% )b 2 *1$&1 *,$&
(irect )abor :,$
.ariab)e o-erhead 1%$
Fi2ed o-erhead 1$&
.ariab)e se))ing e2pense 11&
Fi2ed se))ing e2pense 22&
!!!!!!
*1+1&
333333
Creen has thought of marDeting a new Product B with the
same cost structure as Product 7 e2cept that the price wi))
be *1$:& Creen 9ompan6 current)6 has the p)ant
capacit6 necessar6 for this e2pansion Because of the cost
structure, Creen 9ompan6 wi)) find the production and sa)e
of Product B in the short run to be
7 0ot profitab)e un)ess the price can be raised to
*1+1&
B 0ot profitab)e at an6 price
9 0ot profitab)e at *1$:& because the fi2ed se))ing
e2pense and fi2ed manufacturing o-erhead wi)) not be
co-ered b6 the price
( Profitab)e to produce and se)) Product B in the
short run at the price of *1$:&
[Fact Pattern #2A]
7 compan6 produced the fo))owing data /rounded1 on its
product'
Onit 9ost
0umber of !!!!!!!!!!!!!!!!!!!!!! "argina) "argina)
Onits Produced Fi2ed .ariab)e ;ota) 9ost 5e-enue
!!!!!!!!!!!!!! !!!!! !!!!!!!! !!!!! !!!!!!!! !!!!!!!!
1 1&& 8$ 18$ 8$ A&
2 $& +& 12& $$ A&
% %% :$ A8 $$ A&
, 2$ :+ A2 +% A&
$ 2& +$ A$ 1&+ A&
[2&+] Source' 9I7 118% I.!2%
/5efers to Fact Pattern #2A1
<ow man6 units shou)d be producedK
7 2
B %
9 ,
( $
[2&8] Source' 9I7 118% I.!2,
/5efers to Fact Pattern #2A1
If two units of product were produced and so)d, the tota)
contribution margin wou)d be
7 *2$
B *,&
9 *$&
( *+&
[2&A] Source' 9I7 &$8$ I.!8
Grange 9ompan64s contro))er de-e)oped the fo))owing
direct!costing income statement for 6ear 1'
Per
Onit
!!!!
Sa)es /1$&,&&& units at *%&1 *,,$&&,&&& *%&
!!!!
.ariab)e costs'
(irect materia)s *1,&$&,&&& * +
(irect )abor 1,$&&,&&& 1&
"fg o-erhead %&&,&&& 2
Se))ing B mDg %&&,&&& 2
!!!!!!!!!! !!!!
/%,1$&,&&&1 *21
!!!!!!!!!! !!!!
9ontribution margin *1,%$&,&&& * A
!!!!
Fi2ed costs'
"fg o-erhead * :&&,&&& * ,
Se))ing B mDg %&&,&&& 2
!!!!!!!!!! !!!!
/A&&,&&&1 * :
!!!!!!!!!! !!!!
0et income * ,$&,&&& * %
3333333333 3333
Grange 9o based its ne2t 6ear4s budget on the assumption
that fi2ed costs, unit sa)es, and the sa)es price wou)d remain
as the6 were in 6ear 1, but with net income being reduced
to *%&&,&&& B6 Hu)6 of 6ear 2, the contro))er was ab)e to
predict that unit sa)es wou)d increase o-er 6ear 1 )e-e)s b6
1&> Based on the 6ear 2 budget and the new information,
the predicted 6ear 2 net income wou)d be
7 *%&&,&&&
B *%%&,&&&
9 *,2&,&&&
( *$8$,&&&
[21&] Source' 9I7 118: I.!1&
7 compan6 has =ust comp)eted the fina) de-e)opment of its
on)6 product, genera) recombinant bacteria, which can be
programmed to Di)) most insects before d6ing themse)-es
;he product has taDen % 6ears and *:,&&&,&&& to de-e)op
;he fo))owing costs are e2pected to be incurred on a
month)6 basis for the norma) production )e-e) of 1,&&&,&&&
pounds of the new product'
1,&&&,&&& pounds
!!!!!!!!!!!!!!!!
(irect materia)s * %&&,&&&
(irect )abor 1,2$&,&&&
.ariab)e factor6 o-erhead ,$&,&&&
Fi2ed factor6 o-erhead 2,&&&,&&&
.ariab)e se))ing, genera), and adm e2penses A&&,&&&
Fi2ed se))ing, genera), and adm e2penses 1,$&&,&&&
!!!!!!!!!!
;ota) *:,,&&,&&&
3333333333
7t a sa)es price of *$A& per pound, the sa)es in pounds
necessar6 to ensure a *%,&&&,&&& profit the first 6ear
wou)d be /to the nearest thousand pounds1
7 1%,&1+,&&& pounds
B 1,,&&&,&&& pounds
9 1$,&&&,&&& pounds
( 2$,:&&,&&& pounds
[Fact Pattern #%&]
"oorehead "anufacturing 9ompan6 produces two
products for which the fo))owing data ha-e been tabu)ated
Fi2ed manufacturing cost is app)ied at a rate of *1&& per
machine hour
Per Onit MP!+ B(!,
!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!! !!!!!
Se))ing price *,&& *%&&
.ariab)e manufacturing cost *2&& *1$&
Fi2ed manufacturing cost * +$ * 2&
.ariab)e se))ing cost *1&& *1&&
;he sa)es manager has had a *1:&,&&& increase in the
budget a))otment for ad-ertising and wants to app)6 the
mone6 to the most profitab)e product ;he products are not
substitutes for one another in the e6es of the compan64s
customers
[211] Source' 9"7 &:+A $!2$
/5efers to Fact Pattern #%&1
Suppose the sa)es manager chooses to de-ote the entire
*1:&,&&& to increased ad-ertising for MP!+ ;he minimum
increase in sa)es units of MP!+ re#uired to offset the
increased ad-ertising is
7 :,&,&&& units
B 1:&,&&& units
9 128,&&& units
( 8&,&&& units
[212] Source' 9"7 &:+A $!2:
/5efers to Fact Pattern #%&1
Suppose the sa)es manager chooses to de-ote the entire
*1:&,&&& to increased ad-ertising for B(!, ;he minimum
increase in sa)es do))ars of B(!, re#uired to offset the
increased ad-ertising wou)d be
7 *1:&,&&&
B *%2&,&&&
9 *A:&,&&&
( *1,:&&,&&&
[21%] Source' 9"7 &:+A $!2+
/5efers to Fact Pattern #%&1
Suppose "oorehead has on)6 1&&,&&& machine hours that
can be made a-ai)ab)e to produce additiona) units of MP!+
and B(!, If the potentia) increase in sa)es units for either
product resu)ting from ad-ertising is far in e2cess of this
production capacit6, which product shou)d be ad-ertised
and what is the estimated increase in contribution margin
earnedK
7 Product MP!+ shou)d be produced, 6ie)ding a
contribution margin of *+$,&&&
B Product MP!+ shou)d be produced, 6ie)ding a
contribution margin of *1%%,%%%
9 Product B(!, shou)d be produced, 6ie)ding a
contribution margin of *18+,$&&
( Product B(!, shou)d be produced, 6ie)ding a
contribution margin of *2$&,&&&
[21,] Source' 9I7 118A I.!$,
;he percentage change in earnings before interest and
ta2es
associated with the percentage change in sa)es -o)ume is
the degree of
7 Gperating )e-erage
B Financia) )e-erage
9 BreaDe-en )e-erage
( 9ombined )e-erage
[21$] Source' 9"7 &:A$ 1!1
7 higher degree of operating )e-erage compared with the
industr6 a-erage imp)ies that the firm
7 <as higher -ariab)e costs
B <as profits that are more sensiti-e to changes in
sa)es -o)ume
9 Is more profitab)e
( Is )ess risD6
[21:] Source' 9"7 &:A2 1!8
9ar)is)e 9ompan6 current)6 se))s ,&&,&&& bott)es of
perfume each 6ear @ach bott)e costs *8, to produce and
se))s for *1&& Fi2ed costs are *28,&&& per 6ear ;he firm
has annua) interest e2pense of *:,&&&, preferred stocD
di-idends of *2,&&& per 6ear, and a ,&> ta2 rate ;he
degree of operating )e-erage for 9ar)is)e 9ompan6 is
7 2,
B 1+8
9 21%
( 12
[21+] Source' 9I7 &$A1 I.!1+
7 compan6 maDes a product that se))s for *%& (uring the
coming 6ear, fi2ed costs are e2pected to be *18&,&&&, and
-ariab)e costs are estimated at *2: per unit <ow man6
units must the compan6 se)) to breaD e-enK
7 :,&&&
B :,A2,
9 ,$,&&&
( +2&,&&&
[Fact Pattern #%1]
;he data a-ai)ab)e for the current 6ear are gi-en be)ow
Jho)e 9ompan6 (i-ision 1 (i-ision 2
!!!!!!!!!!!!! !!!!!!!!!! !!!!!!!!!!
.ariab)e manufacturing cost
of goods so)d * ,&&,&&& *22&,&&& *8&,&&&
Ona))ocated costs /eg,
president4s sa)ar61 1&&,&&&
Fi2ed costs contro))ab)e b6
di-ision managers /eg,
ad-ertising, engineering
super-ision costs1 A&,&&& $&,&&& ,&,&&&
0et re-enue 1,&&&,&&& :&&,&&& ,&&,&&&
.ariab)e se))ing and
administrati-e costs 1%&,&&& +&,&&& :&,&&&
Fi2ed costs contro))ab)e b6
others /eg, depreciation,
insurance1 12&,&&& +&,&&& $&,&&&
[218] Source' 9I7 118: I.!1:
/5efers to Fact Pattern #%11
Based upon the information presented abo-e, the
contribution margin for the compan6 was
7 *,&&,&&&
B *,+&,&&&
9 *$%&,&&&
( *:&&,&&&
[21A] Source' 9I7 118: I.!1+
/5efers to Fact Pattern #%11
Osing the information presented abo-e, the contribution b6
(i-ision 1 was
7 *1A&,&&&
B *2:&,&&&
9 *%1&,&&&
( *%8&,&&&
[22&] Source' 9I7 118, I.!%
;wo companies are e2pected to ha-e annua) sa)es of
1,&&&,&&& decDs of p)a6ing cards ne2t 6ear @stimates for
ne2t 6ear are presented be)ow'
9ompan6 1 9ompan6 2
!!!!!!!!! !!!!!!!!!
Se))ing price per decD *%&& *%&&
9ost of paper per decD :2 :$
Printing inD per decD 1% 1$
Iabor per decD +$ 12$
.ariab)e o-erhead per decD %& %$
Fi2ed costs *A:&,&&& *2$2,&&&
Ci-en these data, which of the fo))owing responses is
correctK
.o)ume in Onits
BreaDe-en BreaDe-en at Jhich Profits
Point in Point in of 9ompan6 1
Onits for Onits for and 9ompan6 2
9ompan6 1 9ompan6 2 7re @#ua)
!!!!!!!!! !!!!!!!!! !!!!!!!!!!!!!!!!!
7
8&&,&&& ,2&,&&& 1,18&,&&&
B
8&&,&&& ,2&,&&& 1,&&&,&&&
9
$%%,%%, 1&$,&&& 1,&&&,&&&
(
$%%,%%, 1&$,&&& 1,18&,&&&
[221] Source' 9"7 &:8+ 1!2+
I6man 9ompan6 has the opportunit6 to increase annua)
sa)es *1&&,&&& b6 se))ing to a new, risDier group of
customers ;he unco))ectib)e e2pense is e2pected to be
1$>, and co))ection costs wi)) be $> ;he compan64s
manufacturing and se))ing e2penses are +&> of sa)es, and
its effecti-e ta2 rate is ,&> If I6man shou)d accept this
opportunit6, the compan64s after!ta2 profits wou)d increase
b6
7 *:,&&&
B *1&,&&&
9 *1&,2&&
( *1,,,&&
[222] Source' 9I7 &$+8 I.!18
7n organi8ation4s sa)es re-enue is e2pected to be *+2,:&&,
a 1&> increase o-er )ast 6ear For the same period, tota)
fi2ed costs of *22,&&& are e2pected to be the same as )ast
6ear If the number of units so)d is e2pected to increase b6
1,1&&, the margina) re-enue per unit wi)) be
7 *,
B *:
9 *2&
( *,:
[22%] Source' 7 Ji)son
;he 9hi)ders 9ompan6 se))s widgets ;he compan6 breaDs
e-en at an annua) sa)es -o)ume of +$,&&& units 7ctua)
annua) sa)es -o)ume was 1&&,&&& units, and the compan6
reported a profit of *2&&,&&& ;he annua) fi2ed costs for
the 9hi)ders 9ompan6 are
7 *8&&,&&&
B *:&&,&&&
9 *+$,&&&
( Insufficient information to determine amount of
fi2ed costs
[22,] Source' 9I7 118$ I.!A
7 manufacturer produces a product that se))s for *1& per
unit .ariab)e costs per unit are *: and tota) fi2ed costs are
*12,&&& 7t this se))ing price, the compan6 earns a profit
e#ua) to 1&> of tota) do))ar sa)es B6 reducing its se))ing
price to *A per unit, the manufacturer can increase its unit
sa)es -o)ume b6 2$> 7ssume that there are no ta2es and
that tota) fi2ed costs and -ariab)e costs per unit remain
unchanged If the se))ing price were reduced to *A per unit,
the profit wou)d be
7 *%,&&&
B *,,&&&
9 *$,&&&
( *:,&&&
[Fact Pattern #%2]
7 compan6 has sa)es of one of its products of *,&&,&&&
per 6ear and a contribution margin ratio of 2&> Its margin
of safet6 is *,&,&&&
[22$] Source' Pub)isher
/5efers to Fact Pattern #%21
Jhat is the compan64s breaDe-en pointK
7 *%:&,&&&
B *%2&,&&&
9 *288,&&&
( *8&,&&&
[22:] Source' Pub)isher
/5efers to Fact Pattern #%21
Jhat are the compan64s fi2ed costsK
7 *+2,&&&
B *8&,&&&
9 *288,&&&
( *%2&,&&&
[Fact Pattern #%%]
For one of its di-isions, Buona Fortuna 9ompan6 has fi2ed
costs of *%&&,&&& and a -ariab)e!cost percentage e#ua) to
:&> of its *1& per unit se))ing price It wou)d )iDe to earn a
pre!ta2 income of *A&,&&& per 6ear from the di-ision
[22+] Source' Pub)isher
/5efers to Fact Pattern #%%1
Jhat is the breaDe-en point in do))arsK
7 *%&&,&&&
B *$&&,&&&
9 *+$&,&&&
( *1,&$&,&&&
[228] Source' Pub)isher
/5efers to Fact Pattern #%%1
<ow man6 units wi)) Buona Fortuna ha-e to se)) to earn a
pre!ta2 income of *A&,&&& per 6earK
7 :$,&&& units
B +$,&&& units
9 ++,2$& units
( A+,$&& units
[Fact Pattern #%,]
9atfur 9ompan6 has fi2ed costs of *%&&,&&& It produces
two products, M and P Product M has a -ariab)e cost
percentage e#ua) to :&> of its *1& per unit se))ing price
Product P has a -ariab)e cost percentage e#ua) to +&> of
its *%& se))ing price For the past se-era) 6ears, sa)es of
Product M ha-e a-eraged :: > of the sa)es of Product P
;hat ratio is not e2pected to change
[22A] Source' Pub)isher
/5efers to Fact Pattern #%,1
Jhat is 9atfur4s breaDe-en point in do))arsK
7 *%&&,&&&
B *+$&,&&&
9 *8$+,1,2
( *A,2,8$+
[2%&] Source' Pub)isher
/5efers to Fact Pattern #%,1
<ow man6 units of Product P wi)) 9atfur se)) at the
breaDe-en pointK
7 8,$+1 units
B 2&,,$, units
9 2%,%++ units
( 2$,+1, units
[2%1] Source' Pub)isher
/5efers to Fact Pattern #%,1
7ssume that 9atfur 9ompan6 achie-ed its p)anned
breaDe-en )e-e) of sa)es in do))ars, but the mi2 of products
so)d was one!to!one 7)) actua) costs and unit se))ing prices
e#ua)ed budgeted amounts Jhat is the impact on
profitabi)it6K
7 ;he compan6 is operating at the breaDe-en point
B ;he compan6 earned a profit
9 ;he compan6 sustained a )oss
( 9annot be determined from the information gi-en
[2%2] Source' Pub)isher
Based on potentia) sa)es of 1,&&& units per 6ear, a new
product has estimated costs of *:&&,&&& Jhat is the
target price to obtain a 2&> return on sa)esK
7 *+2&
B *+$&
9 *1,&8&
( *%,&&&
[Fact Pattern #%$]
Pontotoc Industries manufactures a product that is used as
a subcomponent b6 other manufacturers It has the
fo))owing price and cost structure'
Se))ing price *%&&
9osts
(irect materia)s *,&
(irect )abor %&
.ariab)e manufacturing o-erhead 2,
Fi2ed manufacturing o-erhead :&
.ariab)e se))ing :
Fi2ed se))ing and administrati-e 2& /18&1
!! !!!!
Gperating margin *12&
3333
[2%%] Source' Pub)isher
/5efers to Fact Pattern #%$1
Jhat wi)) the contribution margin per unit be if the
compan6 se))s 1&,&&& unitsK
7 *2&:
B *2&&
9 *1,&
( *12&
[2%,] Source' Pub)isher
/5efers to Fact Pattern #%$1
(uring the ne2t 6ear, sa)es are e2pected to be 1&,&&&
units 7)) costs wi)) remain the same e2cept for fi2ed
manufacturing o-erhead, which wi)) increase 2&>, and
direct materia)s, which wi)) increase 1&> ;he se))ing price
per unit for ne2t 6ear wi)) be *%2& Based on this
information, Pontotoc4s contribution margin for ne2t 6ear
wi)) be
7 *1,2,&,&&&
B *1,%:&,&&&
9 *2,1:&,&&&
( *2,2&&,&&&
[Fact Pattern #%:]
7 compan6 wants to open a new store in one of three
nearb6 shopping ma))s In "a)) 7, the rent wi)) be
*%&&,&&& per 6ear In "a)) B, the rent wi)) be ,> of gross
re-enues In "a)) 9, the rent wi)) be *1$&,&&& per 6ear
p)us %> of gross re-enues 7ssume that re-enues and a))
other e)ements under consideration are the same for a))
three ma))s
[2%$] Source' Pub)isher
/5efers to Fact Pattern #%:1
Jhich ma)) shou)d the compan6 choose if re-enues are
e2pected to be *:,&&&,&&& per 6earK
7 "a)) 7
B "a)) B
9 "a)) 9
( ;he compan6 wi)) be indifferent between two of
the choices
[2%:] Source' Pub)isher
/5efers to Fact Pattern #%:1
If the compan6 e2pects re-enues to be *1&,&&&,&&& per
6ear, which ma)) shou)d be chosenK
7 "a)) 7
B "a)) B
9 "a)) 9
( ;he compan6 wi)) be indifferent between two of
the choices
[2%+] Source' Pub)isher
/5efers to Fact Pattern #%:1
Jhat is the ma2imum )e-e) of re-enues at which "a)) 9 wi))
be the most desirab)e of the three optionsK
7 *1,A,AAA
B *$,&&&,&&&
9 *1$,&&&,&&&
( "a)) 9 wi)) ne-er be the most desirab)e choice
[2%8] Source' 9"7 12A, ,!2
Onited Industries manufactures three products at its high)6
automated factor6 ;he products are -er6 popu)ar, with
demand far e2ceeding the compan64s abi)it6 to supp)6 the
marDetp)ace ;o ma2imi8e profit, management shou)d focus
on each product4s
7 Cross margin
B Segment margin
9 9ontribution margin ratio
( 9ontribution margin per machine hour
[2%A] Source' Pub)isher
Product 7 accounts for +$> of a compan64s tota) sa)es
re-enue and :&> of its -ariab)e costs Product B accounts
for 2$> of tota) sa)es re-enue and 8$> of -ariab)e costs
Jhat is the breaDe-en point gi-en fi2ed costs of
*1$&,&&&K
7 *%+$,&&&
B *,,,,,,,
9 *$&&,&&&
( *$,$,,$$
[Fact Pattern #%+]
Nim is thinDing of organi8ing a fundraiser to support a )oca)
charit6 She has p)anned to rent a ban#uet ha)) and pro-ide
the guests with food, entertainment, and -arious part6
fa-ors She has decided to charge *$&& a person 7fter
researching around town, Nim has disco-ered the fo))owing
costs'
Fi2ed 9osts
!!!!!!!!!!!
5enta) fee of ban#uet ha)) *1$&,&&&
7d-ertising $&,&&&
@ntertainment ,,&&&
.ariab)e 9osts Per Cuest
!!!!!!!!!!!!!!!!!!!!!!!!!
Food *12
Gther misce))aneous costs 8
[2,&] Source' Pub)isher
/5efers to Fact Pattern #%+1
Jhat is Nim4s contribution marginK
7 *,&&
B *,$&
9 *,8&
( *$&&
[2,1] Source' Pub)isher
/5efers to Fact Pattern #%+1
<ow man6 guests must attend in order for Nim to breaD
e-enK
7 ,&8
B ,1+
9 ,2$
( ,,%
[2,2] Source' Pub)isher
/5efers to Fact Pattern #%+1
If Nim4s goa) is to raise *1&,&&& for her charit6, how man6
peop)e must attend the ban#uetK
7 ,&,
B ,2$
9 ,28
( ,,:
[Fact Pattern #%8]
<arper and his band want to put on a concert ;he6 ha-e
)ooDed at two -enues, a sma)) one and a )arge one, and
ha-e compi)ed the fo))owing information'
Sma)) Iarge
!!!!!! !!!!!!
9apacit6 of -enue ,&& 1,2&&
Fi2ed costs *2,&&& *,,8&&
;he -ariab)e cost per customer for both -enues is *2 ;he
band wi)) charge *1& per customer for the sma)) -enue or
*1, for the )arge -enue
[2,%] Source' Pub)isher
/5efers to Fact Pattern #%81
Jhat is the breaDe-en point of the sma)) -enueK
7 2&&
B 2$&
9 %&$
( %1$
[2,,] Source' Pub)isher
/5efers to Fact Pattern #%81
Jhat is the breaDe-en point of the )arge -enueK
7 %,%
B %+$
9 %81
( ,&&
[2,$] Source' Pub)isher
/5efers to Fact Pattern #%81
<arper owes the )oca) music store *1,&&& for e#uipment If
he intends on using the profit from the concert to pa6 bacD
his debt, how man6 ticDets must he se)) at the sma)) and
)arge -enue, respecti-e)6K
7 %&& and ,2A
B %+$ and ,2A
9 %+$ and $&&
( %&& and $&&
[Fact Pattern #%A]
Pan6er 9o is a producer of a tanD component ;his
product, H!$, has the fo))owing se))ing price and costs per
unit'
Se))ing price *%&&
(irect materia)s 12$
(irect )abor 2$
.ariab)e manufacturing o-erhead $&
Shipping and hand)ing $
Fi2ed manufacturing o-erhead 1$
Fi2ed se))ing and administrati-e 1&
!!!!
;ota) costs *2%&
3333
[2,:] Source' Pub)isher
/5efers to Fact Pattern #%A1
Pan6er has recent)6 recei-ed a specia), one!time order for
2,&&& units of H!$ Pan6er current)6 has enough e2cess
capacit6 for this order Jhat shou)d be the minimum price
charged b6 Pan6erK
7 *1$$
B *2&$
9 *2%&
( *%&&
[2,+] Source' Pub)isher
/5efers to Fact Pattern #%A1
Pan6er has again recei-ed a specia), one!time offer for
2,&&& units of H!$ Pan6er is now operating at fu)) capacit6,
1&,&&& units, at a tota) cost of *2,%&&,&&& ;o produce
this order wou)d cause a 2&> increase in fi2ed costs Jhat
is the minimum price that is acceptab)e for this one!time,
specia) orderK
7 *2&$
B *2%&
9 *2:&
( *%&&
[Fact Pattern #,&]
;he statement of income for (imme)) 9o presented be)ow
represents the operating resu)ts for the fisca) 6ear =ust
ended (imme)) had sa)es of 1,8&& tons of product during
the current 6ear ;he manufacturing capacit6 of (imme))4s
faci)ities is %,&&& tons of product
(imme)) 9o
Statement of Income
For the Pear @nded (ecember %1, 2&&1
Sa)es *A&&,&&&
!!!!!!!!
.ariab)e costs
"anufacturing *%1$,&&&
Se))ing costs 18&,&&&
!!!!!!!!
;ota) -ariab)e costs *,A$,&&&
!!!!!!!!
9ontribution margin *,&$,&&&
!!!!!!!!
Fi2ed costs
"anufacturing * A&,&&&
Se))ing 112,$&&
7dministration ,$,&&&
!!!!!!!!
;ota) fi2ed costs *2,+,$&&
!!!!!!!!
0et income before income ta2es *1$+,$&&
Income ta2es /,&>1 /:%,&&&1
!!!!!!!!
0et income after income ta2es * A,,$&&
33333333
[2,8] Source' Pub)isher
/5efers to Fact Pattern #,&1
;he breaDe-en -o)ume in tons of product for 2&&1 is
7 ,&& tons
B 1,1&& tons
9 A&& tons
( $$& tons
[2,A] Source' Pub)isher
/5efers to Fact Pattern #,&1
If the sa)es -o)ume is estimated to be 2,1&& tons in the ne2t
6ear, and if the prices and costs sta6 at the same )e-e)s and
amounts ne2t 6ear, the after!ta2 net income that (imme))
can e2pect for 2&&1 is
7 *1%$,&&&
B *11&,2$&
9 *28%,$&&
( *18,,$&&
[2$&] Source' Pub)isher
/5efers to Fact Pattern #,&1
(imme)) has a potentia) foreign customer that has offered to
bu6 1,$&& tons at *,$& per ton 7ssume that a)) of
(imme))4s costs wou)d be at the same )e-e)s and rates as in
2&&& Jhat net income after ta2es wou)d (imme)) maDe if
it tooD this order and re=ected some business from regu)ar
customers so as not to e2ceed capacit6K
7 *2A+,$&&
B *2$2,&&&
9 *211,$&&
( *2$:,$&&
[2$1] Source' Pub)isher
/5efers to Fact Pattern #,&1
(imme)) p)ans to marDet its product in a new territor6
(imme)) estimates that an ad-ertising and promotion
program costing *:1,$&& annua))6 wou)d need to be
undertaDen for the ne2t 2 or % 6ears In addition, a *2$ per
ton sa)es commission o-er and abo-e the current
commission to the sa)es force in the new territor6 wou)d be
re#uired <ow man6 tons wou)d ha-e to be so)d in the new
territor6 to maintain (imme))4s current after!ta2 income of
*A,,$&&K
7 %&+$ tons
B 1,&A$& tons
9 2+%%%% tons
( 1,$,$& tons
[2$2] Source' Pub)isher
/5efers to Fact Pattern #,&1
(imme)) is considering rep)acing a high)6 )abor intensi-e
process with an automatic machine ;his wou)d resu)t in an
increase of *$8,$&& annua))6 in manufacturing fi2ed costs
;he -ariab)e manufacturing costs wou)d decrease *2$ per
ton ;he new breaDe-en -o)ume in tons wou)d be
7 AA& tons
B 1,22, tons
9 1,8$, tons
( :12 tons
[2$%] Source' Pub)isher
/5efers to Fact Pattern #,&1
Ignore the facts presented in the pre-ious #uestion and now
assume (imme)) estimates that the per ton se))ing price
wou)d dec)ine 1&> ne2t 6ear .ariab)e costs wou)d
increase *,& per ton and the fi2ed costs wou)d not change
Jhat sa)es -o)ume in do))ars wou)d be re#uired to earn an
after!ta2 net income of *A,,$&& ne2t 6earK
7 *1,1,&,&&&
B *82$,&&&
9 *1,$&&,&&&
( *1,%$&,&&&
[Fact Pattern #,1]
BaDDer Industries se))s three products /Products :11, :1%,
and :1$1 that it manufactures in a factor6 consisting of one
department Both )abor and machine time are app)ied to the
products
BaDDer4s management is p)anning its production schedu)e
for the ne2t se-era) months ;here are )abor shortages in
the communit6 Some of the machines wi)) be out of ser-ice
for e2tensi-e o-erhau)ing 7-ai)ab)e machine and )abor time
for each of the ne2t : months is )isted be)ow
"onth)6 9apacit6 7-ai)abi)it6
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
0orma) machine capacit6 in machine hours %,$&&
9apacit6 of machines being repaired in machine hours
/$&&1
7-ai)ab)e machine capacit6 in machine hours %,&&&
Iabor capacit6 in direct )abor hours ,,&&&
7-ai)ab)e )abor in direct )abor hours %,+&&
33333
Iabor and "achine
Specifications per Onit of Product
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Product Iabor and "achine ;ime
!!!!!!! !!!!!!!!!!!!!!!!!!!!!!
:11 (irect )abor hours 2
"achine hours 2
:1% (irect )abor hours 1
"achine hours 1
:1$ (irect )abor hours 2
"achine hours 2
;he Sa)es (epartment4s forecast of product demand o-er
the ne2t : months is presented be)ow
Product "onth)6 Sa)es .o)ume
!!!!!!! !!!!!!!!!!!!!!!!!!!!
:11 $&& units
:1% ,&&
:1$ 1,&&&
BaDDer4s in-entor6 )e-e)s wi)) not be increased or
decreased during the ne2t : months ;he unit price and
cost data -a)id for the ne2t : months are presented be)ow
Product
!!!!!!!!!!!!!!!!!!
:11 :1% :1$
Onit costs' !!!! !!!! !!!!
(irect materia) * + * 1% * 1+
(irect )abor 12 : 12
.ariab)e o-erhead 2+ 2& 2$
Fi2ed o-erhead 1$ 1& %2
.ariab)e se))ing % 2 ,
Onit se))ing price *1A: *12% *1:+
[2$,] Source' Pub)isher
/5efers to Fact Pattern #,11
Jhat is the e2cess /deficienc61 for machine hoursK
7 /+&&1 hours
B /,&&1 hours
9 & hours
( 1,1&& hours
[2$$] Source' Pub)isher
/5efers to Fact Pattern #,11
Jhat is the e2cess /deficienc61 for )abor hoursK
7 /1&&1 hours
B %&& hours
9 +&& hours
( 1,8&& hours
[2$:] Source' Pub)isher
/5efers to Fact Pattern #,11
Jhat is product :1$4s contribution per machine hourK
7 *%$
B *+&
9 *A+
( *1:+
[2$+] Source' Pub)isher
/5efers to Fact Pattern #,11
If BaDDer4s strateg6 is to ma2imi8e do))ar profits, how man6
units of product :1$ wi)) be producedK
7 ,&& units
B $&& units
9 8&& units
( 1,&&& units
[2$8] Source' Pub)isher
/5efers to Fact Pattern #,11
If BaDDer4s strateg6 is to ma2imi8e tota) profits, what is the
tota) contributionK
7 *+1,2$&
B *122,$&&
9 *1%:,$&&
( *28&,8&&
[Fact Pattern #,2]
;he Sommers 9ompan6 manufactures a -ariet6 of
industria) -a)-es 9urrent)6, the compan6 is operating at
about +&> capacit6 and is earning a satisfactor6 return on
in-estment
"anagement has been approached b6 C)ascow Industries
Itd of Scot)and with an offer to bu6 12&,&&& units of a
pressure -a)-e C)ascow manufactures a -a)-e that is
a)most identica) to Sommers4 pressure -a)-eT howe-er, a
fire in C)ascow Industries4 -a)-e p)ant has shut down its
manufacturing operations C)ascow needs the 12&,&&&
-a)-es o-er the ne2t , months to meet commitments to its
regu)ar customersT the compan6 is prepared to pa6 *1A
each for the -a)-es, FGB shipping point
Sommers4 product cost, based on current attainab)e
standards, for the pressure -a)-e is
(irect materia)s * $&&
(irect )abor :&&
"anufacturing o-erhead A&&
!!!!!!
;ota) cost *2&&&
333333
"anufacturing o-erhead is app)ied to production at the rate
of *18 per standard direct )abor hour ;his o-erhead rate is
made up of the fo))owing components
.ariab)e factor6 o-erhead * :&&
Fi2ed factor6 o-erhead!direct 8&&
Fi2ed factor6 o-erhead!a))ocated ,&&
!!!!!!
7pp)ied manufacturing o-erhead rate *18&&
333333
In determining se))ing prices, Sommers adds a ,&> marDup
to product cost ;his pro-ides a *28 suggested se))ing price
for the pressure -a)-e ;he "arDeting (epartment,
howe-er, has set the current se))ing price at *2+ to maintain
marDet share
Production management be)ie-es that it can hand)e the
C)ascow Industries order without disrupting its schedu)ed
production ;he order wou)d, howe-er, re#uire additiona)
fi2ed factor6 o-erhead of *12,&&& per month in the form of
super-ision and c)erica) costs
If management accepts the order, %&,&&& pressure -a)-es
wi)) be manufactured and shipped to C)ascow Industries
each month for the ne2t , months Shipments wi)) be made
in weeD)6 consignments, FGB shipping point
[2$A] Source' Pub)isher
/5efers to Fact Pattern #,21
<ow man6 additiona) direct )abor hours wou)d be re#uired
each month to fi)) the C)ascow orderK
7 1&,&&&
B 1$,&&&
9 %&,&&&
( 12&,&&&
[2:&] Source' Pub)isher
/5efers to Fact Pattern #,21
Jhat is the incrementa) profit /)oss1 before ta2 associated
with the C)ascow orderK
7 /*1:8,&&&1
B /*12&,&&&1
9 *$$2,&&&
( *:&&,&&&
[2:1] Source' Pub)isher
/5efers to Fact Pattern #,21
Jhat is the minimum unit price that Sommers cou)d accept
without reducing net incomeK
7 *1,
B *1,,&
9 *2&
( *2&,&
PART 4A
DECISION THEORY AND
OPERATIONAL DECISION ANALYSIS
ANSWERS
[1] Source' 9"7 &:8: $!2:
7nswer /71 is incorrect because *$& resu)ts from
subtracting *1%$& from *1$&& and di-iding b6 %
machine hours
7nswer /B1 is correct ;he -ariab)e costs of
producing B18 tota) *1&$& /*%+$ S *,$& S
*22$1 ;hus, purchasing at *1%$& wou)d resu)t in a
)oss of *% per bearing Ci-en that each bearing
re#uires % hours of machine time, the )oss is *1 per
machine hour
7nswer /91 is incorrect because */1+$1 resu)ts from
not inc)uding -ariab)e manufacturing o-erhead when
ca)cu)ating the costs of producing B18 [/*82$ !
*1%$&1 ・% machine hours]
7nswer /(1 is incorrect because the )oss per machine
hour that resu)ts from bu6ing a component is */1&&1
[/*1&$& ! *1%$&1 ・%]
[2] Source' 9"7 &:8: $!2+
7nswer /71 is incorrect because purchasing ,,8&&
units of B12 wi)) increase the compan64s costs b6 *%
per B12 bearing Purchasing B18s costs )ess ;he
compan6 shou)d not purchase an6 B12 bearings
7nswer /B1 is incorrect because purchasing B12
bearings is not cost effecti-e B6 manufacturing a)) the
B12 units needed, the compan6 can a)so produce
+,&&& units of B18
7nswer /91 is incorrect because, after manufacturing
8,&&& units of B12, there are enough hours )eft to
produce +,&&& units of B18, so on)6 ,,&&& units of
B18 need to be purchased
7nswer /(1 is correct Purchasing wi)) increase the
compan64s costs b6 *% /*112$ ! *22$ ! *, ! *21
for each B12 bearing, or *12& per hour /*% ・2$
hrs1 Bu6ing B18 wi)) on)6 cost the compan6 an
additiona) *1 per machine hour [/*1%$& ! *1&$&1 ・
% machine hours] ;hus, the compan6 shou)d maDe a))
the needed B12s and compensate for the machine
hours constraint b6 purchasing B18s Ci-en that each
unit of B12 re#uires 2$ hours of machine time, the
compan6 can produce the needed 8,&&& units in
2&,&&& hours /2$ 2 8,&&&1 ;he remaining 21,&&&
hours /,1,&&& ! 2&,&&&1 can then be used for the
production of +,&&& B18s /21,&&& ・% hrs1
Because the annua) re#uirement of B18s is 11,&&&
units, the other ,,&&& units wi)) ha-e to be purchased
[%] Source' 9"7 &:8: $!28
7nswer /71 is incorrect because *1&$& is the
ma2imum price Stewart wou)d pa6 for B18 if it had
sufficient id)e capacit6 to produce its annua)
re#uirement of both bearings
7nswer /B1 is incorrect because the ma2imum price
for B18 is *1,1& [*1&$& S /*12& 2 % hours1]
7nswer /91 is incorrect because the ma2imum price
for B18 is *1,1& [*1&$& S /*12& 2 % hours1]
7nswer /(1 is correct If Stewart had sufficient id)e
capacit6 to manufacture its annua) re#uirements of
both bearings, it wou)d be wi))ing to pa6 no more than
*1&$& for a unit of B18 Since the gi-en fi2ed cost
wi)) continue if the id)e capacit6 is not used, Stewart
wou)d increase its costs b6 pa6ing more than the unit
-ariab)e cost /*%+$ S *,$& S *22$ 3 *1&$&1
<owe-er, Stewart must purchase some bearings
because it has insufficient id)e capacit6 to produce its
re#uirements 7s ca)cu)ated in the preceding
#uestions, the gi-en supp)iers4 prices for B12 and
B18 resu)t in a )oss per machine hour of *12& and
*1&&, respecti-e)6 7t those prices, Stewart shou)d
manufacture a)) its re#uirements of B12 and purchase
some units of B18 7ssuming the gi-en price of B12
is he)d constant, Stewart wou)d benefit from
purchasing B12 on)6 if the )oss per hour from bu6ing
B18 e2ceeded *12& per hour, or *%:& per bearing
/% hrs 2 *12&1 ;he ma2imum price for B18 is thus
*1,1& /*1&$& S *%:&1
[,] Source' 9"7 128: $!1+
7nswer /71 is incorrect because *,$&,&&& is the
depreciation charge to ?uig)e6 /%&> 2 *1,$&&,&&&1
7nswer /B1 is correct ;he minimum charge wou)d
inc)ude an6 -ariab)e costs incurred p)us depreciation
on a straight!)ine basis 9urrent)6, -ariab)e costs are
*%:&,&&& at :&> of capacit6 /*1,8&&,&&& 2 2&>1
If ?uig)e6 purchases energ6 e#ua) to an additiona)
%&> of capacit6, it can be assumed that the increase
in tota) -ariab)e costs wi)) be ha)f of the -ariab)e costs
for :&> of capacit6, or *18&,&&& 7)so, a))ocating
*21,&&&,&&& o-er 1, 6ears resu)ts in an annua)
depreciation of *1,$&&,&&& Gf this amount, %&>
wi)) re)ate to the capacit6 so)d ;hus, the depreciation
charge to ?uig)e6 is *,$&,&&& /%&> 2 *1,$&&,&&&1
;he tota) charge is *:%&,&&& /*,$&,&&& depreciation
S *18&,&&& .91
7nswer /91 is incorrect because *AA&,&&& e#ua)s
the *,$&,&&& depreciation p)us *$,&,&&& -ariab)e
costs
7nswer /(1 is incorrect because the amount <ermo
wou)d charge ?uig)e6 wou)d be *:%&,&&&
/*,$&,&&& depreciation S *18&,&&& -ariab)e costs1
[$] Source' 9"7 128: $!18
7nswer /71 is incorrect because ?uig)e6 is current)6
pa6ing *1,2&&,&&& and shou)d be wi))ing to continue
to pa6 the same amount
7nswer /B1 is incorrect because ?uig)e6 is current)6
pa6ing *1,2&&,&&& and shou)d be wi))ing to continue
to pa6 the same amount
7nswer /91 is correct Since ?uig)e6 is current)6
pa6ing *1,2&&,&&&, it wou)d not want to pa6 an6
more for the same ser-ice
7nswer /(1 is incorrect because ?uig)e6 is current)6
pa6ing *1,2&&,&&& and shou)d be wi))ing to continue
to pa6 the same amount
[:] Source' 9"7 &:8+ $!2&
7nswer /71 is incorrect because the firm wi)) incur
the fi2ed costs whether it bu6s the parts or not ;hus,
it wou)d cost *1$ more per unit to purchase the
hand)es [*12$ ! /*1%& ! *2&1]
7nswer /B1 is correct Since the fi2ed cost wi)) be
incurred whether the compan6 maDes or bu6s the
part, the re)e-ant unit cost of maDing the part is the
*11& -ariab)e cost /*1%& ! *2& fi2ed o-erhead1
;he e2istence of id)e capacit6 indicates that the firm
has no opportunit6 cost to be considered in the
ca)cu)ation ;hus, accepting the offer wou)d increase
costs b6 *1$ per unit
7nswer /91 is incorrect because the firm wi)) incur
the fi2ed costs whether it bu6s the parts or not ;hus,
it wou)d cost *1$ more per unit to purchase the
hand)es [*12$ ! /*1%& ! *2&1]
7nswer /(1 is incorrect because the firm wi)) incur
the fi2ed costs whether it bu6s the parts or not ;hus,
it wou)d cost *1$ more per unit to purchase the
hand)es [*12$ ! /*1%& ! *2&1]
[+] Source' 9"7 &:8+ $!21
7nswer /71 is incorrect because 12$,&&& units is the
2$&,&&& -o)ume times the probabi)it6 of $&>
7nswer /B1 is correct ;he e2pected -a)ue is found
b6 mu)tip)6ing the probabi)it6 of each possibi)it6 b6
the potentia) -o)umes'
2&&,&&& 2 2& 3 ,&,&&&
2$&,&&& 2 $& 3 12$,&&&
%&&,&&& 2 2& 3 :&,&&&
%$&,&&& 2 1& 3 %$,&&&
!!!!!!!
;ota) units 2:&,&&&
3333333
7nswer /91 is incorrect because the sa)es -o)ume is
determined b6 mu)tip)6ing each possibi)it6 b6 its
probabi)it6
7nswer /(1 is incorrect because the e2pected -a)ue
of 2:&,&&& units is determined b6 mu)tip)6ing a))
possibi)ities b6 their respecti-e probabi)ities and
tota)ing
[8] Source' 9"7 &:8+ $!22
7nswer /71 is incorrect because *$,A,&&& is
ca)cu)ated b6 mu)tip)6ing the -o)ume times the
probabi)it6 times *18& for each possibi)it6 and then
tota)ing ;his is the tota) re-enue
7nswer /B1 is correct ;he word deterministic is used
to characteri8e processes that are not probabi)istic
Such an approach uses the most )iDe)6 -a)ue In this
case, sa)es of desserts wou)d most )iDe)6 be %&&,&&&
units 7t *18& each, tota) re-enue wou)d be
*$,&,&&&
7nswer /91 is incorrect because *21:,&&& is
ca)cu)ated b6 mu)tip)6ing %&&,&&& units times ,&
probabi)it6 times *18& ;he probabi)it6 shou)d not
be used in the formu)a It shou)d be used to se)ect the
most )iDe)6 possibi)it6
7nswer /(1 is incorrect because the sa)es wou)d
most )iDe)6 be *$,&,&&& /%&&,&&& units times *18&1
because this -o)ume has the highest associated
probabi)it6
[A] Source' 9"7 &:8+ $!2%
7nswer /71 is incorrect because *1A8,2$& inc)udes
the fi2ed costs of *+8,&&&, which shou)d be
subtracted
7nswer /B1 is incorrect because *1$&,2$& inc)udes
the ad-ertising costs of *%&,&&&, which shou)d be
subtracted
7nswer /91 is correct ;he e2pected -a)ue for sa)es
of fro8en desserts is *%&$,&&& /2$&,&&& 2 *%& S
%&&,&&& 2 *,& S %$&,&&& 2 *2& S ,&&,&&& 2
*1&1 7t *18& each, the tota) re-enue from
%&$,&&& units wou)d be *$,A,&&& .ariab)e costs
wou)d tota) *11$ each /*,& S *%$ S *,&1, or
*%$&,+$& for %&$,&&& units Fi2ed costs tota)
*+8,&&& /*,8,&&& S *%&,&&&1 ;hus, operating
profit wou)d be *12&,2$& /*$,A,&&& ! *%$&,+$& !
*+8,&&&1
7nswer /(1 is incorrect because the operating profit
wou)d be *12&,2$& /*$,A,&&& ! *%$&,+$& !
*+8,&&&1
[1&] Source' 9"7 &:8+ $!2,
7nswer /71 is incorrect because %+,$&& units is
ca)cu)ated b6 di-iding *,$,&&& fi2ed costs b6 *12&
se))ing price
7nswer /B1 is correct Fi2ed costs of *,$,&&&
/*2$,&&& S *2&,&&&1 shou)d be di-ided b6 the unit
contribution margin of *,$ /*12& se))ing price !
*2$ ! *%& ! *2&1 ;he unit breaDe-en point is
therefore 1&&,&&& units /*,$,&&& ・*,$1
7nswer /91 is incorrect because :&,&&& units is
ca)cu)ated b6 di-iding *,$,&&& fi2ed costs b6 *+$
/*12& ! 2$ ! 2&1 ;he direct )abor per unit shou)d
a)so be subtracted from the se))ing price
7nswer /(1 is incorrect because the fi2ed costs of
*,$,&&& shou)d be di-ided b6 the unit contribution
margin of *,$ /*12& se))ing price ! *2$ ! *%& !
*2&1 to find the breaDe-en point of 1&&,&&& units
[11] Source' 9"7 &:8+ $!2$
7nswer /71 is incorrect because an incrementa) cost
is the additiona) cost of a new strateg6 or increased
production It is a)so ca))ed a differentia) cost
7nswer /B1 is incorrect because prime costs are
-ariab)e costs of direct materia) and direct )abor
7nswer /91 is incorrect because an opportunit6 cost
is the re-enue obtainab)e from an a)ternati-e use of a
resource
7nswer /(1 is correct 7 sunD cost is a pre-ious)6
incurred cost that is the resu)t of a past irre-ocab)e
management decision 0othing can be done in the
future about sunD costs ;he marDet stud6 cost is an
e2amp)e
[12] Source' 9"7 &:8+ $!2:
7nswer /71 is incorrect because con-ersion costs are
incurred for )abor and o-erhead
7nswer /B1 is correct (iscretionar6 costs refer to
fi2ed costs that are not abso)ute)6 necessar6 to
operate in the current period ;he )e-e) of these costs
is sub=ect to a decision made b6 management each
period 7 De6 characteristic of discretionar6 costs is
that there is no c)ear)6 measurab)e re)ationship
between input /the costs1 and output 7d-ertising is a
good e2amp)e of a discretionar6 fi2ed cost
7nswer /91 is incorrect because committed costs are
those fi2ed costs arising from the possession of p)ant
and e#uipment and a basic organi8ation ;hese costs
are affected primari)6 b6 )ong!run decisions as to a
compan64s desired capacit6
7nswer /(1 is incorrect because an opportunit6 cost
represents the ma2imum re-enue that cou)d ha-e
been earned on the ne2t best a)ternati-e use of a
resource
[1%] Source' 9"7 &:8+ $!2+
7nswer /71 is incorrect because a deferrab)e cost is
one that can be deferred to a future period
7nswer /B1 is incorrect because a sunD cost is one
that cannot be re-ersed since it is the resu)t of a past
irre-ocab)e decision
7nswer /91 is incorrect because an a-oidab)e cost is
an ongoing cost that ma6 be e)iminated b6 ceasing to
perform some economic acti-it6 or segment thereof
or b6 impro-ing the efficienc6 b6 which such acti-it6
is accomp)ished
7nswer /(1 is correct 7n opportunit6 cost is the
ma2imum return that cou)d ha-e been earned on the
ne2t best a)ternati-e use of a resource In this case,
the )ost profit on the ro))s is an opportunit6 cost
[1,] Source' 9"7 1288 $!12
7nswer /71 is incorrect because prime costs are
defined as costs that can be direct)6 traced to specific
units of production @2amp)es are raw materia)s and
direct )abor
7nswer /B1 is incorrect because sunD costs are the
resu)t of a past irre-ocab)e decision and are not
re)e-ant to future decisions
7nswer /91 is incorrect because discretionar6 costs
are characteri8ed b6 uncertaint6 about the
re)ationship between input /the costs1 and the -a)ue of
the re)ated output 7d-ertising and research are
e2amp)es ;he6 shou)d be contrasted with engineered
costs, that is, costs ha-ing a c)ear input!output
re)ationship /eg, direct materia)s1
7nswer /(1 is correct 7)ternati-e uses of p)ant
space to be considered in a maDeEbu6 decision and
the cost of a specia) de-ice necessar6 for acceptance
of a specia) order are e2amp)es of re)e-ant costs
5e)e-ant costs are future costs that are e2pected to
-ar6 with the action taDen Gther costs thus ha-e no
effect on the decision
[1$] Source' 9"7 1288 $!1%
7nswer /71 is correct Hoint production costs are
irre)e-ant to deciding whether to se)) at sp)it!off or to
process further Simi)ar)6, a)read6 incurred 5B(
costs and the costs of obso)ete in-entor6 are
irre)e-ant to future decisions ;hus, these are
e2amp)es of sunD costs SunD costs are una-oidab)e
;he6 are the resu)t of a past irre-ocab)e decision and
thus ha-e no re)e-ance to future decisions
7nswer /B1 is incorrect because discretionar6 costs
are characteri8ed b6 uncertaint6 about the
re)ationship between input /the costs1 and the -a)ue of
the re)ated output 7d-ertising and research are
e2amp)es ;he6 shou)d be contrasted with engineered
costs, that is, costs ha-ing a c)ear input!output
re)ationship /eg, direct materia)s1
7nswer /91 is incorrect because re)e-ant costs are
future costs that are e2pected to -ar6 with the action
taDen
7nswer /(1 is incorrect because differentia) cost
/sometimes ca))ed incrementa) cost1 is the difference
in tota) cost between two decisions
[1:] Source' 9"7 12A& ,!%
7nswer /71 is incorrect because a)) costs are not
considered
7nswer /B1 is incorrect because fi2ed costs wi)) be
considered if the6 differ among options
7nswer /91 is correct 5e)e-ant cost ana)6sis
considers on)6 those costs that differ among decision
options Both fi2ed and -ariab)e costs are considered
if the6 -ar6 with the option se)ected
7nswer /(1 is incorrect because costs that do not
-ar6 are ignored
[1+] Source' 9"7 12A& ,!12
7nswer /71 is incorrect because opportunit6 costs
are considered in the decision process
7nswer /B1 is incorrect because an opportunit6 cost
is the )oss of an inf)ow 7 -ariab)e cost is an outf)ow
7nswer /91 is incorrect because opportunit6 costs
are not costs that ha-e been incurred in the past
;he6 are the benefits forgone b6 not choosing some
other a)ternati-e
7nswer /(1 is correct Gpportunit6 cost is the
ma2imum benefit forgone b6 using a scarce resource
for a gi-en purpose It is the benefit pro-ided b6 the
ne2t best use of that resource 7n opportunit6 cost is
therefore re)e-ant to the decision process
[18] Source' 9"7 &:A1 ,!1,
7nswer /71 is incorrect because the resu)t is a
*%!per!unit )oss
7nswer /B1 is incorrect because the resu)t is a
*%!per!unit )oss
7nswer /91 is incorrect because the resu)t is a
*%!per!unit )oss
7nswer /(1 is correct @2c)usi-e of the fi2ed
o-erhead, the unit cost of maDing the p)ugs is *28
/*%: tota) cost ! *8 fi2ed G<1 Purchasing the p)ugs
wi)) a-oid *2 per unit of fi2ed o-erhead /*:&,&&&
G< app)ied ・%&,&&& units1 7ccording)6, *: per unit
of fi2ed o-erhead is una-oidab)e, and the re)e-ant
/a-oidab)e1 unit cost of maDing the p)ugs is *%& [*%:
tota) cost ! /*8 fi2ed G< ! *2 a-oidab)e cost1] ;he
purchase option therefore resu)ts in a *%!per!unit )oss
/*%% purchase price ! *%& re)e-ant cost1
[1A] Source' 9"7 &:A1 ,!1$
7nswer /71 is incorrect because the minimum annua)
rent must be *1A&,&&&
7nswer /B1 is incorrect because the minimum annua)
rent must be *1A&,&&&
7nswer /91 is incorrect because the minimum annua)
rent must be *1A&,&&&
7nswer /(1 is correct Jithout regard to renta) of
id)e production capacit6, the compan6 wi)) )ose *%
per unit /*%% purchase price ! *%& re)e-ant cost1 b6
purchasing the p)ugs ;he tota) annua) )oss wi)) be
*A&,&&& /%&,&&& units 2 *%1 9onse#uent)6, to
achie-e the targeted sa-ings, the minimum annua) rent
must be *1A&,&&& /*A&,&&& )oss from purchasing S
*1&&,&&& target1
[2&] Source' 9"7 12A2 ,!2
7nswer /71 is incorrect because opportunit6 cost is
not an out!of!pocDet cost, but the benefit gi-en up b6
not se)ecting the ne2t best a)ternati-e
7nswer /B1 is incorrect because opportunit6 cost is
not an out!of!pocDet cost, but the benefit gi-en up b6
not se)ecting the ne2t best a)ternati-e
7nswer /91 is incorrect because opportunit6 cost is
not an out!of!pocDet cost, but the benefit gi-en up b6
not se)ecting the ne2t best a)ternati-e
7nswer /(1 is correct Gpportunit6 cost is the benefit
forgone b6 not se)ecting the ne2t best use of scarce
resources ;he opportunit6 cost is 8ero when no
a)ternati-e use is a-ai)ab)e
[21] Source' 9"7 12A% ,!1
7nswer /71 is incorrect because the a-oidab)e fi2ed
costs of the upgrade process are re)e-ant ;he6 are
an incrementa) cost that wi)) be incurred if the
decision is to process further
7nswer /B1 is correct ;he decision to se)) or process
further shou)d be based on a comparison of the net
rea)i8ab)e -a)ue of M6)ene with the sa)es -a)ue of
M!$,+ If the incrementa) re-enues e2ceed the
incrementa) costs, the product shou)d be processed
further If not, the product shou)d be so)d at the
sp)it!off point ;he =oint manufacturing costs are sunD
costs and are therefore irre)e-ant to the decision
7nswer /91 is incorrect because the =oint
manufacturing costs are sunD costs that are not
re)e-ant to the decision
7nswer /(1 is incorrect because the =oint
manufacturing costs are sunD costs that are not
re)e-ant to the decision
[22] Source' 9"7 128$ $!2A
7nswer /71 is incorrect because -ariab)e costs
inc)ude actua) out)a6s for raw materia)s, direct )abor,
and -ariab)e o-erhead
7nswer /B1 is incorrect because opportunit6 costs
are not the actua) costs incurred
7nswer /91 is incorrect because an opportunit6 cost
is a benefit, not a cost, forgone
7nswer /(1 is correct 7n opportunit6 cost is the
return from the ne2t best opportunit6 that cou)d ha-e
been se)ected for the use of scarce resources It does
not represent an actua) receipt or disbursement of
resources and is not recorded in the accounting
records If the part cou)d be made using otherwise
id)e capacit6, there wou)d be no opportunit6 cost
[2%] Source' 9"7 128+ $!28
7nswer /71 is correct In addition to the *1$,&&&
purchase price, the compan6 wou)d sti)) incur *8,&&&
per unit of una-oidab)e /fi2ed1 manufacturing
o-erhead /2E% of *12,&&&1 ;he materia)s hand)ing
charge of 2&> of the purchase price of components
wou)d add another *%,&&& per unit /2 2 *1$,&&&1
;herefore, the unit cost of purchase wou)d be
*2:,&&& /*1$,&&& S *8,&&& S *%,&&&1, which is
*,,8&& more than the current cost of manufacture
7nswer /B1 is incorrect because a decrease of
*:,2&& assumes the cost to purchase the units is on)6
*1$,&&&
7nswer /91 is incorrect because a decrease of
*%,2&& does not inc)ude the *8,&&& of fi2ed
o-erhead costs
7nswer /(1 is incorrect because the effect on unit
cost if the part is purchased is an increase of *,,8&&
[/*1$,&&& purchase price S *8,&&& fi2ed o-erhead S
*%,&&& materia)s hand)ing charge1 ! *21,2&&]
[2,] Source' 9"7 128+ $!2A
7nswer /71 is incorrect because an increase of
*,8,&&& does not inc)ude the *2$,&&& of renta)
income
7nswer /B1 is correct Purchasing wou)d increase
unit cost b6 *,,8&& /*2:,&&& cost to purchase !
*21,2&& cost to manufacture1, an increase of
*,8,&&& per month /1& units 2 *,,8&&1 <owe-er,
the *2$,&&& of renta) income wou)d reduce the
increase in net costs to *2%,&&& per month
7nswer /91 is incorrect because a decrease of
*+,&&& assumes an increase in unit cost of *1,8&&
7nswer /(1 is incorrect because the month)6 cost
e#ua)s *2%,&&& [/*,,8&& 2 1& units1 ! *2$,&&& renta)
income]
[2$] Source' 9"7 128+ $!%&
7nswer /71 is incorrect because the opportunit6 cost
e#ua)s *,,&&& /*$2,&&& ! *,8,&&&1
7nswer /B1 is incorrect because the opportunit6 cost
e#ua)s *,,&&& /*$2,&&& ! *,8,&&&1
7nswer /91 is correct Gpportunit6 cost is the
ma2imum a)ternati-e earnings that might ha-e been
obtained if the producti-e good, ser-ice, or capacit6
had been app)ied to some a)ternati-e use ;he
additiona) tota) month)6 cost of purchasing the
component is *,8,&&& If the id)e faci)ities cou)d be
used to produce a product contributing *$2,&&& per
month, the net benefit opportunit6 cost of
manufacture wou)d be *,,&&&
7nswer /(1 is incorrect because the opportunit6 cost
e#ua)s *,,&&& /*$2,&&& ! *,8,&&&1
[2:] Source' 9"7 &:A& $!2%
7nswer /71 is incorrect because net rea)i8ab)e -a)ue
is the -a)ue of an asset net of an6 disposa) costs
7nswer /B1 is incorrect because e2pected -a)ue is a
weighted a-erage of potentia) outcomes ;he weights
are probabi)ities
7nswer /91 is correct Gpportunit6 cost is the
ma2imum re-enue or benefit obtainab)e from the ne2t
best a)ternati-e use of a resource It is the benefit
gi-en up b6 not se)ecting that option
7nswer /(1 is incorrect because an incrementa)
/differentia)1 cost is the additiona) cost of se)ecting
one option rather than another
[2+] Source' 9"7 &:A& $!2,
7nswer /71 is incorrect because both fi2ed and
-ariab)e costs can be either re)e-ant or irre)e-ant
depending upon the circumstances
7nswer /B1 is incorrect because re)e-ant costs are
those that differ among decision choices
7nswer /91 is incorrect because past costs are sunD
costs Because the6 cannot be changed b6
management action, the6 are not re)e-ant
7nswer /(1 is correct 5e)e-ant costs are anticipated
costs that wi)) -ar6 among the choices a-ai)ab)e In
other words, if two courses of action share some
costs, those costs are not re)e-ant because the6 wi))
be incurred regard)ess of the decision made
[28] Source' 9"7 &:A& $!2:
7nswer /71 is correct 5e)e-ant costs are those
future costs that differ among the options Incrementa)
or differentia) cost is the difference in tota) cost
between two decisions 9onse#uent)6, incrementa)
fi2ed cost is a re)e-ant cost
7nswer /B1 is incorrect because in-entor6 costs ma6
not a)wa6s differ among options
7nswer /91 is incorrect because costs that do not
-ar6 are not re)e-ant to the decision process
7nswer /(1 is incorrect because costs that do not
-ar6 are not re)e-ant to the decision process
[2A] Source' 9"7 12A& ,!11
7nswer /71 is incorrect because the si8e of the cost
is irre)e-ant if the cost does not affect the decision
process
7nswer /B1 is incorrect because the risDiness of the
decision is irre)e-ant if the cost does not affect the
decision process
7nswer /91 is correct "anageria) decisions shou)d
be based on the re)e-ant re-enues and costs 7
particu)ar cost or re-enue is re)e-ant if it wi)) -ar6 with
the option chosen ;hus, a re)e-ant cost or re-enue
has the abi)it6 to affect the decision made
7nswer /(1 is incorrect because some estimate of the
cost must be considered regard)ess of its accurac6
and -erifiabi)it6
[%&] Source' Pub)isher
7nswer /71 is incorrect because specia) techno)og6 is
considered in a maDe!or!bu6 situation
7nswer /B1 is incorrect because sDi))ed )abor is
considered in a maDe!or!bu6 situation
7nswer /91 is incorrect because specia) materia)s
re#uirements are considered in a maDe!or!bu6
situation
7nswer /(1 is correct @ach of the items )isted affects
the maDe!or!bu6 decision Specia) techno)og6 ma6
be a-ai)ab)e either within or outside the firm that
re)ates to the particu)ar product ;he firm ma6
possess necessar6 sDi))ed )abor or the supp)ier ma6
Specia) materia)s re#uirements ma6 a)so affect the
decision process because one supp)ier ma6 ha-e
monopo)i8ed a De6 component 7nother factor to be
considered is that assurance of #ua)it6 contro) is often
a reason for maDing rather than bu6ing
[%1] Source' Pub)isher
7nswer /71 is incorrect because irre)e-ant costs and
fi2ed costs ma6 be inc)uded in the unit amounts, and
unit cost ma6 be ca)cu)ated based on different
-o)umes
7nswer /B1 is incorrect because irre)e-ant costs and
fi2ed costs ma6 be inc)uded in the unit amounts, and
unit cost ma6 be ca)cu)ated based on different
-o)umes
7nswer /91 is incorrect because irre)e-ant costs and
fi2ed costs ma6 be inc)uded in the unit amounts, and
unit cost ma6 be ca)cu)ated based on different
-o)umes
7nswer /(1 is correct Onit costs shou)d be used
with e2treme care In each situation, the6 ma6 be
ca)cu)ated based on a different -o)ume )e-e) from that
anticipated, so comparabi)it6 ma6 be )ost Irre)e-ant
costs inc)uded in the unit cost shou)d be disregarded,
and on)6 re)e-ant costs inc)uded in the ana)6sis
7))ocated costs shou)d a)so be ignored and on)6 the
re)e-ant costs that wi)) change with the option chosen
shou)d be considered
[%2] Source' Pub)isher
7nswer /71 is correct ;he maintenance of )ong!run
re)ationships with supp)iers ma6 become paramount
in a maDe!or!bu6 decision 7bandoning )ong!run
supp)ier re)ationships ma6 cause difficu)t6 in obtaining
needed parts when terminated supp)iers find it
ad-antageous not to supp)6 parts in the future
7nswer /B1 is incorrect because, if #ua)it6 is
important, one can ordinari)6 contro) it better in one4s
own p)ant
7nswer /91 is incorrect because the a-ai)abi)it6 of
id)e capacit6 more )iDe)6 fa-ors the decision to maDe
7nswer /(1 is incorrect because the importance of
#ua)it6 contro), the firm4s possession of necessar6
sDi))ed )abor, and the a-ai)abi)it6 of id)e capacit6 are
#ua)itati-e factors fa-oring the maDe choice in a
maDe!or!bu6 decision
[%%] Source' 9I7 11A2 I.!18
7nswer /71 is incorrect because *8%$ does not
consider the -ariab)e se))ing e2penses
7nswer /B1 is correct Because the manufacturer has
e2cess capacit6 and e2isting sa)es wi)) be unaffected,
the minimum price the manufacturer shou)d be wi))ing
to accept is an6thing abo-e the tota) -ariab)e cost of
the unit /*2&$ S *%:& S *2+& S *&A& 3 *A2$1,
an amount that inc)udes the -ariab)e manufacturing
cost and the -ariab)e se))ing e2penses ;he fi2ed costs
are not re)e-ant
7nswer /91 is incorrect because *1,&& is the tota)
manufacturing cost, which inc)udes the fi2ed
manufacturing o-erhead and direct materia)s at *2%&
per unit, but not the -ariab)e se))ing e2penses
7dditiona) fi2ed manufacturing o-erhead costs wi))
not be incurred because the manufacturer is be)ow
fu)) capacit6 ;he fi2ed manufacturing o-erhead is a
sunD cost that is not re)e-ant to this decision
7nswer /(1 is incorrect because *1,8& does not
consider that the manufacturer is be)ow fu)) capacit6
and that the customer is p)acing a one!time order
Onder these circumstances, the manufacturer wou)d
not use its targeted se))ing price formu)a
[%$] Source' 9I7 11A% I.!1$
7nswer /71 is correct 7 sunD cost is a cost a)read6
incurred or committed to be incurred 9onse#uent)6,
sunD costs are not re)e-ant to decision maDing
because the6 cannot be affected b6 the choices
made ;he o)d machine4s booD -a)ue of *2,,&&& is
an out)a6 made in the past that cannot be changed
7nswer /B1 is incorrect because the trade!in -a)ue of
the o)d press affects the out!of!pocDet cost of the
new printing press
7nswer /91 is incorrect because the estimated
reduction in operating costs is a differentia) cost
between Deeping the o)d press and bu6ing the new
press
7nswer /(1 is incorrect because the a-oidab)e
interest on the current debt is an opportunit6 cost of
bu6ing the new printing press
[%:] Source' 9I7 11A% I.!2,
7nswer /71 is incorrect because the cost of maDing
M is a sunD cost /irre)e-ant1 In addition, on)6 M or P,
not both, can be so)d
7nswer /B1 is incorrect because on)6 the re)e-ant,
incrementa) costs are considered
7nswer /91 is correct Incrementa) costs are the
additiona) costs incurred for accepting one a)ternati-e
rather than another ?uestions in-o)-ing incrementa)
costing /sometimes ca))ed differentia) costing1
decisions are based upon a -ariab)e costing ana)6sis
;he t6pica) prob)em for which incrementa) cost
ana)6sis can be used in-o)-es two or more
a)ternati-es, for e2amp)e, se))ing or processing further
;hus, the re)e-ant costs and re-enues are the
margina) costs and margina) re-enues
7nswer /(1 is incorrect because P is made on)6 after
M is comp)eted
[%+] Source' 9I7 &$A, III!,$
7nswer /71 is correct ;he origina) manufacturing
cost of *: per unit is a sunD cost that is not re)e-ant
to this decision ;he re)e-ant costs are the amounts
that must be e2pended now <ence, se))ing the to6s
for scrap has a *$,A$& ad-antage because reworD
wi)) produce an additiona) *+,&&& [/*% ! *21 2
+,&&&], whereas the a)ternati-e generates an
additiona) *12,A$& /*18$ 2 +,&&&1
7nswer /B1 is incorrect because the origina)
manufacturing cost of *: shou)d not be added to the
sa)es price
7nswer /91 is incorrect because the origina)
manufacturing cost of *: shou)d not be added to the
sa)es price
7nswer /(1 is incorrect because *8,&$& /reworD1
does not inc)ude the cost of the reworD
[%8] Source' 9"7 &:A& $!2%
7nswer /71 is incorrect because net rea)i8ab)e -a)ue
is the -a)ue of an asset net of an6 disposa) costs
7nswer /B1 is incorrect because e2pected -a)ue is a
weighted a-erage of potentia) outcomes ;he weights
are probabi)ities
7nswer /91 is correct Gpportunit6 cost is the
ma2imum re-enue or benefit obtainab)e from the ne2t
best a)ternati-e use of a resource It is the benefit
gi-en up b6 not se)ecting that option
7nswer /(1 is incorrect because a differentia) cost is
the additiona) cost of se)ecting one option rather than
another
[%A] Source' 9"7 128$ $!%&
7nswer /71 is incorrect because the tota)
manufacturing cost inc)udes actua) out)a6s
7nswer /B1 is incorrect because opportunit6 costs
are not actua) costs
7nswer /91 is incorrect because opportunit6 costs
are benefits forgone, not costs
7nswer /(1 is correct Gpportunit6 cost is the benefit
forgone b6 not se)ecting the ne2t best use of scarce
resources ;he opportunit6 cost is 8ero when no
a)ternati-e use is a-ai)ab)e
[,&] Source' 9"7 12++ $!1
7nswer /71 is correct Incrementa) cost is the
difference in tota) cost between two courses of
action (ecrementa) cost is the term used when the
difference is noted as a dec)ine a)though incrementa)
is the more common term Incrementa) cost is a)so
referred to as differentia) cost
7nswer /B1 is incorrect because opportunit6 cost is
the profit forgone b6 se)ecting one choice instead of
another
7nswer /91 is incorrect because a fi2ed cost is
incurred e-en though no output is produced
7nswer /(1 is incorrect because common or =oint
costs are not a))ocab)e among the possib)e choices
[,1] Source' 9I7 118A I.!2$
7nswer /71 is incorrect because =oint costs are
common costs of two or more products incurred
before the sp)it!off point In this conte2t, the6 are
sunD costs and shou)d be ignored
7nswer /B1 is correct Incrementa) costs are the
additiona) costs incurred b6 choosing one option
rather than another ?uestions in-o)-ing incrementa)
costing /sometimes ca))ed differentia) costing1
decisions are based upon a direct /-ariab)e1 costing
ana)6sis ;he t6pica) prob)em for which incrementa)
cost ana)6sis can be used in-o)-es two or more
options Incrementa) costing is app)icab)e to decisions
concerning specia) orders, maDing or bu6ing a
component, and adding or dropping product )ines
9aution must a)wa6s be used in app)6ing incrementa)
cost ana)6sis because of the man6 non#uantitati-e
factors that must be considered
7nswer /91 is incorrect because absorption costs are
manufacturing costs, inc)uding fi2ed factor6 o-erhead
7nswer /(1 is incorrect because fi2ed factor6
o-erhead is a manufacturing cost, and manufacturing
costs are a t6pe of absorption cost
[,2] Source' 9"7 &:A, ,!1A
7nswer /71 is incorrect because prime costs are the
costs of direct materia)s and direct )abor
7nswer /B1 is incorrect because sunD costs are the
resu)t of past irre-ocab)e decisions
7nswer /91 is incorrect because discretionar6 costs,
such as ad-ertising, are characteri8ed b6 uncertaint6
about the input!output re)ationship
7nswer /(1 is correct Incrementa) costing can be
used in maDing decisions regarding the acceptance of
specia) orders and maDe!or!bu6 decisions "an6
#uantitati-e and non#uantitati-e factors are in-o)-ed
in such decisions ;he first step is to determine which
costs are re)e-ant to the decision 7 re)e-ant cost is
an6 cost that wi)) differ depending upon the decision
made ;he costs described in situations I and I. are
re)e-ant costs In situation I, the cost can be a-oided
if the specia) order is not accepted In situation I., an
opportunit6 cost is associated with the QmaDeQ
a)ternati-e
[,%] Source' 9"7 &:A, ,!2&
7nswer /71 is incorrect because prime costs
represent the costs of direct materia)s and direct
)abor
7nswer /B1 is correct 7 sunD cost is a cost that
cannot be a-oided because the e2penditure has
a)read6 occurred or an irre-ocab)e decision has been
made to incur the cost SunD costs are irre)e-ant to
management decision maDing because the6 cannot
-ar6 with the option se)ected Both situations III and
. represent sunD costs because the costs ha-e
a)read6 been incurred
7nswer /91 is incorrect because discretionar6 costs,
such as ad-ertising, are characteri8ed b6 uncertaint6
about the input!output re)ationship
7nswer /(1 is incorrect because imputed costs are
not paid in cash, but are imp)iedT an e2amp)e is the
interest charge on e#uit6 capita)
[,,] Source' 9"7 &:A, ,!21
7nswer /71 is incorrect because prime costs are the
costs of direct materia)s and direct )abor
7nswer /B1 is correct 7 discretionar6 cost is
characteri8ed b6 uncertaint6 about the re)ationship of
input /the cost1 to output It a)so tends to be the
sub=ect of a periodic decision regarding the out)a6 to
be made 5esearch, ad-ertising, and pub)ic re)ations
are common e2amp)es ;hus, the annua) cost of p)ant
ser-ice is discretionar6 because of the difficu)t6 of
-a)uing the output
7nswer /91 is incorrect because a re)e-ant cost is
an6 cost that affects a decision
7nswer /(1 is incorrect because imputed costs are
not paid in cash, but are imp)iedT an e2amp)e is the
interest charge on e#uit6 capita)
[,$] Source' 9"7 &:A1 ,!+
7nswer /71 is incorrect because fi2ed and -ariab)e
costs beha-e different)6 and therefore recei-e
different treatment in 9.P ana)6sis
7nswer /B1 is incorrect because sunD costs resu)t
from past irre-ocab)e decisions
7nswer /91 is correct "argina) /incrementa) or
differentia)1 ana)6sis determines the differences in
costs among decision choices ;ota) unit costs are not
re)e-ant in margina) ana)6sis because of the inc)usion
of costs that ma6 not -ar6 among the possib)e
choices considered In margina) ana)6sis, on)6 the
incrementa) costs are re)e-ant
7nswer /(1 is incorrect because tota) unit costs are a
product of the s6stem used to ca)cu)ate them
[,:] Source' 9"7 &:A1 ,!12
7nswer /71 is incorrect because re)e-ant cost is an
important decision too) with regard to acceptance of
a specia) order
7nswer /B1 is incorrect because re)e-ant cost is an
important decision too) with regard to manufacture or
purchase of component parts
7nswer /91 is correct 5e)e-ant costs are those
e2pected future costs that -ar6 with the action taDen
7)) other costs are assumed to be constant and thus
ha-e no effect on the decision 5e)e-ant costs are
considered in the ana)6sis of decisions to maDe or
bu6 a product, accept a specia) order, rep)ace capita)
e#uipment, or add or de)ete a product )ine 5e)e-ant
costing app)ies to man6 specia) decisions but not to
determining a product price ;his decision in-o)-es an
e-a)uation of, among other things, demand,
competitors4 actions, and tota) manufacturing and
se))ing costs
7nswer /(1 is incorrect because re)e-ant cost is an
important decision too) with regard to rep)acement of
e#uipment
[,+] Source' 9"7 &:A1 ,!1&
7nswer /71 is incorrect because sunD costs are not
re)ated to opportunit6 costs, which are the benefits
forgone b6 se)ecting the ne2t best a)ternati-e use of a
resource
7nswer /B1 is correct SunD costs are those that
cannot be a-oided because the e2penditure has
a)read6 occurred or an irre-ocab)e decision to incur
the cost has been made SunD costs are irre)e-ant to
management decision maDing because the6 cannot
-ar6 with the decision choice se)ected
7nswer /91 is incorrect because sunD costs are not
re)e-ant to decision maDing
7nswer /(1 is incorrect because sunD costs ma6 be
-ariab)e or fi2ed costs
[,8] Source' 9"7 &:A1 ,!1%
7nswer /71 is correct ;he cost of :&,&&& 8ippers is
*%:,&&& /:&,&&& 2 *:&1 ;he month)6 cost is
*%,&&& /$,&&& 2 *:&1 Because the compan6 wants
to purchase the items month)6, it wi)) in-est at )east
*%,&&& in Hanuar6 7ccording)6, the 8ippers to be
used in Hanuar6 wi)) be purchased at the first of the
6ear e-en if no specia) purchase is made ;hus, the
incrementa) ad-ance purchase wi)) be on)6 *%%,&&&,
not *%:,&&& ;he incrementa) in-estment wi)) dec)ine
at a constant rate of *%,&&& per month, so the
amount for Februar6 wi)) be *%&,&&&, for "arch
*2+,&&&, etc <ence, the incrementa) in-estment for
(ecember wi)) be *& 7ccording)6, assuming
consumption is uniform, the a-erage incrementa)
in-estment during the 6ear wi)) be *1:,$&& /*%%,&&&
・21 if the onetime purchase is made ;ota)
opportunit6 cost is therefore *1,%2& /8> cost of
capita) 2 *1:,$&&1
7nswer /B1 is incorrect because tota) opportunit6
cost is *1,%2&
7nswer /91 is incorrect because tota) opportunit6
cost is *1,%2&
7nswer /(1 is incorrect because tota) opportunit6
cost is *1,%2&
[,A] Source' 9"7 &:A, ,!2$
7nswer /71 is correct If the Suburban Store is
c)osed, one!fourth of its direct fi2ed costs wi))
continue ;hus, the segment margin that shou)d be
used to ca)cu)ate the effect of its c)osing on Norbin4s
operating income is *:,&&& W*%:,&&& contribution
margin ! [*,&,&&& direct fi2ed costs 2 /1& ! 2$1]X
In addition, the sa)es /and contribution margin1 of the
Orban Store wi)) dec)ine b6 1&> if the Suburban
store c)oses 7 1&> reduction in Orban4s *,8,&&&
contribution margin wi)) reduce income b6 *,,8&&
7ccording)6, the effect of c)osing the Suburban Store
is to decrease operating income b6 *1&,8&& /*:,&&&
S *,,8&&1
7nswer /B1 is incorrect because */:,&&&1 o-er)ooDs
the dec)ine in profitabi)it6 at the Orban Store
7nswer /91 is incorrect because */1,2&&1 assumes
that the effect on the Orban Store is a *,,8&&
increase in contribution margin
7nswer /(1 is incorrect because profits wi)) dec)ine
[$&] Source' 9"7 &:A, ,!2:
7nswer /71 is incorrect because */$,&&&1 is the
month)6 ad-ertising cost
7nswer /B1 is correct ;he *:&,&&& ad-ertising
campaign wi)) increase direct fi2ed costs b6 *$,&&&
per month /*:&,&&& ・121 Sa)es and contribution
margin wi)) a)so increase b6 1&> <ence, the
contribution margin for the Suburban Store wi))
increase b6 *%,:&& /1&> 2 *%:,&&&1, and income
wi)) dec)ine b6 *1,,&& /*$,&&& ! *%,:&&1
7nswer /91 is incorrect because the contribution
margin of the Suburban Store wi)) increase b6
*%,:&&, which is *1,,&& )ess than the increased
ad-ertising cost
7nswer /(1 is incorrect because *+,&&& omits the
1&> increase in -ariab)e costs from the ca)cu)ation
[$1] Source' 9"7 &:A, ,!2+
7nswer /71 is incorrect because */$,2&&1 is the new
segment margin
7nswer /B1 is correct If $&> of the Suburban
Store4s sa)es are at -ariab)e cost, its contribution
margin /sa)es ! -ariab)e costs1 must deri-e who))6
from sa)es of other items <owe-er, e)iminating sa)es
at -ariab)e cost reduces other sa)es b6 2&> ;hus,
the effect is to reduce the contribution margin to
*28,8&& /*%:,&&& 2 81 "oreo-er, fi2ed costs wi))
be reduced b6 1$> to *%,,&&& /*,&,&&& 2 8$1
9onse#uent)6, the new segment margin is */$,2&&1
/*%,,&&& direct fi2ed costs ! *28,8&& contribution
margin1, a decrease of *1,2&& [*/$,2&&1 ! */,,&&&1]
7nswer /91 is incorrect because */+,2&&1 is the
reduction in the Suburban Store4s contribution
margin
7nswer /(1 is incorrect because operating income
must decrease
[$2] Source' 9"7 1288 $!1$
7nswer /71 is incorrect because producing 2$,&&&
mi2ers wou)d resu)t in a tota) -ariab)e cost of
*1,%1,,&&& [/*%2 2 2$,&&& mi2ers1 S /*%8 2 %,&&&
mi2ers1 S /*2& 2 2&,&&& b)enders1]
7nswer /B1 is correct Because the sa)es mi2 and
tota) re-enue are constant, the optima) strateg6 is to
minimi8e tota) -ariab)e cost, assuming the *1& per
machine hour of fi2ed factor6 o-erhead is
una-oidab)e @ach b)ender re#uires 1 machine hour
/*1: o-erhead ・*1: per hour1, and each mi2er 2
machine hours /*%2 o-erhead ・*1: per hour1
Cear6 can produce $&,&&& b)enders or 2$,&&&
mi2ers gi-en a capacit6 of $&,&&& machine hours
Because the demand for mi2ers is 28,&&& units, some
mi2ers must be purchased For b)enders, the unit
-ariab)e cost is *1: /*: (" S *, (I S *: .G<1
For each b)ender made, the compan6 reduces costs
b6 *, /*2& ! *1:1 7 b)ender re#uires 1 hour, so the
sa-ings per hour is a)so *, ;he unit -ariab)e cost to
maDe a mi2er is *%2 /*11 (" S *A (I S *12
.G<1 Ci-en a purchase price of *%8, the cost
sa-ings of manufacture is *: per mi2er or *% per
machine hour /*: ・2 hours1 ;hus, as man6 b)enders
as possib)e shou)d be made because the compan6
can sa-e *1 more per machine hour b6 producing
b)enders B6 producing its fu)) annua) demand of
2&,&&& b)enders, the compan6 minimi8es its tota)
-ariab)e cost If 2&,&&& hours are used to produce
b)enders, %&,&&& hours are a-ai)ab)e to produce
1$,&&& mi2ers
7nswer /91 is incorrect because producing 2&,&&&
b)enders and no mi2ers /instead of 1$,&&&1 increases
costs b6 *A&,&&& [/*%8 ! *%21 2 1$,&&& units]
7nswer /(1 is incorrect because the compan6 wou)d
sti)) incur fi2ed factor6 o-erhead, and the -ariab)e
cost of purchase e2ceeds the -ariab)e cost of
manufacture
[$%] Source' 9"7 1288 $!1:
7nswer /71 is correct 5educing the cost of direct
materia)s for mi2ers from *11 to *: per unit
decreases unit -ariab)e cost to *2+ /*: (" S *A (I
S *12 .G<1 and increases the cost sa-ings of
maDing a mi2er from *: to *11, or *$$& per
machine hour /*11 ・2 hours per unit1 Since the cost
sa-ings per machine hour for b)enders is assumed to
remain constant at *, /*2& price ! *1: unit -ariab)e
cost1, the compan6 can now minimi8e tota) -ariab)e
cost b6 maDing as man6 mi2ers as possib)e Since the
compan6 can produce 2$,&&& mi2ers /$&,&&& hours
capacit6 ・21, it wi)) need to purchase %,&&& mi2ers
/28,&&& demanded ! 2$,&&&1 and 2&,&&& b)enders
;ota) -ariab)e cost wi)) be *1,18A,&&& [/*2+ 2
2$,&&& mi2ers1 S /*%8 2 %,&&& mi2ers1 S /*2& 2
2&,&&& b)enders1]
7nswer /B1 is incorrect because the tota) -ariab)e
cost for this option wou)d be *1,21A,&&& [/2&,&&&
b)enders 2 *1:1 S /1$,&&& mi2ers 2 *2+1 S /1%,&&&
mi2ers 2 *%81]
7nswer /91 is incorrect because the tota) -ariab)e
cost of this option wou)d be *1,%8,,&&& [/2&,&&&
b)enders 2 *1:1 S /28,&&& mi2ers 2 *%81]
7nswer /(1 is incorrect because assuming fi2ed costs
are una-oidab)e, some units shou)d be manufactured
since the -ariab)e cost of maDing these items is )ess
than the cost of purchasing them
[$,] Source' 9"7 12A& ,!1&
7nswer /71 is correct 5e)e-ant costs are anticipated
costs that wi)) -ar6 among the choices a-ai)ab)e In
other words, if two courses of action share some
costs, those costs are not re)e-ant because the6 wi))
be incurred regard)ess of the decision made 9osts
in-o)-ed in the ana)6sis of a maDe!or!bu6 decision
inc)ude the re)e-ant -ariab)e costs p)us an6 fi2ed costs
that cou)d be a-oided if the items were purchased
from an outsider
7nswer /B1 is incorrect because depreciation shou)d
not be considered un)ess it can be a-oided
7nswer /91 is incorrect because una-oidab)e costs
are not re)e-ant and shou)d be ignored ;he6 wi)) be
incurred regard)ess of the decision
7nswer /(1 is incorrect because propert6 ta2es are
not affected b6 the decision and are therefore not
re)e-ant
[$$] Source' 9"7 &:A1 ,!A
7nswer /71 is incorrect because the breaDe-en point
is not re)e-ant, but the e2tent of the use of operating
capacit6 ma6 be a consideration
7nswer /B1 is incorrect because whether operations
are at norma) -o)ume is )ess important than the
amount of id)e capacit6 ;he compan6 is )ess )iDe)6 to
bu6 if it has sufficient unused capacit6
7nswer /91 is correct ;he princip)e under)6ing a
maDe!or!bu6 decision is to use a-ai)ab)e resources as
efficient)6 as possib)e before bu6ing from an outside
supp)ier ;he manager considers on)6 the costs
re)e-ant to the in-estment decision If the tota)
re)e-ant costs of production are )ess than the cost to
bu6 the item, it shou)d be produced in!house ;he
De6 -ariab)e is re)e-ant costs, not tota) costs ;hus,
the costs that can be a-oided under either decision
choice must be determined
7nswer /(1 is incorrect because tota) costs
/absorption costing1 are not as important as re)e-ant
costs
[$:] Source' 9"7 &:A1 ,!8
7nswer /71 is incorrect because a )ong!term strateg6
is to ma2imi8e gross profit, which is ca)cu)ated after
deduction of fi2ed costs
7nswer /B1 is incorrect because minimi8ing tota)
-ariab)e cost ignores the ro)e of se))ing price in profit
ma2imi8ation
7nswer /91 is incorrect because minimi8ing unit fi2ed
o-erhead ignores the ro)e of se))ing price in profit
ma2imi8ation 7)so, in the short run, fi2ed o-erhead
does not change and is therefore not re)e-ant
7nswer /(1 is correct In the short run, the best
approach is to ma2imi8e the unit contribution margin
/price ! unit -ariab)e cost1 times the units so)d
because fi2ed costs can be ignored ;he important
consideration is the tota) contribution margin a-ai)ab)e
to co-er fi2ed costs and contribute to profits
[$+] Source' 9"7 &:A2 ,!2$
7nswer /71 is incorrect because *28$,&&& is greater
than the a-oidab)e cost of operating the cafeteria
7nswer /B1 is incorrect because the compan6 can
pa6 more than *1+$,&&& Its o-erhead costs are
a-oidab)e
7nswer /91 is incorrect because the compan6 can
pa6 more than *21A,&&&
7nswer /(1 is correct Ci-en that o-erhead is ,&>
fi2ed, *::,&&& /:&> 2 *11&,&&&1 is -ariab)e, and
*,,,&&& is fi2ed Gf the )atter amount, *2$,&&& is
attributab)e to the super-isor4s sa)ar6 ;he *1A,&&&
remainder is a))ocated from tota) compan6 o-erhead
and is una-oidab)e 7ssuming the compan6 wi))
continue to pa6 the super-isor4s sa)ar6 if an outside
firm ser-ices the cafeteria, the tota) fi2ed o-erhead is
not an a-oidab)e /incrementa)1 cost ;hus, the tota)
a-oidab)e cost of the cafeteria4s operation is
*2,1,&&& /*1&&,&&& food S *+$,&&& )abor S
*::,&&& .G<1 ;his amount is the sa-ings from
hiring an outside firm 7ccording)6, it is a)so the
ma2imum that Iaure) shou)d be wi))ing to pa6 the
outside firm
[$8] Source' 9"7 &:A2 ,!2:
7nswer /71 is correct Ci-en that M e#ua)s the cars
so)d, the indifference e#uation and its so)ution are as
fo))ows'
/:> 2 *2%,&&&1M 3 /2> 2 *2%,&&&1M S /,$ 2 *2,&&&1
*A2&M 3 *A&,&&&
M 3 A+82:1 9ars
7t a price of *2%,&&& each, A+82:1 cars wi)) se)) for
*2,2$&,&&& 7nother approach is to determine the
sa)es per person at which *2,&&& is e#ua) to a ,>
commission ;his amount is *$&,&&& /*2,&&& ・&,1
per person, or *2,2$&,&&& /,$ 2 *$&,&&&1 for the
entire sa)es force
7nswer /B1 is incorrect because, at sa)es of
*%,&&&,&&&, wou)d be better off with the :>
commission
7nswer /91 is incorrect because at sa)es of
*1,$&&,&&&, the sa)es peop)e wou)d be better off
with the sa)ar6 and 2> commission
7nswer /(1 is incorrect because, at sa)es of
*1,2$&,&&&, the sa)es peop)e wou)d be better off
with the sa)ar6 and 2> commission
[$A] Source' 9"7 12A2 ,!1
7nswer /71 is incorrect because an opportunit6 cost
is the benefit deri-ed from the ne2t best use of the
resource, not an out!of!pocDet cost
7nswer /B1 is incorrect because an opportunit6 cost
is the benefit deri-ed from the ne2t best use of the
resource, not an out!of!pocDet cost
7nswer /91 is incorrect because an opportunit6 cost
is the benefit forgone, not the cost
7nswer /(1 is correct 7n opportunit6 cost is the
ma2imum benefit forgone b6 using a scarce resource
for a gi-en purpose It is the benefit pro-ided b6 the
ne2t best use of that resource ;hus, in a factor6
operating at fu)) capacit6, the opportunit6 cost of
maDing a component is the benefit gi-en up b6 not
se)ecting an a)ternati-e use of the p)ant capacit6
[:&] Source' 9"7 12A2 ,!%
7nswer /71 is incorrect because *:,,&& assumes a))
of the o-erhead is -ariab)e
7nswer /B1 is incorrect because *%,:&& o-er)ooDs
the *:,&&& of recei-ing costs for purchased
components
7nswer /91 is correct ;he out!of!pocDet cost of
maDing the part e#ua)s the tota) manufacturing cost
minus the fi2ed o-erhead, or *2:,,&& W*,2,,&& !
[/2E%1 2 *2,,&&&]X ;he cost of the component
consists of the *%&,&&& purchase price p)us the
*:,&&& /2&> of cost1 of -ariab)e recei-ing costs, or
a tota) of *%:,&&& ;hus, unit out!of!pocDet cost
wou)d increase b6 *A,:&& if the components were
purchased
7nswer /(1 is incorrect because *12,,&& is the
difference between the fu)) cost of maDing the part
and the price of the component
[:1] Source' 9"7 12A2 ,!,
7nswer /71 is incorrect because *1,,&&& o-er)ooDs
the *:,&&& per unit of recei-ing costs for purchased
components
7nswer /B1 is correct For 1& components, the tota)
cost increase wou)d be *A:,&&&, but the *$&,&&&
renta) wou)d reduce the net increase to *,:,&&&
7nswer /91 is incorrect because *:,,&&& assumes a))
o-erhead is -ariab)e and ignores renta) re-enue
7nswer /(1 is incorrect because *A:,&&& o-er)ooDs
the renta) re-enue
[:2] Source' 9"7 12A2 ,!$
7nswer /71 is incorrect because *:8,&&& o-er)ooDs
the *:,&&& per unit of recei-ing costs for purchased
components
7nswer /B1 is incorrect because *88,&&& assumes
on)6 one!third of the o-erhead is fi2ed
7nswer /91 is correct For 1& units, the additiona)
cost of purchasing is *A:,&&& <owe-er, the net
effect of purchasing is a gain of *8,&&& /*1&,,&&&
contribution from maDing another product !
*A:,&&&1 Gpportunit6 cost is the benefit from the
ne2t best a)ternati-e use of the resources <ence, the
compan64s opportunit6 cost of maDing the part is
*8,&&&
7nswer /(1 is incorrect because */A:,&&&1 ignores
the *1&,,&&& income from a)ternati-e production
[:%] Source' 9"7 12A, ,!1
7nswer /71 is incorrect because the =oint
manufacturing costs are the on)6 irre)e-ant item
7nswer /B1 is correct 9ommon, or =oint, costs
cannot be identified with a particu)ar =oint product
B6 definition, =oint products ha-e common costs unti)
the sp)it!off point 9osts incurred after the sp)it!off
point are separab)e costs ;he decision to continue
processing be6ond sp)it!off is made separate)6 for
each product ;he costs re)e-ant to the decision are
the separab)e costs because the6 can be a-oided b6
se))ing at the sp)it!off point ;he6 shou)d be compared
with the incrementa) re-enues from processing
further ;hus, items I /re-enue from se))ing at sp)it!off
point1, II /-ariab)e costs of upgrade1, III /a-oidab)e
fi2ed costs of upgrade1, and I. /re-enue from se))ing
after further processing1 are considered in maDing the
upgrade decision
7nswer /91 is incorrect because the =oint
manufacturing costs are the on)6 irre)e-ant item
7nswer /(1 is incorrect because the =oint
manufacturing costs are the on)6 irre)e-ant item
[:,] Source' 9"7 12+, %!22
7nswer /71 is incorrect because the F7SB is a
pri-ate sector organi8ation concerned with financia)
accounting and reporting issues
7nswer /B1 is incorrect because the C7G is the audit
agenc6 of the 9ongress
7nswer /91 is correct ;he 97SB was estab)ished
b6 the OS 9ongress in 1A+& to de-e)op cost
accounting standards app)icab)e to defense
contractors and subcontractors Gther go-ernment
agencies a)so use the standards Jhen the 97SB
was e)iminated in 1A8&, the standards remained in
effect In 1A88, 9ongress reestab)ished the 97SB
7nswer /(1 is incorrect because the S@9 is a
go-ernment agenc6 concerned with pub)ic disc)osure
of financia) and other data b6 pub)ic)6 he)d
companies
[:$] Source' 9"7 12+, %!2%
7nswer /71 is incorrect because the 97SB does not
de-e)op accounting princip)es or set standards other
than for contractors doing business with the OS
Co-ernment
7nswer /B1 is correct ;he 97SB has Qe2c)usi-e
authorit6 to maDe, promu)gate, amend, and rescind
cost accounting standards and interpretations thereofQ
for negotiated contracts and subcontracts o-er
*$&&,&&& Its purpose is Qto achie-e uniformit6 and
consistenc6 in the cost accounting standards
go-erning measurement, assignment, and a))ocation of
costs to contracts within the Onited StatesQ
7nswer /91 is incorrect because the 97SB has no
connection with the S@9 and does not e2amine
registration statements
7nswer /(1 is incorrect because the 97SB does not
administer contracts
[::] Source' 9"7 12A$ ,!21
7nswer /71 is incorrect because margina) cost is the
incrementa) cost of producing one additiona) unit
7nswer /B1 is incorrect because incrementa) cost is
the increase in costs between one a)ternati-e and
another
7nswer /91 is incorrect because potentia) cost is the
cost that ma6 be incurred in the future
7nswer /(1 is correct Gpportunit6 cost is defined as
the profit forgone b6 se)ecting one choice instead of
another It is the benefit pro-ided b6 the ne2t best use
of a scarce resource
[:+] Source' 9"7 &:A2 ,!2+
7nswer /71 is incorrect because ;wo and ;hree
wou)d be profitab)e but for the a))ocation of
corporate o-erhead
7nswer /B1 is incorrect because ;hree is contributing
toward corporate o-erhead
7nswer /91 is correct ;he amount of corporate
o-erhead a))ocated to each comp)e2 is ca)cu)ated
be)ow
9omp)e2 Income Percentage 7))ocation
!!!!!!! !!!!!!!!! !!!!!!!!!! !!!!!!!!!!!
Gne *1,&&& 1%%%> * 1:&
;wo 1,21& 1:1%> 1A,
;hree 2,%,+ %12A> %+$
Four 1,8+8 2$&,> %&&
Fi-e 1,&:$ 1,21> 1+1
!!!!!! !!!!!!! !!!!!!
;ota) *+,$&& 1&&&&> *1,2&&
333333 3333333 333333
;he re-ised profits wou)d be as fo))ows'
9omp)e2 Grigina) 7))ocation 7d=usted
!!!!!!! !!!!!!!!! !!!!!!!!!! !!!!!!!!!!!
Gne *2&& *1:& *%:&
;wo /A&1 1A, 1&,
;hree /2$%1 %+$ 122
Four /$221 %&& /2221
Fi-e /2%$1 1+1 /:,1
7fter e)iminating the a))ocated costs from the income
statement, Four and Fi-e sti)) ha-e )osses
7nswer /(1 is incorrect because Fi-e shou)d a)so be
e)iminated
[:8] Source' 9"7 &:A2 ,!28
7nswer /71 is incorrect because depreciation and
rent are a))ocated costs that wi)) be incurred e-en if
the contract is )ost
7nswer /B1 is incorrect because the super-isor4s
sa)ar6 wi)) ha-e to be co-ered ;he *2&,&&& sa)ar6 is
an a-oidab)e cost
7nswer /91 is incorrect because depreciation is a
cost that cannot be a-oided
7nswer /(1 is correct ;he compan6 wi)) need to
co-er its -ariab)e costs and an6 other incrementa)
costs ;hus, direct materia)s /*2&&,&&&1, direct )abor
/*1$&,&&&1, the super-isor4s sa)ar6 /*2&,&&&1, and
fringe benefits on direct )abor /*1$,&&&1 are the
incrementa) unit costs of manufacturing the engines
;he breaDe-en price is therefore *%8$,&&&
/*2&&,&&& S *1$&,&&& S *2&,&&& S *1$,&&&1
[:A] Source' 9I7 &$A2 III!21
7nswer /71 is correct Satisficing is the
decision!maDing process in which the decision maDer
uses a minima) amount of information ;his is done in
an effort to reduce to a minimum the amount of time it
taDes to maDe a decision ;he resu)t is a decision that
is not the best, but is good enough to gi-e satisfactor6
reso)ution
7nswer /B1 is incorrect because optimi8ing means
se)ecting the best possib)e so)ution
7nswer /91 is incorrect because idea)i8ing in-o)-es
changing the situation so that the prob)em no )onger
e2ists
7nswer /(1 is incorrect because ma2imi8ing is a
s6non6m for optimi8ing and in-o)-es se)ecting the best
so)ution
[+&] Source' 9I7 &$A2 III!A&
7nswer /71 is incorrect because brainstorming
breaDs down broad)6 based prob)ems into their
essentia)s It is an unstructured approach that re)ies
on the spontaneous contribution of ideas from a))
members of a group
7nswer /B1 is incorrect because -a)ue ana)6sis is a
methodica) approach primari)6 designed to optimi8e
performance of an acti-it6 at a minimum cost
@mphasis is on the cost!benefit criterion
7nswer /91 is correct Free association is an
approach to idea generation that reports the first
thought to come to mind in response to a gi-en
stimu)us, for e2amp)e, a s6mbo) or ana)og6 pertaining
to a product for which an ad-ertising s)ogan is sought
;he ob=ecti-e is to e2press the content of
consciousness without censorship or contro)
7nswer /(1 is incorrect because attribute )isting is
app)ied primari)6 to impro-e a tangib)e ob=ect It )ists
the parts and essentia) features of the ob=ect and
s6stematica))6 ana)68es modifications intended as
impro-ements
[+1] Source' 9I7 &$A2 III!A1
7nswer /71 is correct 7ttribute )isting is app)ied
primari)6 to impro-e a tangib)e ob=ect It )ists the
parts and essentia) features of the ob=ect and
s6stematica))6 ana)68es modifications intended as
impro-ements
7nswer /B1 is incorrect because operations research
attempts to find optima) so)utions using c)assica)
concepts such as statistics, simu)ation, )ogica)
thinDing, and other scientific and mathematica)
techni#ues to de-e)op and test h6potheses ;his
app)ication c)ose)6 fits the prob)em and charge gi-en
7nswer /91 is incorrect because morpho)ogica)
matri2 ana)6sis is a structured techni#ue that p)ots
decision -ariab)es a)ong the a2es of a matri2 ;he
re)ationships of these -ariab)es are found in the
s#uares within the chart
7nswer /(1 is incorrect because s6nectics is a high)6
structured group approach to prob)em statement and
so)ution based on creati-e thinDing It in-o)-es free
use of ana)ogies and metaphors in informa) e2change
within a carefu))6 se)ected sma)) group of indi-idua)s
of di-erse persona)it6 and areas of specia)i8ation
[+2] Source' 9I7 &$A2 III!A2
7nswer /71 is incorrect because free association is
an approach to idea generation that reports the first
thought to come to mind in response to a gi-en
stimu)us, for e2amp)e, a s6mbo) or ana)og6 pertaining
to a product for which an ad-ertising s)ogan is sought
;he ob=ecti-e is to e2press the content of
consciousness without censorship or contro)
7nswer /B1 is incorrect because operations research
attempts to find optima) so)utions using c)assica)
concepts such as statistics, simu)ation, )ogica)
thinDing, and other scientific and mathematica)
techni#ues to de-e)op and test h6potheses ;his
app)ication c)ose)6 fits the prob)em and charge gi-en
7nswer /91 is incorrect because B)astR then refine is
a OS 0a-6 prob)em!so)-ing methodo)og6 It
comp)ete)6 disregards /b)asts out of one4s
consciousness1 an6 e2isting approach 7n entire)6
new prob)em so)ution is then sought that wi)) attain the
origina) ob=ecti-es
7nswer /(1 is correct ;he @disonian approach is a
tria)!and!error e2perimenta) method It shou)d usua))6
not be app)ied un)ess other approaches ha-e been
unsuccessfu)
[+%] Source' 9I7 &$A2 III!A%
7nswer /71 is correct Gperations research attempts
to find optima) so)utions using c)assica) concepts such
as statistics, simu)ation, )ogica) thinDing, and other
scientific and mathematica) techni#ues to de-e)op and
test h6potheses ;his app)ication c)ose)6 fits the
prob)em and charge gi-en
7nswer /B1 is incorrect because -a)ue ana)6sis is a
methodica) approach primari)6 designed to optimi8e
performance of an acti-it6 at a minimum cost
@mphasis is on the cost!benefit criterion
7nswer /91 is incorrect because attribute )isting is
app)ied primari)6 to impro-e a tangib)e ob=ect It )ists
the parts and essentia) features of the ob=ect and
s6stematica))6 ana)68es modifications intended as
impro-ements
7nswer /(1 is incorrect because brainstorming
breaDs down broad)6 based prob)ems into their
essentia)s It is an unstructured approach that re)ies
on the spontaneous contribution of ideas from a))
members of a group
[+,] Source' 9I7 &$A: II!2
7nswer /71 is incorrect because se)ecting a so)ution
is the third step in the process
7nswer /B1 is correct Prob)em so)-ing in-o)-es /11
identif6ing the prob)em, /21 generating a)ternati-e
so)utions, /%1 se)ecting a so)ution, and /,1
imp)ementing and e-a)uating the so)ution In the first
step, management determines what the actua)
situation is, what the desired situation is, and the
reason for the difference
7nswer /91 is incorrect because identif6ing the
prob)em is the first step in the process
7nswer /(1 is incorrect because considering the
reaction of competitors is part of the fourth step of
imp)ementing and e-a)uating the so)ution
[+$] Source' 9I7 &$A, II!$
7nswer /71 is incorrect because reasoning from one
or more particu)ar facts to reach a genera) conc)usion
is induction
7nswer /B1 is incorrect because post hoc reasoning
is a )ogica) fa))ac6 It assumes that one e-ent causes
another because the first precedes the second
7nswer /91 is correct (eduction is a process of
reasoning that app)ies genera) or uni-ersa) premises to
reach a conc)usion about particu)ars For e2amp)e,
the )aws of ph6sics ma6 be used to predict the
duration of a particu)ar orbit of a sate))ite
7nswer /(1 is incorrect because inducti-e reasoning
is more c)ose)6 associated with constructing
h6potheses
[+:] Source' 9I7 11A, II!,
7nswer /71 is incorrect because management4s
confidence in its contro) s6stems is not c)ose)6 re)ated
to the concept of probabi)it6
7nswer /B1 is correct Probabi)it6 is a number
between & and 1 inc)usi-e that measures the
)iDe)ihood of the occurrence of some e-ent ;he )ess
)iDe)6 the e-ent, the c)oser the number is to & ;he
two t6pes of probabi)ities are ob=ecti-e and
sub=ecti-e Gb=ecti-e probabi)ities are deri-ed
mathematica))6 from historica) data Sub=ecti-e
probabi)ities are estimated based on past e2perience
and =udgment ;hus, probabi)ities are used to
determine the )iDe)ihood that a gi-en e-ent wi)) occur
7nswer /91 is incorrect because the a-ai)abi)it6 of
factua) information he)ps in the decision!maDing
process, but it is not c)ose)6 re)ated to the concept of
probabi)it6
7nswer /(1 is incorrect because management4s abi)it6
to cope with sub=ecti-e information ma6 be a factor in
decision maDing, but it is not c)ose)6 re)ated to the
concept of probabi)it6
[++] Source' 9I7 11A, II!$
7nswer /71 is correct <ow information is presented
inf)uences both its interpretation and the resu)ting
beha-ior Nreitner /$th ed1 defines a framing error as
Qthe tendenc6 to e-a)uate positi-e)6 presented
information fa-orab)6 and negati-e)6 presented
information unfa-orab)6Q
7nswer /B1 is incorrect because getting )ocDed into
)osing courses of action because of persona)
commitment is esca)ation of commitment
7nswer /91 is incorrect because a framing error is
defined as e-a)uating positi-e information fa-orab)6
and negati-e information unfa-orab)6
7nswer /(1 is incorrect because o-erconfidence
does not re)ate to framing errors
[+8] Source' 9I7 11A, II!:
7nswer /71 is incorrect because groups ma6 ana)68e
prob)ems in great depth
7nswer /B1 is incorrect because indi-idua)s who
participate in the decision ma6 accept it more readi)6
7nswer /91 is incorrect because the greater
e2perience and e2pertise of a group ma6 render it
more effecti-e than a sing)e manager in identif6ing
important components of decision situations
7nswer /(1 is correct ;he difficu)t6 associated with
group!aided decision maDing is accountabi)it6 for the
decision If a decision is made b6 a group, no one
person is responsib)e ;he best method is to ha-e the
group recommend a decision but for a manager to
assume responsibi)it6 for maDing the fina) decision
[+A] Source' 9I7 &$A$ II!:
7nswer /71 is incorrect because samp)ing recei-ab)es
is an e2amp)e of an inducti-e process It entai)s
gathering empirica) data about particu)ar items and
then determining the genera) princip)e that the
e-idence supports
7nswer /B1 is correct (educti-e reasoning is the
inference of a conc)usion about particu)ars from
genera) or uni-ersa) premises In contrast, inducti-e
reasoning is the inference of a genera)i8ed conc)usion
from particu)ar instances 7na)6tica) procedures are
based on the genera) premise that p)ausib)e
re)ationships among the data ma6 reasonab)6 be
e2pected to continue in the absence of Dnown
conditions to the contrar6 For e2amp)e, absent
unusua) circumstances, the sa)es ba)ance is re)ati-e)6
predictab)e gi-en its Dnown re)ationship to other
factors, such as cost of sa)es ;hus, the process is
one of deducti-e reasoning because a genera)
premise /the Dnown re)ationship of sa)es to other
data1 is app)ied to draw a conc)usion about a
particu)ar instance /the sa)es ba)ance1
7nswer /91 is incorrect because test counting
in-entor6 is an e2amp)e of an inducti-e process It
entai)s gathering empirica) data about particu)ar items
and then determining the genera) princip)e that the
e-idence supports
7nswer /(1 is incorrect because e2amining sa)es
recorded after the ba)ance sheet date is an e2amp)e
of an inducti-e process It entai)s gathering empirica)
data about particu)ar items and then determining the
genera) princip)e that the e-idence supports
[8&] Source' 9I7 &$A$ II!12
7nswer /71 is incorrect because re#uiring audit
super-ision and re-iew is an effecti-e techni#ue to
he)p ensure that a)) e-idence is appropriate)6
considered
7nswer /B1 is incorrect because group acti-it6
counteracts indi-idua) bias b6 generating a)ternati-e
e2p)anations
7nswer /91 is correct 7udit independence issues
ordinari)6 focus on the auditor4s persona) integrit6 and
re)ationship with the auditee ;hus, emphasi8ing audit
independence does not necessari)6 reduce the
tendenc6 to confirmator6 bias "ost indi-idua)s are
not aware that the6 are engaging in such beha-ior
7nswer /(1 is incorrect because re#uiring the auditor
to document the reasoning process has two benefits'
/11 it forces the auditor to consider the audit e-idence
more thorough)6, and /21 it pro-ides more
information on the auditor4s thought process than can
be addressed in the re-iew of the auditor4s worD
[81] Source' 9I7 &$A$ II!%%
7nswer /71 is incorrect because esca)ation of
commitment is a ps6cho)ogica) phenomenon unre)ated
to a-ai)abi)it6 of information or time
7nswer /B1 is incorrect because increasing resources
to a new course of action is antithetica) to esca)ation
of commitment
7nswer /91 is incorrect because )imiting resources to
unsuccessfu) pro=ects is antithetica) to esca)ation of
commitment
7nswer /(1 is correct 9onsistenc6 ma6 be
d6sfunctiona) because it ma6 resu)t in inf)e2ibi)it6 ;he
desire to a-oid the inner conf)ict resu)ting from
inconsistenc6 ma6 ha-e ad-erse effects on decision
maDing For e2amp)e, when a decision maDer fee)s
responsib)e for the fai)ure of a course of action, /s1he
ma6 want to pro-e that the origina) decision was
sound despite increasing e-idence to the contrar6
;hus, hisEher commitment to a fai)ed po)ic6 ma6
esca)ate, and additiona) resources ma6 be
s#uandered
[82] Source' 9I7 &$A$ II!%+
7nswer /71 is incorrect because the choice of the
ma2imum pa6off is an assumption of rationa)it6
7nswer /B1 is incorrect because the ranDing of
criteria and options is an assumption of rationa)it6
7nswer /91 is incorrect because the constanc6 of the
criteria and their weights is an assumption of
rationa)it6
7nswer /(1 is correct 7ccording to 5obbins,
Grgani8ationa) Beha-ior /:th ed Prentice!<a)),
1AA%1, rationa)it6 has the same assumptions as the
optimi8ing /outcome ma2imi8ing1 mode) for decision
maDing 5ationa) decision maDing is fu))6 ob=ecti-e
and )ogica) ;he mode) assumes that a sing)e,
we))!defined goa) is to be ma2imi8edT that a)) re)e-ant
criteria and feasib)e options are DnownT that the
criteria and options can be assigned numerica) -a)ues
and ranDedT that preferences are constant /criteria
and their assigned weights do not change1T and that
the decision maDer wi)) choose the option with the
highest ranD /the ma2imum benefits1 <owe-er,
rationa)it6 does not re#uire an assumption about the
a-oidance of conf)ict
[8%] Source' 9I7 11A$ II!,
7nswer /71 is correct If the economic resu)ts of
a)ternati-e capita) in-estments were Dnown with
certaint6 or with minima) risD, the #uantitati-e
ana)6ses wou)d re-ea) the abso)ute best in-estment
options <owe-er, if the economic resu)ts are high)6
uncertain, using a decision!maDing process that
combines rationa) ana)6sis with intuition is
appropriate "oreo-er, non#uantifiab)e -ariab)es
ma6 be in-o)-ed
7nswer /B1 is incorrect because the decision!maDing
process described combines rationa) #uantitati-e
ana)6sis with intuition In addition, research has
shown that intuition can impro-e decision maDing
7nswer /91 is incorrect because Dnowing with
certaint6 which in-estment is the most profitab)e is not
possib)e
7nswer /(1 is incorrect because the term bounded
rationa)it6 refers to the inabi)it6 to percei-e a)) aspects
of a situation and the tendenc6 to simp)if6, not to
intuiti-e decision maDing
[8,] Source' 9I7 &$A$ I.!+,
7nswer /71 is incorrect because, in freight absorption
pricing, the se))ing compan6 absorbs a)) or part of the
actua) freight charges 9ustomers are not charged
actua) de)i-er6 costs
7nswer /B1 is correct In uniform de)i-ered pricing,
the compan6 charges the same price, inc)usi-e of
shipping costs, to a)) customers regard)ess of their
)ocation ;his price is the compan64s a-erage actua)
freight cost ;hus, both nearb6 and distant customers
are charged the same amount ;his po)ic6 is eas6 to
administer, permits the compan6 to ad-ertise one
price nationwide, and faci)itates marDeting to farawa6
customers
7nswer /91 is incorrect because, in 8one pricing,
differentia) freight charges are set for customers on
the basis of their )ocation 9ustomers are not charged
actua) a-erage freight costs
7nswer /(1 is incorrect because, in FGB!origin
pricing, each customer pa6s its actua) freight costs
[8$] Source' 9I7 11A, I.!+8
7nswer /71 is incorrect because adding a standard
marDup to the cost of the product is cost!p)us pricing
7nswer /B1 is incorrect because determining the
price at which the product wi)) earn a target profit is
target profit pricing
7nswer /91 is correct Bu6er!based pricing in-o)-es
basing prices on the product4s percei-ed -a)ue rather
than on the se))er4s cost 0onprice -ariab)es in the
marDeting mi2 augment the percei-ed -a)ue For
e2amp)e, a cup of coffee ma6 ha-e a higher price at
an e2pensi-e restaurant than at a fast food out)et
7nswer /(1 is incorrect because basing prices on
competitors4 prices is going!rate pricing
[8:] Source' 9I7 11A, I.!+A
7nswer /71 is incorrect because, if no bu6ers want
the product at a high price, this marDeting strateg6 is
inappropriate
7nswer /B1 is correct "arDet!sDimming pricing is
used when a new product is introduced at the highest
price possib)e gi-en the benefits of the product For
marDet sDimming to worD, the product must appear
to be worth its price, the costs of producing a sma))
-o)ume cannot be so high that the6 e)iminate the
ad-antage of charging more, and competitors cannot
enter the marDet and undercut the price
7nswer /91 is incorrect because, if competitors can
easi)6 enter the marDet, the6 can undercut the price
7nswer /(1 is incorrect because the product #ua)it6
and image must support a high price
[8+] Source' 9I7 11A$ I.!+$
7nswer /71 is incorrect because cash discounts
encourage prompt pa6ment
7nswer /B1 is incorrect because #uantit6 discounts
encourage )arge -o)ume purchases
7nswer /91 is incorrect because functiona) or trade
discounts are pro-ided to channe) members in return
for the performance of certain functions, such as
se))ing, storing, and record Deeping
7nswer /(1 is correct Seasona) discounts are
designed to smooth production b6 the se))ing firm
For e2amp)e, a sDi manufacturer offers seasona)
discounts to retai)ers in the spring and summer to
encourage ear)6 ordering
[88] Source' 9I7 11A$ I.!+:
7nswer /71 is correct 7 b6!product is a product of
re)ati-e)6 minor importance generated during the
production of one or more other products Its
production entai)s no additiona) costs 7n6 amount
recei-ed abo-e the storage and de)i-er6 costs for a
b6!product a))ows the se))er to reduce the main
product4s price to maDe it more competiti-e
7nswer /B1 is incorrect because optiona) products
are offered for sa)e a)ong with the main product ;he6
are un)iDe)6 to ha-e a 8ero production cost, so the
se))er must recei-e a price abo-e their storage and
de)i-er6 costs
7nswer /91 is incorrect because capti-e products
must be used a)ong with the main product, such as
fi)m for use with a camera Se))ers often maDe their
profits on the capti-e products rather than on the
main product, which is so)d at a )ow price ;he
capti-e products therefore wi)) be priced we)) abo-e
the storage and de)i-er6 costs
7nswer /(1 is incorrect because product bund)es are
combinations of products so)d together at a reduced
price, such as season ticDets for a theater Products
are bund)ed to promote the sa)e of certain items that
consumers might not otherwise purchase ;he
combined price of the bund)e must be )ow enough to
encourage consumers to bu6 the bund)e but must
reco-er production costs and pro-ide some profit for
the se))er, so the price must e2ceed storage and
de)i-er6 costs
[8A] Source' 9"7 &:8: $!2A
7nswer /71 is incorrect because *,8 e#ua)s tota)
annua) cost di-ided b6 tota) orders from the pre-ious
6ear
7nswer /B1 is incorrect because *%$ e#ua)s tota)
annua) cost minus the costs associated with the
shipping c)erDs, di-ided b6 the tota) orders from the
pre-ious 6ear
7nswer /91 is incorrect because *2, inc)udes the
costs associated with shipping
7nswer /(1 is correct ;he incrementa) cost of
additiona) orders e#ua)s the -ariab)e costs incurred in
purchasing and recei-ing in-entor6 /but not costs
associated with shipping1 Osing the high!)ow method
of ana)6sis, these -ariab)e costs can be computed b6
determining the apparent -ariab)e costs for the two
gi-en )e-e)s of acti-it6 For 1:& orders, the re)e-ant
costs with a -ariab)e e)ement inc)ude purchasing
c)erDs, *1,+$&T supp)ies, *,&&T and recei-ing c)erDs,
*2,2&& ;he tota) is *,,%$& For 1&& orders, these
costs are *1,2$&, *2:&, and *1,+&&, respecti-e)6,
for a tota) of *%,21& 7s the number of orders
increased b6 :&, the costs increased b6 *1,1,&
9onse#uent)6, the -ariab)e or incrementa) costs per
order must ha-e been *1A /*1,1,& ・:& orders1
[A&] Source' 9"7 &:8: $!%&
7nswer /71 is correct ;he annua) carr6ing costs are
*12,+$& for the warehouse, *1,$&& for insurance,
and *2,2$& for propert6 ta2es ;hese costs tota)
*1:,$&& In addition, the compan6 desires a 12>
after!ta2 return on in-estments Since the ta2 rate is
,&>, the 12> after!ta2 return e#ua)s a 2&>
before!ta2 return /12> ・:&>1 7 2&> return on
the *+$,&&& a-erage in-estment in in-entor6 is
*1$,&&& <ence, the tota) carr6ing cost is *%1,$&&
/*1:,$&& S *1$,&&&1 ;his amount is ,2> of the
*+$,&&& in-estment in in-entor6
7nswer /B1 is incorrect because %+> does not
consider insurance and propert6 ta2es
7nswer /91 is incorrect because %,> is based on a
12> before!ta2 return
7nswer /(1 is incorrect because 22> e#ua)s carr6ing
costs other than return on in-estment di-ided b6
a-erage in-entor6
[A1] Source' 9"7 &:8, $!2$
7nswer /71 is incorrect because the accounting
e-a)uation of in-entor6 does not affect the @G?
7nswer /B1 is incorrect because the accounting
e-a)uation of in-entor6 does not affect the @G?
7nswer /91 is incorrect because the accounting
e-a)uation of in-entor6 does not affect the @G?
7nswer /(1 is correct ;he @G? is computed b6
using the annua) #uantit6, cost per order, and the
annua) carr6ing cost per unit ;he in-entor6 method
has no effect on these components of the @G?, and
therefore has no effect on the @G?
[A2] Source' 9"7 128: $!1&
7nswer /71 is incorrect because it is a pro=ect
management and schedu)ing techni#ue that
determines the )ongest time path from the first to the
)ast e-ent for a pro=ect
7nswer /B1 is correct "ateria)s re#uirements
p)anning /"5P1 is usua))6 considered a
computer!based information s6stem designed to p)an
and contro) raw materia)s used in a production
setting It assumes that estimated demand for
materia)s is reasonab)6 accurate and that supp)iers
can de)i-er based upon this accurate schedu)e It is
crucia) that de)i-er6 de)a6s be a-oided because,
under "5P, production de)a6s are a)most
una-oidab)e if the materia)s are not on hand 7n
"5P s6stem uses a parts )ist, often ca))ed a bi)) of
materia)s, and )ead times for each t6pe of materia) to
obtain materia)s =ust as the6 are needed for p)anned
production
7nswer /91 is incorrect because it is not meaningfu)
in this conte2t
7nswer /(1 is incorrect because the @G? mode)
does not ad=ust for the dependent demand for the
components of an in-entor6 item
[A%] Source' 9"7 128: $!11
7nswer /71 is correct ;he 7B9 method of
in-entor6 contro) re#uires management to e2ert
greatest contro) o-er the 7 c)assification items, which
usua))6 inc)ude a re)ati-e)6 sma)) percentage of tota)
items but a high percentage of the do))ar -o)ume ;his
method is ana)ogous to the 8&E2& ru)e, which sa6s,
for instance, that 2&> of the customers account for
8&> of the profit
7nswer /B1 is incorrect because the @G? mode) is
intended to minimi8e the sum of ho)ding and ordering
costs
7nswer /91 is incorrect because a =ust!in!time
s6stem attempts to reduce ho)ding costs b6
schedu)ing de)i-eries of materia)s as c)ose)6 as
possib)e to when the6 are needed in production
7nswer /(1 is incorrect because an "5P s6stem
recogni8es that the demand for one in-entor6 item
creates a dependent demand for the components of
that item
[A,] Source' 9"7 &:88 $!22
7nswer /71 is incorrect because the a-erage
in-entor6 )e-e) increases b6 the amount of the safet6
stocD
7nswer /B1 is incorrect because the a-erage
in-entor6 )e-e) increases b6 the amount of the safet6
stocD
7nswer /91 is incorrect because the a-erage
in-entor6 )e-e) increases b6 the amount of the safet6
stocD
7nswer /(1 is correct If there is no safet6 stocD, the
a-erage )e-e) of in-entor6 wi)) be one!ha)f of the
economic order #uantit6 For e2amp)e, if the @G? is
$&&, the basic mode) predicts that the a-erage
in-entor6 )e-e) wi)) be 2$& ;he compan6 wi)) ha-e
$&& units immediate)6 after a purchase and 8ero
immediate)6 before the receipt of the ne2t purchase
/rep)enishment is assumed to be instantaneous1
<owe-er, safet6 stocD increases the a-erage
in-entor6 )e-e) b6 the amount of the safet6 stocD ;he
modified @G? mode) assumes that safet6 stocD wi))
ne-er be used ;hus, if a safet6 stocD of 1&& is
carried b6 the compan6 in the e2amp)e, the a-erage
in-entor6 )e-e) wi)) increase to %$& In-entor6 wi)) be
:&& units immediate)6 upon receipt of a purchase and
1&& units immediate)6 before the receipt of the ne2t
purchase
[A$] Source' 9"7 &:88 $!2,
7nswer /71 is incorrect because production /or
resupp)61 is assumed to be instantaneous
7nswer /B1 is incorrect because production /or
resupp)61 is assumed to be instantaneous
7nswer /91 is correct ;his mode) is the same as the
basic @G? mode), with the production #uantit6 /)ot1
substituted for the @G? and the cost of a production
run for the order cost In the basic mode), the
production rate /or time to fi)) an order1 is deemed to
be instantaneous, whereas demand is assumed to
occur at a constant rate o-er some period of time
7nswer /(1 is incorrect because the purpose of the
basic mode) is to ad=ust production to match demand
;his answer choice imp)ies that production is gi-en
[A:] Source' 9"7 1288 $!22
7nswer /71 is incorrect because *2,:&& is the
carr6ing cost of the safet6 stocD
7nswer /B1 is correct ;he annua) cost consists of the
carr6ing cost of the 2&& units of safet6 stocD at *1%
each, or *2,:&&, p)us the stocDout costs incurred
when 2&& units are insufficient ;he stocDout cost per
unit is *% ;he e2cess demand has been 1&& units
/%&& ! 2&&1 greater than the proposed safet6 stocD
%&> of the time /12 ・,&1 ;he cost per stocDout
was *%&& /*% 2 1&&1 (emand has e2ceeded the
safet6 stocD b6 2&& units /,&& ! 2&&1 1$> of the
time /: ・,&1 ;he cost per stocDout was *:&& /*% 2
2&&1 Ci-en %&> and 1$> probabi)ities of *%&& and
*:&& stocDout costs, respecti-e)6, the e2pected
stocDout cost for a 2&&!unit safet6 stocD for one
reorder c6c)e is *18& [/%&> 2 *%&&1 S /1$> 2
*:&&1] ;hus, the annua) e2pected stocDout cost for
a 2&&!unit safet6 stocD is *18& times the number of
reorder c6c)es per 6ear, or *1,,,& [*18& 2 /$&,&&&
・:,2$& @G?1] ;he annua) cost of a 2&&!unit safet6
stocD is *,,&,& /*2,:&& S 1,,,&1
7nswer /91 is incorrect because *,,2:& is the annua)
cost of estab)ishing %&&!unit safet6 stocD
7nswer /(1 is incorrect because *$,2&& is the annua)
cost of estab)ishing a ,&&!unit safet6 stocD
[A+] Source' 9"7 12A& ,!A
7nswer /71 is incorrect because the purchasing
manager4s sa)ar6 is a fi2ed cost
7nswer /B1 is incorrect because ad-ertising is not an
ordering or carr6ing cost
7nswer /91 is incorrect because the cost of shipping
to customers is a se))ing e2pense
7nswer /(1 is correct ;he determination of the
economic order #uantit6 ba)ances the -ariab)e costs
of ordering and carr6ing in-entor6 Factors in the
e#uation inc)ude the cost of p)acing an order, unit
carr6ing cost, and annua) demand in units 9arr6ing
costs inc)ude storage costs, hand)ing costs, insurance,
propert6 ta2es, obso)escence, and the opportunit6
cost of in-esting capita) in in-entor6 ;hus, the return
on capita) that is forgone when it is in-ested in
in-entor6 shou)d be considered
[A8] Source' 9"7 &:A1 ,!,
7nswer /71 is correct 7 decrease in in-entor6
ordering costs shou)d decrease the economic order
#uantit6 ;he effect is that more orders can be made
/of sma))er #uantities1 without increasing costs
7ccording)6, in the @G? mode), ordering cost is a
numerator -a)ue
7nswer /B1 is incorrect because the reorder point is
based on )ead time, not the @G? mode)
7nswer /91 is incorrect because the @G? shou)d
dec)ine
7nswer /(1 is incorrect because the @G? shou)d
dec)ine
[AA] Source' 9"7 &:A1 ,!$
7nswer /71 is correct 7n increase in ho)ding costs
wi)) )ead to a decrease in the economic order
#uantit6 7n increase in ho)ding costs wi)) cause tota)
costs to rise un)ess the a-erage in-entor6 dec)ines
Because the a-erage in-entor6 wi)) be at )east ha)f of
the @G?, the on)6 wa6 for the a-erage in-entor6 to
dec)ine /other than b6 changing safet6 stocDs1 is for
purchases to be made more often and in sma))er
#uantities ;hus, in the @G? mode), carr6ing cost is a
denominator -a)ue
7nswer /B1 is incorrect because the safet6 stocD is
not a factor in the @G? ca)cu)ation If an6thing,
management wi)) reduce safet6 stocDs when in-entor6
ho)ding costs increase
7nswer /91 is incorrect because the @G? wi))
dec)ine
7nswer /(1 is incorrect because the @G? wi))
dec)ine
[1&&] Source' 9"7 12A1 ,!28
7nswer /71 is incorrect because e2pected usage is
2&& units
7nswer /B1 is incorrect because e2pected usage is
2&& units
7nswer /91 is correct ;he e2pected a-erage weeD)6
usage is an e2pected -a)ue, that is, the sum of the
products of the e2pected outcomes and their re)ated
probabi)ities <ence, usage is estimated to be 2&&
units [/2 2 28&1 S /8 2 18&1]
7nswer /(1 is incorrect because e2pected usage is
2&& units
[1&1] Source' 9"7 12A1 ,!2A
7nswer /71 is incorrect because the e2pected usage
during )ead time is :%& units
7nswer /B1 is incorrect because the e2pected usage
during )ead time is :%& units
7nswer /91 is correct ;he e2pected )ead time,
which is an e2pected -a)ue e#ua) to the sum of the
products of the possib)e )ead times and their re)ated
probabi)ities, is 21 weeDs [/1 2 %1 S /A 2 21]
9onse#uent)6, the e2pected usage during )ead time is
:%& units /21 weeDs 2 %&& units e2pected to be
used in the a-erage weeD1
7nswer /(1 is incorrect because the e2pected usage
during )ead time is :%& units
[1&2] Source' 9"7 12A1 ,!%&
7nswer /71 is incorrect because the probabi)it6 is
&1&,
7nswer /B1 is incorrect because the probabi)it6 is
&1&,
7nswer /91 is correct Based on the gi-en data,
weeD)6 usage must be either 28& or 18& units, and
the )ead time must be either % or 2 weeDs Jhene-er
the )ead time is 2 weeDs, no stocDout wi)) occur
because usage wi)) be at most $:& units /2 weeDs 2
28& units1 ;hus, one condition of a stocDout is a )ead
time of % weeDs 7 second condition of a stocDout is
that usage e#ua) 28& units for at )east 2 of the %
weeDsT if usage is 28& units for on)6 1 weeD, the tota)
usage during the )ead time wi)) be on)6 :,& units [/2 2
18&1 S 28&] ;he probabi)it6 of a %!weeD )ead time
is gi-en as 1 Ci-en that weeD)6 usage is independent
of )ead time and of prior weeDs4 usage, the
probabi)it6 that usage wi)) be 28& units for at )east 2
weeDs is the sum of the probabi)ities of the fo))owing
combinations of e-ents'
JeeD 1 JeeD 2 JeeD % Probabi)it6
!!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!!!!!!
28& 28& 28& 2 2 2 2 2 3 &&8
28& 28& 18& 2 2 2 2 8 3 &%2
28& 18& 28& 2 2 8 2 2 3 &%2
18& 28& 28& 8 2 2 2 2 3 &%2
!!!!
1&,
3333
;he probabi)it6 of both a %!weeD )ead time and usage
in e2cess of +&& units is therefore &1&, /1 2 1&,1
7nswer /(1 is incorrect because the probabi)it6 is
&1&,
[1&%] Source' 9"7 &:A2 ,!2%
7nswer /71 is incorrect because a safet6 stocD of &
units has a tota) e2pected cost of *21,&&&
7nswer /B1 is incorrect because a safet6 stocD of
1&& units has a tota) e2pected cost of *1%,1&&
7nswer /91 is incorrect because a safet6 stocD of %&
units has a tota) e2pected cost of *%,:&&
7nswer /(1 is correct ;he tota) e2pected cost of
safet6 stocD e#ua)s the sum of the e2pected annua)
stocDout cost and the e2pected annua) carr6ing cost
7nnua) e2pected stocDout cost e#ua)s the cost per
occurrence /*1,+$&1, times the probabi)it6 of a
stocDout per c6c)e, times the number of c6c)es /2,1
7nnua) e2pected carr6ing cost of a safet6 stocD
e#ua)s the unit carr6ing cost /*$1 times the number of
units <ence, a safet6 stocD of ,&& units has the
)owest tota) e2pected cost
@2pected @2pected ;ota)
9arr6ing StocDout 9ost StocDout 9ost
@2pected
<e)d 9ost Per 96c)e for 2, 96c)es 9ost
!!!! !!!!!!!!! !!!!!!!!!!!! !!!!!!!!!!!!! !!!!!!!!
& * & *8+$&& *21,&&& *21,&&&
1&& $&& $2$&& 12,:&& 1%,1&&
2&& 1,&&& 2,$&& $,88& :,88&
%&& 1,$&& 8+$& 2,1&& %,:&&
,&& 2,&&& 1+$& ,2& 2,,2&
[1&,] Source' 9"7 12A% ,!:
7nswer /71 is incorrect because 8&> of Hune4s cost
of sa)es shou)d be inc)uded
7nswer /B1 is incorrect because 11> of sa)es in "a6
is 2&> at "a64s cost of sa)es
7nswer /91 is correct 9ost of sa)es for Hu)6 e#ua)s
$$ percent of Hu)6 sa)es Because ending in-entor6
for Hune must e#ua) 2&> of the cost of sa)es for Hu)6,
the cost of the ending in-entor6, which is paid for in
Hune, is 11 percent of Hu)6 sa)es Furthermore, 8&>
of the in-entor6 so)d in the current month is
purchased and paid for in the current month If Hune4s
cost of sa)es e#ua)s fift6!fi-e percent of sa)es, cash
pa6ments for in-entor6 purchased and so)d in Hune
e#ua) fort6!four percent of Hune sa)es <ence, tota)
month)6 cash pa6ments for merchandise in Hune e#ua)
fort6!four percent of Hune sa)es p)us e)e-en percent of
Hu)6 sa)es
7nswer /(1 is incorrect because 11> of sa)es in
"a6 is 2&> at "a64s cost of sa)es
[1&$] Source' 9"7 12A% ,!8
7nswer /71 is incorrect because $,&&& units
represents the #uantit6 e2pected to be so)d during the
norma) )ead time
7nswer /B1 is incorrect because :,+$& units inc)udes
not on)6 the safet6 stocD, but a)so the units e2pected
to be so)d during the norma) )ead time
7nswer /91 is correct Safet6 stocD is defined as the
amount of e2tra stocD that is Dept on hand to guard
against stocDouts It is the in-entor6 )e-e) at the
reorder point minus the e2pected usage during the
)ead time (ai)6 usage is 2$& units /:&,&&& per 6ear
・2,& da6s1 Ci-en a ma2imum )ead time of 2+ da6s
and a norma) )ead time of 2& da6s, a safet6 stocD for
+ da6s /2+ ! 2&1 shou)d be maintained <ence, safet6
stocD is 1,+$& units /+ 2 2$& units1
7nswer /(1 is incorrect because 2$& units is 1 da64s
sa)es
[1&:] Source' 9"7 12A% ,!A
7nswer /71 is incorrect because $,&&& units does not
a))ow for safet6 stocD
7nswer /B1 is correct ;he reorder point is the
#uantit6 on hand when an order is p)aced Jith a
2&!da6 norma) )ead time, a +!da6 safet6 stocD, and
usage of 2$& units per da6, an order shou)d be
p)aced when 2+ da6s of in-entor6 are on hand, a
tota) of :,+$& units /2+ 2 2$&1
7nswer /91 is incorrect because 1,+$& units co-ers
on)6 safet6 stocD
7nswer /(1 is incorrect because $,2$& units inc)udes
on)6 1 da6 of safet6 stocD
[1&+] Source' 9"7 &:A, ,!22
7nswer /71 is incorrect because the cost of
maintaining an a-erage in-entor6 of :2$ units is
*:,2$&
7nswer /B1 is incorrect because *$,&&& is based
upon an @G? of 1,&&& units and an a-erage
in-entor6 of $&& units
7nswer /91 is correct Ci-en four production runs
and an annua) demand of $,&&& units, each
production run must generate 1,2$& units In-entor6
wi)) tota) 1,2$& units at the comp)etion of each run but
wi)) dec)ine to 8ero =ust prior to the ne2t run ;hus,
the a-erage in-entor6 is :2$ units /1,2$& ・21, and
the tota) carr6ing cost is *:,2$& /*1& 2 :2$ units1
7nswer /(1 is incorrect because the cost of
maintaining an a-erage in-entor6 of :2$ units is
*:,2$&
[1&8] Source' 9"7 &:A, ,!2%
7nswer /71 is incorrect because a sing)e production
run indicates an @G? of $,&&& units ;he carr6ing
costs of *2$,&&& [*1& 2 /*$,&&& ・21] wou)d
e2ceed the *1,&&& of set!up costs
7nswer /B1 is incorrect because two production runs
correspond to an @G? of 2,$&& units and an a-erage
in-entor6 of 1,2$& units ;he resu)ting *12,$&& of
carr6ing costs wou)d e2ceed the *2,&&& of set!up
costs
7nswer /91 is incorrect because four production runs
correspond to an @G? of 1,2$& units and an a-erage
in-entor6 of :2$ units ;he resu)ting *:,2$& of
carr6ing costs wou)d e2ceed the *,,&&& of set!up
costs
7nswer /(1 is correct ;he @G? minimi8es the sum
of carr6ing and set!up costs ;he @G? is the amount
at which carr6ing costs are e#ua) to set!up costs
;hus, p)ugging the data into the @G? formu)a resu)ts
in the fo))owing'
レ ソス
ウ 2/$,&&&1/1,&&&1ウ
@G? 3 ウ!!!!!!!!!!!!!!! ウ 3 1&&& Onits
ウ 1& ウ
タ ル
;hus, if each )ot consists of 1,&&& units, fi-e
production runs per 6ear are needed to meet the
$,&&&!unit demand 7t this )e-e), set!up costs wi))
tota) *$,&&& /$ 2 *1,&&&1 9arr6ing costs wi)) a)so
e#ua) *$,&&& /*1& per unit carr6ing cost 2 a-erage
in-entor6 of $&& units1 7ccording)6, tota) costs are
minimi8ed at *1&,&&&
[1&A] Source' 9"7 &:A, ,!2,
7nswer /71 is incorrect because a-erage in-entor6
must increase if the compan6 maintains a safet6
stocD
7nswer /B1 is incorrect because 2& units is the safet6
stocD per da6 /$,&&& units ・2$& business da6s1
7nswer /91 is incorrect because $& units is the
a-erage safet6 stocD assuming that it wi)) decrease to
8ero
7nswer /(1 is correct ;he annua) sa)es of $,&&&
units are made o-er 2$& da6s, or 2& units per da6
;hus, a $!da6 safet6 stocD e#ua)s 1&& units /$ da6s 2
2& units per da61
[11&] Source' 9"7 12A, ,!:
7nswer /71 is incorrect because carr6ing costs
t6pica))6 dec)ine in HI; companies Iess in-entor6 is
on hand
7nswer /B1 is correct ;he ob=ecti-e of HI; is to
reduce carr6ing costs b6 e)iminating in-entories and
increasing the de)i-eries made b6 supp)iers Idea))6,
shipments of raw materia)s are recei-ed =ust in time to
be incorporated into the manufacturing process ;he
focus of #ua)it6 contro) under HI; is the pre-ention of
#ua)it6 prob)ems ?ua)it6 contro) is shifted to the
supp)ier HI; companies t6pica))6 do not inspect
incoming goodsT the assumption is that receipts are of
perfect #ua)it6 Supp)iers are )imited to those who
guarantee perfect #ua)it6 and prompt de)i-er6
7nswer /91 is incorrect because more de)i-eries are
needed @ach shipment is sma))er in si8e
7nswer /(1 is incorrect because, in a HI; s6stem,
materia)s are de)i-ered direct)6 to the production )ine
read6 for insertion in the finished product
[111] Source' 9"7 12A, ,!+
7nswer /71 is incorrect because interest on in-ested
capita) is an item considered in the basic @G? mode)
7nswer /B1 is incorrect because in-entor6
obso)escence is an item considered in the basic @G?
mode)
7nswer /91 is incorrect because pub)ic warehouse
renta) charges is an item considered in the basic @G?
mode)
7nswer /(1 is correct ;he basic @G? mode)
minimi8es the sum of ordering /or set!up1 and
carr6ing costs Inc)uded in the formu)a are annua)
demand, ordering /or set!up1 costs, and carr6ing
costs 9arr6ing costs inc)ude warehousing costs,
insurance, spoi)age, obso)escence, and interest on
in-ested capita) ;he cost of the in-entor6 itse)f is not
a component of the @G? mode), and neither are an6
#uantit6 discounts )ost on in-entor6 purchases
[112] Source' 9"7 12A, ,!8
7nswer /71 is correct ;he basic @G? mode) e#ua)s
the s#uare root of the #uotient of /11 the product of
twice the demand times the cost per order, /21
di-ided b6 the periodic carr6ing cost <ence, the
mode) is re)ati-e)6 insensiti-e to error 7 gi-en
percentage error in a -a)ue resu)ts in a )ower
percentage change in the @G?
7nswer /B1 is incorrect because the @G? mode) can
be used regard)ess of the re)ationship between
carr6ing and ho)ding costs
7nswer /91 is incorrect because product demand
and ordering costs must be Dnown with some
certaint6
7nswer /(1 is incorrect because an @G? mode) can
be used with an6 t6pe of s6stem
[11%] Source' 9"7 12A, ,!A
7nswer /71 is correct Ci-en usage of 8,,&&& units
o-er %&& worD da6s, the a-erage usage rate is 28&
units per da6 Increasing the safet6 stocD b6 a 2!da6
supp)6 /8 da6s ! usua) :!da6 )ead time1 increases
in-entor6 b6 $:& units /2 2 28&1 ;he additiona)
in-entor6 shou)d decrease stocDout costs and
increase in-entor6 carr6ing costs
7nswer /B1 is incorrect because carr6ing costs wi))
increase with the increased in-entor6 si8e
7nswer /91 is incorrect because the compan6 is
a)read6 carr6ing a :!da6 supp)6 of safet6 stocD /:
da6s 2 28& units 3 1,:8& units1 ;he on)6 additiona)
units needed are for 2 e2tra da6s
7nswer /(1 is incorrect because 1,:8& units is a
:!da6 supp)6, not the increase in safet6 stocD 7)so,
stocDout costs wi)) decrease and carr6ing costs wi))
increase
[11,] Source' 9"7 &:A: ,!11
7nswer /71 is incorrect because *8$& assumes that
a)) -ariab)e marDeting costs are a-oidab)e
7nswer /B1 is correct ;he compan64s a-oidab)e unit
costs tota) *:+$ [/*2&& (" S *2,& (I S *1:&
.G<1 S /% 2 *2$& -ariab)e marDeting costs1]
<ence, it wi)) at )east breaD e-en b6 pa6ing no more
than *:+$
7nswer /91 is incorrect because *++$ assumes that
fi2ed manufacturing costs of *1 are a-oidab)e
7nswer /(1 is incorrect because *$2$ resu)ts from
subtracting the sa-ings in marDeting costs from the
manufacturing sa-ings
[11$] Source' 9"7 &:A: ,!1$
7nswer /71 is incorrect because )abor is either
-ariab)e or mi2ed
7nswer /B1 is incorrect because o-erhead is either
-ariab)e or mi2ed
7nswer /91 is correct "ost t6pes of costs either are
-ariab)e or contain some mi2 of fi2ed and -ariab)e
components For e2amp)e, )abor and materia)s are
primari)6 -ariab)e ;heir amounts f)uctuate with the
re)e-ant cost dri-ers Se))ing e2penses and o-erhead
costs can be either fi2ed or -ariab)e (epreciation,
howe-er, is strict)6 a fi2ed cost when -iewed in a
decision ana)6sis situation because it re#uires no cash
out)a6 Instead, the initia) ac#uisition of the )ong!)i-ed
asset re#uires the cash out)a6
7nswer /(1 is incorrect because se))ing costs are
either -ariab)e or mi2ed
[11:] Source' 9"7 &:A: ,!1:
7nswer /71 is incorrect because incrementa) cost is
re)e-ant to management decision ana)6sis
7nswer /B1 is incorrect because differentia) cost is
re)e-ant to management decision ana)6sis
7nswer /91 is incorrect because a-oidab)e cost is
re)e-ant to management decision ana)6sis
7nswer /(1 is correct "anagement decision ana)6sis
is based on the concept of re)e-ant costs 5e)e-ant
costs differ among decision choices ;hus,
incrementa) /differentia) or a-oidab)e1 costs are
a)wa6s re)e-ant Gpportunit6 cost is a)so re)e-ant
because it is the benefit forgone b6 se)ecting one
choice instead of another <istorica) costs, because
the6 occurred in the past, are sunD costs and not
re)e-ant to most management decisions
[11+] Source' 9"7 &:A: ,!1+
7nswer /71 is correct "anagement decision ana)6sis
is based on the concept of re)e-ant costs 5e)e-ant
costs differ among decision choices ;hus,
incrementa) or differentia) costs are a)wa6s re)e-ant
In specia)!order situations, gi-en sufficient e2cess
capacit6, management is not concerned with fu))
absorption costing because it inc)udes certain product
costs /fi2ed factor6 o-erhead1 that wi)) not change if
the specia) order is accepted ;he principa) issue is
reco-er6 of the -ariab)e costs of processing the
specia) order and earning a contribution margin to
app)6 toward co-ering fi2ed costs and profits ;hus,
gi-en sufficient capacit6 that wou)d otherwise be id)e
/opportunit6 cost is 8ero1, accepting a specia) order
ma6 be indicated as )ong as the organi8ation recoups
its -ariab)e costs
7nswer /B1 is incorrect because differentia)
/incrementa)1 costs are re)e-ant b6 definition
7nswer /91 is incorrect because direct costs that wi))
not be incurred if the order is not accepted are
re)e-ant
7nswer /(1 is incorrect because -ariab)e costs that
wi)) not be incurred if the order is not accepted are
re)e-ant
[118] Source' 9"7 &:A: ,!18
7nswer /71 is incorrect because the origina) cost of
the o)d e#uipment is a sunD cost with no re)e-ance to
future decision maDing
7nswer /B1 is correct "anagement decision ana)6sis
is based on the concept of re)e-ant costs 5e)e-ant
costs differ among decision choices ;hus,
incrementa) or differentia) costs are a)wa6s re)e-ant
<istorica) costs, such as the origina) cost of the
e#uipment, because the6 were incurred in the past,
are not re)e-ant Simi)ar)6, an6 gain or )oss on the o)d
e#uipment is not re)e-ant because this amount is
based on the historica) cost <owe-er, the disposa)
price of the o)d e#uipment is re)e-ant because it
in-o)-es a future cash inf)ow that wi)) not occur un)ess
the e#uipment is disposed of
7nswer /91 is incorrect because gain or )oss is based
on historica) cost, which is a sunD cost
7nswer /(1 is incorrect because a )ump!sum
write!off of a sunD cost is not re)e-ant to a future
decision
[11A] Source' 9"7 &:A: ,!1A
7nswer /71 is incorrect because e2pected -a)ue is
the probabi)istica))6 weighted a-erage of the
outcomes of an action
7nswer /B1 is incorrect because an incrementa) cost
is the difference in costs between two decisions
7nswer /91 is incorrect because net rea)i8ab)e -a)ue
is a -a)uation concept for recording assets on the
ba)ance sheet
7nswer /(1 is correct 7n opportunit6 cost is defined
as the benefit forgone, for e2amp)e, the contribution
to income, b6 not se)ecting the best a)ternati-e use of
scarce resources Gpportunit6 costs are not recorded
in the accounting records, but the6 are important for
management decision maDing
[12&] Source' 9"7 &:A: ,!21
7nswer /71 is incorrect because una-oidab)e costs
wi)) be the same regard)ess of the decisionT thus, the6
are not re)e-ant
7nswer /B1 is incorrect because depreciation is a
fi2ed cost that wi)) remain the same regard)ess of the
decision
7nswer /91 is correct 7-ai)ab)e resources shou)d be
used as efficient)6 as possib)e before bu6ing from an
outside supp)ier ;he manager must consider on)6 the
costs re)e-ant to the in-estment decision If the tota)
re)e-ant costs of production are )ess than the cost to
bu6 the item, it shou)d be insourced ;he De6 -ariab)e
is re)e-ant costs, not tota) costs 5e)e-ant costs differ
among decision choices ;hus, incrementa) or
differentia) costs are a)wa6s re)e-ant 7-oidab)e costs
wi)) not be incurred if a certain decision is madeT thus,
a-oidab)e costs are re)e-ant Gpportunit6 costs are
a)so re)e-ant because the6 are the benefits forgone b6
not se)ecting the ne2t best a)ternati-e use of scarce
resources <owe-er, historica) costs, such as the
origina) cost of e#uipment, are not re)e-ant because
the6 are sunD costs
7nswer /(1 is incorrect because propert6 ta2es are
fi2ed regard)ess of the production )e-e) ;he6 are not
re)e-ant to a maDe!or!bu6 decision
[121] Source' 9"7 &:A: ,!22
7nswer /71 is incorrect because the highest sa)es
price does not consider costs and constraints
7nswer /B1 is incorrect because the product with the
highest O9" ma6 re#uire greater usage of the
constrained resource than another product
contributing a )esser amount per unit
7nswer /91 is incorrect because the highest sa)es
-o)ume does not consider costs and constraints
7nswer /(1 is correct In the short run, man6 costs
are fi2ed <ence, contribution margin /re-enues ! a))
-ariab)e costs1 becomes the best measure of
profitabi)it6 "oreo-er, certain resources are a)so
fi2ed 7ccording)6, when deciding which products to
produce at fu)) capacit6, the criterion shou)d be the
contribution margin per unit of the most constrained
resource ;his approach ma2imi8es tota) contribution
margin
[122] Source' 9"7 12A: ,!1
7nswer /71 is incorrect because discretionar6 costs
are sub=ect to a periodic out)a6 decision, and the
input!output re)ationship is not we)) defined
7nswer /B1 is incorrect because fu)) absorption costs
inc)ude direct materia)s, direct )abor, and a)) factor6
o-erhead
7nswer /91 is incorrect because margina) costs are
differentia) or incrementa) costs
7nswer /(1 is correct 7 sunD cost cannot be
a-oided because the e2penditure has a)read6
occurred or an irre-ocab)e decision to incur the cost
has been made SunD costs are irre)e-ant to
management decision maDing because the6 cannot
-ar6 with the option se)ected
[12%] Source' 9"7 12A: ,!2
7nswer /71 is incorrect because *,+ ignores the
shipping and hand)ing costs
7nswer /B1 is correct 7 compan6 must co-er the
incrementa) costs of a specia) order when it has
e2cess capacit6 ;he incrementa) costs for product
NB!A: are *$& /*2& direct materia)s S *1$ direct
)abor S *12 -ariab)e o-erhead S *% shipping and
hand)ing1 ;he fi2ed costs wi)) not change as a resu)t
of the specia) order, so the6 are not re)e-ant ;hus,
an6 price is e2cess of *$& per unit is acceptab)e
7nswer /91 is incorrect because *:& inc)udes fi2ed
se))ing and administrati-e costs
7nswer /(1 is incorrect because *++ inc)udes fi2ed
manufacturing o-erhead but omits shipping and
hand)ing costs
[12,] Source' 9"7 12A: ,!%
7nswer /71 is incorrect because *:2&,&&& inc)udes
a)) fi2ed costs
7nswer /B1 is incorrect because *+$&,&&& inc)udes
a)) manufacturing costs
7nswer /91 is correct 9ontribution margin e#ua)s
sa)es minus -ariab)e costs 7)) -ariab)e costs wi))
remain the same e2cept that direct materia)s wi))
increase to *22 per unit /11 2 *2&1 ;hus, tota) unit
-ariab)e costs wi)) be *$2 /*22 S *1$ S *12 S *%1,
and the contribution margin wi)) be *1,&8&,&&&
[1&,&&& units /*1:& unit se))ing price ! *$21]
7nswer /(1 is incorrect because *1,11&,&&&
assumes that the fi2ed costs and shipping and
hand)ing are the on)6 re)e-ant costs
[12$] Source' 9"7 12A: ,!,
7nswer /71 is correct Ci-en no e2cess capacit6, the
price must co-er the incrementa) costs ;he
incrementa) costs for NB!A: e#ua) *$& /*2& direct
materia)s S *1$ direct )abor S *12 -ariab)e o-erhead
S *% shipping and hand)ing1 Gpportunit6 cost is the
benefit of the ne2t best a)ternati-e use of scarce
resources Because acceptance of the specia) order
wou)d cause the compan6 to forgo a contribution
margin of *1&,&&&, that amount must be ref)ected in
the price <ence, the minimum unit price is *:& [*$&
unit incrementa) cost S /*1&,&&& )ost 9" ・1,&&&
units1]
7nswer /B1 is incorrect because *+& inc)udes fi2ed
se))ing and administrati-e costs
7nswer /91 is incorrect because *8+ inc)udes fi2ed
manufacturing o-erhead but omits shipping and
hand)ing costs
7nswer /(1 is incorrect because *1&& is based on
fu)) absorption cost
[12:] Source' 9"7 12A: ,!$
7nswer /71 is incorrect because margina) cost is an
incrementa) or differentia) cost
7nswer /B1 is incorrect because incrementa) cost is
the difference in tota) cost between two decision
choices
7nswer /91 is incorrect because a potentia) cost ma6
arise in the future
7nswer /(1 is correct 7n opportunit6 cost is the
ma2imum benefit sacrificed b6 emp)o6ing a scarce
producti-e resource in a specified manner In other
words, it is the -a)ue or worth of that resource in its
ne2t best a)ternati-e use
[12+] Source' 9"7 12A: ,!:
7nswer /71 is incorrect because fu))!cost pricing
promotes price stabi)it6 It )imits the abi)it6 to cut
prices
7nswer /B1 is incorrect because fu))!cost pricing
pro-ides e-idence that the compan6 is not -io)ating
antitrust )aws against predator6 pricing
7nswer /91 is correct 7 target price is the e2pected
marDet price of a product, gi-en the compan64s
Dnow)edge of its customers and competitors <ence,
under target pricing, the sa)es price is Dnown before
the product is de-e)oped Subtracting the unit target
profit margin determines the )ong!term unit target
cost If cost!cutting measures do not permit the
product to be made at or be)ow the target cost, it wi))
be abandoned
7nswer /(1 is incorrect because fu))!cost pricing has
the ad-antage of reco-ering the fu)) )ong!term costs of
the product In the )ong term, a)) costs are re)e-ant
[128] Source' 9"7 12A: ,!+
7nswer /71 is incorrect because the =oint costs are
irre)e-ant
7nswer /B1 is incorrect because the unit price must
co-er the *%$& opportunit6 cost p)us the *1$& of
additiona) costs
7nswer /91 is correct ;he unit price of the product
at the sp)it!off point is Dnown to be *%$&, so the
=oint costs are irre)e-ant ;he additiona) unit cost of
further processing is *1$& /*A&,&&& ・:&,&&& units1
9onse#uent)6, the unit price must be at )east *$&&
/*%$& opportunit6 cost S *1$&1
7nswer /(1 is incorrect because an6 price greater
than *$ wi)) pro-ide greater profits, in abso)ute
do))ars, e-en though the gross profit percentage
dec)ines
[12A] Source' 9"7 12A: ,!8
7nswer /71 is incorrect because the *% unit =oint cost
shou)d be inc)uded in the in-entor6 -a)ue
7nswer /B1 is correct Hoint costs are a))ocated
based on units of production 7ccording)6, the unit
=oint cost a))ocated to 7"!12 is *%&& [*%&&,&&& ・
/:&,&&& units of 7"!12 S ,&,&&& units of B"!%:1]
;he unit cost of 7"!12 is therefore *,$& [*%&&
=oint cost S /*A&,&&& additiona) cost ・:&,&&&
units1] ;ota) in-entor6 -a)ue is *,$,&&& /1&,&&&
units 2 *,$&1, and tota) operating profit is *$&,&&&
[/*$$& unit price ! *,$& unit cost1 2 $&,&&& units
so)d]
7nswer /91 is incorrect because the *1$& unit
additiona) cost shou)d be inc)uded in tota) unit cost
7nswer /(1 is incorrect because the *% unit =oint cost
shou)d be inc)uded in the cost of goods so)d, and
in-entor6 shou)d inc)ude the *1$& unit additiona)
cost
[1%&] Source' 9"7 12A: ,!22
7nswer /71 is incorrect because factor6 management
costs are un)iDe)6 to differ regard)ess of which
decision is se)ected
7nswer /B1 is incorrect because genera) office costs
are un)iDe)6 to differ regard)ess of which decision is
se)ected
7nswer /91 is correct ;he re)e-ant costs in a
maDe!-ersus!bu6 decision are those that differ
between the two decision choices ;hese costs
inc)ude an6 -ariab)e costs p)us an6 a-oidab)e fi2ed
costs 7-oidab)e fi2ed costs wi)) not be incurred if the
Qbu6Q decision is se)ected
7nswer /(1 is incorrect because depreciation costs
are un)iDe)6 to differ regard)ess of which decision is
se)ected
[1%1] Source' Pub)isher
7nswer /71 is incorrect because *1+&& assumes
that a)) -ariab)e marDeting costs wi)) be e)iminated
7nswer /B1 is correct ;he compan6 is current)6
incurring -ariab)e costs of *,&& for materia)s, *,8&
for direct )abor, and *%2& for -ariab)e indirect costs,
a)) of which wi)) be e)iminated if the purchase is made
from the outside supp)ier ;hese -ariab)e
manufacturing costs tota) *12&& per unit In addition,
the compan64s -ariab)e marDeting costs wi)) be
decreased b6 *1$& /%&> 2 *$1 <ence, gi-en that
the resu)ting id)e capacit6 cannot be used for other
profitab)e acti-ities /opportunit6 cost is 8ero1, the
compan6 can pa6 *1%$& per unit /*12&& S *1$&1
to the outside supp)ier without reducing its operating
income
7nswer /91 is incorrect because *1$$& assumes
that fi2ed manufacturing costs of *2 wi)) be
e)iminated
7nswer /(1 is incorrect because *1&$& subtracts
the sa-ings in marDeting costs from the manufacturing
sa-ings
[1%2] Source' Pub)isher
7nswer /71 is incorrect because, gi-en e2cess
capacit6, the tota) absorption cost of *18& per unit is
not re)e-ant
7nswer /B1 is incorrect because *12& is the norma)
operating margin, not a cost
7nswer /91 is correct In a specia) order situation, a
compan6 with e2cess capacit6 has a *& opportunit6
cost of fi))ing the specia) order 7ccording)6, it shou)d
be wi))ing to se)) the product at a price that e2ceeds
its incrementa) costs ;he incrementa) /re)e-ant1 costs
for Pontotoc e#ua) the -ariab)e costs of *1&& /*,&
direct materia)s S *%& direct )abor S *2, -ariab)e
o-erhead S *: -ariab)e se))ing costs1 ;hus, if the
se))ing price is in e2cess of *1&&, the compan6 shou)d
be wi))ing to accept the order
7nswer /(1 is incorrect because *1:& inc)udes the
fi2ed manufacturing o-erhead, an irre)e-ant cost
[1%%] Source' Pub)isher
7nswer /71 is incorrect because *2&& is based on a
*2& increment o-er the tota) cost on an absorption
costing basis
7nswer /B1 is incorrect because *18& is the tota)
absorption cost
7nswer /91 is incorrect because *1,& is based on a
*2& increment o-er the operating margin
7nswer /(1 is correct Incrementa) /re)e-ant1 costs
inc)ude the -ariab)e costs of *1&& /*,& direct
materia)s S *%& direct )abor S *2, -ariab)e o-erhead
S *: -ariab)e se))ing costs1 Furthermore, if the
compan6 does not ha-e id)e capacit6, the unit price
must co-er the opportunit6 costs as we)) as the
-ariab)e costs Ci-en that the a)ternati-e use wi))
generate a *2&,&&& contribution, the 1,&&&
specia)!order units wi)) ha-e to generate at )east *2&
per unit /*2&,&&& ・1,&&& units1 abo-e their -ariab)e
costs, a tota) of *12& per unit
[1%,] Source' Pub)isher
7nswer /71 is incorrect because co))usi-e pricing
in-o)-es a conspirac6 to set higher prices
7nswer /B1 is incorrect because dumping is defined
under OS )aw as sa)e b6 a non!OS compan6 in the
OS marDet of a product be)ow its marDet -a)ue in
the countr6 where it was produced Such sa)e is
i))ega) if it threatens materia) in=ur6 to a OS industr6
7nswer /91 is correct Predator6 pricing is
intentiona))6 pricing be)ow cost to e)iminate
competition and reduce supp)6 Federa) statutes and
man6 state )aws prohibit the practice ;he OS
Supreme 9ourt has he)d that pricing is predator6
when two conditions are met' /11 the se))er4s price is
be)ow Qan appropriate measure of its costs,Q and /21
it has a reasonab)e prospect of reco-ering the
resu)ting )oss through higher prices or greater marDet
share
7nswer /(1 is incorrect because price discrimination
entai)s charging different prices to different customers
for essentia))6 the same product if the effect is to
)essen competition substantia))6T to tend to create a
monopo)6T or to in=ure, destro6, or pre-ent
competition
[1%$] Source' Pub)isher
7nswer /71 is incorrect because *1$ is the budgeted
unit manufacturing cost
7nswer /B1 is incorrect because *%1 is the budgeted
unit )ife!c6c)e cost
7nswer /91 is incorrect because *%: is the budgeted
unit who)e!)ife cost
7nswer /(1 is correct Jho)e!)ife costs inc)ude
after!purchase costs /operating, support, repair, and
disposa)1 incurred b6 customers as we)) as )ife!c6c)e
costs /5B(, design, manufacturing, marDeting,
distribution, and research1 <ence, the budgeted unit
who)e!)ife cost is *%: [/*2,&&&,&&& S *%,&&&,&&& S
*1,2&&,&&& S *1,&&&,&&&1 ・2&&,&&& units], and
the budgeted unit se))ing price is *,$ /12$> 2 *%:1
[1%:] Source' 9I7 &$A: III!%$
7nswer /71 is correct 7utomating and computeri8ing
production processes re#uires a substantia)
in-estment in fi2ed assets and an increase in risD
because of greater fi2ed costs 9I" a)so necessitates
an increase in software costs and e2tensi-e worDer
retraining <owe-er, the costs of spoi)age, reworD,
and scrap are reduced a)ong with )abor costs ;he
#ua)itati-e ad-antages of 9I" are increased
f)e2ibi)it6, shorter manufacturing )ead time, #uicDer
de-e)opment of new products, better product
de)i-er6 and ser-ice, faster response to marDet
changes, and impro-ed competiti-eness
7nswer /B1 is incorrect because an increase in fi2ed
assets resu)ts in higher booD -a)ue and depreciation
e2pense
7nswer /91 is incorrect because worDing capita)
norma))6 is reduced as in-estments shift from current
to fi2ed assets
7nswer /(1 is incorrect because actua) or potentia)
marDet share changes ma6 trigger in-estments in
9I"
[1%+] Source' 9I7 11A$ III!AA
7nswer /71 is correct F)e2ib)e manufacturing is the
capacit6 of computer!contro))ed machiner6 to
perform man6 different programmed functions B6
e)iminating machine setup time, strengthening contro),
and automating hand)ing processes, computer!aided
manufacturing permits the efficient production of sma))
numbers of different products b6 the same machines
7 compan6 can therefore more accurate)6 match
output with consumer tastes and a-oid )ong
production runs of identica) goods 7 f)e2ib)e
manufacturing s6stem consists of two or more
computer!contro))ed machines )inDed b6 automated
hand)ing de-ices such as robots and transport
s6stems
7nswer /B1 is incorrect because a HI; s6stem
in-o)-es the purchase of materia)s and production of
components immediate)6 preceding their use
7nswer /91 is incorrect because a master budget is
the detai)ed financia) p)an for the ne2t period
7nswer /(1 is incorrect because the @G? is the
#uantit6 that minimi8es tota) costs
[1%8] Source' 9I7 &$A$ III!2A
7nswer /71 is incorrect because economies of sca)e
cannot continue to be achie-ed if the products are not
sa)ab)e
7nswer /B1 is incorrect because economies of sca)e
cannot continue to be achie-ed if the products are not
sa)ab)e
7nswer /91 is incorrect because economies of sca)e
can sti)) be achie-ed from )ong production runs if the
goods are sa)ab)e
7nswer /(1 is correct C)oba) competition and more
rapid)6 changing consumer tastes are )essening the
need for )ong production runs and increasing the need
for di-ersit6 of products and f)e2ibi)it6 of
manufacturing ;he economies of sca)e concept is
being rep)aced b6 economies of scope, which resu)t
when f)e2ib)e manufacturing methods /use of
computeri8ed machines to perform man6
programmed functions1 permit the economica) output
of sma)) numbers of man6 different products with the
same machines
[1%A] Source' 9"7 Samp ?,!2
7nswer /71 is incorrect because a differentia)
/incrementa)1 cost is re)e-ant It is the difference in
tota) cost between two decisions
7nswer /B1 is incorrect because out!of!pocDet costs
/out)a6 costs1 are re)e-ant ;he6 re#uire negati-e
cash f)ows /e2penditures1 current)6 or in the future
7nswer /91 is incorrect because a rep)acement cost
is re)e-ant It is the cash or e#ui-a)ent that wou)d be
paid for a current ac#uisition of the same or an
e#ui-a)ent asset
7nswer /(1 is correct 7 sunD cost cannot be
a-oided because either the e2penditure has occurred,
or an irre-ocab)e decision to incur the cost has been
made SunD costs are irre)e-ant to management
decision!maDing because the6 cannot -ar6 with the
option se)ected
[1,&] Source' 9"7 Samp ?,!%
7nswer /71 is incorrect because, if the components
are transferred at cost, no ta2 wi)) be paid in the OS,
and the per!unit ta2 on French sa)es of the
subassemb)6 wi)) be *,A [/*1+& ! *%& ! *1$ ! *$$1
2 +] ;hus, the conso)idated entit64s per!unit profit
wi)) be *21 /*1+& ! *%& ! *1$ ! *$$ ! *,A1
7nswer /B1 is incorrect because, if the transfer is at
*:$, OS ta2 per unit wi)) be *1, [/*:$ ! *%&1 2 ,],
and the French ta2 per unit wi)) be *2,$& [/*1+& !
*:$ ! *1$ ! *$$1 2 +] ;he conso)idated entit64s
per!unit profit wi)) therefore be *%1$& /*1+& ! *%& !
*1$ ! *$$ ! *1, ! *2,$&1
7nswer /91 is correct If the 1$&,&&& components
are so)d separate)6 in the OS, the after!ta2 profit per
unit wi)) be *21 [/*:$ ! *%&1 2 :] ;he French
subsidiar6 wi)) then purchase 1$&,&&& components
domestica))6 to inc)ude in the subassemb)6 ;he
per!unit profit on sa)es of the subassemb)6 wi)) be
*12 [/*1+& ! *+$ ! *$$1 2 %] ;he tota) per!unit
profit for the conso)idated entit6 from these
transactions wi)) therefore be *%% /*21 S *121
7nswer /(1 is incorrect because, if the transfer is at
*:$ and the OS parent pa6s the shipping costs, the
OS ta2 per unit wi)) be *8 [/*:$ ! *%& ! *1$1 2 ,],
and the French ta2 per unit wi)) be *%$ [/*1+& ! *:$
! *$$1 2 +] ;he conso)idated entit64s per!unit profit
wi)) be *2+ /*1+& ! *%& ! *1$ ! *$$ ! *8 ! *%$1
[1,1] Source' 9I7 &$A: I.!+8
7nswer /71 is incorrect because this graph describes
the fami)iar, negati-e)6 s)oped re)ation between price
charged and the resu)ting demand )e-e) for norma)
goods ;he demand cur-e can be )inear or
cur-i)inear
7nswer /B1 is incorrect because this graph describes
the fami)iar, negati-e)6 s)oped re)ation between price
charged and the resu)ting demand )e-e) for norma)
goods ;he demand cur-e can be )inear or
cur-i)inear
7nswer /91 is correct G-er some intermediate range
of prices, the reaction to a price increase for prestige
goods is an increase, not a decrease, in the #uantit6
demanded Jithin this range, the demand cur-e is
upward s)oping ;he reason is that consumers
interpret the higher price to indicate a better or more
desirab)e product 7bo-e some price )e-e), the
re)ation between price and #uantit6 demanded wi))
again become negati-e)6 s)oped
7nswer /(1 is incorrect because this demand cur-e
has the same basic shape as the demand cur-e for
prestige goods, but it bends the wrong wa6 7s
prices increase, #uantit6 demanded first fa))s and then
rises in this graph
[1,2] Source' 9"7 128A $!1:
7nswer /71 is incorrect because 7B is the time
between receipt of the )ast order and the p)acing of
the ne2t order
7nswer /B1 is incorrect because 7@ is the safet6
stocD
7nswer /91 is incorrect because 7F represents the
#uantit6 of in-entor6 that wi)) be used during the
reorder )ead time
7nswer /(1 is correct ;he #uantit6 of in-entor6 on
hand is represented b6 the 6 a2is and time b6 the 2
a2is ;he reorder )ead time is represented b6 the )ine
segment B9
[1,%] Source' 9"7 128A $!1+
7nswer /71 is incorrect because 7B is the time
between the receipt of the )ast order and the p)acing
of the ne2t order
7nswer /B1 is correct ?uantities of in-entor6 are
shown a)ong the 6 a2is Safet6 stocD is represented
b6 the )ine 7@
7nswer /91 is incorrect because 79 is the time to
consume the @G?
7nswer /(1 is incorrect because B9 is the reorder
)ead time
[1,,] Source' 9"7 128A $!18
7nswer /71 is incorrect because (@ represents the
tota) in-entor6 on hand =ust after an order has been
recei-ed
7nswer /B1 is incorrect because B9 is the reorder
)ead time
7nswer /91 is correct ;ime is shown a)ong the 2
a2is ;he )ine segment 79 depicts the time to
consume an entire order /to reduce the in-entor6 to
the safet6 stocD1
7nswer /(1 is incorrect because 7@ is the safet6
stocD
[1,$] Source' 9"7 &:A& ,!2+
7nswer /71 is incorrect because the effect is to
increase gains and decrease )osses
7nswer /B1 is correct 7n acce)erated method
reduces the booD -a)ue of the asset more rapid)6 in
the ear)6 6ears of the usefu) )ife than does the
straight!)ine method <ence, the effect of an ear)6 sa)e
is to increase the gain or decrease the )oss that wou)d
ha-e been recogni8ed under the straight!)ine method
7nswer /91 is incorrect because the effect is to
increase gains and decrease )osses
7nswer /(1 is incorrect because the effect is to
increase gains and decrease )osses
[1,:] Source' Pub)isher
7nswer /71 is incorrect because 1%& automobi)es is
the resu)t of not mu)tip)6ing the product of the cost
per order and the items so)d b6 two
7nswer /B1 is incorrect because 2, automobi)es is
%,&&& automobi)es di-ided b6 the carr6ing cost of
*12$ per automobi)e
7nswer /91 is correct ;he optima) order #uantit6 for
an in-entor6 item is found b6 mu)tip)6ing the cost per
order, *+&&, b6 the number of automobi)es so)d
throughout the 6ear, %,&&& ;his product is then
mu)tip)ied b6 two ;his number, *,,2&&,&&&, is then
di-ided b6 the carr6ing cost per item, which is *12$
;his is e#ua) to *%%,:&& ;he s#uare root of this
figure is then ca)cu)ated to produce an optima) order
#uantit6 of 18% automobi)es ;he formu)a is'
2/G1/S1
S#uare root of !!!!!!!
9
with G being the cost per order, S being the number
of items so)d, and 9 being the carr6ing cost
7nswer /(1 is incorrect because 2A: automobi)es is
the resu)t of taDing the s#uare root of the product of
the cost per order, *+&&, and the carr6ing cost,
*12$
[1,+] Source' 9"7 &:A& $!12
7nswer /71 is correct 7t a -o)ume of 8,&&& units,
sa)es wi)) be *+,2&&,&&& /8,&&& 2 *A&&1 .ariab)e
costs wi)) be *,,8&&,&&& /8,&&& units 2 *:&&1 ;hus,
the contribution margin is *2,,&&,&&& (educting the
*:,:&&,&&& of fi2ed costs from the contribution
margin )ea-es a net )oss of *,,2&&,&&&
7nswer /B1 is incorrect because the annua)
before!ta2 /)oss1 is */,,2&&,&&&1 /*+,2&&,&&& sa)es
! *,,8&&,&&& -ariab)e costs ! *:,:&&,&&& fi2ed
costs1
7nswer /91 is incorrect because the annua)
before!ta2 /)oss1 is */,,2&&,&&&1 /*+,2&&,&&& sa)es
! *,,8&&,&&& -ariab)e costs ! *:,:&&,&&& fi2ed
costs1
7nswer /(1 is incorrect because the annua)
before!ta2 /)oss1 is */,,2&&,&&&1 /*+,2&&,&&& sa)es
! *,,8&&,&&& -ariab)e costs ! *:,:&&,&&& fi2ed
costs1
[1,8] Source' 9"7 &:A& $!1%
7nswer /71 is correct ;he formu)a for the breaDe-en
point in units di-ides the fi2ed costs b6 the unit
contribution margin /*A&& se))ing price ! *:&&
-ariab)e costs 3 *%&&1 <ence, the breaDe-en point
is 22,&&& units /*:,:&&,&&& ・%&&1
7nswer /B1 is incorrect because the breaDe-en point
of 22,&&& units is determined b6 di-iding the fi2ed
costs b6 the unit contribution margin [*:,:&&,&&& ・
/*A&& ! *:&&1]
7nswer /91 is incorrect because the breaDe-en point
of 22,&&& units is determined b6 di-iding the fi2ed
costs b6 the unit contribution margin [*:,:&&,&&& ・
/*A&& ! *:&&1]
7nswer /(1 is incorrect because the breaDe-en point
of 22,&&& units is determined b6 di-iding the fi2ed
costs b6 the unit contribution margin [*:,:&&,&&& ・
/*A&& ! *:&&1]
[1,A] Source' 9"7 &:A& $!1,
7nswer /71 is incorrect because the breaDe-en point
in sa)es do))ars is *22,$&&,&&& [/*:,:&&,&&& fi2ed
costs S *A&&,&&& before!ta2 income1 ・%% 1E%>
contribution margin percentage]
7nswer /B1 is correct ;he formu)a for the breaDe-en
point in sa)es di-ides fi2ed costs b6 the contribution
margin percentage ;he contribution margin
percentage is %% 1E%> [*%&& unit contribution margin
/*A&& se))ing price ! *:&& -ariab)e costs1 ・*A&&
se))ing price] ;he after!ta2 income specified is
*$,&,&&&, which is e#ua) to :&> /1& ! , ta2 rate1
of the before!ta2 income 9onse#uent)6, the
before!ta2 income needed is *A&&,&&& /*$,&,&&& ・
:1 ;his amount ma6 be treated as a fi2ed cost for
the purpose of the formu)a ;he breaDe-en point in
sa)es do))ar is therefore *22,$&&,&&& [/*:,:&&,&&& S
*A&&,&&&1 ・%% 1E%>]
7nswer /91 is incorrect because the breaDe-en point
in sa)es do))ars is *22,$&&,&&& [/*:,:&&,&&& fi2ed
costs S *A&&,&&& before!ta2 income1 ・%% 1E%>
contribution margin percentage]
7nswer /(1 is incorrect because the breaDe-en point
in sa)es do))ars is *22,$&&,&&& [/*:,:&&,&&& fi2ed
costs S *A&&,&&& before!ta2 income1 ・%% 1E%>
contribution margin percentage]
[1$&] Source' 9"7 &:A& $!1$
7nswer /71 is incorrect because the unit -ariab)e cost
is reduced b6 *2,, so O9" is *%2, ;he
contribution margin percentage wi)) be %:> /*%2, ・
*A&&1
7nswer /B1 is incorrect because the unit -ariab)e cost
is reduced b6 *2,, so O9" is *%2, ;he
contribution margin percentage wi)) be %:> /*%2, ・
*A&&1
7nswer /91 is correct ;he origina) unit contribution
margin /O9"1 was *%&& But unit direct )abor cost
is 2&> higher /2&> 2 *18& 3 *%:1 Onit direct
materia)s cost wi)) be reduced b6 2$>, or *:& /2$>
2 *2,&1 ;hus, the net resu)t is that unit -ariab)e cost
is reduced b6 *2, /*:& ! *%:1, and the O9" wi)) be
*%2, /*%&& S *2,1 ;he contribution margin
percentage wi)) therefore be %:> /*%2, ・A&&1
7nswer /(1 is incorrect because the unit -ariab)e cost
is reduced b6 *2,, so O9" is *%2, ;he
contribution margin percentage wi)) be %:> /*%2, ・
*A&&1
[1$1] Source' 9"7 &:A& $!1:
7nswer /71 is incorrect because the new breaDe-en
point is *+,2:&,&&& /11 2 *:,:&&,&&&1 fi2ed costs ・
*%2, ;he new breaDe-en point is an increase of ,&+
units /22,,&+ units ! 22,&&& units at the pre-ious
breaDe-en point
7nswer /B1 is incorrect because the new breaDe-en
point is *+,2:&,&&& /11 2 *:,:&&,&&&1 fi2ed costs ・
*%2, ;he new breaDe-en point is an increase of ,&+
units /22,,&+ units ! 22,&&& units at the pre-ious
breaDe-en point
7nswer /91 is incorrect because the new breaDe-en
point is *+,2:&,&&& /11 2 *:,:&&,&&&1 fi2ed costs ・
*%2, ;he new breaDe-en point is an increase of ,&+
units /22,,&+ units ! 22,&&& units at the pre-ious
breaDe-en point
7nswer /(1 is correct ;he new contribution margin
is *%2, (i-iding this amount into the fi2ed costs wi))
determine the new unit breaDe-en point Fi2ed costs
ha-e increased b6 1&> to *+,2:&,&&& /11 2
*:,:&&,&&&1, and the new breaDe-en point is 22,,&+
units /*+,2:&,&&& ・*%2,1 ;he origina) unit
breaDe-en point was 22,&&& units <ence, the
production changes increased the breaDe-en point b6
,&+ units /22,,&+ ! 22,&&&1
[1$2] Source' 9"7 &:A% ,!1
7nswer /71 is incorrect because 2&,A%& e2c)udes the
*1$& of -ariab)e se))ing e2penses from the unit
contribution margin
7nswer /B1 is incorrect because 18,1,& e2c)udes the
*1$& of -ariab)e se))ing e2penses from the unit
contribution margin and the depreciation from the
fi2ed costs
7nswer /91 is correct ;he breaDe-en point in units
e#ua)s fi2ed costs di-ided b6 the unit contribution
margin /in do))ars1 ;he unit contribution margin is
*2& /*%: se))ing price ! *1: unit -ariab)e cost1
<ence, the breaDe-en point e#ua)s 22,$&& units
/*,$&,&&& ・*2&1
7nswer /(1 is incorrect because 2$,$&& adds the
*:&,&&& of depreciation to the fi2ed costs
[1$%] Source' 9"7 &:A% ,!2
7nswer /71 is correct ;he ma2imum output
/ma2imum sa)es )e-e)1 is 2$,&&& units /gi-en1 ;he
breaDe-en point in units is 22,$&& /*,$&,&&&F9 ・
*2&1 ;he unit contribution margin is *2& /*%: se))ing
price ! *1: unit .91 7t the breaDe-en point, a))
fi2ed costs ha-e been reco-ered <ence, preta2
profit e#ua)s the unit contribution margin times unit
sa)es in e2cess of the breaDe-en point, or *$&,&&&
[/2$,&&& unit sa)es ! 22,$&& B@P1 2 *2& O9"]
7fter!ta2 profit is *%&,&&& [*$&,&&& 2 /1& ! , ta2
rate1]
7nswer /B1 is incorrect because *$&,&&& is the
pre!ta2 profit
7nswer /91 is incorrect because *11&,&&& fai)s to
inc)ude depreciation as a fi2ed cost and ignores
income ta2es
7nswer /(1 is incorrect because *::,&&& fai)s to
inc)ude depreciation as a fi2ed cost
[1$,] Source' 9"7 &:A% ,!%
7nswer /71 is incorrect because *%+&& does not
consider income ta2es
7nswer /B1 is incorrect because *%::& e2c)udes
depreciation
7nswer /91 is incorrect because *%,:& does not
inc)ude depreciation or ta2es
7nswer /(1 is correct If M represents the necessar6
se))ing price, 2$,&&& e#ua)s ma2imum sa)es -o)ume,
*1: is the -ariab)e cost per unit, *,$&,&&& is the tota)
fi2ed cost, and *12$,&&& [*+$,&&& target after!ta2
profit ・/1& ! , ta2 rate1] is the desired pre!ta2
profit, the fo))owing formu)a ma6 be so)-ed to
determine the re#uisite unit price'
2$,&&& /M ! *1:1 ! *,$&,&&& 3 *12$,&&&
2$,&&&M ! *,&&,&&& ! *,$&,&&& 3 *12$,&&&
2$,&&&M 3 *A+$,&&&
M 3 *%A
[1$$] Source' 9"7 &:8+ ,!1&
7nswer /71 is incorrect because *A&& is the
e2pected price, not the price with the same 9"5
7nswer /B1 is incorrect because *82$ is the sum of
the o)d O9" and the new unit -ariab)e cost
7nswer /91 is correct Iast 6ear, unit -ariab)e cost
was *22$, so the unit contribution margin /O9"1
was *$2$ /*+$& price ! *22$1, and the
contribution margin rate /9"51 was +&> /*$2$ ・
*+$&1 If -ariab)e costs increase b6 one!third, the
new -ariab)e cost wi)) be *% [*22$ 2 /, ・%1] If a
+&> 9"5 is desired, the *% -ariab)e cost wi)) be
%&> of sa)es, and the unit sa)es price wi)) be *1& /*%
・%&>1
7nswer /(1 is incorrect because the se))ing price to
maintain a +&> [/*+$& ! *22$1 ・*+$&] 9"5 is
*1&&& W[*22$ o)d unit .9 2 /, ・%1] ・%&>X
[1$:] Source' 9"7 &:8+ ,!11
7nswer /71 is incorrect because 1+,$&& is based on
the preceding 6ear4s fi2ed costs
7nswer /B1 is correct ;he breaDe-en point /B@P1 in
units e#ua)s fi2ed cost di-ided b6 O9" Fi2ed cost
for the pre-ious 6ear was *1&$,&&& /2&,&&& units at
breaDe-en 2 *$2$ O9"1 Fi2ed cost for the current
6ear is *11$,$&& /11&> 2 *1&$,&&&1 ;he new
O9" is *: /*A se))ing price ! *% -ariab)e cost1
7ccording)6, the B@P is 1A,2$& units /*11$,$&& ・
*:1
7nswer /91 is incorrect because 2&,&&& is the
preceding 6ear4s B@P
7nswer /(1 is incorrect because fi2ed costs for the
current 6ear are *11$,$&& /11&> 2 *1&$,&&&1
;hus, the new breaDe-en point is 1A,2$& units
[*11$,$&& ・/*A price ! *% unit .91]
[1$+] Source' 9"7 &:8+ ,!12
7nswer /71 is correct Ci-en that )ast 6ear4s after!ta2
profit was *$,&,&, preta2 net income must ha-e been
*8,,&& [*$,&,& ・/1 ! ,&> ta2 rate1] Because fi2ed
cost has been fu))6 reco-ered at the B@P, a)) of the
O9" be6ond that sa)es )e-e) is inc)uded in preta2 net
income ;he O9" was *$2$, so the units so)d in
e2cess of the 2&,&&&!unit B@P e#ua)ed 1,:&&
/*8,,&& ・*$2$1 If 21,:&& tota) units were so)d )ast
6ear, an increase of 1,&&& units resu)ts in sa)es of
22,:&& units
7nswer /B1 is incorrect because 21,A:& units
assumes that )ast 6ear4s after!ta2 profit was the preta2
net income
7nswer /91 is incorrect because sa)es -o)ume is
estimated to be 22,:&& units [2&,&&& S /*8,,&&
preta2 0I ・*$2$ O9"1 S 1,&&&]
7nswer /(1 is incorrect because sa)es -o)ume is
estimated to be 22,:&& units [2&,&&& S /*8,,&&
preta2 0I ・*$2$ O9"1 S 1,&&&]
[1$8] Source' 9"7 &:8+ ,!1%
7nswer /71 is incorrect because after!ta2 net income
of *22,$&& e#ua)s a preta2 income of *%+,$&&
[*22,$&& ・/1 ! ,&> ta2 rate1] Jith a O9" of *:
contributing toward the *1$%,&&& of fi2ed cost and
profit /*11$,$&& S *%+,$&&1, 2$,$&& units
/*1$%,&&& ・:1 must be so)d 7t *A per unit, sa)es
re-enue is *22A,$&&
7nswer /B1 is incorrect because after!ta2 net income
of *22,$&& e#ua)s a preta2 income of *%+,$&&
[*22,$&& ・/1 ! ,&> ta2 rate1] Jith a O9" of *:
contributing toward the *1$%,&&& of fi2ed cost and
profit /*11$,$&& S *%+,$&&1, 2$,$&& units
/*1$%,&&& ・:1 must be so)d 7t *A per unit, sa)es
re-enue is *22A,$&&
7nswer /91 is correct 7n after!ta2 net income of
*22,$&& e#ua)s a preta2 income of *%+,$&&
[*22,$&& ・/1 ! ,&> ta2 rate1] Jith a O9" of *:
contributing toward the *1$%,&&& tota) of fi2ed cost
/*11$,$&&1 and desired profit /*%+,$&&1, 2$,$&&
units /*1$%,&&& ・*:1 must be so)d 7t *A per unit,
sa)es re-enue is *22A,$&&
7nswer /(1 is incorrect because after!ta2 net income
of *22,$&& e#ua)s a preta2 income of *%+,$&&
[*22,$&& ・/1 ! ,&> ta2 rate1] Jith a O9" of *:
contributing toward the *1$%,&&& of fi2ed cost and
profit /*11$,$&& S *%+,$&&1, 2$,$&& units
/*1$%,&&& ・:1 must be so)d 7t *A per unit, sa)es
re-enue is *22A,$&&
[1$A] Source' HB 5oma)
7nswer /71 is incorrect because the sa)es mi2
dictates how much of the tota) 9" wi)) come from
sa)es of each product Onit sa)es are attributab)e ,&>
to racers and :&> to $!speeds, so ,&> of the O9"
for racers must be added to :&> of the O9" for
$!speeds to get the weighted!a-erage 9"
7nswer /B1 is incorrect because the sa)es mi2
dictates how much of the tota) 9" wi)) come from
sa)es of each product Onit sa)es are attributab)e ,&>
to racers and :&> to $!speeds, so ,&> of the O9"
for racers must be added to :&> of the O9" for
$!speeds to get the weighted!a-erage 9"
7nswer /91 is incorrect because the sa)es mi2
dictates how much of the tota) 9" wi)) come from
sa)es of each product Onit sa)es are attributab)e ,&>
to racers and :&> to $!speeds, so ,&> of the O9"
for racers must be added to :&> of the O9" for
$!speeds to get the weighted!a-erage 9"
7nswer /(1 is correct ;he contribution margin is
se))ing price minus -ariab)e costs
5acer' *$+& ! *2&& 3 *%+&
$!Speed' *18& ! *A& 3 * A&
;he sa)es mi2 is'
8,&&&
!!!!!!!!!!!!!! 3 ,&> racers
8,&&& S 12,&&&
12,&&&
!!!!!!!!!!!!!! 3 :&> $!speeds
8,&&& S 12,&&&
"u)tip)6 the 9" b6 the sa)es mi2 for each product, and
add the resu)ts
/*%+& 2 ,&>1 S /*A& 2 :&>1 3 9"
*1,8 S *$, 3 *2&2
[1:&] Source' 9I7 &$8: I.!8
7nswer /71 is incorrect because the contribution
margin for the ratio of each product shou)d be added,
not mu)tip)ied, in determining the composite
contribution margin
7nswer /B1 is correct ;he composite breaDe-en
point for a mu)tiproduct firm is computed b6 di-iding
tota) fi2ed costs b6 a composite contribution margin
9omposite contribution margin 3 2/*2$&1 S $/*12&1 3
*11
B@P 3 *,A,$&& ・*11 3 ,,$&& composite units
7nswer /91 is incorrect because 8,2$& wou)d resu)t
if the composite unit consisted on)6 of fi-e units of P
[*,A,$&& ・/$ 2 *12&1 3 8,2$&]
7nswer /(1 is incorrect because 22,$&& e#ua)s the
number of units of P in ,,$&& composite units
[1:1] Source' 9I7 &$8: I.!A
7nswer /71 is incorrect because $,&&& units of M
and 12,$&& units of P wi)) resu)t in a *,,,&&& )oss
;he *22,&&& of profit shou)d be added to /not
subtracted from1 fi2ed costs in determining the
number of units so)d
7nswer /B1 is correct Onit sa)es can be computed
b6 adding profit to fi2ed costs and di-iding b6 the
composite contribution margin
F9 S Profit *,A,$&& S *22,&&&
!!!!!!!!!!!! 3 !!!!!!!!!!!!!!!!!
9omposite 9" *11
3 :,$&& composite units
;hus, 1%,&&& units of Product M and %2,$&& units of
Product P must ha-e been so)d
7nswer /91 is incorrect because 2%,8&& units of M
and $A,$&& units of P wi)) resu)t in a *$A,,&& profit
;he composite contribution margin from two units of
M and fi-e units of P must be used to determine the
number of units so)d
7nswer /(1 is incorrect because %2,$&& e#ua)s unit
sa)es of P, and 1%,&&& e#ua)s unit sa)es of M
[1:2] Source' Pub)isher
7nswer /71 is correct ;he absorption!costing
breaDe-en point in units so)d e#ua)s the sum of /11
the tota) fi2ed costs and /21 the product of the fi2ed
manufacturing cost app)ication rate and the difference
between the B@P in units so)d /M1 and units
produced, with the sum di-ided b6 the O9" ;hus,
the absorption!costing breaDe-en point in units so)d is
,2$,&&& units'
/*2 2 1,&&&,&&& denominator capacit61
S *1,$&&,&&& S *2/M ! A&&,&&&1
M 3 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
*:
*%,$&&,&&& S *2M ! *1,8&&,&&&
M 3 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
*:
*:M 3 *1,+&&,&&& S *2M
M 3 ,2$,&&&
7nswer /B1 is incorrect because $8%,%%% units is the
-ariab)e!costing B@P
7nswer /91 is incorrect because A&&,&&& units is the
actua) production )e-e)
7nswer /(1 is incorrect because 1,&&&,&&& units is
the capacit6 used to ca)cu)ate the fi2ed o-erhead
app)ication rate
[1:%] Source' Pub)isher
7nswer /71 is incorrect because *$,&&&,&&& is the
fi2ed cost and ,,&&& is the number ser-ed gi-en a
reduced appropriation
7nswer /B1 is incorrect because *8,%%%,%%% and
*8%% are the appropriation and per!patient annua)
cost, respecti-e)6, for the ne2t 6ear that resu)t from a
1&> increase in the appropriation of the current 6ear
instead of a 1&> decrease in the ne2t 6ear4s
appropriation
7nswer /91 is correct ;his #uestion app)ies 9.P
ana)6sis in a not!for!profit conte2t in which the
agenc6 wishes to assist as man6 peop)e as possib)e
;hus, a breaDe-en point must be ca)cu)ated ;ota)
re-enue /the appropriation1 e#ua)s fi2ed cost p)us the
product of unit -ariab)e cost /per!patient annua) cost1
and the number of patients who can be assisted gi-en
the a-ai)ab)e resources ;he fo))owing are
simu)taneous e#uations stated in the two unDnowns'
M ! $,&&&P 3 *$,&&&,&&&
AM ! ,,&&&P 3 *$,&&&,&&&
Because M must e#ua) $,&&&P S *$,&&&,&&&, the
second e#uation ma6 be so)-ed as fo))ows for the
per!patient annua) cost /P1'
A/$,&&&P S *$,&&&,&&&1 ! ,,&&&P 3 *$,&&&,&&&
,,$&&P S *,,$&&,&&& ! ,,&&&P 3 *$,&&&,&&&
$&&P 3 *$&&,&&&
P 3 *1,&&&
7ccording)6, the budgeted appropriation /M1 must be
*1&,&&&,&&& [/$,&&& 2 *1,&&&1 .9 S *$,&&&,&&&
F9], and the reduced appropriation must be
*A,&&&,&&& /A&> 2 *1&,&&&,&&&1
7nswer /(1 is incorrect because *1&,&&&,&&& is the
budgeted appropriation and $,&&& is the number of
peop)e it wou)d ser-e
[1:,] Source' 9I7 &$A% I.!11
7nswer /71 is correct ;he breaDe-en point in sa)es
do))ars is e#ua) to the sum of fi2ed costs p)us an6
desired preta2 profit, di-ided b6 the contribution
margin ratio [/sa)es ! -ariab)e costs1 ・sa)es] Fi2ed
cost was *$&,&&& /*$&&,&&& sa)es ! *%&&,&&& .9 !
*1$&,&&& preta2 profit1 Ci-en the increase in sa)es
of 1&> and decrease in fi2ed costs of 2&>, the
breaDe-en point in sa)es is *88,&&&
Fi2ed 9osts /*$&,&&& M 81 S
(esired Preta2 Profit & *,&,&&&
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 3 !!!!!!!!!!!!!!!!!!!
[Sa)es /*$&&,&&& M 111 ! .ariab)e 9osts *2$&,&&& ・
*$$&,&&&
/*%&&,&&&1] ・Sa)es /*$&&,&&& M 111
7nswer /B1 is incorrect because *1&&,&&& ignores
the 1&> sa)es price increase
7nswer /91 is incorrect because *11&,&&& ignores
the 2&> decrease in fi2ed costs
7nswer /(1 is incorrect because *12$,&&& ignores
the changes in sa)es price and fi2ed costs
[1:$] Source' 9I7 &$A% I.!1+
7nswer /71 is incorrect because *2&&,&&& resu)ts
from app)6ing product 74s price /,&,&&& 2 *$1
7nswer /B1 is correct ;he breaDe-en point e#ua)s
fi2ed costs di-ided b6 unit contribution margin ;he
composite unit contribution margin for 7 and B is *+
W[% units of 7 2 /*$ ! *%1] S [1 unit of B 2 /*: !
*$1]X ;hus, ,&,&&& composite units /*28&,&&& ・
*+1, inc)uding ,&,&&& units of B, are so)d at the
breaDe-en point <ence, sa)es of B at the breaDe-en
point e#ua) *2,&,&&& /,&,&&& units 2 *:1
7nswer /91 is incorrect because *28&,&&& e#ua)s
fi2ed costs
7nswer /(1 is incorrect because *8,&,&&& e#ua)s
product 7 sa)es and product B sa)es at the
breaDe-en point
[1::] Source' 9I7 11A% I.!11
7nswer /71 is incorrect because 2+$> represents
the contribution margin per unit di-ided b6 the se))ing
price before considering an6 marDdowns /*,,& ・
*1:1
7nswer /B1 is correct ;he contribution margin
e#ua)s re-enues minus -ariab)e costs ;he
contribution margin ratio e#ua)s the unit contribution
margin di-ided b6 the se))ing price For e2amp)e, if
-ariab)e costs a-erage *1& per unit, the a-erage
se))ing price is *1: /1:& 2 *1&1 <owe-er, the 1&>
marDdown imp)ies that the actua) a-erage se))ing price
is *1,,& /A& 2 *1:1 ;he contribution margin ratio
is therefore %&:> [/*1,,& ! *1&&&1 ・*1,,&]
7nswer /91 is incorrect because %+$> does not
consider the marDdowns in either the numerator or
the denominator
7nswer /(1 is incorrect because ,1+> represents
the contribution margin before the marDdowns
di-ided b6 the se))ing price after the marDdowns
[1:+] Source' 9I7 &$A, III!,2
7nswer /71 is incorrect because :$,&&& units is the
breaDe-en point
7nswer /B1 is incorrect because it produces a net
)oss
7nswer /91 is correct 5e-enue minus -ariab)e and
fi2ed e2penses e#ua)s net income If M e#ua)s unit
sa)es, re-enue e#ua)s *2$M, tota) -ariab)e e2penses
e#ua) *1:M /*, S *+ S *2 S *%1, tota) fi2ed
e2penses e#ua) *$8$,&&& /*%:&,&&& S *22$,&&&1,
and net income e#ua)s 1&> of re-enue <ence, M
e#ua)s A&,&&& units
*2$M ! *1:M ! *$8$,&&& 3 1&> 2 *2$M
:$M 3 *$8$,&&&
M 3 A&,&&& units
7nswer /(1 is incorrect because 2$,&&& is the e2cess
of the re#uired units o-er the breaDe-en point
[1:8] Source' 9I7 &$A, III!,%
7nswer /71 is correct ;he compan6 wi)) breaD e-en
when net income e#ua)s 8ero 0et income is e#ua) to
re-enue minus -ariab)e e2penses and fi2ed e2penses,
inc)uding ad-ertising ;hus, if M e#ua)s ad-ertising
cost, the e#uation is
/*2$1/8&,&&&1 ! /*1:1/8&,&&&1 ! *$8$,&&& ! M 3 &
7nswer /B1 is incorrect because the unit -ariab)e
e2penses are *1:
7nswer /91 is incorrect because the unit -ariab)e
e2penses are *1:
7nswer /(1 is incorrect because the unit -ariab)e
e2penses are *1:
[1:A] Source' 9I7 11A% I.!12
7nswer /71 is incorrect because %2,&&& is the
breaDe-en sa)es -o)ume
7nswer /B1 is incorrect because 1:,&&& treats the
0GI as a net operating profit
7nswer /91 is incorrect because 12,8&& e#ua)s fi2ed
costs di-ided b6 unit sa)es price
7nswer /(1 is correct ;he breaDe-en point in units
e#ua)s fi2ed costs di-ided b6 the difference between
unit price and unit -ariab)e cost Fi2ed costs were
*1:&,&&& [/*%&&,&&& sa)es ! *18&,&&& .91 S
*,&,&&& 0GI], units so)d e#ua)ed 2,,&&&
/*%&&,&&& sa)es ・*12$& SP1, and unit -ariab)e cost
was *+$& /*18&,&&& .9 ・2,,&&& units so)d1
7ccording)6, the breaDe-en point in units was %2,&&&
[*1:&,&&& F9 ・/*12$& SP ! *+$& unit .91], and
the additiona) units that shou)d ha-e been so)d to
breaD e-en e#ua)ed 8,&&& /%2,&&& ! 2,,&&&1
[1+&] Source' 9"7 128: $!12
7nswer /71 is incorrect because the gross margin
e#ua)s sa)es price minus cost of goods so)d, inc)uding
fi2ed cost
7nswer /B1 is correct 7t the breaDe-en point, tota)
re-enue e#ua)s the fi2ed cost p)us the -ariab)e cost
Be6ond the B@P, each unit sa)e wi)) increase
operating income b6 the unit contribution margin /unit
sa)es price ! unit -ariab)e cost1 because fi2ed cost wi))
a)read6 ha-e been reco-ered
7nswer /91 is incorrect because operating income
wi)) increase b6 the O9"
7nswer /(1 is incorrect because operating income
wi)) increase b6 the O9"
[1+1] Source' 9"7 &:8+ ,!1,
7nswer /71 is incorrect because the sa)es #uantit6
/-o)ume1 -ariance focuses on the firm4s aggregate
resu)ts It assumes a constant product mi2 and an
a-erage contribution margin for the composite unit
;he sa)es -o)ume -ariance e#ua)s the budgeted
a-erage O9" ca)cu)ated for the composite unit
mu)tip)ied b6 the difference between the actua) and
budgeted unit sa)es
7nswer /B1 is incorrect because it is the rate of return
a potentia) in-estment must earn before it is
acceptab)e to management
7nswer /91 is incorrect because the margina) income
rate is the rate of return from maDing one more sa)e
or one more in-estment
7nswer /(1 is correct ;he margin of safet6 measures
the amount b6 which sa)es ma6 dec)ine before )osses
occur It e#ua)s budgeted or actua) sa)es minus sa)es
at the B@P It ma6 be stated in either units so)d or
sa)es re-enue
[1+2] Source' 9"7 12A& ,!2
7nswer /71 is incorrect because breaDe-en ana)6sis
assumes no changes in efficienc6 and producti-it6
7nswer /B1 is incorrect because one )imiting
assumption is that unit -ariab)e cost, not tota) -ariab)e
cost, is constant
7nswer /91 is correct ;he inherent simp)if6ing
assumptions used in 9.P ana)6sis are the fo))owing'
costs and re-enues are predictab)e and are )inear
o-er the re)e-ant rangeT -ariab)e costs change
proportiona))6 with acti-it6 )e-e)T changes in in-entor6
are insignificant in amountT fi2ed costs remain
constant o-er the re)e-ant range of -o)umeT prices
remain fi2edT production e#ua)s sa)esT there is a
re)e-ant range in which the -arious re)ationships are
true for a gi-en time spanT a)) costs are either fi2ed or
-ariab)eT producti-e efficienc6 is constantT costs -ar6
on)6 with changes in sa)es -o)umeT and there is a
constant mi2 of products /or on)6 one product1
7nswer /(1 is incorrect because the cost of
production factors is assumed to be stab)e
[1+%] Source' 9"7 &:A1 ,!11
7nswer /71 is incorrect because =ob order costing
does not separate fi2ed costs from -ariab)e costs
7nswer /B1 is correct 7 -ariab)e /direct1 costing
s6stem is best for pro-iding the information needed
for 9.P ana)6sis because both techni#ues separate
the fi2ed costs from -ariab)e costs 9.P ana)6sis
ca)cu)ates a -ariab)e cost per unit and deducts it from
unit sa)es price to determine the unit contribution
margin ;he tota) contribution margin from a gi-en
)e-e) of unit sa)es measures the e2tent of reco-er6 of
fi2ed costs and the profit earned (irect costing is
)iDewise oriented toward determination of the
contribution margin because it treats fi2ed
manufacturing o-erhead as a period, not a product,
cost ;hus, it faci)itates 9.P ana)6sis b6 iso)ating
-ariab)e manufacturing costs
7nswer /91 is incorrect because =oint costing does
not separate fi2ed costs from -ariab)e costs
7nswer /(1 is incorrect because absorption /fu))1
costing does not separate fi2ed costs from -ariab)e
costs
[1+,] Source' 9"7 12A, ,!%
7nswer /71 is incorrect because the ac#uisition of
new machiner6 wi)) resu)t in greater fi2ed costs and
the possibi)it6 of a higher breaDe-en point
7nswer /B1 is incorrect because a decrease in se))ing
price reduces the unit contribution margin, which in
turn increases the breaDe-en point
7nswer /91 is incorrect because an increase in the
marDet for septine has an indeterminate effect ;he
facts gi-en do not indicate whether its unit
contribution margin is greater or )ess than the a-erage
unit contribution margin for a)) products
7nswer /(1 is correct 7 compan64s breaDe-en point
wi)) be reduced if fi2ed costs are )owered or the
a-erage unit contribution margin is increased Ci-en
that petro) is the compan64s most profitab)e product,
and assuming that it has a higher unit contribution
margin than septine and trido), an increase in sa)es of
petro) re)ati-e to the other products wi)) resu)t in a
higher a-erage unit contribution margin and a )ower
breaDe-en point /fi2ed costs ・a-erage O9"1
[1+$] Source' 9"7 128: $!1%
7nswer /71 is incorrect because the contribution
margin rate is computed b6 di-iding contribution
margin b6 sa)es ;he contribution margin e#ua)s sa)es
minus tota) -ariab)e costs
7nswer /B1 is incorrect because the margin of safet6
is e2pressed in re-enue or units, not contribution
margin
7nswer /91 is correct ;he margin of safet6 measures
the amount b6 which sa)es ma6 dec)ine before )osses
occur It is the e2cess of budgeted or actua) sa)es
o-er sa)es at the B@P It ma6 be stated in either units
so)d or sa)es re-enue
7nswer /(1 is incorrect because cash f)ow is not
re)e-ant
[1+:] Source' Pub)isher
7nswer /71 is incorrect because it is the
responsibi)it6 of the accountant to be in-o)-ed with
management and aid in their decision maDing
7nswer /B1 is correct ;he assumptions under which
9.P ana)6sis operates primari)6 hinge on certaint6
Gnce uncertaint6 enters the situation, the resu)ts are
not so c)ear ;hus, the accountant shou)d maDe an
appropriate effort to ascertain the probabi)ities of
-arious outcomes ;he accountant can then worD
with management to he)p maDe the appropriate
decision
7nswer /91 is incorrect because it is not appropriate
for the accountant to maDe the decision "anagement
shou)d maDe the decision with the accountant4s
ad-ice and he)p
7nswer /(1 is incorrect because, a)though using a
random number tab)e or a simu)ation ma6 be part of
the decision process, the decision shou)d not rest with
the accountant a)one
[1++] Source' 9"7 12A& ,!1
7nswer /71 is incorrect because 9.P ana)6sis
assumes a constant product mi2 or on)6 one product
7nswer /B1 is incorrect because e2pected -a)ue
ana)6sis a))ows the decision maDer to introduce
probabi)ities in the e-a)uation of decision a)ternati-es
7nswer /91 is correct Sensiti-it6 ana)6sis permits the
decision maDer to measure the effects of errors in
certaint6 e#ui-a)ents, which are estimated amounts
de-e)oped b6 the best means a-ai)ab)e and assumed
for purposes of a gi-en decision mode) to be certain
;he decision mode) then ma6 be e-a)uated b6
changing certain data -ariab)es /certaint6 e#ui-a)ents1
critica) to the success of the entit6 and obser-ing the
outcomes ;his ana)6sis a))ows the decision maDer to
#uantif6 the effects of forecasting or prediction errors
and to identif6 the most critica) -ariab)es For
e2amp)e, with respect to breaDe-en ana)6sis, a firm
might maDe computations using se-era) different
estimates of what fi2ed costs are e2pected to be
;hese ca)cu)ations indicate how sensiti-e the resu)ts
are to changes in fi2ed costs
7nswer /(1 is incorrect because, in
cost!-o)ume!profit ana)6sis, costs are separated into
fi2ed and -ariab)e components
[1+8] Source' 9I7 1188 I.!1+
7nswer /71 is incorrect because the contribution
income statement shows the contribution margin
/sa)es ! -ariab)e costs1 before it subtracts the fi2ed
costs Fi2ed costs are not combined with -ariab)e
costs
7nswer /B1 is correct ;he contribution income
statement emphasi8es the distinction between fi2ed
and -ariab)e costs "aDing this distinction faci)itates
determination of 9.P re)ationships and the effects of
changes in sa)es -o)ume on income ;hus, fi2ed
manufacturing costs and other fi2ed costs are
separated from -ariab)e manufacturing costs and
other -ariab)e costs ;he basic categories in the
contribution income statement are -ariab)e costs,
contribution margin, fi2ed costs, and operating
income
7nswer /91 is incorrect because fi2ed costs are not
combined with -ariab)e costs on contribution income
statements
7nswer /(1 is incorrect because fi2ed costs are not
combined with -ariab)e costs on contribution income
statements
[1+A] Source' 9"7 12A1 ,!1%
7nswer /71 is correct ;he breaDe-en sa)es -o)ume
e#ua)s tota) fi2ed costs di-ided b6 the unit
contribution margin /O9"1 In the breaDe-en
formu)a, the desired profit shou)d be treated as a
fi2ed cost Because the O9" is stated in preta2
do))ars, the targeted profit must be ad=usted for ta2es
<ence, the targeted after!ta2 net income of *2,,&&&
is e#ui-a)ent to a preta2 profit of *,&,&&& [*2,,&&&
・/1& ! , ta2 rate1] ;he sum of the preta2 profit
and the fi2ed costs is *%$:,8&& /*%1:,8&& S
*,&,&&&1 9onse#uent)6, the desired sa)es -o)ume is
1%,118 pairs of touring sDis [*%$:,8&& ・/*8& price
! *$28& unit .91]
7nswer /B1 is incorrect because 1%,118 pairs of
touring sDis must be so)d
7nswer /91 is incorrect because 1%,118 pairs of
touring sDis must be so)d
7nswer /(1 is incorrect because 1%,118 pairs of
touring sDis must be so)d
[18&] Source' 9"7 12A1 ,!1,
7nswer /71 is correct ;he sa)es re-enue at which
the same profit or )oss wi)) be made e#ua)s the unit
price times the units so)d for each Dind of sDis
7ccording)6, if " is the number of units so)d of
mountaineering sDis and ; is the number of units so)d
of touring sDis, this )e-e) of sa)es re-enue ma6 be
stated as *88" or *8&;, and " is therefore e#ua) to
/*8& ・*881; "oreo-er, gi-en the same profit or
)oss, the difference between sa)es re-enue and tota)
costs /-ariab)e S fi2ed1 wi)) a)so be the same for the
two Dinds of sDis So)-ing the e#uation be)ow b6
substituting for " 6ie)ds sa)es re-enue of *88&,&&&
[/11,&&& 2 *8&1 or /1&,&&& 2 *881]
Sa)es ! .9 ! F9 3 Sa)es ! .9 ! F9
" " " ; ; ;
*88" ! *$28&" ! *%:A,:&& 3 *8&; ! *$28&; !
*%1:,8&&
*%$2" ! *$2,8&& 3 *2+2;
*%$2/*8& ・*881; 3 *2+2; S *$2,8&&
; 3 11,&&& units
" 3 1&,&&& units
7nswer /B1 is incorrect because the same profit or
)oss is earned at a sa)es re-enue of *88&,&&&
7nswer /91 is incorrect because the same profit or
)oss is earned at a sa)es re-enue of *88&,&&&
7nswer /(1 is incorrect because the same profit or
)oss is earned at a sa)es re-enue of *88&,&&&
[182] Source' 9"7 &:A, ,!28
7nswer /71 is incorrect because a breaDe-en point
of 8,$&& units ignores -ariab)e costs
7nswer /B1 is incorrect because the breaDe-en point
is 2&,&&& units when the contribution margin is *: per
unit
7nswer /91 is incorrect because 1$,&&& units e#ua)s
fi2ed costs di-ided b6 unit -ariab)e cost
7nswer /(1 is correct ;he breaDe-en point in units
e#ua)s tota) additiona) fi2ed costs di-ided b6 the unit
contribution margin Onit -ariab)e costs tota) *8
/*%2$ S *,&& S *+$1 ;hus, O9" is *: /*1, unit
se))ing price ! *: unit .91, and the breaDe-en point is
2&,&&& units /*12&,&&& F9 ・*:1
[18%] Source' 9"7 &:A, ,!2A
7nswer /71 is incorrect because 1&,+&& units is
based on a O9" e#ua) to se))ing price
7nswer /B1 is incorrect because a contribution
margin of *: per unit necessitates sa)es of 2$,&&&
units to produce a *%&,&&& before!ta2 profit
7nswer /91 is incorrect because 2&,&&& units is the
breaDe-en point
7nswer /(1 is correct ;he number of units to be
so)d to generate a specified pre!ta2 income e#ua)s
the sum of tota) fi2ed costs and the targeted pre!ta2
income, di-ided b6 the unit contribution margin Onit
-ariab)e costs tota) *8 /*%2$ S *,&& S *+$1, and
O9" is *: /*1, unit se))ing price ! *81 ;hus, the
desired unit sa)es )e-e) e#ua)s 2$,&&& units
[/*12&,&&& S *%&,&&&1 ・*:]
[18,] Source' 9"7 &:A, ,!%&
7nswer /71 is incorrect because 1&,+&& units is
based on a O9" e#ua) to se))ing price and *%&,&&&
of preta2 income
7nswer /B1 is incorrect because a *: O9"
necessitates sa)es of 28,%&& units to produce a
*%&,&&& after!ta2 profit
7nswer /91 is incorrect because 2&,&&& units is the
breaDe-en point
7nswer /(1 is correct ;he number of units to be
so)d to generate a specified pre!ta2 income e#ua)s
the sum of tota) fi2ed costs and the targeted pre!ta2
income, di-ided b6 the unit contribution margin
Ci-en a desired after!ta2 income of *%&,&&& and a
ta2 rate of ,&>, the targeted pre!ta2 income must be
*$&,&&& [*%&,&&& ・/1& ! ,1] Onit -ariab)e costs
tota) *8 /*%2$ S *,&& S *+$1, and O9" is *:
/*1, unit se))ing price ! *81 <ence, the desired unit
sa)es )e-e) is 28,%%% [/*12&,&&& S *$&,&&&1 ・*:]
5ounded to the nearest hundred, the answer is
*28,%&&
[18$] Source' 9"7 12A, ,!$
7nswer /71 is incorrect because 1A,%&& units does
not taDe income ta2es into consideration
7nswer /B1 is incorrect because 21,%1: units fai)s to
consider the increased -ariab)e costs from the
introduction of the higher!priced component
7nswer /91 is correct ;he units to be so)d e#ua)
fi2ed costs p)us the desired preta2 profit, di-ided b6
the unit contribution margin In the preceding 6ear,
the unit contribution margin was *%8 /*:& price !
*22 unit .91 ;hat amount wi)) decrease b6 *2 to
*%: in the upcoming 6ear because of use of a
higher!grade component Fi2ed costs wi)) increase
from *$&,,&&& to *$22,&&& as a resu)t of the
*18,&&& /*18&,&&& ・1& 6ears1 increase in fi2ed
costs attributab)e to depreciation on the new
machine (i-iding the *1+2,8&& of desired after!ta2
income b6 :&> /the comp)ement of the ta2 rate1
produces a desired before!ta2 income of *288,&&&
<ence, the breaDe-en point in units is 22,$&&
[/*$22,&&& S *288,&&&1 ・*%:]
7nswer /(1 is incorrect because 2%,8&& units does
not taDe income ta2es into consideration, and it
inc)udes the entire cost of the new machine as a fi2ed
cost
[18:] Source' 9"7 12A& ,!,
7nswer /71 is correct ;he ca)cu)ation of the
breaDe-en point is to di-ide the fi2ed costs b6 the
contribution margin per unit ;his determination is
more comp)icated for a mu)ti!product firm If the
same proportiona) product mi2 is maintained, one unit
of p)astic frames is so)d for e-er6 three units of g)ass
frames 7ccording)6, a composite unit consists of four
frames' one p)astic and three g)ass For p)astic
frames, the unit contribution margin is *$ /*1& ! *2 !
*%1 For g)ass frames, the unit contribution margin is
*+ /*1$ ! *% ! *$1 ;hus, the composite unit
contribution margin is *2: /*$ S *+ S *+ S *+1, and
the breaDe-en point is %+,$&& pacDages /*A+$,&&&
F9 ・*2:1 Because each composite unit contains
four frames, the tota) units so)d e#ua) 1$&,&&&
7nswer /B1 is incorrect because the tota) units so)d at
the breaDe-en point is 1$&,&&&
7nswer /91 is incorrect because the tota) units so)d at
the breaDe-en point is 1$&,&&&
7nswer /(1 is incorrect because the tota) units so)d at
the breaDe-en point is 1$&,&&&
[18+] Source' 9"7 12A& ,!$
7nswer /71 is incorrect because the new breaDe-en
point is 1,,,,,, units
7nswer /B1 is correct If the )abor costs for the
p)astic frames are reduced b6 *1, the composite unit
contribution margin wi)) be *2+ [/*1& ! *2 ! *%1 S
/%1/*1$ ! *% ! *$1] <ence, the new breaDe-en point
is 1,,,,,, units [/*A+$,&&& F9 ・*2+1 2 , units]
7nswer /91 is incorrect because the new breaDe-en
point is 1,,,,,, units
7nswer /(1 is incorrect because the new breaDe-en
point is 1,,,,,, units
[188] Source' 9"7 12A& ,!:
7nswer /71 is incorrect because the breaDe-en point
in units wi)) be 1$%,A,+
7nswer /B1 is incorrect because the breaDe-en point
in units wi)) be 1$%,A,+
7nswer /91 is correct ;he unit contribution margins
for p)astic frames and g)ass frames are *$ /*1& ! *2 !
*%1 and *+ /*1$ ! *% ! *$1, respecti-e)6 If the
number of p)astic frames so)d is $&> of the number
of g)ass frames so)d, a composite unit wi)) contain one
p)astic frame and two g)ass frames ;hus, the
composite unit contribution margin wi)) be *1A /*$ S
*+ S *+1, and the breaDe-en point in units wi)) be
1$%,A,+ [/*A+$,&&& ・*1A1 2 % units]
7nswer /(1 is incorrect because the breaDe-en point
in units wi)) be 1$%,A,+
[18A] Source' 9"7 &:A2 ,!22
7nswer /71 is incorrect because the breaDe-en point
is 21,81A units
7nswer /B1 is incorrect because the breaDe-en point
is 21,81A units
7nswer /91 is correct Ci-en the constant product
mi2 of %','1 estab)ished b6 the budgeted unit sa)es, a
composite unit consists of eight indi-idua) units /% of
7, , of B, and 1 of 91 ;he unit contribution margins
for 7, B, and 9 are *: /*1& price ! *, .91, *+
/*1$ ! *8 .91, and *A /*18 price ! *A .91,
respecti-e)6 <ence, the contribution margin for a
composite unit is *$$ [/% 2 *:1 S /, 2 *+1 S /1 2
*A1], and the breaDe-en point is 2,+2+2+2+
composite units /*1$&,&&& F9 ・*$$1 ;his amount
e#ua)s 21,81A /rounded up1 indi-idua) units /8 2
2,+2+2+2+1
7nswer /(1 is incorrect because :,818 is based on
an a-erage contribution margin of *22 per unit
[1A&] Source' 9"7 &:A2 ,!2A
7nswer /71 is incorrect because *1,:,%,1 does not
e-en co-er fi2ed costs
7nswer /B1 is correct Fi2ed costs tota) *%$&,&&&
.ariab)e costs tota) *:+$,&&& Ci-en sa)es of
*1,$&&,&&&, the contribution margin is *82$,&&&
/*1,$&&,&&& ! *:+$,&&&1 ;hus, the contribution
margin percentage is $$> /*82$,&&& ・
*1,$&&,&&&1 (i-iding the *%$&,&&& of fi2ed costs
b6 $$> produces a breaDe-en point of
*:%:,%:%:,
7nswer /91 is incorrect because *+2A,+%& of sa)es
resu)t in a sma)) profit
7nswer /(1 is incorrect because *181,818 does not
co-er the *%$&,&&& of fi2ed costs
[1A1] Source' 9"7 &:A2 ,!%&
7nswer /71 is correct Sa)es are e2pected to be
*1,:$&,&&& /11& 2 *1,$&&,&&&1, -ariab)e costs
*+$:,&&& /112 2 :+$,&&&1, and fi2ed e2penses
*%A$,&&& /*%$&,&&& S *,$,&&&1 ;hus, the
contribution margin wi)) be *8A,,&&& /*1,:$&,&&& !
*+$:,&&&1, and the contribution margin percentage is
$,1818> ;he breaDe-en point is therefore
*+2A,&2+ /*%A$,&&& fi2ed e2penses ・$,1818>1
7nswer /B1 is incorrect because the contribution
margin percentage is computed b6 di-iding the
contribution margin /tota) sa)es ! tota) -ariab)e costs1
b6 tota) sa)es, not b6 di-iding the tota) -ariab)e costs
b6 tota) sa)es
7nswer /91 is incorrect because *21,,&18 does not
co-er fi2ed costs
7nswer /(1 is incorrect because *,+,,&&& bare)6
co-ers fi2ed costs
[1A2] Source' 9"7 12A, ,!,
7nswer /71 is incorrect because *18: is an after!ta2
amount based on the inc)usion of a)) fi2ed costs in the
ca)cu)ation
7nswer /B1 is incorrect because *%1& is erroneous)6
based on the inc)usion of a)) fi2ed costs in the
ca)cu)ation of the O9"
7nswer /91 is incorrect because *+%& inc)udes the
*%&&,&&& of fi2ed SB7 costs in the ca)cu)ation of the
O9"
7nswer /(1 is correct Onit contribution margin is the
difference between unit se))ing price and unit -ariab)e
cost Onit se))ing price is *1+ /*8$&,&&& ・$&,&&&
units1, and unit -ariab)e cost is *%+& [/*1,&,&&&
-ariab)e manufacturing cost S *,$,&&& -ariab)e SB7
cost1 ・$&,&&& units so)d] 7ccording)6, unit
contribution margin is *1%%& /*1+ ! *%+&1
[1A%] Source' 9"7 &:+A $!1%
7nswer /71 is correct ;he B@P in units is e#ua) to
fi2ed costs di-ided b6 the difference between unit
se))ing price and unit -ariab)e cost /O9"1 ;he
*18,&&& sa)-age -a)ue, the cash f)ow to be recei-ed
if production is discontinued, is treated here as a fi2ed
cost <ence, continuation of the product )ine wi))
permit the firm to breaD e-en or maDe a profit on)6 if
the tota) 9" is *18,&&& or more
*18,&&&
B@P 3 !!!!!!!! 3 ,,$&& units
*1& ! *:
Fi2ed o-erhead a))ocated is not considered in this
ca)cu)ation because it is not a cash f)ow and wi))
continue regard)ess of the decision
7nswer /B1 is incorrect because the B@P is e#ua) to
the sa)-age -a)ue /not depreciation1 di-ided b6 the
O9" of *, /*1& ! *:1 (epreciation is a non!cash
f)ow and therefore shou)d not be considered in the
cash f)ow breaDe-en point ca)cu)ation
7nswer /91 is incorrect because the B@P is e#ua) to
the sa)-age -a)ue /not depreciation1 di-ided b6 the
O9" of *, /*1& ! *:1 (epreciation is a non!cash
f)ow and therefore shou)d not be considered in the
cash f)ow breaDe-en point ca)cu)ation
7nswer /(1 is incorrect because unit fi2ed costs
shou)d not be subtracted in determining the unit
contribution margin ;he fi2ed costs wi)) continue
regard)ess so the6 are not inc)uded in the ca)cu)ation
;herefore, the *18,&&& sa)-age -a)ue wi)) be di-ided
b6 the *, unit contribution margin in determining the
cash f)ow breaDe-en point in units
[1A,] Source' 9H SDender
7nswer /71 is incorrect because on)6 the first +$,&&&
units ha-e a O9" of *1& 7dditiona) units in e2cess
of +$,&&& ha-e a O9" of *12$&
7nswer /B1 is correct ;he B@P in units is e#ua) to
fi2ed cost di-ided b6 the difference between unit
se))ing price and unit -ariab)e cost /the unit
contribution margin1 7t )ess than +$,&&& units, fi2ed
costs are *8&&,&&& and O9" is *1& [*2$ ! /:&> 2
*2$1] 7t this O9", 8&,&&& units /*8&&,&&& ・*1&1
must be so)d, but this -o)ume is not within the re)e-ant
range 7t an6 production )e-e) greater than +$,&&&
units, tota) fi2ed costs are *1,2&&,&&& but there are
two O9" )a6ers ;he first +$,&&& units so)d wi))
produce a contribution margin of *+$&,&&& /+$,&&&
2 *1&1 <ence, another *,$&,&&& /*1,2&&,&&& !
*+$&,&&&1 must be contributed ;he O9" is *12$&
[*2$ ! /$&> 2 *2$1] for units in e2cess of +$,&&&,
and %:,&&& /*,$&,&&& ・*12$&1 additiona) units
must be so)d ;ota) unit sa)es at the B@P are 111,&&&
/+$,&&& S %:,&&&1
7nswer /91 is incorrect because the first +$,&&& units
ha-e a O9" of on)6 *1&
7nswer /(1 is incorrect because production of units
in e2cess of +$,&&& units wi)) increase fi2ed costs
from *8&&,&&& to *1,2&&,&&&
[1A$] Source' 9I7 11A: III!A&
7nswer /71 is correct 9ompan6 14s breaDe-en point
is )ower because its fi2ed costs are )ower 9ompan6
14s breaDe-en point is *:2,$&&,&&& /*2$,&&&,&&& ・
,&>1 9ompan6 24s breaDe-en point is *:+,%&+,:A2
[/*2$,&&&,&&& 2 1,1 ・/,&> 2 1%1] ;he
indifference point, at which do))ar profits are e#ua), is
*8%,&&&,&&& /*2$,&&&,&&& S :&M 3 *%$,&&&,&&&
S ,8M1 Gnce the indifference point is passed,
9ompan6 1 wi)) maDe )ower profits than 9ompan6 2
because 9ompan6 2 has a higher contribution margin
7nswer /B1 is incorrect because 9ompan6 14s
breaDe-en point is )ower, but its profits wi)) be )ower
past the indifference point
7nswer /91 is incorrect because 9ompan6 14s
breaDe-en point is )ower, but its profits wi)) be )ower
past the indifference point
7nswer /(1 is incorrect because 9ompan6 14s
breaDe-en point is )ower, but its profits wi)) be )ower
past the indifference point
[1A:] Source' 9I7 11A: III!A1
7nswer /71 is incorrect because %88,8&& units
resu)ts from not subtracting the -ariab)e costs per unit
from sa)es price
7nswer /B1 is incorrect because $18,,&& units does
not ref)ect the sa)es commissions in the tota) -ariab)e
costs
7nswer /91 is correct ;he breaDe-en point is
determined b6 di-iding tota) fi2ed costs b6 the unit
contribution margin ;he tota) fi2ed costs are
*A,%%1,2&& /*$,$A8,+2& manufacturing o-erhead S
*%,+%2,,8& genera) and administrati-e1 ;he
contribution margin is *1:&& /*,& sa)es price ! *22
-ariab)e production cost ! *2&& commission1 ;hus,
the breaDe-en point is $8%,2&& units /*A,%%1,2&& ・
*1:1
7nswer /(1 is incorrect because A+2,&&& units
inc)udes ta2es in the tota) -ariab)e costs, which
understates the unit contribution margin
[1A+] Source' 9I7 &$A: III!8,
7nswer /71 is incorrect because *2&,1:&,&&& does
not ad=ust after!ta2 net income to preta2 net income
7nswer /B1 is correct ;he desired after!ta2 net
income is *1,188,&&& /the past 6ear4s amount1
Ci-en a ,&> ta2 rate, the preta2 e#ui-a)ent is
*1,A8&,&&& [*1,188,&&& ・/1& ! ,&1] Preta2 net
income e#ua)s do))ar sa)es /unit sa)es 2 *,&1, minus
tota) fi2ed costs, minus tota) -ariab)e costs /unit sa)es
2 unit -ariab)e cost1 <ence, the contribution margin
/sa)es ! -ariab)e costs1 is e#uated with the sum of
fi2ed costs and the targeted preta2 net income Onit
sa)es /S1 e#ua) $,&,&&&, and sa)es do))ars e#ua)
*21,:&&,&&& /*,& 2 $,&,&&& units1
*,&S ! *A,A&&,&&& ! *18S 3 *1,A8&,&&&
*22S 3 *11,88&,&&&
S 3 $,&,&&& units
7nswer /91 is incorrect because *2%,,&&,&&& resu)ts
from ad=usting after!ta2 net income b6 di-iding b6 the
ta2 rate rather than one minus the ta2 rate
7nswer /(1 is incorrect because *2:,,&&,&&& resu)ts
from e#uating the sum of the desired preta2 net
income and tota) fi2ed costs with tota) -ariab)e costs
instead of the contribution margin
[1A8] Source' 9I7 &$A: III!8$
7nswer /71 is incorrect because %%+,$&& units
resu)ts from using the wrong sign for the preta2 net
income
7nswer /B1 is incorrect because %,:,8+$ units
resu)ts from subtracting, not adding, the incrementa)
marDeting costs to determine tota) fi2ed costs
7nswer /91 is incorrect because ,2$,&&& units fai)s
to ad=ust for the increase in direct materia)s costs
7nswer /(1 is correct Preta2 net income /1&> of
do))ar sa)es1 e#ua)s do))ar sa)es /unit sa)es 2 *$&1,
minus tota) fi2ed costs /increased b6 *1,$+$,&&& of
marDeting costs1, minus tota) -ariab)e costs
/increased b6 *% per unit1 Onit sa)es /S1 therefore
e#ua) ,+8,12$ units
1&/*$&S1 3 *$&S ! /*A,A&&,&&& S *1,$+$,&&&1 ! /*18 S
*%1S
*2,S 3 *11,,+$,&&
S 3 ,+8,12$ units
[1AA] Source' 9I7 &$A, III!AA
7nswer /71 is correct 9ost M is a mi2ed cost /part
-ariab)e and part fi2ed1 ;he hi!)ow method can be
used to determine the fi2ed and -ariab)e portions
(i-iding the tota) cost of M at two different
production -o)umes b6 the difference in units
produced gi-es a unit -ariab)e cost of *,8%
[/*1+8,2:& ! *2%,+&&1 ・/%$,&&& units ! %,&&&
units1] Fi2ed cost must therefore be *A,21&
[*1+8,2:& cost of M for %$,&&& units ! /*,8% 2
%$,&&& units1] ;ota) cost of M for 8,&&& units is
*,+,8$& [*A,21& S /*,8% 2 8,&&& units1], and the
a-erage cost is *$A8 /*,+,8$& ・8,&&&1
7nswer /B1 is incorrect because *$8$ e#ua)s the
a-erage cost of A,&&& units
7nswer /91 is incorrect because *+A& e#ua)s the
a-erage cost of %,&&& units
7nswer /(1 is incorrect because *,8% is the -ariab)e
cost per unit
[2&&] Source' 9I7 1188 I.!1:
7nswer /71 is incorrect because net income cannot
be determined b6 comparing the tota) -ariab)e
e2pense and tota) fi2ed e2pense )ines
7nswer /B1 is incorrect because the compan6 wi))
incur a net )oss when the tota) e2pense )ine e2ceeds
the tota) sa)es re-enue )ine
7nswer /91 is incorrect because this answer
represents the contribution margin ;ota) sa)es
re-enue must be compared to the tota) e2pense )ine,
not the tota) fi2ed e2pense )ine, in order to determine
the net income
7nswer /(1 is correct 7 cost!-o)ume!profit chart
contains e)ements /)ines, points, a2es1 that identif6
-ariab)e cost, fi2ed cost, the breaDe-en point, tota)
re-enue, profit, and -o)ume in units Jhen the tota)
sa)es re-enue )ine rises abo-e the tota) e2pense )ine, a
compan6 wi)) ha-e positi-e net income
[2&1] Source' 9I7 &$82 I.!2%
7nswer /71 is incorrect because the breaDe-en point
in sa)es do))ars wi)) not change
7nswer /B1 is incorrect because the 9"5 wi))
remain the same ;herefore, the breaDe-en point in
sa)es do))ars wi)) remain unchanged
7nswer /91 is incorrect because the breaDe-en point
in sa)es do))ars wi)) not change
7nswer /(1 is correct ;he B@P in sa)es do))ars is
e#ua) to the fi2ed cost di-ided b6 the 9"5
7ccording)6, e#ua) percentage changes in se))ing
price and -ariab)e cost per unit wi)) not affect the
B@P in sa)es do))ars For e2amp)e, assume the unit
price of a product is *1 and its unit -ariab)e cost is
*:& ;he 9"5 e#ua)s ,&> [/*1 ! *:&1O9" ・*1
unit price] If fi2ed cost is *1&&, the B@P in sa)es
do))ars is *2$& /*1&& ・,&>1 5aising the se))ing
price and -ariab)e cost b6 2&> to *12& and *+2,
respecti-e)6, )ea-es the 9"5 at ,&> /*,8 ・
*12&1 Simi)ar)6, )owering the se))ing price and
-ariab)e cost to *8& and *,8, respecti-e)6, a)so
)ea-es the 9"5 at ,&> /*%2 ・*8&1
[2&2] Source' 9"7 12+% ,!,
7nswer /71 is correct ;he p)ausib)e options are a
decrease in se))ing price or an increase in -ariab)e
e2penses because O9" e#ua)s unit sa)es price minus
unit -ariab)e cost <owe-er, a gi-en percentage
change in unit sa)es price must ha-e a greater effect
than an e#ua) but opposite percentage change in unit
-ariab)e cost because the former is greater than the
)atter ;he e2amp)e be)ow demonstrates this point
Grigina)' SP 3 *1&&
.9 3 $&
!!!!!!!
9" 3 * $&
3333333
SP ! 1$>' SP 3 * 8$
.9 3 $&
!!!!!!!
9" 3 * %$ /*1$ decrease1
3333333
.9 S 1$>' SP 3 *1&&&&
.9 3 $+$&
!!!!!!!
9" 3 * ,2$& /*+$& decrease1
3333333
7nswer /B1 is incorrect because a 1$> increase in
-ariab)e e2penses wi)) not decrease the 9" as much
as a 1$> decrease in sa)es price
7nswer /91 is incorrect because a decrease in
-ariab)e e2penses wou)d increase O9"
7nswer /(1 is incorrect because a decrease in fi2ed
e2penses has no effect on the O9"
[2&%] Source' 9I7 &$++ I.!11
7nswer /71 is incorrect because, if other factors are
constant, an increase in sa)es price or a decrease in
unit -ariab)e cost increases the 9" and )owers the
B@P
7nswer /B1 is correct ;he B@P e#ua)s fi2ed cost
di-ided b6 the O9" /se))ing price ! unit -ariab)e
cost1 7n increase in semi-ariab)e costs increases
fi2ed costs andEor -ariab)e costs 7n increase in
either wi)) raise the B@P If fi2ed costs increase, more
units must be so)d, assuming the same O9", to
co-er the greater fi2ed costs If -ariab)e costs
increase, the O9" wi)) decrease and again more
units must be so)d to co-er the fi2ed costs
7nswer /91 is incorrect because an increase in the
9" decreases the B@P
7nswer /(1 is incorrect because, if income ta2es are
taDen into account, the6 are treated as -ariab)e costs
7 decrease in -ariab)e costs )owers the B@P
[2&,] Source' Pub)isher
7nswer /71 is incorrect because, at re-enues be)ow
*:,2$&,&&&, "a)) B is preferab)e
7nswer /B1 is incorrect because, at re-enues be)ow
*:,2$&,&&&, "a)) B is preferab)e
7nswer /91 is correct ;he )e-e) of indifference is
ca)cu)ated b6 setting the e#uation for the first ma)) /a
f)at *2$&,&&&1 e#ua) to the e#uation for the second
ma)) So)-ing for that e#uation in-o)-es di-iding
*2$&,&&& b6 ,>, resu)ting in an indifference )e-e) of
re-enues of *:,2$&,&&&
7nswer /(1 is incorrect because, at an6 )e-e) of
re-enues o-er *:,2$&,&&&, "a)) 7 is preferab)e
[2&$] Source' 9I7 &$8% I.!$
7nswer /71 is correct ;his #uestion re#uires so)-ing
simu)taneous e#uations because both the -ariab)e
o-erhead per direct )abor hour /P1 and the fi2ed
o-erhead /M1 are unDnown
*8&,&&& 3 M S 1,&&&P
*1,&,&&& 3 M S %,&&&P
*:&,&&& 3 2,&&&P
P 3 *%& per direct )abor hour
Substituting,
*8&,&&& 3 M S 1,&&&/*%&1
M 3 *$&,&&&
7nswer /B1 is incorrect because *,:,::+ is the
a-erage tota) factor6 o-erhead app)ied per month, a
portion of which is -ariab)e
7nswer /91 is incorrect because the month)6 fi2ed
factor6 o-erhead is ca)cu)ated b6 di-iding the
difference between tota) factor6 o-erhead a))ocated in
Hanuar6 and Februar6 b6 the change in direct )abor
hours ;his e#ua)s the -ariab)e o-erhead per direct
)abor hour Subtracting the #uantit6 of direct )abor
hours times -ariab)e o-erhead rate per hour from
tota) factor6 o-erhead e#ua)s fi2ed o-erhead
7nswer /(1 is incorrect because *%&,&&& is the
-ariab)e factor6 o-erhead per 1,&&& hours
[2&:] Source' 9I7 &$8$ I.!:
7nswer /71 is incorrect because the cost for Product
B in the short run wi)) be )ower than *1+1& because
the fi2ed costs of *%+& wou)d not be inc)uded in the
incrementa) cost of Product B
7nswer /B1 is incorrect because Product B wou)d be
profitab)e at a *1$:& se))ing price
7nswer /91 is incorrect because, in the short run, the
fi2ed e2penses and o-erhead do not need to be
inc)uded in the cost of Product B because the6 are a))
co-ered b6 Product 7
7nswer /(1 is correct Jith e2cess capacit6,
production is profitab)e if the incrementa) re-enues
are greater than the incrementa) costs <ere, the
incrementa) costs e#ua) tota) costs minus an6 fi2ed
costs /*1+1& ! *1$& ! *22& 3 *1%,&1 If Product
B can be so)d for a price greater than *1%,&,
short!run production wi)) be profitab)e Iong!run
profitabi)it6, howe-er, wi)) depend on fi2ed costs as
we)) as -ariab)e costs and sa)es price
[2&+] Source' 9I7 118% I.!2%
7nswer /71 is incorrect because 2 units of
production is not the highest )e-e) of production
where margina) re-enue e2ceeds margina) costs
Production shou)d continue up to and unti) margina)
re-enue e#ua)s margina) cost
7nswer /B1 is incorrect because , units cou)d be
produced and sti)) increase the compan64s profits
7nswer /91 is correct ;his #uestion is based more
on the economists4 -iew of margina) re-enue and
margina) cost than on 9.P ana)6sis Gne of the
assumptions of the )atter methodo)og6 /constant unit
-ariab)e cost1 is -io)ated "argina) re-enue e2ceeds
margina) cost for the fourth but not the fifth unit
Production shou)d continue unti) margina) cost e#ua)s
margina) re-enue 7ccording)6, four units shou)d be
produced
7nswer /(1 is incorrect because, at $ units of
production, the margina) cost /*1&+1 e2ceeds the
margina) re-enue /*A&1 so the compan6 wou)d )ose
income b6 producing this unit
[2&8] Source' 9I7 118% I.!2,
7nswer /71 is incorrect because the contribution
margin e#ua)s the tota) re-enue *18& /*A& 2 21 minus
the -ariab)e costs *1,& /*+& 2 21
7nswer /B1 is correct 9ontribution margin is defined
as tota) re-enue minus -ariab)e costs ;ota) re-enue
for two units is *18& /2 2 *A& margina) re-enue1, and
tota) -ariab)e costs are *1,& /2 2 *+& unit cost1 ;he
tota) contribution margin is *,& /*18& ! *1,&1
7nswer /91 is incorrect because the contribution
margin e#ua)s the tota) re-enue *18& /*A& 2 21 minus
the -ariab)e costs *1,& /*+& 2 21
7nswer /(1 is incorrect because the contribution
margin e#ua)s the tota) re-enue *18& /*A& 2 21 minus
the -ariab)e costs *1,& /*+& 2 21
[2&A] Source' 9I7 &$8$ I.!8
7nswer /71 is incorrect because *%&&,&&& is the
pro=ected net income before the increase in sa)es
7nswer /B1 is incorrect because *%%&,&&& has taDen
into account a 1&> increase in fi2ed costs to
*AA&,&&& when the fi2ed costs did not increase
7nswer /91 is correct Pro=ected net income is
estimated tota) re-enue minus estimated tota) costs
Ci-en the origina) assumption that F9, unit sa)es, and
sa)es price remain the same, and that net income wi))
be reduced, the -ariab)e costs must increase If the
Hu)6 6ear 2 prediction that unit sa)es wi)) increase b6
1&> from 1$&,&&& to 1:$,&&& is based on the
budgeted F9, sa)es price, and .9, predicted net
income wi)) increase from *%&&,&&& to *,2&,&&&
;5 ! F9 ! .9 3 *%&&,&&&
;5 ! *A&&,&&& ! .9 3 *%&&,&&&
;5 ! .9 3 *1,2&&,&&&
9" 3 *1,2&&,&&&
Budgeted O9" 3 *1,2&&,&&& ・1$&,&&& units 3 *8
;ota) 9" 3 1:$,&&& units 2 *8 3 *1,%2&,&&&
F9 3 /A&&,&&&1
!!!!!!!!!!
0et income * ,2&,&&&
3333333333
7nswer /(1 is incorrect because the O9" for 6ear 2
is *8 per unit, not *A
[21&] Source' 9I7 118: I.!1&
7nswer /71 is incorrect because the sa)es necessar6
to ensure a *%,&&&,&&& profit is 1$,&&&,&&& pounds
7nswer /B1 is incorrect because 1,,&&&,&&& pounds
is the breaDe-en point
7nswer /91 is correct In breaDe-en ana)6sis, tota)
re-enue e#ua)s fi2ed costs p)us -ariab)e costs If a
gi-en profit is desired, it is treated as a fi2ed cost
@2c)usi-e of profit, the annua) fi2ed cost is
*,2,&&&,&&& /12 months 2 *%,$&&,&&& per month of
fi2ed factor6 o-erhead and SCB7 e2pense1 ;he
-ariab)e cost per pound is *2A& [/*%&&,&&& S
*1,2$&,&&& S *,$&,&&& S *A&&,&&&1 ・1,&&&,&&&
)bs] If M e#ua)s sa)es in pounds, the )e-e) of sa)es
needed to earn a *%,&&&,&&& profit is
*$A&M 3 *%,&&&,&&& S *,2,&&&,&&& S *2A&M
*%M 3 *,$,&&&,&&&
M 3 1$,&&&,&&& pounds
;his ana)6sis assumes that no additiona) costs are
incurred when production e2ceeds the norma) )e-e) of
1,&&&,&&& pounds per month
7nswer /(1 is incorrect because the sa)es necessar6
to ensure a *%,&&&,&&& profit is 1$,&&&,&&& pounds
[211] Source' 9"7 &:+A $!2$
7nswer /71 is incorrect because :,&,&&& units
wou)d be the resu)t if the unit contribution margin for
MP!+ were *2$ instead of *1&& /:,&,&&& 2 *2$ 3
*1:&,&&&1 Fi2ed manufacturing costs are not
inc)uded in determining unit contribution margin
7nswer /B1 is correct ;he contribution margin for
MP!+ is *1 per unit /*, sa)es price ! *% -ariab)e
costs1 ;hus, 1:&,&&& units of MP!+ wi)) generate an
additiona) *1:&,&&& of 9", which is sufficient to
co-er the increase in ad-ertising costs
7nswer /91 is incorrect because 128,&&& units
imp)ies a *12$ unit contribution margin .ariab)e
se))ing costs are inc)uded and fi2ed manufacturing
costs are not inc)uded in determining unit contribution
margin
7nswer /(1 is incorrect because 8&,&&& units imp)ies
a *2&& unit contribution margin ;he correct O9"
of *1&& is found b6 subtracting a)) -ariab)e costs
from the se))ing price
[212] Source' 9"7 &:+A $!2:
7nswer /71 is incorrect because a *1 increase in
sa)es does not resu)t in a *1 increase in profits
.ariab)e costs of producing the units must be
deducted in order to determine the contribution
margin deri-ed from each unit so)d
7nswer /B1 is incorrect because %2&,&&& is the
number of sa)es units, not sa)es do))ars, needed to
offset the increased ad-ertising costs
7nswer /91 is correct Sa)es do))ars must increase
sufficient)6 to co-er the *1:&,&&& increase in
ad-ertising ;he unit contribution margin for B(!, is
*$& /*% ! *2$& -ariab)e costs1, and the 9"5 is 1E:
/O9" ・*% sa)es price1 (i-iding the *1:&,&&& b6
1E: gi-es the sa)es do))ars necessar6 to generate a
9" of *A:&,&&& /*1:&,&&& ・1E: 3 *A:&,&&&1
7nswer /(1 is incorrect because fi2ed manufacturing
costs are not inc)uded in determining unit contribution
margin
[21%] Source' 9"7 &:+A $!2+
7nswer /71 is incorrect because product MP!+
actua))6 has a contribution margin of *1%%,%%%, which
is )ower than the *2$&,&&& contribution margin for
product B(!,
7nswer /B1 is incorrect because product B(!, has a
higher contribution margin at *2$&,&&&
7nswer /91 is incorrect because product B(!, has a
contribution margin of *2$&,&&&
7nswer /(1 is correct ;he machine hours are a
scarce resource that must be a))ocated to the
product/s1 in a proportion that ma2imi8es the tota)
contribution margin Ci-en that potentia) additiona)
sa)es of either product are in e2cess of production
capacit6, on)6 the product with the greater
contribution margin per unit of scarce resource shou)d
be produced MP!+ re#uires +$ hoursT B(!,
re#uires 2 hours of machine time /gi-en fi2ed
manufacturing cost app)ied at *1 per machine hour of
*+$ for MP!+ and *2& for B(!,1 MP!+ has a 9"
of *1%% per machine hour /*1 O9" ・+$ hours1,
and B(!, has a 9" of *2$& per machine hour
/*$& ・2 hours1 ;hus, on)6 B(!, shou)d be
produced, 6ie)ding a 9" of *2$&,&&& /1&&,&&& 2
*2$&1 ;he De6 to the ana)6sis is 9" per unit of
scarce resource
[21,] Source' 9I7 118A I.!$,
7nswer /71 is correct Gperating )e-erage is based
on the degree to which fi2ed costs are used in
production Firms ma6 increase fi2ed costs, such as
b6 automation, to reduce -ariab)e costs ;he resu)t is
a greater degree of operating )e-erage /(GI1, which
is the percentage change in net operating income
/earnings before interest and ta2es1 di-ided b6 the
percentage change in unit sa)es ;hus, operating
)e-erage is re)ated to the price e)asticit6 concept in
economics It can a)so be determined from di-iding
the tota) contribution margin b6 operating income as
e2pressed in the fo))owing formu)a, gi-en that ? is
#uantit6 of units so)d, P is unit price, . is unit -ariab)e
cost, and F is fi2ed cost'
?/P ! .1
!!!!!!!!!!!!
?/P ! .1 ! F
7nswer /B1 is incorrect because the degree of
financia) )e-erage e#ua)s the percentage change in net
income di-ided b6 the percentage change in operating
income
7nswer /91 is incorrect because the breaDe-en point
is the sa)es -o)ume at which tota) re-enue e#ua)s tota)
costs
7nswer /(1 is incorrect because the degree of tota)
/combined1 )e-erage e#ua)s the percentage change in
net income di-ided b6 the percentage change in sa)es
[21$] Source' 9"7 &:A$ 1!1
7nswer /71 is incorrect because a firm with higher
operating )e-erage has higher fi2ed costs and )ower
-ariab)e costs
7nswer /B1 is correct Gperating )e-erage is a
measure of the degree to which fi2ed costs are used
in the production process 7 compan6 with a higher
percentage of fi2ed costs /higher operating )e-erage1
has greater risD than one in the same industr6 that
re)ies more hea-i)6 on -ariab)e costs ;he (GI
e#ua)s the percentage change in net operating income
di-ided b6 the percentage change in sa)es ;hus,
profits become more sensiti-e to changes in sa)es
-o)ume as the (GI increases
7nswer /91 is incorrect because a firm with higher
)e-erage wi)) be re)ati-e)6 more profitab)e than a firm
with )ower )e-erage when sa)es are high ;he
opposite is true when sa)es are )ow
7nswer /(1 is incorrect because a firm with higher
)e-erage is more risD6 Its re)iance on fi2ed costs is
greater
[21:] Source' 9"7 &:A2 1!8
7nswer /71 is incorrect because 2, is obtained b6
o-erstating the contribution margin or the fi2ed costs
7nswer /B1 is correct Gperating )e-erage is the
percentage change in operating income resu)ting from
a percentage change in sa)es It measures how a
change in -o)ume affects profits 7n a)ternati-e
formu)a for operating )e-erage di-ides contribution
margin b6 the contribution margin minus fi2ed costs
9ompanies with )arger in-estments and greater fi2ed
costs ordinari)6 ha-e higher contribution margins and
more operating )e-erage ;he degree of operating
)e-erage measures the e2tent to which fi2ed assets
are used in the production process 7 compan6 with
a high percentage of fi2ed costs is more risD6 than a
firm in the same industr6 that re)ies more on -ariab)e
costs to produce Based on a contribution margin of
*1: per unit /*1 ! *8, -ariab)e cost1, the degree of
operating )e-erage is
/,&&,&&& 2 *1:1 ・[/,&&,&&& 2 *1:1 ! *28,&&&] 3 1+8
7nswer /91 is incorrect because 21% inc)udes a
nonoperating e2pense /interest1 as a fi2ed cost
7nswer /(1 is incorrect because 12 is obtained b6
understating the *:,,&&& contribution margin or
understating the *28,&&& of fi2ed costs
[21+] Source' 9I7 &$A1 I.!1+
7nswer /71 is incorrect because :,&&& units wi))
co-er the fi2ed costs for the 6ear but not the -ariab)e
costs /*18&,&&& ・*%& 3 :,&&&1
7nswer /B1 is incorrect because :,A2, units is found
b6 di-iding the tota) fi2ed costs b6 the -ariab)e cost
per unit F9 shou)d be di-ided b6 the unit
contribution margin
7nswer /91 is correct ;he contribution to o-erhead
per unit is *,&& Fi2ed costs of *18&,&&& di-ided b6
the contribution of *,&& gi-es breaDe-en sa)es
-o)ume of ,$,&&& units
7nswer /(1 is incorrect because the tota) fi2ed costs
shou)d be di-ided /not mu)tip)ied1 b6 the unit
contribution margin
[218] Source' 9I7 118: I.!1:
7nswer /71 is incorrect because *,&&,&&& is the
tota) -ariab)e manufacturing cost of goods so)d
9ontribution margin e#ua)s net re-enue minus
-ariab)e costs
7nswer /B1 is correct 9ontribution margin is sa)es
minus -ariab)e costs (irect costing considers on)6
-ariab)e costs as product costs, so contribution
margin appears in a direct costing income statement
7bsorption costing treats both -ariab)e and fi2ed
costs as product costs ;hus, -ariab)e costs are not
stated separate)6, and contribution margin wou)d not
appear in the income statement 7ccording)6, the 9"
is *,+&,&&& /*1,&&&,&&& net re-enues ! *,&&,&&&
-ariab)e 9CS ! *1%&,&&& -ariab)e SB7 costs1
7nswer /91 is incorrect because *$%&,&&& is the
tota) -ariab)e costs for the 6ear 9ontribution margin
e#ua)s net re-enue minus -ariab)e costs
7nswer /(1 is incorrect because -ariab)e se))ing and
administrati-e costs must a)so be subtracted from net
re-enue in determining contribution margin
[21A] Source' 9I7 118: I.!1+
7nswer /71 is correct ;he contribution margin for
(i-ision 1 is *%1&,&&& /*:&&,&&& net re-enue !
*2A&,&&& tota) -ariab)e costs1 ;he contribution
contro))ab)e b6 (i-ision 14s manager is *2:&,&&&
/*%1&,&&& 9" ! *$&,&&& contro))ab)e fi2ed cost1
;he tota) contribution b6 (i-ision 1 e#ua)s its net
re-enue minus a)) costs traceab)e to it 7ccording)6,
the tota) contribution is *1A&,&&& /*2:&,&&&
contro))ab)e contribution ! *+&,&&& a))ocated but
contro))ab)e b6 others1 Ona))ocated costs are
e2c)uded from the ca)cu)ation If separate amounts
are determined for the di-ision4s contribution and the
contro))ab)e contribution, the difference between the
di-ision4s and the manager4s performance ma6 be
ascertained /assuming contro))abi)it6 of fi2ed costs
can be assigned1
7nswer /B1 is incorrect because *2:&,&&& is the
contribution contro))ab)e b6 the (i-ision 1 manager
7)) the costs incurred in (i-ision 1 are subtracted
from net re-enue in determining the contribution b6
(i-ision 1
7nswer /91 is incorrect because *%1&,&&& is the
contribution margin for (i-ision 1 7)) the costs
incurred in (i-ision 1 are subtracted from net re-enue
in determining the contribution b6 (i-ision 1
7nswer /(1 is incorrect because a)) costs /not
-ariab)e manufacturing costs on)61 incurred b6
(i-ision 1 must be subtracted from (i-ision 1 net
re-enue in order to find the contribution
[22&] Source' 9I7 118, I.!%
7nswer /71 is correct ;he B@P in units is found b6
di-iding the fi2ed costs b6 the O9"
*A:&,&&&
9ompan6 1 3 !!!!!!!!!!!!!!!!!!!!!!!!!!! 3 8&,&&&
*% ! :2 ! 1% ! +$ ! Y%&
*2$2,&&&
9ompan6 2 3 !!!!!!!!!!!!!!!!!!!!!!!!!!! 3 ,2&,&&&
*% ! :$ ! 1$ ! 12$ ! %$
;he -o)ume at which profits are e#ua) occurs when
the difference between tota) re-enue and tota) cost is
a)so the same 9ompan6 1 has a per unit cost of
*18&/*:2 S 1% S +$ S %&1 and 9ompan6 2 has a
per unit cost of *2,&/*:$ S1$ S 12$ S %$1 Both
charge *% per decD, so tota) re-enue for the two
companies at the indifference -o)ume /O1 wi)) be
e#ua) 9onse#uent)6, tota) costs shou)d a)so be e#ua)
*18&O S *A:&,&&& 3 *2,&O S *2$2,&&&
*:&O 3 *+&8,&&&
O 3 1,18&,&&&
7nswer /B1 is incorrect because the -o)ume at which
9ompan6 1 and 9ompan6 2 ha-e e#ua) profits is
1,18&,&&& units
7nswer /91 is incorrect because the breaDe-en point
is determined b6 di-iding fi2ed costs b6 unit
contribution margin, not unit -ariab)e costs
Furthermore, the -o)ume at which there are e#ua)
profits between the companies is a)so higher
7nswer /(1 is incorrect because the breaDe-en point
is determined b6 di-iding fi2ed costs b6 unit
contribution margin, not unit -ariab)e costs
[222] Source' 9I7 &$+8 I.!18
7nswer /71 is incorrect because the margina) re-enue
per unit is e#ua) to the increase in re-enue di-ided b6
the increase in units so)d
7nswer /B1 is correct "argina) re-enue /"51 is the
incrementa) re-enue for each additiona) unit so)d
/increase in re-enue ・increase in units so)d1 If
e2pected re-enue of *+2,:&& is a 1&> increase o-er
that for the prior 6ear, the prior 6ear4s re-enue must
ha-e been *::,&&& /*+2,:&& ・11&>1
*+2,:&& ! *::,&&& *:,:&&
"5 3 !!!!!!!!!!!!!!!!! 3 !!!!!! 3 *:
1,1&& 1,1&&
7nswer /91 is incorrect because *2& is the tota) fi2ed
costs /*22,&&&1 di-ided b6 the increase in sa)es
/1,1&&1 ;he margina) re-enue per unit is e#ua) to the
increase in re-enue di-ided b6 the increase in units
so)d
7nswer /(1 is incorrect because the margina) re-enue
per unit is e#ua) to the increase in re-enue di-ided b6
the increase in units so)d, not the difference of
e2pected sa)es minus fi2ed costs, di-ided b6 the unit
increase in sa)es
[22%] Source' 7 Ji)son
7nswer /71 is incorrect because *8&&,&&& is the
contribution margin of sa)es of 1&&,&&& units
7nswer /B1 is correct ;he profit increased b6
*2&&,&&& and the sa)es -o)ume increased b6 2$,&&&
units from the B@P ;his increase in profit is a resu)t
of an increase in the contribution margin /sa)es !
-ariab)e costs1 Onit contribution margin is *8
/*2&&,&&& ・2$,&&& units1 ;he B@P in units is e#ua)
to fi2ed costs di-ided b6 the O9"
Fi2ed costs
B@P 3 !!!!!!!!!!! 3 +$,&&& units
*8 unit
Fi2ed costs 3 *:&&,&&&
7nswer /91 is incorrect because the annua) fi2ed
costs are determined b6 finding the O9" /*2&&,&&&
profit ・2$,&&& increase in units o-er breaDe-en
point1 and mu)tip)6ing it b6 the number of units at the
breaDe-en point
7nswer /(1 is incorrect because there is sufficient
information to determine the amount of fi2ed costs
;he annua) fi2ed costs are determined b6 finding the
O9" /*2&&,&&& profit ・2$,&&& increase in units
o-er breaDe-en point1 and mu)tip)6ing it b6 the
number of units at the breaDe-en point
[22,] Source' 9I7 118$ I.!A
7nswer /71 is correct ;o determine the profit under
the new pricing po)ic6, the sa)es -o)ume under the o)d
po)ic6 must be ca)cu)ated
*1&M ! *:M ! *12,&&& 3 &1/*1&M1
M 3 ,,&&& units
Profit at the new price /*A1 is
@2pected -o)ume
at *A 3 12$> 2 ,,&&& 3 $,&&&
Profit 3 /*A 2 $,&&&1 ! /*: 2 $,&&&1 ! *12,&&& 3 *%,&&&
7nswer /B1 is incorrect because the sa)es -o)ume
under the o)d po)ic6 is ,,&&& units [*1&M ! *:M !
*12,&&& ! 1/*1&M1] ;he sa)es wi)) increase 2$>
when the price is )owered to *AT thus, the new
-o)ume is $,&&& units /,,&&& 2 12$>1 and the profit
wou)d be *%,&&&
7nswer /91 is incorrect because the sa)es -o)ume
under the o)d po)ic6 is ,,&&& units [*1&M ! *:M !
*12,&&& ! 1/*1&M1] ;he sa)es wi)) increase 2$>
when the price is )owered to *AT thus, the new
-o)ume is $,&&& units /,,&&& 2 12$>1 and the profit
wou)d be *%,&&&
7nswer /(1 is incorrect because the sa)es -o)ume
under the o)d po)ic6 is ,,&&& units [*1&M ! *:M !
*12,&&& ! 1/*1&M1] ;he sa)es wi)) increase 2$>
when the price is )owered to *AT thus, the new
-o)ume is $,&&& units /,,&&& 2 12$>1 and the profit
wou)d be *%,&&&
[22$] Source' Pub)isher
7nswer /71 is correct ;he margin of safet6 e#ua)s
sa)es abo-e the breaDe-en point ;hus, if the margin
of safet6 is *,&,&&&, the breaDe-en point must be
*%:&,&&& /*,&&,&&& sa)es ! *,&,&&&1
7nswer /B1 is incorrect because the breaDe-en point
in do))ars is the difference between actua) sa)es and
the margin of safet6
7nswer /91 is incorrect because the breaDe-en point
in do))ars is the difference between actua) sa)es and
the margin of safet6
7nswer /(1 is incorrect because the breaDe-en point
in do))ars is the difference between actua) sa)es and
the margin of safet6
[22:] Source' Pub)isher
7nswer /71 is correct ;he margin of safet6 e#ua)s
sa)es abo-e the breaDe-en point ;hus, if the margin
of safet6 is *,&,&&&, the breaDe-en point in sa)es
do))ars must be *%:&,&&& If the contribution margin
ratio is 2&>, the contribution margin /sa)es ! -ariab)e
costs1 at the breaDe-en point is *+2,&&& /2&> 2
*%:&,&&&1 ;his amount must e#ua) fi2ed costs
because sa)es e#ua) the sum of fi2ed and -ariab)e
costs at the breaDe-en point
7nswer /B1 is incorrect because *8&,&&& resu)ts
from not subtracting the margin of safet6 from sa)es
7nswer /91 is incorrect because *288,&&& e#ua)s
tota) -ariab)e costs
7nswer /(1 is incorrect because *%2&,&&& e#ua)s
tota) -ariab)e costs if *,&&,&&& is the breaDe-en
point
[22+] Source' Pub)isher
7nswer /71 is incorrect because *%&&,&&& e#ua)s
fi2ed costs
7nswer /B1 is incorrect because *$&&,&&& is based
on the -ariab)e!cost percentage
7nswer /91 is correct BreaDe-en point is ca)cu)ated
b6 di-iding the fi2ed costs of *%&&,&&& b6 the
contribution margin percentage, which was ,&>
(i-iding *%&&,&&& b6 , resu)ts in a breaDe-en point
of *+$&,&&&
7nswer /(1 is incorrect because *1,&$&,&&& added
fi2ed costs to the breaDe-en )e-e)
[228] Source' Pub)isher
7nswer /71 is incorrect because :$,&&& units resu)ts
from using the unit -ariab)e cost in the denominator
7nswer /B1 is incorrect because +$,&&& units is the
breaDe-en point
7nswer /91 is incorrect because ++,2$& units wou)d
6ie)d a profit )ess than the desired *A&,&&&
7nswer /(1 is correct ;he breaDe-en point is
ca)cu)ated b6 di-iding the fi2ed costs b6 the unit
contribution margin in do))ars ;o determine how
man6 units need to be so)d to 6ie)d a specific income,
that income shou)d be treated as a fi2ed cost ;hus,
adding the *A&,&&& of desired income to the
*%&&,&&& of fi2ed costs resu)ts in a numerator of
*%A&,&&& <ence, the necessar6 unit sa)es e#ua)s
A+,$&& units [*%A&,&&& ・/*1& unit price ! *: unit
-ariab)e cost1]
[22A] Source' Pub)isher
7nswer /71 is incorrect because *%&&,&&& e#ua)s
the fi2ed costs
7nswer /B1 is incorrect because *+$&,&&& assumes
a ,&> contribution margin ratio
7nswer /91 is incorrect because *8$+,1,2 assumes
a %$> contribution margin ratio
7nswer /(1 is correct 7 he)pfu) approach in a
mu)tiproduct situation is to maDe ca)cu)ations based
on the composite unit, ie, 2 units of Product M and %
units of Product P /a :: > ratio1 ;he se))ing price of
this composite unit is *11& [/2 2 *1&1 S /% 2 *%&1]
;he O9" of the composite unit is *%$ W[2 2 /*1& !
*:1] S [% 2 /*%& ! *211]X 9onse#uent)6, the
breaDe-en point in composite units is 8,$+1,%
/*%&&,&&& F9 ・*%$ O9"1, and the breaDe-en
point in sa)es do))ars is *A,2,8$+ /8,$+1,% 2 *11&1
[2%&] Source' Pub)isher
7nswer /71 is incorrect because 8,$+1 units e#ua)s
the number of composite units so)d at the breaDe-en
point
7nswer /B1 is incorrect because 2&,,$, assumes a
,&> contribution margin ratio
7nswer /91 is incorrect because 2%,%++ assumes a
%$> contribution margin ratio
7nswer /(1 is correct 7 composite unit was defined
as consisting of 2 units of Product M and % units of
Product P ;he breaDe-en point in composite units is
8,$+1,% 7ccording)6, the units of Product P so)d at
the breaDe-en point are e#ua) to 2$,+1, /8,$+1,% 2
%1
[2%1] Source' Pub)isher
7nswer /71 is incorrect because the compan6 is
profitab)e due to the higher a-erage contribution
margin
7nswer /B1 is correct ;he e2pected sa)es mi2 is
,&> for Product M and :&> for Product P Ci-en
that Product M has a ,&> contribution margin ratio
and Product P has a %&> contribution margin ratio,
se))ing more of Product M and )ess of Product P
increases the a-erage contribution margin ratio ;he
effect is to )ower the breaDe-en point ;hus, if the
new composite unit inc)udes 2 units of Product M and
2 units of Product P, the composite unit se))ing price
is *8& [/2 2 *1&1 S /2 2 *%&1], and the composite
O9" is *2: W[2 2 /*1& ! *:1] S [2 2 /*%& ! *211]X
;he new breaDe-en point in composite units is
therefore 11,$%8,: /*%&&,&&& F9 ・*2: O9"1,
and the new breaDe-en point in sa)es do))ars is
*A2%,&++ /11,$%8,: 2 *8&1 Ci-en that sa)es
reached the budgeted breaDe-en point of *A,2,8$+,
9atfur must ha-e made a profit of *1A,+8&
/*A,2,8$+ ! *A2%,&++1
7nswer /91 is incorrect because the compan6 is
profitab)e due to the higher a-erage contribution
margin
7nswer /(1 is incorrect because the compan6 is
profitab)e due to the higher a-erage contribution
margin
[2%2] Source' Pub)isher
7nswer /71 is incorrect because *+2& is based on a
2&> return on costs
7nswer /B1 is correct If the compan6 wants a 2&>
return on sa)es, the *:&&,&&& of costs represent 8&>
of the se))ing price (i-iding *:&&,&&& b6 8 resu)ts in
a tota) se))ing price of *+$&,&&&, or *+$& per unit
7nswer /91 is incorrect because *1,&8& is based on
an 8&> return on costs
7nswer /(1 is incorrect because *%,&&& is based on
an 8&> return on sa)es
[2%%] Source' Pub)isher
7nswer /71 is incorrect because *2&: e2c)udes
-ariab)e se))ing costs
7nswer /B1 is correct 9ontribution margin is the
e2cess of sa)es o-er -ariab)e costs Sa)es wi)) be at
*%&& per unit .ariab)e costs are *1&&, consisting of
*,& of direct materia)s, *%& of direct )abor, *2, of
-ariab)e o-erhead, and *: of -ariab)e se))ing costs
;hus, the contribution margin wi)) be *2&& per unit
/*%&& ! *1&&1
7nswer /91 is incorrect because *1,& inc)udes fi2ed
manufacturing o-erhead
7nswer /(1 is incorrect because *12& is the
operating margin
[2%,] Source' Pub)isher
7nswer /71 is incorrect because *1,2,&,&&& is
based on tota) costs
7nswer /B1 is incorrect because *1,%:&,&&& inc)udes
*8& per unit of fi2ed costs
7nswer /91 is correct 9ontribution margin is the
e2cess of sa)es o-er -ariab)e costs Sa)es of 1&,&&&
units at *%2& each wi)) produce tota) re-enue of
*%,2&&,&&& .ariab)e costs wi)) be *1&, per unit,
consisting of *,, for direct materia)s, *%& for direct
)abor, *2, for -ariab)e o-erhead, and *: for se))ing
costs 7t *1&, per unit, the 1&,&&& units wi)) ha-e
tota) -ariab)e costs of *1,&,&,&&&, resu)ting in a
contribution margin of *2,1:&,&&& /*%,2&&,&&& !
*1,&,&,&&&1
7nswer /(1 is incorrect because *2,2&&,&&& does
not consider the 1&> increase in direct materia)s
costs
[2%$] Source' Pub)isher
7nswer /71 is incorrect because "a)) B4s rent is
*2,&,&&&, "a)) 74s rent is *%&&,&&&, and "a)) 94s
rent is *%%&,&&&
7nswer /B1 is correct ;he answer depends on the
e2pected )e-e) of re-enues If the compan6 e2pects
re-enues to be *:,&&&,&&& per 6ear, the ca)cu)ation
is as fo))ows'
"a)) 7' *%&&,&&&
"a)) B' *:,&&&,&&& 2 ,> 3 *2,&,&&&
"a)) 9' *:,&&&,&&& 2 %> 3 *18&,&&& S *1$&,&&& 3
*%%&,&&&
;hus, "a)) B is preferab)e
7nswer /91 is incorrect because "a)) B4s rent is
*2,&,&&&, "a)) 74s rent is *%&&,&&&, and "a)) 94s
rent is *%%&,&&&
7nswer /(1 is incorrect because "a)) B4s rent is
*2,&,&&&, "a)) 74s rent is *%&&,&&&, and "a)) 94s
rent is *%%&,&&&
[2%:] Source' Pub)isher
7nswer /71 is correct If the compan6 e2pects
re-enues to be *1&,&&&,&&& per 6ear, the ca)cu)ation
is as fo))ows'
"a)) 7' *%&&,&&&
"a)) B' *1&,&&&,&&& 2 ,> 3 *,&&,&&&
"a)) 9' *1&,&&&,&&& 2 %> 3 *%&&,&&& S *1$&,&&& 3
*,$&,&&&
;hus, "a)) 7 is preferab)e
7nswer /B1 is incorrect because "a)) 74s rent is
*%&&,&&&, "a)) B4s rent is *,&&,&&&, and "a)) 94s
rent is *,$&,&&&
7nswer /91 is incorrect because "a)) 74s rent is
*%&&,&&&, "a)) B4s rent is *,&&,&&&, and "a)) 94s
rent is *,$&,&&&
7nswer /(1 is incorrect because "a)) 74s rent is
*%&&,&&&, "a)) B4s rent is *,&&,&&&, and "a)) 94s
rent is *,$&,&&&
[2%+] Source' Pub)isher
7nswer /71 is incorrect because "a)) 9 wi)) ne-er be
the )owest cost choice
7nswer /B1 is incorrect because "a)) 9 wi)) ne-er be
the )owest cost choice
7nswer /91 is incorrect because "a)) 9 wi)) ne-er be
the )owest cost choice
7nswer /(1 is correct "a)) 9 wi)) ne-er be the
optima) choice because it wi)) be )ess desirab)e than
"a)) B as )ong as 1> of gross re-enue is )ess than
*1$&,&&&, that is, unti) re-enues reach *1$,&&&,&&&
[*1$&,&&& minimum ・/,> ! %>1] <owe-er, at an6
)e-e) of re-enues greater than *+,$&&,&&& /*%&&,&&&
・,>1, "a)) 7 /a f)at *%&&,&&& renta)1 wi)) be more
desirab)e than either of the other choices ;hus, "a))
9 wi)) ne-er be the most desirab)e
[2%8] Source' 9"7 12A, ,!2
7nswer /71 is incorrect because the compan6 can
se)) as much of each product as it can produce ;hus,
sa)es are )imited b6 production constraints, eg,
machine hours ;he compan6 shou)d therefore seeD
to ma2imi8e its return per unit of the constraint
7nswer /B1 is incorrect because the compan6 can
se)) as much of each product as it can produce ;hus,
sa)es are )imited b6 production constraints, eg,
machine hours ;he compan6 shou)d therefore seeD
to ma2imi8e its return per unit of the constraint
7nswer /91 is incorrect because the contribution
margin ratio is on)6 important as it trans)ates to
do))ars 7 high margin on a )ow sa)es -o)ume wi)) not
be profitab)e
7nswer /(1 is correct Jhen demand far e2ceeds a
compan64s abi)it6 to supp)6 the marDetp)ace,
management wi)) want to ma2imi8e its profits per unit
of scarce resource If the scarce resource is raw
materia)s, the products that pro-ide the greatest
contribution margin per unit of raw materia)s are the
products to emphasi8e If machine hours are the
constraint, profits are ma2imi8ed b6 emphasi8ing the
contribution margin per machine hour
[2%A] Source' Pub)isher
7nswer /71 is incorrect because *%+$,&&& is based
on the contribution margin of Product 7 on)6 rather
than a weighted a-erage
7nswer /B1 is correct Sa)es 3 F9 S .9 ;he
proportion of each product4s sa)es must be
considered
S 3 *1$&,&&& S &+$S/&:&1 S &2$S/&8$1
S 3 *1$&,&&& S &,$S S &212$S
S ! &::2$S 3 *1$&,&&&
&%%+$S 3 *1$&,&&&
S 3 *,,,,,,,
7nswer /91 is incorrect because *$&&,&&& is based
on ha)f of the re#uired sa)es at B4s contribution
margin
7nswer /(1 is incorrect because *$,$,,$$ is based
on an unweighted a-erage of the two contribution
margins
[2,&] Source' Pub)isher
7nswer /71 is incorrect because *,8& is the
contribution margin
7nswer /B1 is incorrect because *,8& is the
contribution margin
7nswer /91 is correct ;he contribution margin in a
breaDe-en ana)6sis can be found b6 taDing the
re-enues per person and subtracting the -ariab)e cost
per person In this case, it wou)d be *$&& ! *2& 3
*,8&
7nswer /(1 is incorrect because *,8& is the
contribution margin
[2,1] Source' Pub)isher
7nswer /71 is incorrect because ,&8 is found b6 not
subtracting -ariab)e costs from re-enues to get the
contribution margin
7nswer /B1 is incorrect because ,1+ is found b6 not
inc)uding the *,,&&& of entertainment e2penses in the
fi2ed cost
7nswer /91 is correct ;he breaDe-en formu)a
e#uates operating income with re-enues minus fi2ed
costs minus -ariab)e costs B6 setting operating
income e#ua) to &, the number needed to breaDe-en
can be found
GI 3 5 ! F9 ! .9, or
*& 3 *$&&2 ! *2&,,&&& ! *2&2
*,8&2 3 *2&,,&&&
2 3 ,2$
7nswer /(1 is incorrect because ,,% is found b6
subtracting -ariab)e cost from the contribution margin
[2,2] Source' Pub)isher
7nswer /71 is incorrect because ,&, guests is found
b6 subtracting the *1&,&&& of desired income from
the fi2ed costs
7nswer /B1 is incorrect because ,2$ guests is the
amount needed to breaD e-en
7nswer /91 is incorrect because ,28 guests is found
b6 not subtracting the -ariab)e costs per person from
the re-enues per person to get the contribution
margin
7nswer /(1 is correct ;he breaDe-en formu)a
e#uates operating income with re-enues minus fi2ed
costs minus -ariab)e costs B6 setting operating
income e#ua) to the desired amount of income, the
number of guests re#uired can be disco-ered
GI 3 5 ! F9 ! .9, or
*1&,&&& 3 *$&&2 ! *2&,,&&& ! *2&2
*,8&2 3 *21,,&&&
2 3 ,,$8% or ,,: /cannot ha-e 8% of a person1
[2,%] Source' Pub)isher
7nswer /71 is incorrect because 2&& ticDet sa)es is
found b6 not subtracting the -ariab)e cost per person
from the re-enues per person
7nswer /B1 is correct In a breaDe-en ana)6sis, set
the operating income e#ua) to & and e#uate it with
re-enues minus fi2ed costs minus -ariab)e costs ;he
breaDe-en point is therefore
*& 3 *1&2 ! *2,&&& ! *22
*82 3 *2,&&&
2 3 2$&
7nswer /91 is incorrect because 2$& ticDet sa)es is
the amount needed to breaD e-en
7nswer /(1 is incorrect because 2$& ticDet sa)es is
the amount needed to breaD e-en
[2,,] Source' Pub)isher
7nswer /71 is incorrect because %,% ticDet sa)es is
found b6 not subtracting the -ariab)e cost per person
from the re-enues per person
7nswer /B1 is incorrect because ,&& ticDet sa)es is
the amount needed to breaD e-en
7nswer /91 is incorrect because ,&& ticDet sa)es is
the amount needed to breaD e-en
7nswer /(1 is correct In a breaDe-en ana)6sis, set
the operating income e#ua) to & and e#uate it with
re-enues minus fi2ed costs minus -ariab)e costs ;he
breaDe-en point is therefore
*& 3 *1,2 ! *,,8&& ! *22
*122 3 *,,8&&
2 3 ,&&
[2,$] Source' Pub)isher
7nswer /71 is incorrect because %&& ticDet sa)es is
found b6 not subtracting the -ariab)e cost from
re-enue in the sma)) -enue, and ,2A ticDet sa)es is
found b6 not subtracting the -ariab)e cost from
re-enues in the )arge -enue
7nswer /B1 is incorrect because ,2A ticDet sa)es is
found b6 not subtracting the -ariab)e cost from
re-enues in the )arge -enue
7nswer /91 is correct ;he breaDe-en formu)a
e#uates operating income with re-enue minus fi2ed
costs minus -ariab)e cost In this prob)em, set
operating income to *1,&&& do))ars and so)-e'
Sma))
!!!!!
*1,&&& 3 *1&2 ! *2,&&& ! *22
*82 3 *%,&&&
2 3 %+$
Iarge
!!!!!
*1,&&& 3 *1,2 ! *$,&&& ! *22
*122 3 *:,&&&
2 3 $&&
7nswer /(1 is incorrect because %&& ticDet sa)es is
found b6 not subtracting the -ariab)e cost from
re-enue in the sma)) -enue
[2,:] Source' Pub)isher
7nswer /71 is incorrect because *1$$ ignores the
-ariab)e manufacturing o-erhead from tota) -ariab)e
costs
7nswer /B1 is correct Jith the assumption that id)e
capacit6 is sufficient to manufacture 2,&&& e2tra units,
the goa) is to find a minimum price that wi)) not affect
the price or #uantit6 of other units so)d ;his minimum
price is e#ua) to the sum of the -ariab)e costs, *2&$
7nswer /91 is incorrect because *2%& is the amount
of the tota) costs, not the tota) -ariab)e costs
7nswer /(1 is incorrect because *%&& is the norma)
se))ing price
[2,+] Source' Pub)isher
7nswer /71 is incorrect because *2&$ is the
minimum price at )ess than fu)) capacit6
7nswer /B1 is incorrect because *2%& is the unit cost
at fu)) capacit6
7nswer /91 is correct ;o determine the minimum
price per unit, whi)e at fu)) capacit6, the differentia)
costs must be found ;he tota) cost of producing
12,&&& units is *2,82&,&&& W12,&&& units 2 [*2&$
-ariab)e cost S 12/*2$ fi2ed cost1]X ;hus, the tota)
differentia) cost is *$2&,&&& /*2,82&,&&& !
*2,%&&,&&&1, and the unit differentia) cost is *2:&
/*$2&,&&& ・2,&&& units1
7nswer /(1 is incorrect because *%&& is the price for
regu)ar orders
[2,8] Source' Pub)isher
7nswer /71 is incorrect because ,&& tons used on)6
fi2ed manufacturing costs rather than a)) fi2ed costs
7nswer /B1 is correct ;he breaDe-en formu)a sets
sa)es e#ua) to the sum of fi2ed and -ariab)e costs
;hus, sa)es e#ua) *2,+,$&& p)us &$$S ;he -ariab)e
costs of *,A$,&&& are $$> of the tota) sa)es of
*A&&,&&& JorDing through the formu)a, sa)es are
e#ua) to *$$&,&&& Because 1,8&& tons were so)d
for *A&&,&&&, the se))ing price is *$&& per ton
/*A&&,&&& ・1,8&& tons1 ;he breaDe-en point in
tons is the breaDe-en point in do))ars of *$$&,&&&
di-ided b6 *$&& per ton, or 1,1&& tons
S 3 *2,+,$&& S &$$S
&,$S 3 *2,+,$&&
S 3 *$$&,&&&
7nswer /91 is incorrect because A&& tons used
-ariab)e costs in the denominator instead of
contribution margin
7nswer /(1 is incorrect because $$& tons is ha)f of
the breaDe-en )e-e)
[2,A] Source' Pub)isher
7nswer /71 is correct Because the se))ing price is
*$&& per ton, sa)es wi)) be *1,&$&,&&& ;he
contribution margin ratio is ,$> /*,&$,&&& ・
*A&&,&&&1, resu)ting in a contribution margin of
*,+2,$&& 0et income before ta2es is the
contribution margin minus fi2ed costs of *2,+,$&&,
which e#ua)s *22$,&&& 0et income is *1%$,&&&
[/1& ! ,&>1 ta2 rate 2 *22$,&&&]
S 3 2,1&& 2 *$&& 3 *1,&$&,&&&
9" 3 &,$ 2 *1,&$&,&&& 3 *,+2,$&&
0IB; 3 *,+2,$&& ! *2,+,$&& 3 *22$,&&&
0I 3 &:& 2 *22$,&&& 3 *1%$,&&&
7nswer /B1 is incorrect because *11&,2$& in-erses
the -ariab)e cost and contribution margin
7nswer /91 is incorrect because *28%,$&& fai)s to
deduct non!manufacturing fi2ed costs
7nswer /(1 is incorrect because *18,,$&& fai)s to
deduct some fi2ed costs
[2$&] Source' Pub)isher
7nswer /71 is incorrect because *2A+,$&& fai)s to
deduct se))ing e2penses
7nswer /B1 is incorrect because *2$2,&&& ignores
administrati-e e2penses
7nswer /91 is correct ;ota) sa)es e#ua) *1,,2$,&&&
;he unit -ariab)e cost of sa)es is *2+$ /$$> of
*$&&1, and tota) -ariab)e cost of sa)es is *82$,&&&
/*2+$ 2 %,&&& units1 ;he contribution margin is
*1,,2$,&&& of sa)es minus *82$,&&& cost of sa)es
0et income before ta2es is *:&&,&&& minus
*2,+,$&& fi2ed costs, or *%$2,$&& 0et income is
:&> /1& ! ,&> ta2 rate1 of the net income before
ta2es of *%$2,$&&, or *211,$&&
S 3 /1,$&& 2 *,$&1 S /1,$&& 2 *$&&1 3 *1,,2$,&&&
9GCS 3 /%,&&& 2 *2+$1 3 *82$,&&&
9" 3 *1,,2$,&&& ! *82$,&&& 3 *:&&,&&&
0IB; 3 *:&&,&&& ! *2,+,$&& 3 *%$2,$&&
0I 3 &:& 2 *%$2,$&& 3 *211,$&&
7nswer /(1 is incorrect because *2$:,$&& mi2es
-ariab)e costs and contribution margin
[2$1] Source' Pub)isher
7nswer /71 is correct Ci-en that *:1,$&& is
re#uired for ad-ertising and promotion, these are
fi2ed costs that wi)) ha-e to be co-ered b6 the
contribution margin for sa)es in the new marDet of
*2&& each ;he unit contribution margin for regu)ar
sa)es was *22$ /,$> 2 *$&& se))ing price1, and there
is a *2$ additiona) -ariab)e commission e2pense for
sa)es in the new territor6 ;he ,$> contribution
margin is computed b6 di-iding the *,&$,&&&
contribution margin b6 the *A&&,&&& of sa)es ;hus,
the new unit contribution of *2&& is di-ided into
*:1,$&& of incrementa) fi2ed costs, resu)ting in
additiona) sa)es from the new program of %&+$ tons
at the breaDe-en point
7nswer /B1 is incorrect because 1,&A$& tons wou)d
resu)t in a greater profit
7nswer /91 is incorrect because 2+%%%% tons
ignores the increased commissions in the new
territor6
7nswer /(1 is incorrect because 1,$,$& tons resu)ts
in increased income
[2$2] Source' Pub)isher
7nswer /71 is incorrect because AA& tons ignores the
increase in fi2ed costs
7nswer /B1 is correct ;he new manufacturing fi2ed
cost wou)d be *%&:,&&& ;he new contribution
margin wou)d be *2$& per unit, which is the o)d
contribution margin of *22$ p)us the *2$ of -ariab)e
cost sa-ings per ton ;hus, the new breaDe-en point
wou)d be *%&:,&&& of fi2ed costs di-ided b6 the new
*2$& contribution margin per unit, or 1,22, tons
F9 3 *2,+,$&& S *$8,$&& 3 *%&:,&&&
O9" 3 *22$ S *2$ 3 *2$&
B@ 3 *%&:,&&& ・*2$& 3 1,22, tons
7nswer /91 is incorrect because 1,8$, tons wou)d
produce a profit
7nswer /(1 is incorrect because :12 tons is ha)f the
breaDe-en )e-e)
[2$%] Source' Pub)isher
7nswer /71 is incorrect because it resu)ts in an
income of )ess than *A,,$&&
7nswer /B1 is incorrect because it resu)ts in an
income of )ess than *A,,$&&
7nswer /91 is incorrect because *1,$&&,&&& resu)ts
in an income abo-e *A,,$&&
7nswer /(1 is correct ;he se))ing price per unit wi))
decrease from *$&& to *,$& ;he unit -ariab)e costs
wi)) increase from *2+$ to *%1$ 7)so, *1$+,$&& of
preta2 profit is re#uired to obtain *A,,$&& of
after!ta2 profit [*A,,$&& ・/1& ! ,&> ta2 rate1]
;hus, the number of units to be so)d e#ua)s %,&&&
[/*2,+,$&& F9 S *1$+,$&& preta2 profit1 ・/*,$& !
*%1$1 O9"] "u)tip)6ing %,&&& b6 the se))ing price
of *,$& resu)ts in *1,%$&,&&& of sa)es
[2$,] Source' Pub)isher
7nswer /71 is incorrect because a +&&!hour
deficienc6 is found b6 subtracting a-ai)ab)e )abor
hours from a-ai)ab)e machine hours
7nswer /B1 is correct ;he e2cess /deficienc61 for
machine hours in a gi-en department is found b6
initia))6 mu)tip)6ing machine hours re#uired per unit for
that product b6 demand for that product In this case,
the tota) wou)d be 1,&&& for :11, ,&& for :1%, and
2,&&& for :1$ ;he ne2t step is to add these numbers
together to get %,,&&, and subtract that from machine
hours a-ai)ab)e, %,&&& ;herefore, the e2cess
/deficienc61 for machine hours wou)d be %,&&& hours
! %,,&& hours to get a ,&&!hour deficienc6
7nswer /91 is incorrect because &!hour e2cess is
found b6 not inc)uding the ,&& hours from product
:1%
7nswer /(1 is incorrect because 1,1&&!hour e2cess
is found b6 not mu)tip)6ing the demand for the
products b6 hours re#uired per unit to produce that
product
[2$$] Source' Pub)isher
7nswer /71 is incorrect because a 1&&!hour
deficienc6 is found b6 adding the ,&&!hour deficienc6
in machine hours with the %&&!hour e2cess in )abor
hours
7nswer /B1 is correct ;he e2cess /deficienc61 for
)abor hours in a gi-en department is found b6 initia))6
mu)tip)6ing the )abor hours re#uired to produce a
product b6 the demand for that product ;he tota)s
wou)d then be 1,&&& for product :11, ,&& for
product :1%, and 2,&&& for product :1$ ;he tota)s
are then added together to get %,,&& hours ;his
number is then subtracted from )abor hours a-ai)ab)e,
%,+&&, to get an e2cess of %&& )abor hours
7nswer /91 is incorrect because a +&&!hour e2cess
is found b6 subtracting machine hours a-ai)ab)e from
)abor hours a-ai)ab)e
7nswer /(1 is incorrect because an 1,8&&!hour
e2cess is found b6 not mu)tip)6ing the )abor hours
re#uired to produce a product b6 the demand for that
product
[2$:] Source' Pub)isher
7nswer /71 is correct ;he contribution per machine
hour of a gi-en product is found b6 initia))6 ca)cu)ating
the contribution margin Product :1$ has a se))ing
price of *1:+ and -ariab)e costs of *A+ ;his gi-es a
contribution margin of *+& /*1:+ ! *A+1 ;he
contribution per machine hour is then found b6
di-iding the contribution per unit b6 the machine
hours re#uired to produce that product, or *+&
di-ided b6 2 hours to gi-e a contribution per machine
hour of *%$
7nswer /B1 is incorrect because *+& is the
contribution margin
7nswer /91 is incorrect because *A+ is the amount of
-ariab)e costs for product :1$
7nswer /(1 is incorrect because *1:+ is the se))ing
price of product :1$
[2$+] Source' Pub)isher
7nswer /71 is incorrect because ,&& units is the
amount of product :1% produced
7nswer /B1 is incorrect because $&& units is the
amount of product :11 produced
7nswer /91 is correct Jhen a compan6 has a
scarce resource machine hour capacit6, the compan6
shou)d ma2imi8e contribution per machine hour to
ma2imi8e o-era)) profits Because product :1$ has
the )owest contribution per machine hour of the three
products, product :1$ wi)) be produced using the
remaining hours after product :1% and product :11
ha-e been produced to e#ua) demand ;herefore, the
,&& hours needed to produce product :1% and the
1,&&& hours needed to produce product :11 are
subtracted from the %,&&& a-ai)ab)e machine hours
;his )ea-es a tota) of 1,:&& machine hours for
product :1$, which e#uates to 8&& units being
produced
7nswer /(1 is incorrect because 1,&&& units is the
amount of product :1$ that is demanded
[2$8] Source' Pub)isher
7nswer /71 is incorrect because *+1,2$& is found b6
mu)tip)6ing the number of products produced b6 the
contribution per machine hour
7nswer /B1 is correct ;he number of units being
produced for each product mu)tip)ied b6 the
contribution margin of the respecti-e product wi))
e#uate to the contribution of that product ;he
accumu)ation of the product contributions wi)) gi-e the
tota) contribution of a department'
Product :1% /,&& 2 *$&1 * 2&,&&&
Product :11 /$&& 2 *A%1 ,:,$&&
Product :1$ /8&& 2 *+&1 $:,&&&
!!!!!!!!
*122,$&&
33333333
7nswer /91 is incorrect because *1%:,$&& is found
b6 incorrect)6 producing 1,&&& units of product :1$
7nswer /(1 is incorrect because *28&,8&& is found
b6 mu)tip)6ing the number of products produced b6
the unit se))ing price
[2$A] Source' Pub)isher
7nswer /71 is incorrect because 1&,&&& hours is
found b6 di-iding the direct )abor per pressure -a)-e
b6 the manufacturing o-erhead rate to find the
standard direct )abor hour per finished -a)-e
7nswer /B1 is correct ;he manufacturing o-erhead
rate is *18 per standard direct )abor hour and the
standard product cost inc)udes *A of manufacturing
o-erhead per pressure -a)-e 7ccording)6, the
standard direct )abor hour per finished -a)-e is ス
hour /*A ・*181 ;herefore, %&,&&& units per month
wou)d re#uire 1$,&&& direct )abor hours
7nswer /91 is incorrect because %&,&&& is the
number of pressure -a)-es produced in a month
7nswer /(1 is incorrect because 12&,&&& is the tota)
number of -a)-es ordered
[2:&] Source' Pub)isher
7nswer /71 is incorrect because a *1:8,&&& )oss is
found b6 using a -ariab)e o-erhead rate of *A per
unit
7nswer /B1 is incorrect because a *12&,&&& )oss is
found b6 using a -ariab)e o-erhead rate of *A per
unit
7nswer /91 is correct ;he incrementa) re-enue is
found b6 taDing the *1A per unit price and mu)tip)6ing
it b6 the 12&,&&& units ordered ;hen, the -ariab)e
costs per unit are mu)tip)ied b6 12&,&&& to get a
*:&&,&&& cost for materia)s /*$ 2 12&,&&&1, a
*+2&,&&& cost for )abor /*: 2 12&,&&&1, and a
*%:&,&&& cost for o-erhead /*% 2 12&,&&&1 ;he
-ariab)e costs are added to the additiona) fi2ed
o-erhead cost of *,8,&&& /, months 2 *12,&&&1 to
get a tota) incrementa) cost of *1,+28,&&& ;hen, the
tota) cost is subtracted from the re-enue to get an
incrementa) profit before ta2 of *$$2,&&&
/*2,28&,&&& ! *1,+28,&&&1
7nswer /(1 is incorrect because a *:&&,&&& profit is
found b6 not subtracting the fi2ed o-erhead
[2:1] Source' Pub)isher
7nswer /71 is incorrect because *1, is found b6 not
adding the fi2ed cost
7nswer /B1 is correct ;he minimum unit price
without reducing net income must co-er -ariab)e
costs p)us the additiona) fi2ed cost ;herefore, the
three -ariab)e costs of *$&& for direct materia)s,
*:&& for direct )abor, and *%&& for -ariab)e
o-erhead are added to the additiona) fi2ed cost per
unit *,& /*,8,&&& ・12&,&&&1 ;he tota) is *1,,&
7nswer /91 is incorrect because *2& is found b6
using a -ariab)e o-erhead rate of *A and ignoring
fi2ed o-erhead
7nswer /(1 is incorrect because *2&,& is found b6
using a -ariab)e o-erhead rate of *A