Chapter13 Relevant Costing

Chapter 13
Relevant Costs for Decision-Making
True/False
1. One of the dangers of allocating common fixed costs to a product
T line is that such allocations can make the line appear less
Medium profitable than it really is.
2. Future costs that do not differ among the alternatives are not
T relevant in a decision.
Medium
3. Variable costs are always relevant costs.
F
Medium
4. An avoidable cost is a cost that can be eliminated (in whole or
T in part) as a result of choosing one alternative over another.
Easy
5. A sunk cost is a cost that has already been incurred and that
T cannot be avoided regardless of what action is chosen.
Easy
6. The book value of old equipment is not a relevant cost in an
T equipment replacement decision problem.
Easy
7. Only the variable costs identified with a product are relevant in
F a decision concerning whether to eliminate the product.
Medium
8. If by dropping a product a firm can avoid more in fixed costs
T than it loses in contribution margin, then the firm is better off
Easy economically if the product is dropped.
9. The cost of a resource that has no alternative use in a make or
T buy decision problem has an opportunity cost of zero.
Easy
10. Managers should pay little attention to bottleneck operations
F since they have limited capacity for producing output.
Hard
Managerial Accounting, 9/e 216
11. Opportunity costs are recorded in the accounts of an
F organization.
Easy
12. All other things equal, it is profitable to continue processing a
T joint product after the splitoff point so long as the
Easy incremental revenue from further processing exceeds the
incremental costs of further processing.
13. Joint production costs are relevant costs in decisions about what
F to do with a product from the splitoff point onward in the
Medium production process.
14. Two or more different products that are manufactured in the same
F production period are known as joint products.
Medium
15. A merchandising firm which buys all of its inventory from outside
F suppliers is an example of a firm that is vertically integrated.
Easy
Multiple Choice
16. Costs which are always relevant in decision making are those
B costs which are:
Easy a. variable.
b. avoidable.
c. sunk.
d. fixed.
17. Consider a decision facing a firm of either accepting or
D rejecting a special offer for one of its products. A cost that is
Easy not relevant is:
a. direct materials.
b. variable overhead.
c. fixed overhead that will be avoided if the special offer is
accepted.
d. common fixed overhead that will continue if the special offer
is not accepted.
18. To maximize total contribution margin, a firm faced with a
C production constraint should:
Easy a. promote those products having the highest unit contribution
margins.
b. promote those products having the highest contribution margin
ratios.
c. promote those products having the highest contribution margin
per unit of constrained resource.
d. promote those products have the highest contribution margins
and contribution margin ratios.
217Managerial Accounting, 9/e
19. A plant operating at capacity would suggest that:
B a. every machine and person in the plant is working at the
Hard maximum possible rate.
b. only some specific machines or processes are operating at the
maximum rate possible.
c. fixed costs will need to change to accommodate increased
demand.
d. managers should produce those products with the highest
contribution margin in order to deal with the constrained
resource.
20. Which of the following is not an effective way of dealing with a
C production constraint (i.e., bottleneck)?
Medium a. Reduce the number of defective units produced at the
bottleneck.
b. Pay overtime to workers assigned to the bottleneck.
c. Pay overtime to workers assigned to work stations located
after the bottleneck in the production process.
d. Subcontract work that would otherwise required use of the
bottleneck.
21. The opportunity cost of making a component part in a factory with
D no excess capacity is the:
Medium a. variable manufacturing cost of the component.
b. fixed manufacturing cost of the component.
c. cost of the production given up in order to manufacture the
component.
d. net benefit foregone from the best alternative use of the
capacity required.
22. A joint product is:
D a. any product which consists of several parts.
Easy b. any product produced by a firm with more than one product
line.
c. any product involved in a make or buy decision.
d. one of several products produced from a common input.
23. Consider the following statements:
D
Medium I. A vertically integrated firm is more dependent on its
suppliers than a firm that is not vertically integrated.
II. Many firms feel they can control quality better by making
their own parts.
III. A vertically integrated firm realizes profits from the
parts it is "making" instead of "buying" as well as
profits from its regular operations.
Which of the above statements represent advantages to a firm that
is vertically integrated?
a. Only I
b. Only III
c. Only I and II
d. Only II and III
24. The Lantern Corporation has 1,000 obsolete lanterns that are
A carried in inventory at a manufacturing cost of $20,000. If the
Easy lanterns are remachined for $5,000, they could be sold for
CPA adapted $9,000. Alternatively, the lanterns could be sold for scrap for
$1,000. Which alternative is more desirable and what are the
total relevant costs for that alternative?
a. remachine and $5,000.
b. remachine and $25,000.
c. scrap and $20,000.
d. scrap and $19,000.
25. Relay Corporation manufactures batons. Relay can manufacture
B 300,000 batons a year at a variable cost of $750,000 and a fixed
Medium cost of $450,000. Based on Relay's predictions for next year,
CPA adapted 240,000 batons will be sold at the regular price of $5.00 each.
In addition, a special order was placed for 60,000 batons to be
sold at a 40% discount off the regular price. Total fixed costs
would be unaffected by this order. By what amount would the
company's net operating income be increased or decreased as a
result of the special order?
a. $60,000 decrease.
b. $30,000 increase.
c. $36,000 increase.
d. $180,000 increase.
26. The manufacturing capacity of Jordan Company's facilities is
B 30,000 units a year. A summary of operating results for last year
Medium follows:
CPA adapted
Sales (18,000 units @ $100) .... $1,800,000
Variable costs ................. 990,000
Contribution margin ........... 810,000
Fixed costs .................... 495,000
Net operating income ........... $ 315,000
A foreign distributor has offered to buy 15,000 units at $90 per
unit next year. Jordan expects its regular sales next year to be
18,000 units. If Jordan accepts this offer and rejects some
business from regular customers so as not to exceed capacity,
what would be the total net operating income next year? (Assume
that the total fixed costs would be the same no matter how many
units are produced and sold.)
a. $390,000.
b. $705,000.
c. $840,000.
d. $855,000.
27. Wagner Company sells product A for $21 per unit. Wagner's unit
A product cost based on the full capacity of 200,000 units is as
Easy follows:
CPA adapted
Direct materials ..................... $ 4
Direct labor ......................... 5
Manufacturing overhead ............... 6
Unit product cost .................. $15
A special order offering to buy 20,000 units has been received
from a foreign distributor. The only selling costs that would be
incurred on this order would be $3 per unit for shipping. Wagner
has sufficient idle capacity to manufacture the additional units.
Twothirds of the manufacturing overhead is fixed and would not
be affected by this order. Assume that direct labor is an
avoidable cost in this decision. In negotiating a price for the
special order, the minimum acceptable selling price per unit
should be:
a. $14.
b. $15.
c. $16.
d. $18.
28. A study has been conducted to determine if one of the departments
C in Parry Company should be discontinued. The contribution margin
Easy in the department is $50,000 per year. Fixed expenses charged to
the department are $65,000 per year. It is estimated that $40,000
of these fixed expenses could be eliminated if the department is
discontinued. These data indicate that if the department is
discontinued, the company's overall net operating income would:
a. decrease by $25,000 per year.
b. increase by $25,000 per year.
c. decrease by $10,000 per year.
d. increase by $10,000 per year.
29. A study has been conducted to determine if Product A should be
C dropped. Sales of the product total $200,000 per year; variable
Easy expenses total $140,000 per year. Fixed expenses charged to the
product total $90,000 per year. The company estimates that
$40,000 of these fixed expenses will continue even if the product
is dropped. These data indicate that if Product A is dropped, the
company's overall net operating income would:
a. decrease by $20,000 per year.
b. increase by $20,000 per year.
c. decrease by $10,000 per year.
d. increase by $30,000 per year.
30. Lusk Company produces and sells 15,000 units of Product A each
A month. The selling price of Product A is $20 per unit, and
Easy variable expenses are $14 per unit. A study has been made
concerning whether Product A should be discontinued. The study
shows that $70,000 of the $100,000 in fixed expenses charged to
Product A would continue even if the product was discontinued.
These data indicate that if Product A is discontinued, the
company's overall net operating income would:
a. decrease by $60,000 per month.
b. increase by $10,000 per month.
c. increase by $20,000 per month.
d. decrease by $20,000 per month.
31. Manor Company plans to discontinue a department that has a
B contribution margin of $24,000 and $48,000 in fixed costs. Of the
Easy fixed costs, $21,000 cannot be avoided. The effect of this
CPA adapted discontinuance on Manor's overall net operating income would be
a(an):
a. decrease of $3,000.
b. increase of $3,000.
c. decrease of $24,000.
d. increase of $24,000.
32. Gata Co. plans to discontinue a department that has a $48,000
C contribution margin and $96,000 of fixed costs. Of these fixed
Easy costs, $42,000 cannot be avoided. What would be the effect of
CPA adapted this discontinuance on Gata's overall net operating income?
a. Increase of $48,000
b. Decrease of $48,000
c. Increase of $6,000
d. Decrease of $6,000
33. The Cook Company has two divisionsEastern and Western. The
B divisions have the following revenues and expenses:
Medium
Eastern Western
Sales ......................... $550,000 $500,000
Variable costs ................ 275,000 200,000
Direct fixed costs ............ 180,000 150,000
Allocated corporate costs ..... 170,000 135,000
Net income (loss) ............. (75,000) 15,000
The management of Cook is considering the elimination of the
Eastern Division. If the Eastern Division were eliminated, the
direct fixed costs associated with this division could be
avoided. However, corporate costs would still be $305,000 in
total. Given these data, the elimination of the Eastern Division
would result in an overall company net income (loss) of:
a. $15,000.
b. ($155,000).
c. ($75,000).
d. ($60,000).
34. Manor Company plans to discontinue a department that has a
B contribution margin of $25,000 and $50,000 in fixed costs.
Medium Of the fixed costs, $21,000 cannot be eliminated. The effect
on the profit of Manor Company of discontinuing this
department would be:
a. a decrease of $4,000.
b. an increase of $4,000.
c. a decrease of $25,000.
d. an increase of $25,000.
35. Green Company produces 1,000 parts per year, which are used in
D the assembly of one of its products. The unit product cost of
Easy these parts is:
Variable manufacturing cost ..... $12
Fixed manufacturing cost ........ 9
Unit product cost ............. $21
The part can be purchased from an outside supplier at $20 per
unit. If the part is purchased from the outside supplier, two
thirds of the fixed manufacturing costs can be eliminated. The
annual impact on the company's net operating income as a result
of buying the part from the outside supplier would be:
a. $1,000 increase.
b. $1,000 decrease.
c. $5,000 increase.
d. $2,000 decrease.
36. Pitkin Company produces a part used in the manufacture of one of
A its products. The unit product cost of the part is $33, computed
Easy as follows:
Direct materials ..................... $12
Direct labor ......................... 8
Variable manufacturing overhead ...... 3
Fixed manufacturing overhead ......... 10
An outside supplier has offered to provide the annual requirement
of 10,000 of the parts for only $27 each. The company estimates
that 30% of the fixed manufacturing overhead costs above will
continue if the parts are purchased from the outside supplier.
Assume that direct labor is an avoidable cost in this decision.
Based on these data, the per unit dollar advantage or
disadvantage of purchasing the parts from the outside supplier
would be:
a. $3 advantage.
b. $1 advantage.
c. $1 disadvantage.
d. $4 disadvantage.
37. Cardinal Company needs 20,000 units of a certain part to use in
B one of its products. The following information is available:
Easy
CPA adapted Cost to Cardinal to make the part:
Direct materials ................. $ 4
Direct labor ..................... 16
Variable manufacturing overhead .. 8
Fixed manufacturing overhead ..... 10
$38
Cost to buy the part from
the Oriole Company ............. $36
Oriole Company has offered to sell this part to Cardinal company
for $36 each. If Cardinal buys the part from Oriole instead of
making it, Cardinal would not have any use for the released
capacity. In addition, 60% of the fixed manufacturing overhead
costs will continue regardless of what decision is made. Assume
that direct labor is an avoidable cost in this decision. In
deciding whether to make or buy the part, the total relevant
costs to make the part are:
a. $560,000.
b. $640,000.
c. $720,000.
d. $760,000.
38. Golden, Inc., has been manufacturing 5,000 units of Part 10541
B which is used in one of its products. At this level of
Easy production, the unit product cost of Part 10541 is as follows:
CPA adapted
Direct materials ..................... $ 2
Direct labor ......................... 8
Variable manufacturing overhead ...... 4
Fixed manufacturing overhead ......... 6
Brown Company has offered to sell Golden 5,000 units of Part
10541 for $19 a unit. Golden has determined that two thirds of
the fixed manufacturing overhead will continue even if Part 10541
is purchased from Brown. Assume that direct labor is an avoidable
cost in this decision. To determine whether to accept Brown's
offer, the relevant costs to Golden of manufacturing the parts
internally are:
a. $70,000.
b. $80,000.
c. $90,000.
d. $95,000.
39. The following standard costs pertain to a component part
B manufactured by Ashby Company:
Easy
CPA adapted Direct materials ................. $ 2
Direct labor ..................... 5
Manufacturing overhead ........... 20
Standard cost per unit ........ $27
The company can purchase the part from an outside supplier for
$25 per unit. The manufacturing overhead is 60% fixed and this
fixed portion would not be affected by this decision. Assume that
direct labor is an avoidable cost in this decision. What is the
relevant amount of the standard cost per unit to be considered in
a decision of whether to make the part internally or buy it from
the external supplier?
a. $2
b. $15
c. $19
d. $27
40. The SP Company makes 40,000 motors to be used in the production
B of its sewing machines. The average cost per motor at this level
Medium of activity is:
Direct materials ............ $5.50
Direct labor ................ $5.60
Variable factory overhead ... $4.75
Fixed factory overhead ...... $4.45
An outside supplier recently began producing a comparable motor
that could be used in the sewing machine. The price offered to SP
Company for this motor is $18. If SP Company decides not to make
the motors, there would be no other use for the production
facilities and total fixed factory overhead costs would not
change. If SP Company decides to continue making the motor, how
much higher or lower would net income be than if the motors are
purchased from the outside suppler? Assume that direct labor is a
variable cost in this company.
a. $276,000 higher.
b. $86,000 higher.
c. $92,000 lower.
d. $178,000 higher.
41. Manico Company produces three products X, Y, & Z with the
B following characteristics:
Medium
X Y Z
o
Selling price per unit ...... $20 100% $16 100% $15 100%
Variable cost per unit ...... 12 60 12 75 6 40
Contribution margin per unit $ 8 40% $ 4 25% $ 9 60%
Machine hours per unit ...... 5 3 6
The company has only 2,000 machinehours available each month. If
demand exceeds the company's capacity, in what sequence should
orders be filled if the company wants to maximize its total
contribution margin?
a. orders for Z first, X second, and Y third.
b. orders for X first, Z second, and Y third.
c. orders for Y first, X second, and Z third.
d. orders for Z first and no orders for X or Y.
42. Consider the following production and cost data for two products,
B L and C:
Medium
Product L Product C
Contribution margin per unit ....... $130 $120
Machine setups needed per unit .... 10 setups 8 setups
The company can only perform 65,000 machine setups each period
due to limited skilled labor and there is unlimited demand for
each product. What is the largest possible total contribution
margin that can be realized each period?
a. $845,000.
b. $975,000.
c. $910,000.
d. $1,820,000.
43. Products A, B, and C are produced from a single raw material
B input. The raw material costs $90,000, from which 5,000 units of
Medium A, 10,000 units of B, and 15,000 units of C can be produced each
period. Product A can be sold at the splitoff point for $2 per
unit, or it can be processed further at a cost of $12,500 and
then sold for $5 per unit. Product A should be:
a. sold at the splitoff point, since further processing would
result in a loss of $0.50 per unit.
b. processed further, since this will increase profits by $2,500
each period.
c. sold at the splitoff point, since further processing will
result in a loss of $2,500 each period.
d. processed further, since this will increase profits by
$12,500 each period.
44. The Wyeth Company produces three products, A, B, and C, from a
C single raw material input. Product A can be sold at the splitoff
Easy point for $40,000, or it can be processed further at a total cost
of $15,000 and then sold for $58,000. Joint product costs total
$60,000 annually. Product A should be:
a. discontinued since revenues after further processing are less
than total joint product costs.
b. sold at the splitoff point.
c. processed further and then sold.
d. processed further only if its share of the total joint
product costs is less than the incremental revenues from
further processing.
45. WP Company produces products X, Y, and Z from a single raw
A material input in a joint production process. Budgeted data for
Medium the next month is as follows:

X Y Z
o
Units produced ............................. 1,500 2,000 3,000
Per unit sales value at splitoff .......... $19 $21 $24
Added processing costs per unit ............ $ 7 $7.50 $ 7
Per unit sales value if processed further .. $29 $29 $30
The cost of the joint raw material input is $149,000. Which of
the products should be processed beyond the splitoff point?

X Y Z o
a. yes yes no
b. no yes no
c. yes no yes
d. no yes yes
Reference: 131
The following are the Wyeth Company's unit costs of making and selling an item
at a volume of 10,000 units per month (which represents the company's
capacity):
Manufacturing:
Direct materials ............ $1.00
Direct labor ................ 2.00
Variable overhead ........... 0.50
Fixed overhead .............. 0.90
Selling and administrative:
Variable .................... 1.50
Fixed ....................... 0.60
Present sales amount to 9,000 units per month. An order has been received from
a customer in a foreign market for 1,000 units. The order would not affect
current sales. Fixed costs, both manufacturing and selling and administrative,
are constant within the relevant range between 8,000 and 10,000 units per
month. The variable selling and administrative costs would have to be incurred
for this special order as well as all other sales. Assume direct labor is a
variable cost.
46. How much will the company's net operating income be increased or
D (decreased) if it prices the 1,000 units in the special order at
Medium $6 each?
Refer To: a. ($500)
131 b. $400
c. $2,500
d. $1,000
47. Assume the company has 50 units left over from last year which
C have small defects and which will have to be sold at a reduced
Medium price as scrap. This would have no effect on the company's other
Refer To: sales. What cost is relevant as a guide for setting a minimum
131 price on these defective units?
a. $6.50
b. $5.00
c. $1.50
d. $3.50
Reference: 132
The Tolar Company has 400 obsolete desk calculators that are carried in
inventory at a total cost of $26,800. If these calculators are upgraded at a
total cost of $10,000, they can be sold for a total of $30,000. As an
alternative, the calculators can be sold in their present condition for
$11,200.
48. The sunk cost in this situation is:
B a. $10,000.
Easy b. $26,800.
Refer To: c. $11,200.
132 d. $0
49. What is the net advantage or disadvantage to the company from
A upgrading the calculators?
Medium a. $8,800 advantage
Refer To: b. $18,000 disadvantage
132 c. $20,000 advantage
d. $8,000 disadvantage
50. Assume that Tolar decides to upgrade the calculators. At what
C selling price per unit would the company be as well off as if it
Hard just sold the calculators in their present condition?
Refer To: a. $8
132 b. $30
c. $53
d. $67
Reference: 133
The Immanuel Company has just obtained a request for a special order of 6,000
jigs to be shipped at the end of the month at a selling price of $7 each. The
company has a production capacity of 90,000 jigs per month with total fixed
production costs of $144,000. At present, the company is selling 80,000 jigs
per month through regular channels at a selling price of $11 each. For these
regular sales, the cost for one jig is:
Variable production cost ... $4.60
Fixed production cost ...... 1.80
Variable selling expense ... 1.00
If the special order is accepted, Immanuel will not incur any selling expense;
however, it will incur shipping costs of $0.30 per unit.
51. If Immanuel accepts this special order, the change in the monthly
A net operating income will be a:
Medium a. $12,600 increase.
Refer To: b. $14,400 increase.
133 c. $3,600 increase.
d. $1,800 increase.
52. At what selling price per unit should Immanuel be indifferent
D between accepting or rejecting the special offer?
Medium a. $7.40
Refer To: b. $7.70
133 c. $6.40
d. $4.90
53. Suppose that regular sales of jigs total 85,000 units per month.
B All other conditions remain the same. If Immanuel accepts the
Hard special order, the change in monthly operating income will be:
Refer To: a. $14,400 increase.
133 b. $7,200 increase.
c. $3,600 decrease.
d. $5,400 decrease.
Reference: 134
The Varone Company makes a single product called a Hom. The company has the
capacity to produce 40,000 Homs per year. Per unit costs to produce and sell
one Hom at that activity level follow:
Direct materials .................... $20
Direct labor ........................ 10
Variable manufacturing overhead ..... 5
Fixed manufacturing overhead ........ 7
Variable selling expense ............ 8
Fixed selling expense ............... 2
The regular selling price for one Hom is $60. A special order has been
received at Varone from the Fairview Company to purchase 8,000 Homs next year
at 15% off the regular selling price. If this special order were accepted,
variable selling expense would be reduced by 25%. However, Varone would have
to purchase a specialized machine to engrave the Fairview name on each Hom in
the special order. This machine would cost $12,000 and it would have no use
after the special order was filled. The total fixed costs, both manufacturing
and selling, are constant within the relevant range of 30,000 to 40,000 Homs
per year. Assume direct labor is a variable cost.
54. If Varone can expect to sell 32,000 Homs next year through
D regular channels and the special order is accepted at 15% off the
Medium regular selling price, the effect on net operating income next
Refer To: year due to accepting this order would be a:
134 a. $52,000 increase.
c. $24,000 decrease.
55. If Varone can expect to sell 32,000 Homs next year through
C regular channels, at what special order price from Fairview
Hard should Varone be economically indifferent between either
Refer To: accepting or not accepting this special order?
134 a. $51.00
b. $48.20
c. $42.50
d. $39.60
56. If Varone has an opportunity to sell 37,960 Homs next year
A through regular channels and the special order is accepted for
Hard 15% off the regular selling price, the effect on net operating
Refer To: income next year due to accepting this order would be a:
134 a. $33,320 decrease
b. $33,320 increase
c. $35,480 decrease
d. $35,480 increase
Reference: 135
Eley Company produces a single product. The cost of producing and selling a
single unit of this product at the company's normal activity level of 40,000
units per month is as follows:
Direct materials .......................... $42.60
Direct labor .............................. 8.10
Variable manufacturing overhead ........... 1.10
Fixed manufacturing overhead .............. 17.30
Variable selling & administrative expense . 1.80
Fixed selling & administrative expense .... 8.00
The normal selling price of the product is $86.10 per unit.
An order has been received from an overseas customer for 2,000 units to be
delivered this month at a special discounted price. This order would have no
effect on the company's normal sales and would not change the total amount of
the company's fixed costs. The variable selling and administrative expense
would be $1.20 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
57. Suppose there is ample idle capacity to produce the units
C required by the overseas customer and the special discounted
Medium price on the special order is $76.40 per unit. By how much would
Refer To: this special order increase (decrease) the company's net
135 operating income for the month?
a. ($17,000)
b. $13,400
c. $48,000
d. ($5,000)
58. Suppose the company is already operating at capacity when the
A special order is received from the overseas customer. What would
Hard be the opportunity cost of each unit delivered to the overseas
Refer To: customer?
135 a. $32.50
b. $8.40
c. $9.70
d. $7.20
59. Suppose there is not enough idle capacity to produce all of the
D units for the overseas customer and accepting the special order
Hard would require cutting back on production of 700 units for regular
Refer To: customers. The minimum acceptable price per unit for the special
135 order is closest to:
a. $86.10.
b. $78.90.
c. $69.10.
d. $63.78.
Reference: 136
The Clemson Company reported the following results last year for the
manufacture and sale of one of its products known as a Tam.
Sales (6,500 Tams at $130 each) ............... $845,000
Variable cost of sales ........................ 390,000
Variable distribution costs ................... 65,000
Fixed advertising expense ..................... 275,000
Salary of product line manager ................ 25,000
Fixed manufacturing overhead .................. 145,000
Net loss ...................................... ($ 55,000)
Clemson Company is trying to determine whether or not to discontinue the
manufacture and sale of Tams. The operating results reported above for last
year are expected to continue in the foreseeable future if the product is not
dropped. The fixed manufacturing overhead represents the costs of production
facilities and equipment that the Tam product shares with other products
produced by Clemson. If the Tax product were dropped, there would be no change
in the fixed manufacturing costs of the company.
60. Assume that discontinuing the manufacture and sale of Tams will
C have no effect on the sale of other product lines. If the company
Medium discontinues the Tam product line, the change in annual operating
Refer To: income (or loss) should be:
136 a. $55,000 decrease.
b. $65,000 decrease.
61. Assume that discontinuing the Tam product would result in a
D $120,000 increase in the contribution margin of other product
Hard lines. How many Tams would have to be sold next year for the
Refer To: company to be as well off as if it just dropped the line and
136 enjoyed the increase in contribution margin from other products?
a. 5,000 units
b. 6,000 units
c. 6,500 units
d. 7,000 units
Reference: 137
Condensed monthly operating income data for Cosmo Inc. for November is
presented below. Additional information regarding Cosmo's operations follows
the statement.
Mall Town
Total Store Store
Sales ....................... $200,000 $80,000 $120,000
Less variable costs ......... 116,000 32,000 84,000
Contribution margin ......... 84,000 48,000 36,000
Less traceable fixed
expenses .................. 60,000 20,000 40,000
Store segment margin ........ 24,000 28,000 (4,000)
Less common fixed
expenses .................. 10,000 4,000 6,000
Operating income ............ $ 14,000 $24,000 $(10,000)
Threequarters of each store's traceable fixed expenses are avoidable if the
store were to be closed.
Cosmo allocates common fixed expenses to each store on the basis of sales
dollars.
Management estimates that closing the Town Store would result in a ten percent
decrease in Mall Store sales, while closing the Mall Store would not affect
Town Store sales.
The operating results for November are representative of all months.
62. A decision by Cosmo Inc. to close the Town Store would result in
B a monthly increase (decrease) in Cosmo's operating income of:
Hard a. $4,000.
CMA adapted b. $(10,800).
Refer To: c. $(800).
137 d. $(6,000).
63. Cosmo is considering a promotional campaign at the Town Store
D that would not affect the Mall Store. Increasing annual
Hard promotional expenses at the Town Store by $60,000 in order to
CMA adapted increase Town Store sales by ten percent would result in a
Refer To: monthly increase (decrease) in Cosmo's operating income of:
137 a. $(16,800).
b. $3,400.
c. $7,000.
d. $(1,400).
Reference: 138
The Western Company is considering the addition of a new product to its
current product lines. The expected cost and revenue data for the new product
are as follows:
Annual sales ..................................... 3,000 units
Selling price per unit ........................... $309
Variable costs per unit:
Production ..................................... $130
Selling ........................................ $ 50
Avoidable fixed costs per year:
Production ..................................... $51,000
Selling ........................................ $75,000
Unavoidable allocated fixed corporate
costs per year ............................... $54,000
If the new product is added to the existing product line, then sales of
existing products will decline. As a consequence, the contribution margin of
the other existing product lines is expected to drop $78,000 per year.
64. If the new product is added next year, the increase in net income
C resulting from this decision would be:
Hard a. $387,000.
Refer To: b. $261,000.
138 c. $183,000.
d. $207,000.
65. What is the lowest selling price per unit among those listed
D below that could be charged for the new product and still make it
Hard economically desirable to add the new product?
Refer To: a. $240.
138 b. $222.
c. $291.
d. $249
Reference: 139
Bingham Company manufactures and sells a product, Product J. Results for last
year for the manufacture and sale of Product J are as follows:
Sales10,000 units at $160 each .................... $1,600,000
Less costs:
Variable production costs ......................... 960,000
Sales commissions15% of sales ................... 240,000
Salaries of line supervisors ...................... 195,000
Traceable fixed advertising expense ............... 180,000
Fixed general factory overhead (allocated to
products on the basis of square feet occupied) .. 170,000
Total costs ..................................... 1,745,000
Net loss ............................................ $ (145,000)
Bingham Company anticipates no change in the operating result for Product J in
the foreseeable future if the product is produced. Bingham is reexamining all
of its products and is trying to decide whether to discontinue the manufacture
and sale of Product J. The company's total fixed factory overhead cost would
not be affected by this decision.
66. Assume that discontinuing the manufacture and sale of Product J
A will not affect the sale of other products. If the company
Medium discontinues Product J, the change in annual net income due to
Refer To: this decision will be a:
139 a. $25,000 decrease.
d. $315,000 decrease.
67. Assume that discontinuing Product J would result in a $30,000
C increase in the contribution margin of other product lines. If
Medium Bingham chooses to discontinue Product J, then the change in net
Refer To: income next year due to this action will be a:
139 a. $145,000 increase.
c. $5,000 increase.
68. Assume that discontinuing Product J would result in a $100,000
B increase in the contribution margin of other product lines. How
Hard many units of Product J would have to be sold next year for the
Refer To: company to be as well off as if it just dropped Product J and
139 enjoyed the increase in contribution margin from other products?
a. 2,500 units.
b. 11,875 units.
c. 16,125 units.
d. 15,500 units.
Reference: 1310
Hadley, Inc. makes a line of bathroom accessories. Because of a decline in
sales, the company has 10,000 machine hours of idle capacity available each
year. This idle capacity could be used by the company to make, rather than
buy, one of the components used in its production process. Hadley needs 5,000
units of this component each year. At present, the component is being
purchased from an outside supplier at $7.50 per unit. Variable production cost
for the component would be $4.10 per unit, and additional supervisory costs
would be $18,000 per year. Already existing fixed costs that would be
allocated to this part amount to $300,000 per year.
69. The change in the company’s overall annual net operating income
B that would result from making the component, rather than buying
Medium it, would be:
Refer To: a. $17,000 increase.
1310 b. $1,000 decrease.
d. $5,000 increase.
70. What would the annual cost of additional supervision have to be
D in order for Hadley to be economically indifferent between making
Hard or buying the component? (Assume all other conditions stay the
Refer To: same.)
1310 a. $20,000.
b. $19,000.
c. $18,000.
d. $17,000.
Reference: 1311
The Rodgers Company makes 27,000 units of a certain component each year for
use in one of its products. The cost per unit for the component at this level
of activity is as follows:
Direct materials .................... $4.20
Direct labor ........................ $12.00
Variable manufacturing overhead ..... $5.80
Fixed manufacturing overhead ........ $6.50
Rogers has received an offer from an outside supplier who is willing to
provide 27,000 units of this component each year at a price of $25 per
component. Assume that direct labor is a variable cost.
71. Assume that there is no other use for the capacity now being used
B to produce the component and the total fixed manufacturing
Medium overhead of the company would be unaffected by this decision. If
Refer To: Rogers Company purchases the components rather than making them
1311 internally, what would be the impact on the company's annual net
operating income?
a. $94,500 increase.
72. Assume that if the component is purchased from the outside
B supplier, $35,100 of annual fixed manufacturing overhead would be
Hard avoided and the facilities now being used to make the component
Refer To: would be rented to another company for $64,800 per year. If
1311 Rogers chooses to buy the component from the outside supplier
under these circumstances, then the impact on annual net
operating income due to accepting the offer would be:
a. $18,900 decrease.
Reference: 1312
Aholt Company makes 40,000 units per year of a part it uses in the products it
manufactures. The unit product cost of this part is computed as follows:
Direct materials ................. $11.30
Direct labor ..................... 22.70
Variable manufacturing overhead .. 1.20
Fixed manufacturing overhead ..... 24.70
Unit product cost .............. $59.90
An outside supplier has offered to sell the company all of these parts it
needs for $46.20 a unit. If the company accepts this offer, the facilities now
being used to make the part could be used to make more units of a product that
is in high demand. The additional contribution margin on this other product
would be $264,000 per year.
If the part were purchased from the outside supplier, all of the direct
labor cost of the part would be avoided. However, $21.90 of the fixed
manufacturing overhead cost being applied to the part would continue even if
the part were purchased from the outside supplier. This fixed manufacturing
overhead cost would be applied to the company's remaining products.
73. How much of the unit product cost of $59.90 is relevant in the
A decision of whether to make or buy the part?
Easy a. $38.00
Refer To: b. $59.90
1312 c. $35.20
d. $22.70
74. What is the net total dollar advantage (disadvantage) of
D purchasing the part rather than making it?
Medium a. $264,000
Refer To: b. ($328,000)
1312 c. $548,000
d. ($64,000)
75. What is the maximum amount the company should be willing to pay
B an outside supplier per unit for the part if the supplier commits
Hard to supplying all 40,000 units required each year?
Refer To: a. $6.60
1312 b. $44.60
c. $59.90
d. $66.50
Reference: 1313
Brown Company makes four products in a single facility. These products have
the following unit product costs:

Product
o
A B C D
Direct materials ................. $15.60 $19.50 $12.50 $15.20
Direct labor ..................... 17.60 21.00 15.40 9.40
Variable manufacturing overhead .. 4.40 5.60 8.10 5.10
Fixed manufacturing overhead ..... 27.50 14.40 14.50 16.50
Unit product cost ................ $65.10 $60.50 $50.50 $46.20
Additional data concerning these products are listed below.

Product

A B C D
Grinding minutes per unit ........ 2.00 1.10 0.70 0.30
Selling price per unit ........... $78.70 $71.10 $67.90 $62.60
Variable selling cost per unit ... $2.60 $3.10 $2.80 $3.50
Monthly demand in units .......... 3,000 2,000 2,000 4,000
The grinding machines are potentially the constraint in the production
facility. A total of 10,500 minutes are available per month on these machines.
76. How many minutes of grinding machine time would be required to
D satisfy demand for all four products?
Easy a. 10,500
Refer To: b. 10,700
1313 c. 11,000
d. 10,800
77. Which product makes the LEAST profitable use of the grinding
A machines?
Hard a. Product A
Refer To: b. Product B
1313 c. Product C
d. Product D
78. Which product makes the MOST profitable use of the grinding
D machines?
Hard a. Product A
1313 c. Product C
d. Product D
79. Up to how much should the company be willing to pay for one
D additional hour of grinding machine time if the company has made
Hard the best use of the existing grinding machine capacity? (Round
Refer To: off to the nearest whole cent.)
1313 a. $10.60
b. $21.90
c. $0.00
d. $19.25
Reference: 1314
Crane Company makes four products in a single facility. Data concerning these
products appear below:

Product

A B C D
Selling price per unit ............ $35.30 $30.20 $20.80 $26.00
Variable manuf. cost per unit...... $16.50 $15.80 $7.90 $8.50
Variable selling cost per unit .... $3.80 $1.60 $1.90 $3.30
Milling machine minutes per unit .. 3.30 1.70 2.10 2.50
Monthly demand in units ........... 4,000 1,000 3,000 1,000
The milling machines are potentially the constraint in the production
facility. A total of 22,600 minutes are available per month on these machines.
80. How many minutes of milling machine time would be required to
B satisfy demand for all four products?
Easy a. 22,600
Refer To: b. 23,700
1314 c. 18,400
d. 9,000
81. Which product makes the LEAST profitable use of the milling
A machines?
Medium a. Product A
1314 c. Product C
d. Product D
82. Which product makes the MOST profitable use of the milling
B machines?
Medium a. Product A
1314 c. Product C
d. Product D
83. Up to how much should the company be willing to pay for one
C additional hour of milling machine time if the company has made
Medium the best use of the existing milling machine capacity? (Round
Refer To: off to the nearest whole cent.)
1314 a. $11.00
b. $0.00
c. $4.55
d. $15.00
Reference: 1315
The Madison Company produces three products with the following costs and
selling prices:

A B C
o
Selling price per unit ............. $16 $21 $21
Variable cost per unit ............. 7 11 13
Contribution margin per unit ....... $ 9 $10 $ 8
Direct labor hours per unit ........ 1 1.5 2
Machine hours per unit ............. 4.5 2 2.5
84. If direct laborhours is the company's production constraint,
A then the three products should be produced in the order:
Medium a. A, B, C.
Refer To: b. B, C, A.
1315 c. C, A. B.
d. A, C, B.
85. If machinehours is Madison's production constraint, then the
C three products should be produced in the order:
Medium a. A, B, C.
Refer To: b. A, C, B.
1315 c. B, C, A.
d. C, A, B.
Reference: 1316
Austin Wool Products purchases raw wool and processes it into yarn. The
spindles of yarn can then be sold directly to stores or they can be used by
Austin Wool Products to make afghans. Each afghan requires one spindle of
yarn. Current cost and revenue data for the spindles of yarn and for the
afghans are as follows:
Data for one spindle of yarn:
Selling price .................................... $12
Variable production cost ......................... 8
Fixed production cost (based on 4,000 spindles
of yarn produced) ............................. 2
Data for one afghan:
Selling price .................................... $32
Production cost per spindle of yarn .............. 10
Variable production cost to process the
yarn into an afghan ............................ 9
Avoidable fixed production cost to process
the yarn into an afghan (based on 4,000
afghans produced) .............................. 5
Each month 4,000 spindles of yarn are produced that can either be sold
outright or processed into afghans.
86. If Austin chooses to produce 4,000 afghans each month, the change
B in the monthly net operating income as compared to selling 4,000
Medium spindles of yarn is:
Refer To: a. $24,000 decrease.
1316 b. $24,000 increase.
87. What is the lowest price Austin should be willing to accept for
D one afghan as long as it can sell spindles of yarn to the outside
Hard market for $12 each?
Refer To: a. $32
1316 b. $30
c. $28
d. $26
Reference: 1317
Dowchow Company makes two products from a common input. Joint processing costs
up to the splitoff point total $38,400 a year. The company allocates these
costs to the joint products on the basis of their total sales values at the
splitoff point. Each product may be sold at the splitoff point or processed
further. Data concerning these products appear below:
Product X Product Y Total
Allocated joint processing costs ...... $20,800 $17,600 $38,400
Sales value at splitoff point ........ $26,000 $22,000 $48,000
Costs of further processing ........... $22,600 $20,400 $43,000
Sales value after further processing .. $45,000 $45,900 $90,900
88. What is the net monetary advantage (disadvantage) of processing
D Product X beyond the splitoff point?
Easy a. $1,600
Refer To: b. $22,400
1317 c. $27,600
d. ($3,600)
89. What is the net monetary advantage (disadvantage) of processing
A Product Y beyond the splitoff point?
Medium a. $3,500
Refer To: b. $7,900
1317 c. $29,900
d. $25,500
90. What is the minimum amount the company should accept for Product
A X if it is to be sold at the splitoff point?
Hard a. $22,400
Refer To: b. $43,400
1317 c. $20,800
d. $45,000
Essay
91. Foster Company makes 20,000 units per year of a part it uses in
Hard the products it manufactures. The unit product cost of this part
is computed as follows:
Direct materials ................. $24.70
Direct labor ..................... 16.30
Variable manufacturing overhead .. 2.30
Fixed manufacturing overhead ..... 13.40
Unit product cost .............. $56.70
An outside supplier has offered to sell the company all of
these parts it needs for $51.80 a unit. If the company accepts
this offer, the facilities now being used to make the part could
be used to make more units of a product that is in high demand.
The additional contribution margin on this other product would be
$44,000 per year.
If the part were purchased from the outside supplier, all of
the direct labor cost of the part would be avoided. However,
$5.10 of the fixed manufacturing overhead cost being applied to
the part would continue even if the part were purchased from
the outside supplier. This fixed manufacturing overhead cost
would be applied to the company's remaining products.
Required:
a. How much of the unit product cost of $56.70 is relevant in
the decision of whether to make or buy the part?
b. What is the net total dollar advantage (disadvantage) of
purchasing the part rather than making it?
c. What is the maximum amount the company should be willing to
pay an outside supplier per unit for the part if the supplier
commits to supplying all 20,000 units required each year?
Answer:
a. Relevant cost per unit:
Direct materials .................. $24.70
Direct labor ...................... 16.30
Variable manufacturing overhead ... 2.30
Fixed manufacturing overhead ...... 8.30
Relevant manufacturing cost ... $51.60
b. Net advantage (disadvantage):
Manufacturing cost savings ........ $1,032,000
Additional contribution margin .... 44,000
Cost of purchasing the part ....... (1,036,000)
Net advantage (disadvantage) .. $40,000
c. Maximum acceptable purchase price:
Manufacturing cost savings ....... $1,032,000
Additional contribution margin ... $44,000
Total benefit .................... $1,076,000
Number of units .................. 20,000
Benefit per unit ................. $53.80
92. The Hyatt Company is trying to decide whether it should purchase
Medium new equipment and continue to make its subassemblies internally
or if production should be discontinued and the subassembly
purchased from an outside supplier.
New equipment for producing the subassemblies can be purchased at
a cost of $400,000. The equipment would have a fiveyear useful
life (the company uses straightline depreciation) and a $50,000
salvage value.
Alternatively, the subassemblies could be purchased from an
outside supplier. The supplier has offered to provide the
subassemblies for $9 each under a fiveyear contract.
Hyatt Company's present costs per unit of producing the
subassemblies internally (with the old equipment) are given
below. The costs are based on a current activity level of
40,000 subassemblies per year:
Direct materials ........................................ $ 3.00
Direct labor ............................................ 4.20
Variable overhead ....................................... 0.60
Fixed overhead ($0.80 supervision, $0.90 depreciation,
and $2 general company overhead) .................... 3.70
Total cost per unit ..................................... $11.50
The new equipment would be more efficient and would reduce direct
labor costs and variable overhead costs by 25%. Supervision cost
($30,000 per year) and direct materials cost per unit would not
be affected by the new equipment. The company has no other use
for the space now being used to produce the subassemblies. The
company's total general company overhead would not be affected by
this decision. Assume direct labor is a variable cost.
Required:
Assume that 40,000 subassemblies are needed each year. Prepare
an analysis of the two alternatives and make a recommendation
to the management of the company of the appropriate course of
action.
Answer:
The $2.00 per unit general overhead cost is not relevant to the
decision. This cost will continue regardless of which alternative
the
company should select. The depreciation of $0.90 per unit is
not a relevant cost since its represents a sunk cost (in
addition to the fact that the old equipment is worn out and
must be replaced). The cost of the new equipment is relevant
since the new equipment will not be purchased if the company
decides to accept the outside supplier's offer. The cost of
supervision is relevant since this cost can be avoided by
purchasing the subassemblies.
Cost Per Unit

Make Buy
o
Outside supplier's price..................... $9.00
Direct materials............................. $3.00
Direct labor ($4.20 x 0.75).................. 3.15
Variable overhead ($0.60 x 0.75)............. 0.45
Supervision.................................. 0.80
Depreciation................................. 1.75 o
Total........................................ $9.15 $9.00
Difference in favor of buying................ $0.15
Depreciation: ($400,000 $50,000)/5 years = $70,000 per year.
$70,000 per year/40,000 units = $1.75 per unit
At the level of 40,000 subassemblies per year, the company
should purchase the subassemblies from the outside supplier.
93. Benjamin Signal Company produces products R, J, and C from a
Medium joint production process. Each product may be sold at the split
off point or be processed further. Joint production costs of
$92,000 per year are allocated to the products based on the
relative number of units produced. Data for Benjamin's operations
for the current year are as follows:
Units Allocated Joint Sales Value
Product Produced Production Cost at Splitoff
R 8,000 $32,000 $76,000
J 10,000 40,000 71,000
C 5,000 20,000 48,000
Product R can be processed beyond the splitoff point for an
additional cost of $26,000 and can then be sold for $105,000.
Product J can be processed beyond the splitoff point for an
Product C can be processed beyond the splitoff point for an
Required:
Which products should be processed beyond the splitoff point?
Answer:

R J C
o
Sales value after further
processing..................... $105,000 $117,000 $57,000
Sales value at splitoff......... 76,000 71,000 48,000
Added sales value from processing 29,000 46,000 9,000
Added processing costs........... 26,000 38,000 12,000
Net gain (loss) from further
processing..................... $ 3,000 $ 8,000 $(3,000)
Products R and J should be processed beyond the splitoff point.
Product C should be sold at splitoff. Joint production costs are
not relevant to the decision to sell at splitoff or to process
further.
94. Bowen Company produces products P, Q, and R from a joint
Medium production process. Each product may be sold at the splitoff
point or be processed further. Joint production costs of $81,000
per year are allocated to the products based on the relative
number of units produced. Data for Bowen's operations for the
current year are as follows:
Allocated Joint Sales Value
Product Units Produced Production Cost at Splitoff
P 4,000 $28,000 $38,000
Q 7,000 49,000 47,000
R 2,000 14,000 16,000
Product P can be processed beyond the splitoff point for an
Product Q can be processed beyond the splitoff point for an
Product R can be processed beyond the splitoff point for an
Required:
Which products should be processed beyond the splitoff point?
Answer:

P Q R o
processing .................... $ 50,000 $ 65,000 $ 25,000
Sales value at splitoff......... 38,000 47,000 16,000
Added sales value from processing 12,000 18,000 9,000
Added processing costs........... 10,000 35,000 6,000
Net gain (loss) from further
processing..................... $ 2,000 $(17,000) $ 3,000
Products P and R should be processed beyond the splitoff point.
Product Q should be sold at splitoff. Joint production costs are
not relevant to the decision to sell at splitoff or to process
further.
95. (Ignore income taxes and the time value of money in this
problem.) Madison optometry is considering the purchase of a new
lens grinder to replace a machine that was purchased several
years ago. Selected information on the two machines is given
below:
Old New
Machine Machine
Original cost when new ............ $80,000 $85,000
Accumulated depreciation to date .. 32,000
Current salvage value ............. 26,000
Annual operating cost ............. 4,000 3,000
Remaining useful life ............. 4 years 4 years
Required:
Compute the total advantage or disadvantage of using the new
machine instead of the old machine over the next four years.
Answer:
The analysis of the alternatives appears below:
Old New
Machine Machine
Purchase cost .................... $(85,000)
Salvage value of old machine ..... 26,000
Operating cost for 4 years ....... $(16,000) (12,000)
Total cost ....................... $(16,000) $(71,000)
Therefore, the net disadvantage to purchasing and using the new
machine would be $55,000 since its total cost is $55,000 higher
than the total cost of using the old machine.
96. Juett Company produces a single product. The cost of producing
Hard and selling a single unit of this product at the company's normal
activity level of 70,000 units per month is as follows:
Direct materials ........................ $29.60
Direct labor ............................ 5.80
Variable manufacturing overhead ......... 2.50
Fixed manufacturing overhead ............ 17.20
Variable selling & administrative expense 1.80
Fixed selling & administrative expense .. 6.70
The normal selling price of the product is $72.90 per unit.
An order has been received from an overseas customer for 2,000
units to be delivered this month at a special discounted price.
This order would have no effect on the company's normal sales and
would not change the total amount of the company's fixed costs.
The variable selling and administrative expense would be $1.10
less per unit on this order than on normal sales.
Required:
a. Suppose there is ample idle capacity to produce the units
required by the overseas customer and the special discounted
price on the special order is $66.10 per unit. By how much
would this special order increase (decrease) the company's
net operating income for the month?
b. Suppose the company is already operating at capacity when the
special order is received from the overseas customer. What
would be the opportunity cost of each unit delivered to the
overseas customer?
c. Suppose there is not enough idle capacity to produce all of
the units for the overseas customer and accepting the
special order would require cutting back on production of
1,300 units for regular customers. What would be the minimum
acceptable price per unit for the special order?
Answer:
a.
Variable cost per unit on normal sales:
Direct materials ........................ $29.60
Direct labor ............................ 5.80
Variable manufacturing overhead ......... 2.50
Variable selling & administrative expense 1.80
Variable cost per unit on normal sales $39.70
Variable cost per unit on special order:
Normal variable cost per unit ........... $39.70
Reduction in variable selling & admin. .. 1.10
Variable cost per unit on special order $38.60
Selling price for special order ........... $66.10
Variable cost per unit on special order ... 38.60
Unit contribution margin on special order 27.50
Number of units in special order .......... 2,000
Increase (decrease) in net operating income $55,000
b. The opportunity cost is just the contribution margin on
normal sales:
Normal selling price per unit ............. $72.90
Variable cost per unit on normal sales .... 39.70
Unit contribution margin on normal sales .. $33.20
c. Minimum acceptable price:
Unit contribution margin on normal sales .. $33.20
Displaced normal sales .................... 1,300
Lost contribution margin displaced sales .. $43,160
Total variable cost on special order ...... $77,200
$120,360
Number of units in special order .......... 2,000
Minimum acceptable price on special order $60.18
97. When Mr. Ding L. Berry, president and chief executive of Berry,
Medium Inc., first saw the segmented income statement below, he flew
into his usual rage: "When will we ever start showing a real
profit? I'm starting immediate steps to eliminate those two
unprofitable lines!"

Product Lines o
Total U V W
Sales ................. $250,000 $100,000 $75,000 $75,000
Variable expenses ..... 119,000 37,500 35,000 47,000
Contribution margin ... 131,000 63,000 40,000 28,000
Traceable fixed
expenses* ........... 98,000 31,000 37,000 30,000
Common expenses,
allocated ........... 32,900 18,000 10,500 4,400
Operating income (loss) $ 100 $ 14,000 $(7,500) $(6,400)
*These traceable expenses could be eliminated if the product lines
to which they are traced were discontinued.
Required:
Recommend which segments, if any, should be eliminated. Prepare a
report in good form to support your answer.
Answer:
A segmented income report, without the allocation of common fixed
expenses, will provide the basis for deciding which segments to
drop.

Product Lines o
Total U V W
Sales ................. $250,000 $100,000 $75,000 $75,000
Variable expenses ..... 119,000 37,500 35,000 47,000
Contribution margin ... 131,000 63,000 40,000 28,000
Traceable fixed
expenses* ........... 98,000 31,000 37,000 30,000
Segment margin ........ 33,000 $ 32,000 $ 3,000 $(2,000)
Common expenses,
allocated ........... 32,900
Operating income (loss) $ 100
The only segment that possibly should be eliminated is segment W,
which shows a negative segment margin of $2,000.
98. Northern Stores is a retailer in the upper midwest. The most
Medium recent monthly income statement for Northern Stores is given
below:

Total Store I Store II
o
Sales .................... $2,100,000 $1,300,000 $ 800,000
Less variable expenses ... 1,260,000 882,000 378,000
Contribution margin ...... 840,000 418,000 422,000
Less traceable fixed
expenses .............. 420,000 231,000 189,000
Segment margin ........... 420,000 187,000 233,000
Less common fixed expenses 350,000 210,000 140,000
Net income ............... $ 70,000 $ (23,000) $ 93,000
Northern is considering closing Store I. If Store I is closed,
onefourth of its traceable fixed expenses would continue to be
incurred. Also, the closing of Store I would result in a 20%
decrease in sales in Store II. Northern allocates common fixed
expenses on the basis of sales dollars and none of these costs
would be saved if a store were shut down.
Required:
Compute the overall increase or decrease in the net income of
Northern Stores if Store I is closed.
Answer:
Loss in contribution is Store I is closed:
Store I contribution margin lost............... $(418,000)
Store II contribution margin lost
(20% x 422,000)........................... (84,400)
Total lost contribution........................ (502,400)
Fixed costs avoided if Store I is closed
(0.75 x 231,000).......................... 173,250_
Net decrease in income of closing Store I............ $(329,150)
99. The Anaconda Mining Company currently is operating at less than
Medium 50 percent of practical capacity. The management of the company
expects sales to drop below the present level of 15,000 tons of
ore per month very soon. The selling price per ton of ore is $2
and the variable cost per ton is $1. Fixed costs per month total
$15,000.
Management is concerned that a further drop in sales volume will
generate a loss and, accordingly, is considering the temporary
suspension of operations until demand in the metals markets
returns to normal levels and prices rebound. Management has
implemented a cost reduction program over the past year that has
been successful in reducing costs. Nevertheless, suspension of
operations appears to be the only viable alternative. Management
estimates that suspension of operations would reduce fixed costs
from $15,000 to $5,000 per month.
Required:
a. Why does management estimate that fixed costs will persist at
$5,000 per month even though the mine is temporarily closed?
b. At what sales volume should management suspend operations at
the mine?
Answer:
a. Some fixed costs will continue to incurred despite the
temporary closing of the mine. Key employees cannot be
discharged since these employees will seek employment
elsewhere and replacing them could prove to be quite costly.
A skeleton staff would be needed to perform some
administrative functions. Additionally, the maintenance of
building and equipment would need to continue to prevent
damage that would be costly to repair. Taxes and insurance
would continue to be paid during the shutdown period.
b. Suspension of operations would be desirable when sales volume
drops below 10,000 tons as shown below:
Fixed costs if mine continues to operate ........... $15,000
Fixed costs if mine is shut down ................... 5,000
Fixed costs to be recovered if mine is operated .... $10,000
Each ton extracted contributes $1.00 per ton towards
fixed costs:
Selling price per ton .............................. $2.00
Variable cost per ton .............................. 1.00
Contribution margin ................................ $1.00
Sales volume necessary to recover $10,000 of fixed costs:
$10,000  $1.00 = 10,000 tons
100. Kramer Company makes 4,000 units per year of a part called an
Hard axial tap for use in one of its products. Data concerning the
unit production costs of the axial tap follow:
Direct materials ...................... $35
Direct labor .......................... 10
Variable manufacturing overhead ....... 8
Fixed manufacturing overhead .......... 20
Total manufacturing cost per unit ..... $73
An outside supplier has offered to sell Kramer Company all of the
axial taps it requires. If Kramer Company decided to discontinue
making the axial taps, 40% of the above fixed manufacturing
overhead costs could be avoided. Assume that direct labor is a
variable cost.
Required:
a. Assume Kramer Company has no alternative use for the
facilities presently devoted to production of the axial taps.
If the outside supplier offers to sell the axial taps for $65
each, should Kramer Company accept the offer? Fully support
your answer with appropriate calculations.
b. Assume that Kramer Company could use the facilities presently
devoted to production of the axial taps to expand production
of another product that would yield an additional contribution
margin of $80,000 annually. What is the maximum price Kramer
Company should be willing to pay the outside supplier for
axial taps?
Answer:
a. The analysis of the alternatives follows below:
Make Buy
Purchase cost .................... $65
Direct materials ................. $35
Direct labor ..................... 10
Variable manufacturing overhead .. 8
Fixed manufacturing overhead ..... 8*
Total cost ....................... $61 $65
* 40% x $20
The company should make the part rather than buy it from the
outside supplier since it costs $4 less under that
alternative.
b. The maximum acceptable price is $81 since that is the cost to
the company of making the part itself when the opportunity
cost is included:
Total cost of making the part internally ..... $61
Opportunity cost per unit ($80,000 ÷ 4,000) .. 20
Total ........................................ $81
101. Glocker Company makes three products in a single facility. These
Medium products have the following unit product costs:

Products o
A B C
Direct materials ................. $10.90 $15.80 $ 8.00
Direct labor ..................... 12.50 12.60 9.90
Variable manufacturing overhead .. 2.40 1.20 1.40
Fixed manufacturing overhead ..... 11.60 7.20 7.80
Unit product cost ................ $37.40 $36.80 $27.10
Additional data concerning these products are listed below.

Products o
A B C
Mixing minutes per unit .......... 2.00 1.00 0.50
Selling price per unit ........... $55.80 $54.60 $43.10
Variable selling cost per unit ... $2.10 $1.40 $1.90
Monthly demand in units .......... 2,000 1,000 3,000
The mixing machines are potentially the constraint in the
production facility. A total of 5,900 minutes are available per
month on these machines.
Required:
a. How many minutes of mixing machine time would be required to
satisfy demand for all four products?
b. How much of each product should be produced to maximize net
operating income? (Round off to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one
additional hour of mixing machine time if the company has
made the best use of the existing mixing machine capacity?
(Round off to the nearest whole cent.)
Answer:
a. Demand on the mixing machine:

Products o
A B C
Total minutes required ......... 4,000 1,000 1,500
Total time required for all products: 6,500
b. Optimal production plan:

Products o
A B C
Direct materials ................. $10.90 $15.80 $8.00
Direct labor ..................... 12.50 12.60 9.90
Variable selling cost per unit ... 2.10 1.40 1.90
Total variable cost per unit .. $27.90 $31.00 $21.20
Contribution margin per unit ..... $27.90 $23.60 $21.90
Contribution margin per minute ... $13.95 $23.60 $43.80
Rank in terms of profitability ... 3 2 1
Optimal production ............... 1,700 1,000 3,000
c. The company should be willing to pay up to the contribution
margin per minute for the marginal job, which is $13.95.
102. Holt Company makes three products in a single facility. Data
Medium concerning these products follow:

Products o
A B C
Direct materials ................. $12.10 $10.30 $8.60
Direct labor ..................... $14.10 $8.00 $6.80
Variable manufacturing overhead .. $2.60 $2.20 $1.80
Variable selling cost per unit ... $2.50 $2.20 $2.50
The mixing machines are potentially the constraint in the
production facility. A total of 25,800 minutes are available per
month on these machines.
Required:
a. How many minutes of mixing machine time would be required to
satisfy demand for all four products?
b. How much of each product should be produced to maximize net
operating income? (Round off to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one
additional hour of mixing machine time if the company has
made the best use of the existing mixing machine capacity?
(Round off to the nearest whole cent.)
Answer:
a. Demand on the mixing machine:

Products o
A B C
Total minutes required ......... 2,700 9,900 14,100
Total time required for all products: 26,700
b. Optimal production plan:

Products o
A B C
Direct materials ................. $12.10 $10.30 $ 8.60
Direct labor ..................... 14.10 8.00 6.80
Variable selling cost per unit ... 2.50 2.20 2.50
Total variable cost per unit .. $31.30 $22.70 $19.70
Contribution margin per unit ..... $36.60 $35.00 $24.20
Contribution margin per minute ... $13.56 $10.61 $ 5.15
Rank in terms of profitability ... 1 2 3
Optimal production ............... 1,000 3,000 2,809
c. The company should be willing to pay up to the contribution
margin per minute for the marginal job, which is $5.15.
103. Redner, Inc. produces three products. Data concerning the selling
Hard prices and unit costs of the three products appear below:

Product

J K L
Selling price .......... $80 $60 $90
Variable costs ......... 50 40 55
Fixed costs ............ 25 8 22
Grinding machine time .. 10 min. 5 min. 7 min.
Fixed costs are applied to the products on the basis of direct
labor hours.
Demand for the three products exceeds the company's productive
capacity. The grinding machine is the constraint, with only 2,400
minutes of grinding machine time available this week.
Required:
a. Given the grinding machine constraint, which product should
be emphasized? Support your answer with appropriate
calculations.
b. Assuming that there is still unfilled demand for the product
that the company should emphasize in part (a) above, up to
how much should the company be willing to pay for an
additional hour of grinding machine time?
Answer:
a. The product to emphasize can be determined by computing the
contribution margin per unit of the scarce resource, which in
this case is grinding machine time.

Product

J K L
Selling price .......... $80 $60 $90
Variable costs ......... 50 40 55
Contribution margin .... $30 $20 $35
Grinding machine time .. 10 min. 5 min. 7 min.
Contribution margin
per minute ........... $3.00 $4.00 $5.00
Product L should be emphasized because it has the greatest
contribution margin per unit of the scarce resource.
b. If additional grinding machine time would be used to produce
more of Product L, the time would be worth 60 x $5 = $300 per
hour.
104. Iaci Company makes two products from a common input. Joint
hard processing costs up to the splitoff point total $42,000 a year.
The company allocates these costs to the joint products on the
basis of their total sales values at the splitoff point. Each
product may be sold at the splitoff point or processed further.
Data concerning these products appear below:
Product X Product Y Total
Allocated joint processing costs .. $22,400 $19,600 $42,000
Sales value at splitoff point .... $32,000 $28,000 $60,000
Costs of further processing ....... $11,600 $25,300 $36,900
processing ...................... $40,800 $54,200 $95,000
Required:
a. What is the net monetary advantage (disadvantage) of
processing Product X beyond the splitoff point?
b. What is the net monetary advantage (disadvantage) of
processing Product Y beyond the splitoff point?
c. What is the minimum amount the company should accept for
Product X if it is to be sold at the splitoff point?
d. What is the minimum amount the company should accept for
Product Y if it is to be sold at the splitoff point?
Answer:
a. & b.
Product X Product Y
Sales value after further processing $40,800 $54,200
Costs of further processing ........ 11,600 25,300
Benefit of further processing ...... 29,200 28,900
Less: Sales value at splitoff point 32,000 28,000
Net advantage (disadvantage) ......... ($ 2,800) $ 900
c. & d.
Minimum selling price at splitoff ... $29,200 $28,900
105. Harris Corp. manufactures three products from a common input in a
Medium joint processing operation. Joint processing costs up to the
splitoff point total $200,000 per year. The company allocates
these costs to the joint products on the basis of their total
sales value at the splitoff point.
Each product may be sold at the splitoff point or processed
further. The additional processing costs and sales value after
further processing for each product (on an annual basis) are:
Sales Value
Sales Value Further After Further
Product at SplitOff Processing Costs Processing
J $180,000 $ 60,000 $230,000
K $135,000 $105,000 $280,000
L $ 95,000 $ 85,000 $160,000
The "Further Processing Costs" consist of variable and avoidable
fixed costs.
Required:
Which product or products should be sold at the splitoff point,
and which product or products should be processed further? Show
computations.
Answer:

Product

J K L
Sales value after
further processing .. $230,000 $280,000 $160,000
Sales value at
splitoff ........... 180,000 135,000 95,000
Incremental revenue .... 50,000 145,000 65,000
Further processing costs 60,000 105,000 85,000
Incremental income (loss) $(10,000) $ 40,000 $(20,000)
Product K should be sold after further processing beyond the
splitoff point. Products J and L should be sold at the split
off point without any further processing.

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Chapter 13

Relevant Costs for Decision-Making

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