Quiz 7 Answers & Explanations

1.

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:

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.

What is the lowest selling price per unit among those listed below that could be charged for the
new product and still make it economically desirable to add the new product?
A. $240
B. $222
C. $291
D. $249

The selling price would have to cover the total cost of $744,000. On a per unit basis, this would
be $744,000  3,000 units = $248 per unit. The lowest selling price that is listed that is larger
than $248 per unit is $249 per unit.
Quiz 7 Answers & Explanations

2.

Condensed monthly operating income data for Cosmo Inc. for November is presented below.
Additional information regarding Cosmo's operations follows the statement.

Three-quarters 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.

A decision by Cosmo Inc. to close the Town Store would result in a monthly increase (decrease)
in Cosmo's operating income of:
A. $4,000
B. $(10,800)
C. $(800)
D. $(6,000)
Quiz 7 Answers & Explanations

3.

Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's
costs to produce 200,000 wheels annually are as follows:

An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels
are purchased from the outside supplier, $25,000 of annual fixed manufacturing overhead would
be avoided and the facilities now being used to make the wheels would be rented to another
company for $55,000 per year.

What is the highest price that Talboe could pay the outside supplier for each wheel and still be
economically indifferent between making or buying the wheels?
A. $0.95
B. $1.15
C. $1.00
D. $1.05

The company could pay up to $1.05 per unit ($210,000  200,000 units).
Quiz 7 Answers & Explanations

4.

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:

Rodgers 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. None of the fixed manufacturing overhead would be avoidable if this component were
purchased from the outside supplier.

Assume that there is no other use for the capacity now being used to produce the component and
the total fixed manufacturing overhead of the company would be unaffected by this decision. If
Rodgers Company purchases the components rather than making them internally, what would be
the impact on the company's annual net operating income?
A. $94,500 increase
B. $81,000 decrease
C. $237,600 decrease
D. $124,000 increase

Expenses would increase by $81,000 (= $675,000 - $594,000), so annual net operating income
would decrease by $81,000.
Quiz 7 Answers & Explanations

5.

(USE Q4 ABOVE INFORMATION)

Assume that if the component is purchased from the outside supplier, $35,100 of annual fixed
manufacturing overhead would be avoided and the facilities now being used to make the
component would be rented to another company for $64,800 per year. If Rodgers 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
B. $18,900 increase
C. $21,400 decrease
D. $21,400 increase

Expenses would decrease by $18,900 (= $629,100 - $610,200), so annual net operating income
would increase by $18,900.
Quiz 7 Answers & Explanations

6.

Elhard 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:

The normal selling price of the product is $51.10 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 $0.10 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.

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 $41.60 per unit. By how much would this
special order increase (decrease) the company's net operating income for the month?
A. $2,000
B. $25,200
C. $(8,400)
D. $(18,800)
Quiz 7 Answers & Explanations

7.

(USE Q6 ABOVE INFORMATION)

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 200 units for regular
customers. The minimum acceptable price per unit for the special order is closest to:
A. $38.80
B. $31.20
C. $51.10
D. $45.80

Minimum acceptable price:

Quiz 7 Answers & Explanations

8.

Broze Company makes four products in a single facility. These products have the following unit
product costs:

Additional data concerning these products are listed below.

The grinding machines are potentially the constraint in the production facility. A total of 53,600
minutes are available per month on these machines.
Direct labor is a variable cost in this company.

How many minutes of grinding machine time would be required to satisfy demand for all four
products?
A. 56,100
B. 40,900
C. 53,600
D. 13,000
Quiz 7 Answers & Explanations

9.

(USE Q8 INFORMATION ABOVE)

Up to how much should the company be willing to pay for one additional minute of grinding
machine time if the company has made the best use of the existing grinding machine capacity?
(Round off to the nearest whole cent.)
A. $35.90
B. $0.00
C. $8.58
D. $11.60

The company should be willing to pay up to the contribution margin per minute for the marginal
job, which is $8.58 per minute for Product C.
Quiz 7 Answers & Explanations

10.

Dodrill Company makes two products from a common input. Joint processing costs up to the
split-off point total $43,200 a year. The company allocates these costs to the joint products on the
basis of their total sales values at the split-off point. Each product may be sold at the split-off
point or processed further. Data concerning these products appear below:

What is the minimum amount the company should accept for Product X if it is to be sold at the
split-off point?
A. $26,800
B. $19,800
C. $52,200
D. $45,200

The minimum amount the company should accept for Product X if it is to be sold at the split-off
point is $26,800.