Professional Documents
Culture Documents
SHORT-TERM DECISIONS
AND
ACCOUNTING INFORMATION
2nd Semester, 2019-2020
Multiple Choice
a 1. The salary or wage that you could be earning while you are taking this test is
a. an opportunity cost.
b. a sunk cost.
c. an incremental cost.
d. a joint cost.
b 3. The role of sunk costs in decision making can be summed up in which of the following sayings?
a. Nothing ventured, nothing gained.
b. Bygones are bygones.
c. A penny saved is a penny earned.
d. The love of money is the root of all evil.
a 5. The Robinson-Patman Act forbids charging different prices to different customers unless
a. the price differences are justified by differences in distribution costs.
b. prices offered competitors are fully disclosed to all customers.
c. such prices produce profits no greater than normal profits.
d. the customers are located within the seller's state.
a 7. From its refining process an oil company obtains three products, one of which can be processed further into a different product,
the other two of which can be sold after further refining. The refining process is
a. a joint process.
b. a mixed cost process.
c. an unavoidable process.
d. a process whose costs should be allocated to the resulting products.
b 8. The Accessories Department shows sales of $35,000. Variable costs are $30,000 and allocated unavoidable fixed costs are
$9,000, leaving a $4,000 loss. Based on this information and all other things equal,
a. the department contributes $35,000 to total profits.
b. dropping the department will reduce total company profits by $5,000.
c. the department should be closed.
d. the department should be kept only if unit volume can be increased enough to increase sales by $4,000.
b 11. Which of the following costs is relevant in deciding whether to sell joint products at split-off or process them further?
a. The unavoidable costs of further processing.
b. The avoidable costs of further processing.
c. The variable cost of operating the joint process.
d. The cost of materials used to make the joint products.
d 13. Which of the following is a short-term decision in which opportunity costs are not relevant?
a. Make-or-buy decision.
b. Special-order decision.
c. Drop-a-segment decision.
d. None of the above.
b 15. A company has space that it uses to make a component. It could rent the space to another company. The rent is
a. a sunk cost.
b. an opportunity cost.
c. a joint cost.
d. an avoidable cost.
a 16. Escanaba Company has 200 units of an obsolete component. The variable cost to produce them was $10 per unit. They could
now be sold for $1.75 each and it would cost $7.60 to make them now. If the units could be used to make a product for a
special order, their relevant cost is
a. $ 1.75.
b. $ 7.60.
c. $10.00.
d. some other number.
b 23. Which of the following statements pertaining to the Theory of Constraints is true?
a. Inventory is evil and should never be kept.
b. Inventory is important to keep immediately before a bottleneck process.
c. Inventory should be kept before every machining process to prevent any downtime.
d. None of the above are true.
c 24. Which of the following cost-classification schemes is most relevant to decision making?
a. Fixed--variable.
b. Joint--common
c. Avoidable--unavoidable.
d. Direct--common.
d 25. Which of the following is NOT relevant in deciding whether to process a joint product beyond its split-off point?
a. The split-off value.
b. The price after additional processing.
c. The cost of further processing.
d. The cost of operating the joint process.
c 26. Benson Company has 200 units of an obsolete part. The variable cost to produce them was $4 per unit. They could now be sold
for $3 each and it would cost $6 to make them now. The parts could be reworked for $8 each and sold for $17. What is the
monetary advantage of reworking the parts over the next-best action?
a. $ 600.
b. $1,000.
c. $1,200.
d. $2,000.
b 27. Pueblo Company sells a product for $60. Variable cost is $32. Pueblo could accept a special order for 1,000 units at $46. If
Pueblo accepted the order, how many units could it lose at the regular price before the decision became unwise?
a. 1,000.
b. 500.
c. 200.
d. 0.
c 31. Which of the following is NOT relevant in a make-or-buy decision about a part the entity uses in some of its products?
a. The reliability of the outside supplier.
b. The alternative uses of owned equipment used to make the part.
c. The outside supplier's per-unit variable cost to make the part.
d. The number of units of the part needed each period.
d 32. Which of the following is NOT relevant to a decision about whether to drop a segment?
a. The contribution margin expected to be produced by the segment.
b. The avoidable fixed costs direct to that segment.
c. The complementary effects of dropping the segment.
d. "None of the above" is the best answer because all of the above are relevant.
a 33. Just-in-time manufacturers are less likely than conventional manufacturing companies to
a. operate a joint process that results in joint products.
b. be able to accommodate special orders.
c. have constraints on their productive capacity.
d. fit any of the above characterizations.
c 35. Buchanan Company currently sells 4,000 units of product Q for $1 each. Capacity is 5,000 units. Variable costs are $0.40 and
avoidable fixed costs are $400. A chain store has offered $0.80 per unit for 400 units of Q. If Buchanan accepts the order, the
change in income will be a
a. $60 decrease.
b. $80 decrease.
c. $160 increase.
d. $480 increase.
a 36. Tyler Company currently sells 1,000 units of product M for $1 each. Variable costs are $0.40 and avoidable fixed costs are $400.
A discount store has offered $0.80 per unit for 400 units of product M. The managers believe that if they accept the special
order, they will lose some sales at the regular price. Determine the number of units they could lose before the order became
unprofitable.
a. 267 units
b. 500 units
c. 600 units
d. Some other number.
b 37. Bear Valley produces three products: A, B, and C. One machine is used to produce the products. The contribution margins,
sales demands, and time on the machine (in minutes) are as follows:
Time on
Demand CM machine
------ ---- --------
A 100 $25 10
B 80 18 5
C 150 30 10
There are 2400 minutes available on the machine during the week. How many units should be produced and sold to
maximize the weekly contribution?
A B C
a. 100 80 150
b. 50 80 150
c. 90 0 150
d. 100 80 100
d 38. Elk Grove produces three products: A, B, and C. A machine is used to produce the products. The contribution margins, sales
demands, and time on the machine (in minutes) are as follows:
Time on
Demand CM machine
------ ---- --------
A 120 $20 5
B 80 36 10
C 100 50 15
There are 2400 minutes available on the machine during the week. How many units should be produced and sold to
maximize the weekly contribution?
A B C
a. 120 80 100
b. 20 80 100
c. 120 30 100
d. 120 80 66
a 39. Black Oak Company makes and sells oak boxes for a price of $60 each. Unit costs based on anticipated monthly sales of
1,000 boxes are as follows:
A chain store has offered to buy 100 boxes per month at $58 each. To accept this special order, Black Oak will have
to restrict its sales to regular customers to only 900 boxes per monthly because its production capacity cannot be
expanded in the short run. However, no variable selling expenses will be incurred for this special order. If Black Oak
accepts the chain store's offer, its profit will
a. increase by $300.
b. increase by $500.
c. decrease by $200.
d. decrease by $500.
a 40. Medford Corporation operates a plant with a productive capacity to manufacture 20,000 units of its product a year. The follow
information pertains to the production costs at capacity:
A supplier has offered to sell 4,000 units to Medford annually. Assume no change in the fixed costs. What is the price per
unit that makes Medford indifferent between the "make" and "buy" options?
a. $8
b. $12
c. $20
d. $0
b 41. DJH Company produces 1,000 units of Part X per month. The total manufacturing costs of the part are as follows:
Direct materials $10,000
Direct labor 15,000
Variable overhead 5,000
Fixed overhead 30,000
-------
Total manufacturing cost $60,000
=======
An outside supplier has offered to supply the part at $40 per unit. It is estimated that 20% of the fixed overhead assigned to
Part X will no longer be incurred if the company purchases the part from the outside supplier. If DJH Company purchases
1,000 units of Part X from the outside supplier per month, then its monthly operating income will
a. decrease by $20,000.
b. decrease by $4,000.
c. not change.
d. increase by $20,000.
c 42. DJH Company produces 1,000 units of Part X per month. The total manufacturing costs of the part are as follows:
c 43. Scooter Company produces three products from a joint process costing $100,000. The following information is available:
b 44. Genco Company produces three products from a joint process costing $100,000. The following information is available:
c 45. Colfax Company expects to incur the following costs at the planned production level of 10,000 units:
The selling price is $50 per unit. The company currently operates at full capacity of 10,000 units. Capacity can be increased
to 13,000 units by operating overtime. Variable costs increase by $14 per unit for overtime production. Fixed overhead costs
remain unchanged when overtime operations occur. Colfax Company has received a special order from a wholesaler who has
offered to buy 1,000 units at $45 each. What is the incremental cost associated with this special order?
a. $14,000
b. $28,000
c. $42,000
d. $45,000
b 46. Colfax Company expects to incur the following costs at the planned production level of 10,000 units:
The selling price is $50 per unit. The company currently operates at full capacity of 10,000 units. Capacity can be increased
to 13,000 units by operating overtime. Variable costs increase by $14 per unit for overtime production. Fixed overhead costs
remain unchanged when overtime operations occur. Colfax Company has received a special order from a wholesaler who has
offered to buy 1,000 units at $45 each. What is the impact on Colfax's operating income if this special order is accepted?
a. $17,000 increase
b. $3,000 increase
c. no change
d. $5,000 decrease
c 47. GMH Company manufactures 100,000 units of Part X annually for use in one of its main products. The total manufacturing cost
for 100,000 units of Part X is as follows:
Selin Company has offered to sell GMH 100,000 units of Part X per year. If GMH accepts this offer, the facilities used to
produce Part X can be used in the production of other components. This change would save GMH $10,000 in rent for the
leased production facility used at present to support the production of other components. What is the amount of relevant costs
for this make-or-buy decision?
a. $200,000
b. $240,000
c. $250,000
d. $400,000
d 48. GMH Company manufactures 100,000 units of Part X annually for use in one of its main products. The total manufacturing cost
for 100,000 units of Part X is as follows:
Sutton Company has offered to sell GMH 100,000 units of Part X per year. If GMH accepts this offer, the facilities used to
produce Part X can be used in the production of other components. This change would save GMH $10,000 in rent for the
leased production facility used at present to support the production of other components. What is the maximum price that
GMH should be willing to pay Sutton for part X?
a. $1.20
b. $2.00
c. $2.40
d. $2.50
d 49. Barrie, Inc., produces three products: A, B, and C. Two machines are used to produce the products. The contribution margins,
sales demands, and time on each machine (in minutes) is as follows:
Time Time
Demand CM on M1 on M2
A 100 $12 5 10
B 80 18 10 5
C 100 25 15 5
There are 2,400 minutes available on each machine during the week. How many units should be produced and sold to
maximize the weekly contribution?
A B C
a. 100 80 100
b. 20 80 100
c. 100 40 100
d. 100 80 73
b 50. Barrie, Inc., produces three products: A, B, and C. Two machines are used to produce the products. The contribution margins,
sales demands, and time on each machine (in minutes) is as follows:
Time Time
Demand CM on M1 on M2
A 100 $12 5 10
B 80 18 10 5
C 150 25 5 10
There are 2,400 minutes available on each machine during the week. How many units should be produced and sold to
maximize the weekly contribution?
A B C
a. 100 80 150
b. 50 80 150
c. 90 0 150
d. 100 80 100
True-False
F 1. If the results of a decision are not as good as expected, there has been an error in the decision-making process.
T 4. In general, the smaller the segment being considered in a decision, the fewer the avoidable costs.
T 5. A given fixed cost might be separable and relevant for the purpose of one decision and common and irrelevant for the purpose of
another decision in the same company.
T 7. Fixed costs that are allocated to several segments are normally irrelevant to decisions for one of those segments.
T 8. The only revenues or costs that are relevant in decision making are the differential revenues or costs.
T 10. Management's objective should be to exploit a constraint rather than to eliminate it.
Problems
1. Wilson Company expects the following results, without considering any of the changes described below.
Product A Product B Total
--------- --------- -----
Sales $100 $300 $400
Variable costs 40 100 140
---- ---- ----
Contribution margin $ 60 $200 $260
Fixed costs - avoidable (20) (30) (50)
- unavoidable (50) (100) (150)
---- ---- ----
Profit (loss) $(10) $ 70 $ 60
===== ==== ====
The unavoidable costs are allocated based on unit sales of 1,000 A and 2,000 B. CONSIDER EACH QUESTION
INDEPENDENTLY UNLESS TOLD OTHERWISE.
b. If product A were dropped and the unit sales of product B increased by 30%, what would the company's income be?
c. Product A can be dropped and replaced with a new product, C, which would have avoidable fixed costs of $50. Product C would
sell for $0.60, have variable costs of $0.20, and expected volume of 400 units. Compute Wilson's income if A were replaced
by C.
d. Suppose now that products A and B are joint products that are being sold at split-off. All of the costs shown on the income
statement are the materials, labor, and overhead of the joint process. Find income if product B were processed further at
additional costs of $90 and sold for $350.
SOLUTION:
2. Arapahoe Corp. can make three products from a joint process. The monthly cost of the joint process is $10,000. Following are data
about the three products.
b. Arapahoe is currently processing all three products rather than selling any of them at the split-off point. Find its current income.
SOLUTION:
3. Madison Co. operates a joint process. Three products, B, C, and D emerge from that process, each of which can be sold
immediately or processed further. Monthly output is 50,000 gallons; 50% is B, 30% is C, and 20% is D. You have the following
information.
B C D
------- ------- -------
Per-gallon split-off price $8 $9 $6
Per-gallon price after further
processing $13 $15 $12
Per-gallon variable cost of
further processing $4 $2 $4
Avoidable direct fixed costs of
further processing, per month $35,000 $45,000 $18,000
Unavoidable direct fixed costs
of further processing, per month $18,000 $40,000 $ 7,000
SOLUTION:
4. Milton Company has three products: A, B, and C. Three machines are used to produce the products. The contribution margins, sales
demands, and time on each machine (in minutes) is as follows:
There are 2,400 minutes available on each machine during the week. All materials needed are readily available on a just-in-time
basis.
a. What are the load factors for each of the three machines?
SOLUTION:
c. A: 93, B: 80, C: 60
A: $45/15 = $3
B: $30/5 = $6
C: $40/10 = $4
The unavoidable costs are allocated based on unit sales of 1,000 A and 2,000 B. An exporter has offered $0.80 per unit for 200 units
of A.
a. Find the change in income if LaCrosse accepts the order, assuming no loss of regular sales.
b. The managers believe that if they accept the special order, they will lose some sales at the regular price. Determine the number of
units they could lose before the order became unprofitable.
c. The managers believe that they will lose 80 units at the regular price if they accept the order. Calculate the price they must charge
for the special order to increase income by $50.
SOLUTION:
a. Change in income: $80 increase [200 x ($0.80 - $0.40 variable cost per unit)]
c. Price: $0.89
Lost contribution margin (80 x $0.60) $48.0
Desired profit 50.0
-----
Contribution margin required from special order $98.0
Divided by 20. units 200
-----
Equals contribution margin per unit $0.49
Plus variable cost 0.40
-----
Equals required price $0.89
=====
6. Mays Company manufactures 200,000 units of part XYZ annually. The following information has been collected:
Materials $200,000
Direct labor 110,000
Variable overhead 50,000
Fixed overhead 100,000
--------
Total costs $460,000
========
Clemens Company has offered to provide part XYZ for $2 per unit. Assume no other productive use of the space exists.
b. What is the maximum price Mays is willing to pay for the part?
SOLUTION:
b. $1.80 ($360,000/200,000)
7. Gonzalez can produce any of three products with its current production line. The heat treating equipment has 400 hours available
during any given month. Per unit production, sales, and cost statistics are as follows:
A B C
--- --- ---
Selling price $15 $20 $10
Variable cost $9 $12 $7
Required time in heat treat 1.5 hrs 2.5 hrs. 1.0 hrs
Maximum demand per month 100 100 100
b. Suppose the selling price of C increases to $12. How many of each product should Gonzalez produce and sell?
SOLUTION:
a. 100 A, 100 B, 0 C
A: ($15 - 9)/1.5 = $4.00/hr 100 x 1.5 hrs = 150.0 hrs
B: ($20 - 12)/2.5 = $3.20/hr 100 x 2.5 hrs = 250.0
C: ($10 - 7)/1.0 = $3.00/hr 0 (no hours remaining)
b. 100 A, 60 B, 100 C
C: ($12 - 7)/1.0 = $5.00/hr 100 x 1.0 hrs = 100.0 hrs
A: ($15 - 9)/1.5 = $4.00/hr 100 x 1.5 hrs = 150.0
B: ($20 - 12)/2.5 = $3.20/hr (400 - 100 - 150)/2.5 hrs = 60 units
A B C
Unit demand per month 2,000 3,000 4,000
Labor and overhead are applied to each product at a rate of $30 per machine hour. Management considers both labor and
overhead to be fixed costs.
a. Scottso currently has 60,000 hours available for production each month. How many units should be produced and sold for
each product?
b. An exporter has approached Scottso with an offer to purchase 500 units of product C for a discounted price. This is a one-
time order and will not affect normal sales. No commission will be paid. What is the minimum price Scottso should accept?
SOLUTION:
b. $575
Lost throughput of B: $32.14 x 7 hours = $225
Materials 350
Minimum price $575
9. Miami Company currently sells 3,000 units of product A for $1.25 each. Variable costs are $0.60, avoidable fixed costs are $750,
and unavoidable allocated fixed costs are $1,500. An exporter has offered $0.90 per unit for 800 units of product A.
a. Find the change in income if Miami can accept the order without affecting current sales.
b. The managers believe that if they accept the special order, they will lose some sales at the regular price. Determine the number of
units they could lose before the order became unprofitable.
c. The managers believe that they will lose 270 units at the regular price if they accept the order. Calculate the price they must
charge for the special order to increase income by $200.
SOLUTION:
c. Price: $1.07
Lost contribution margin (270 x $0.65) $175.5
Desired profit 200.0
-----
Contribution margin required from special order $375.5
Divided by 800 units 800
-----
Equals contribution margin per unit $0.47 rounded
Plus variable cost 0.60
-----
Equals required price $1.07
=====
10. Arpeggio Company manufactures 1,000 units of part XYZ annually. The following information has been collected:
Materials $200,000
Direct labor 110,000
Variable overhead 50,000
Fixed overhead 100,000
--------
Total costs $460,000
========
Mobile Company has offered to provide part XYZ for $400 per unit. If Arpeggio accepts the offer another product will be moved
into the space vacated, saving $60,000 a year in rent.
b. What is the maximum price Arpeggio is willing to pay for the part?
SOLUTION:
Cost to make the part: $200,000 + 110,000 + 50,000 = $360,000 + 60,000 rent = $420,000
b. $420 ($420,000/1,000)