Cost Concepts

1. Transportation costs incurred by a manufacturing company to ship its product to its

customers would be classified as which of the following? 
A. Product cost
B. Manufacturing overhead
C. Period cost
D. Administrative cost

2. only costs incurred during the current period.

B. only direct labor and direct materials costs.
C. some costs incurred during the prior period as well as costs incurred during the current
period.
D. some period costs as well as some product costs.

3. Within the relevant range, the difference between variable costs and fixed costs is: 
A. variable costs per unit fluctuate and fixed costs per unit remain constant.
B. variable costs per unit are constant and fixed costs per unit fluctuate.
C. both total variable costs and total fixed costs are constant.
D. both total variable costs and total fixed costs fluctuate.

 4. Green Company's costs for the month of August were as follows: direct materials, $27,000;
direct labor, $34,000; selling, $14,000; administrative, $12,000; and manufacturing overhead,
$44,000. The beginning work in process inventory was $16,000 and the ending work in
process inventory was $9,000. What was the cost of goods manufactured for the month? 
A. $105,000
B. $132,000
C. $138,000
D. $112,000

5. The following inventory balances relate to Lequin Manufacturing Corporation at the

beginning and end of the year:

   

Lequin's total manufacturing cost was $543,000. What was Lequin's cost of goods sold? 
A. $517,000
B. $545,000
C. $569,000
D. $567,000
6. The following data have been provided by a company for a recent accounting period:

   

The cost of goods manufactured for the period was: 

A. $147,000
B. $151,000
C. $153,000
D. $154,000

Management of Berndt Corporation has asked your help as an intern in preparing some key
reports for August. The beginning balance in the raw materials inventory account was
$33,000. During the month, the company made raw materials purchases amounting to
$62,000. At the end of the month, the balance in the raw materials inventory account was
$30,000. Direct labor cost was $46,000 and manufacturing overhead was $74,000. The
beginning balance in the work in process account was $13,000 and the ending balance was
$19,000. The beginning balance in the finished goods account was $54,000 and the ending
balance was $50,000. Sales totaled $270,000. Selling expense was $18,000 and administrative
expense was $49,000.

 7. Thetotal manufacturing cost for August was: 

A. $185,000
B. $182,000
C. $120,000
D. $74,000

8. The cost of goods sold for August was: 

A. $175,000
B. $183,000
C. $138,000
D. $274,000
Job-Order Costing

1. Which of the following companies would be most likely to use a job-order costing system
rather than a process costing system? 
A. fast food restaurant
B. shipbuilding
C. crude oil refining
D. candy making

2. The Work in Process inventory account of a manufacturing company shows a balance of

$2,400 at the end of an accounting period. The job cost sheets of the two uncompleted jobs
show charges of $400 and $200 for direct materials, and charges of $300 and $500 for direct
labor. From this information, it appears that the company is using a predetermined overhead
rate, as a percentage of direct labor costs, of: 
A. 80%
B. 125%
C. 300%
D. 240%

3. Job 607 was recently completed. The following data have been recorded on its job cost
sheet:

   

The company applies manufacturing overhead on the basis of machine-hours. The

predetermined overhead rate is $14 per machine-hour. The total cost that would be recorded
on the job cost sheet for Job 607 would be: 
A. $4,107
B. $6,319
C. $3,432
D. $4,863

4. Freeman Company uses a predetermined overhead rate based on direct labor-hours to apply
manufacturing overhead to jobs. At the beginning of the year, the company estimated
manufacturing overhead would be $150,000 and direct labor-hours would be 10,000. The
actual figures for the year were $186,000 for manufacturing overhead and 12,000 direct labor-
hours. The cost records for the year will show: 
A. overapplied overhead of $30,000
B. underapplied overhead of $30,000
C. underapplied overhead of $6,000
D. overapplied overhead of $6,000
5. Simplex Company has the following estimated costs for next year:

   

Simplex estimates that 10,000 direct labor and 16,000 machine-hours will be worked during
the year. If overhead is applied on the basis of machine-hours, the overhead rate per hour will
be: 
A. $8.56
B. $7.63
C. $6.94
D. $3.50

6. Waldvogel Corporation has provided data concerning the company's Manufacturing

Overhead account for the month of April. Prior to the closing of the overapplied or
underapplied balance to Cost of Goods Sold, the total of the debits to the Manufacturing
Overhead account was $55,000 and the total of the credits to the account was $56,000. Which
of the following statements is true? 
A. Manufacturing overhead for the month was underapplied by $1,000.
B. Manufacturing overhead applied to Work in Process for the month was $56,000.
C. Actual manufacturing overhead incurred during the month was $56,000.
D. Manufacturing overhead transferred from Finished Goods to Cost of Goods Sold during
the month was $55,000.

7. Mcmackin Corporation had $35,000 of raw materials on hand on August 1. During the
month, the company purchased an additional $66,000 of raw materials. During August,
$81,000 of raw materials were requisitioned from the storeroom for use in production. These
raw materials included both direct and indirect materials. The indirect materials totaled
$7,000. The debits to the Work in Process account as a consequence of the raw materials
transactions in August total: 
A. $66,000
B. $0
C. $74,000
D. $81,000

8. Inks Corporation incurred $69,000 of actual Manufacturing Overhead costs during June.
During the same period, the Manufacturing Overhead applied to Work in Process was
$70,000. The journal entry to record the incurrence of the actual Manufacturing Overhead
costs would include a: 
A. debit to Manufacturing Overhead of $69,000
B. debit to Work in Process of $70,000
C. credit to Manufacturing Overhead of $69,000
D. credit to Work in Process of $70,000
9. Lucy Sportswear manufactures a specialty line of T-shirts. The company uses a job-order
costing system. During March, the following costs were incurred on Job ICU2: direct
materials $13,700 and direct labor $4,800. In addition, selling and shipping costs of $7,000
were incurred on the job. Manufacturing overhead was applied at the rate of $25 per machine-
hour and Job ICU2 required 800 machine-hours. If Job ICU2 consisted of 7,000 shirts, the
Cost of Goods Sold per shirt was: 
A. $6.50
B. $6.00
C. $5.70
D. $5.50

10. beginning inventories; consequently, the direct materials, direct labor, and manufacturing
overhead applied listed below are all for the current month.

   

Manufacturing overhead for the month was overapplied by $3,000.

The company allocates any underapplied or overapplied overhead among work in process,
finished goods, and cost of goods sold at the end of the month on the basis of the overhead
applied during the month in those accounts.

The cost of goods sold for October after allocation of any underapplied or overapplied
overhead for the month is closest to: 
A. $215,600
B. $210,980
C. $210,290
D. $216,290
11. Molano Corporation has provided the following data concerning manufacturing overhead
for June:

   

The company's Cost of Goods Sold was $255,000 prior to closing out its Manufacturing
Overhead account. The company closes out its Manufacturing Overhead account to Cost of
Goods Sold. Which of the following statements is true? 
A. Manufacturing overhead was underapplied by $7,000; Cost of Goods Sold after closing out
the Manufacturing Overhead account is $248,000
B. Manufacturing overhead was overapplied by $7,000; Cost of Goods Sold after closing out
the Manufacturing Overhead account is $248,000
C. Manufacturing overhead was underapplied by $7,000; Cost of Goods Sold after closing out
the Manufacturing Overhead account is $262,000
D. Manufacturing overhead was overapplied by $7,000; Cost of Goods Sold after closing out
the Manufacturing Overhead account is $262,000

 Loraine Company applies manufacturing overhead to jobs using a predetermined overhead

rate of 70% of direct labor cost. Any underapplied or overapplied overhead cost is closed to
Cost of Goods Sold at the end of the month. During August, the following transactions were
recorded by the company:

   

12. The amount of direct materials cost in the August 31 Work in Process inventory account
was: 
A. $10,200
B. $9,000
C. $4,800
D. $4,200

 
13. The Cost of Goods Manufactured for August was: 
A. $69,600
B. $69,500
C. $76,900
D. $84,500

The Garnet Company uses a job-order costing system. The following data were recorded for
February:

   

Overhead is charged to jobs at the rate of 140% of direct labor cost.

Jobs 1, 2, and 3 were completed during February and transferred to
finished goods. Job 3 has been delivered to the customer.

14. The manufacturing costs added to jobs during the month totaled: 

A. $8,250
B. $11,880
C. $12,500
D. $15,180

15. The work in process inventory on February 28 was: 

A. $7,310
B. $9,500
C. $3,950
D. $7,060

16. The cost of goods sold during February was: 

A. $5,100
B. $3,000
C. $12,120
D. $8,120
Process Costing 

1. Process costing would be appropriate for each of the following except: 

A. custom furniture manufacturing.
B. oil refining.
C. grain milling.
D. newsprint production.

 2. Assume there was no beginning work in process inventory and the ending work in process
inventory is 70% complete with respect to conversion costs. Under the weighted-average
method, the number of equivalent units of production with respect to conversion costs would
be: 
A. the same as the units completed.
B. less than the units completed.
C. the same as the units started during the period.
D. less than the units started during the period.

3. The Assembly Department started the month with 59,000 units in its beginning work in
process inventory. An additional 274,000 units were transferred in from the prior department
during the month to begin processing in the Assembly Department. There were 21,000 units
in the ending work in process inventory of the Assembly Department.
How many units were transferred to the next processing department during the month? 
A. 333,000
B. 236,000
C. 354,000
D. 312,000

4. Dewey Company uses the weighted-average method in its process costing system. The first
processing department, the Welding Department, started the month with 15,000 units in its
beginning work in process inventory that were 20% complete with respect to conversion
costs. The conversion cost in this beginning work in process inventory was $19,200. An
additional 86,000 units were started into production during the month. There were 13,000
units in the ending work in process inventory of the Welding Department that were 60%
complete with respect to conversion costs. A total of $575,360 in conversion costs were
incurred in the department during the month.
The cost per equivalent unit for conversion costs is closest to: 
A. $5.812
B. $6.206
C. $6.400
D. $6.690
5. Park Company uses the weighted-average method in its process costing system. The
Molding Department is the second department in its production process. The data below
summarize the department's operations in January.

   

The accounting records indicate that the conversion cost that had been assigned to beginning
work in process inventory was $40,484 and a total of $213,890 in conversion costs were
incurred in the department during January.
The cost per equivalent unit for conversion costs for January in the Molding Department is
closest to: 
A. $4.823
B. $4.186
C. $4.650
D. $4.590

6. Sala Corporation uses the weighted-average method in its process costing system. The
Fitting Department is the second department in its production process. The data below
summarize the department's operations in March.

   

The Fitting Department's cost per equivalent unit for conversion cost for March was $2.64.
How much conversion cost was assigned to the units transferred out of the Fitting Department
during March? 
A. $118,800.00
B. $131,472.00
C. $126,508.80
D. $143,616.00
7. In
September, one of the processing departments at Shenkel Corporation had beginning
work in process inventory of $25,000 and ending work in process inventory of $18,000.
During the month, the cost of units transferred out from the department was $304,000. In the
department's cost reconciliation report for September, the total cost accounted for would be: 
A. $619,000
B. $644,000
C. $322,000
D. $43,000

Abis Corporation uses the weighted-average method in its process costing system. This
month, the beginning inventory in the first processing department consisted of 800 units. The
costs and percentage completion of these units in beginning inventory were:

   

A total of 9,200 units were started and 8,200 units were transferred to the second processing
department during the month. The following costs were incurred in the first processing
department during the month:

   

The ending inventory was 80% complete with respect to materials and 20% complete with
respect to conversion costs.
Note: Your answers may differ from those offered below due to rounding error. In all cases,
select the answer that is the closest to the answer you computed. To reduce rounding error,
carry out all computations to at least three decimal places.

 8. What are the equivalent units for conversion costs for the month in the first processing
department? 
A. 10,000
B. 360
C. 8,200
D. 8,560
 9. The cost per equivalent unit for materials for the month in the first processing department
is closest to: 
A. $11.39
B. $12.44
C. $11.82
D. $11.99
 10. The cost per equivalent unit for conversion costs for the first department for the month is
closest to: 
A. $40.77
B. $33.24
C. $38.83
D. $37.68
 
11. The total cost transferred from the first processing department to the next processing
department during the month is closest to: 
A. $512,700
B. $452,300
C. $420,414
D. $436,400

12. The cost of ending work in process inventory in the first processing department according
to the company's cost system is closest to: 
A. $73,829
B. $18,457
C. $92,286
D. $31,891

 
CVP Analysis

1. A company increased the selling price for its product from $5 to $6 per unit when total
fixed expenses increased from $100,000 to $200,000 and variable expense per unit remained
unchanged. How would these changes affect the break-even point? 
A. The break-even point in units would increase.
B. The break-even point in units would decrease.
C. The break-even point in units would remain unchanged.
D. The effect cannot be determined from the information given.

2. Witczak Company has a single product and currently has a degree of operating leverage of
5. Which of the following will increase Witczak's degree of operating leverage?

    
A. Choice A
B. Choice B
C. Choice C
D. Choice D

3. Last year, Twins Company reported $750,000 in sales (25,000 units) and a net operating
income of $25,000. At the break-even point, the company's total contribution margin equals
$500,000. Based on this information, the company's: 
A. contribution margin ratio is 40%.
B. break-even point is 24,000 units.
C. variable expense per unit is $9.
D. variable expenses are 60% of sales.

4. A company has provided the following data:

   

If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by
20%, and all other factors remain the same, net operating income will: 
A. increase by $61,000.
B. increase by $20,000.
C. increase by $3,500.
D. increase by $11,000.

 
5. Carver Company produces a product which sells for $30. Variable manufacturing costs are
$15 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity,
and fixed selling and administrative costs are $4 per unit. A selling commission of 10% of the
selling price is paid on each unit sold. The contribution margin per unit is: 
A. $3
B. $15
C. $8
D. $12

 6. LitkeCorporation, a company that produces and sells a single product, has provided its
contribution format income statement for February.

   

If the company sells 5,100 units, its net operating income should be closest to: 
A. $15,600
B. $11,700
C. $8,400
D. $14,733
 

7. Forest Corporation has prepared the following budgeted data based on a sales forecast of
$3,000,000:

   

What would be the amount of dollar sales at the break-even point? 

A. $1,125,000
B. $2,000,000
C. $2,650,000
D. $1,750,000

 
8. Slosh Cleaning Corporation services both residential and commercial customers. Slosh
expects the following operating results next year for each type of customer:

   

Slosh expects to have $18,000 in fixed expenses next year. What would Slosh's total dollar
sales have to be next year in order to generate a profit of $90,000? 
A. $216,000
B. $250,000
C. $270,000
D. $300,000

 9.Riven Corporation has a single product whose selling price is $10. At an expected sales
level of $1,000,000, the company's variable expenses are $600,000 and its fixed expenses are
$300,000. The marketing manager has recommended that the selling price be increased by
20%, with an expected decrease of only 10% in unit sales. What would be the company's net
operating income if the marketing manager's recommendation is adopted? 
A. $132,000
B. $290,000
C. $180,000
D. $240,000

10. Data concerning Damberger Corporation's single product appear below:

   

The company is currently selling 5,000 units per month. Fixed expenses are $243,000 per
month. The marketing manager believes that an $11,000 increase in the monthly advertising
budget would result in a 180 unit increase in monthly sales. What should be the overall effect
on the company's monthly net operating income of this change? 
A. increase of $200
B. decrease of $200
C. increase of $10,800
D. decrease of $11,000

 
11. Vaccaro Corporation produces and sells a single product. Data concerning that product
appear below:

   
Fixed expenses are $293,000 per month. The company is currently selling 3,000 units per
month. Management is considering using a new component that would increase the unit
variable cost by $13. Since the new component would increase the features of the company's
product, the marketing manager predicts that monthly sales would increase by 400 units.
What should be the overall effect on the company's monthly net operating income of this
change? 
A. increase of $600
B. increase of $39,600
C. decrease of $600
D. decrease of $39,600

12. Bear Publishing sells a nature guide. The following information was reported for a typical
month (sales volume is constant each month):

   

Bear is expecting a 20 cent increase in variable expenses. No other changes are expected or
planned. How much contribution margin should Bear expect after the increase? 
A. $7,700
B. $4,100
C. $9,900
D. Cannot be determined.

13. Witting Corporation produces and sells a single product. Data concerning that product
appear below:

   

The break-even in monthly unit sales is closest to: 

A. 2,523
B. 1,502
C. 3,337
D. 2,730

 
14. Austin Manufacturing had the following operating data for the year just ended.

   

Management plans to improve the quality of its only product by: (1) replacing a component
that costs $3.50 with a higher-grade component that costs $5.50; and (2) renting a packing
machine for $18,000 a year. If the desired target profit is $288,000, the company must sell: 
A. 19,300 units
B. 21,316 units
C. 22,500 units
D. 20,842 units

15. Lineman Corporation sells a product for $230 per unit. The product's current sales are
23,400 units and its break-even sales are 20,124 units.
What is the margin of safety in dollars? 
A. $3,588,000
B. $5,382,000
C. $753,480
D. $4,628,520

16. Hilty Corporation produces and sells two products. In the most recent month, Product
U77D had sales of $45,000 and variable expenses of $15,750. Product D86D had sales of
$49,000 and variable expenses of $22,790. And the fixed expenses of the entire company
were $46,170. The break-even point for the entire company is closest to: 
A. $47,830
B. $84,710
C. $46,170
D. $78,254

A tile manufacturer has supplied the following data:

   

 17. What is the company's unit contribution margin? 

A. $0.86
B. $2.35
C. $4.10
D. $1.75
 
18. The company's contribution margin ratio is closest to: 
A. 42.7%
B. 57.3%
C. 45.8%
D. 21.0%

19. If the company increases its unit sales volume by 3% without increasing its fixed
expenses, then total net operating income should be closest to: 
A. $459,380
B. $453,667
C. $13,380
D. $482,660
Variable Costing

1. Which of the following statements is true? 

A. Expenses are not usually separated into variable and fixed elements in externally reported
income statements.
B. Even if there is no change in units sold, selling price, or cost structure, a company can
increase its absorption costing net operating income from one year to the next just by
producing more units.
C. When finished goods inventory decreases during a period, a manufacturing company's
absorption costing net operating income for that period will usually be greater than its
variable costing net operating income.
D. Both A and B above.

2. Weber Company computes net operating income under both the absorption costing
approach and the variable costing approach. For a given year the absorption costing net
operating income was greater than the variable costing net operating income. This fact
suggests that: 
A. variable manufacturing costs were less than fixed manufacturing costs.
B. more units were produced during the year than were sold.
C. more units were sold during the year than were produced.
D. common costs were greater than variable costs for the year.

 3. SilverCompany produces a single product. Last year, the company's variable production
costs totaled $7,500 and its fixed manufacturing overhead costs totaled $4,500. The company
produced 3,000 units during the year and sold 2,400 units. There were no units in the
beginning inventory. Which of the following statements is true? 
A. Under variable costing, the units in the ending inventory will be costed at $4 each.
B. The net operating income under absorption costing for the year will be $900 lower than the
net operating income under variable costing.
C. The ending inventory under variable costing will be $900 lower than the ending inventory
under absorption costing.
D. Under absorption costing, the units in ending inventory will be costed at $2.50 each.
4. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

   

What is the variable costing unit product cost for the month? 
A. $97
B. $90
C. $68
D. $75

5. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

   

What is the total period cost for the month under absorption costing? 
A. $48,000
B. $275,100
C. $86,400
D. $188,700
6. Indiana Corporation produces a single product that it sells for $9 per unit. During the first
year of operations, 100,000 units were produced and 90,000 units were sold. Manufacturing
costs and selling and administrative expenses for the year were as follows:

   

What was Indiana Corporation's net operating income for the year using variable costing? 
A. $181,000
B. $271,000
C. $281,000
D. $371,000

7. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

   

What is the net operating income for the month under absorption costing? 
A. $(15,900)
B. $19,200
C. $10,200
D. $9,000
8. Lee Company produces a single product. At the end of last year, the company had 30,000
units in its ending inventory. Lee's variable production costs are $10 per unit and its fixed
manufacturing overhead costs are $5 per unit every year. The company's net operating income
for the year was $12,000 higher under variable costing than under absorption costing. Given
these facts, the number of units of product in inventory at the beginning of the year must have
been: 
A. 28,800 units
B. 27,600 units
C. 32,400 units
D. 42,000 units

9. Schrick Inc. manufactures a variety of products. Variable costing net operating income was
$86,800 last year and ending inventory increased by 1,900 units. Fixed manufacturing
overhead cost was $6 per unit. What was the absorption costing net operating income last
year? 
A. $86,800
B. $75,400
C. $98,200
D. $11,400

Abdol Company, which has only one product, has provided the following data concerning its
most recent month of operations:

   

10. What is the unit product cost for the month under variable costing? 
A. $73
B. $44
C. $79
D. $38

 
11. What is the unit product cost for the month under absorption costing? 
A. $38
B. $73
C. $44
D. $79

 12. Thetotal contribution margin for the month under the variable costing approach is: 
A. $273,000
B. $42,000
C. $84,500
D. $312,000
 

13. The total gross margin for the month under the absorption costing approach is: 
A. $13,000
B. $91,800
C. $273,000
D. $84,500

 14. Whatis the total period cost for the month under the variable costing approach? 
A. $263,500
B. $71,500
C. $302,500
D. $231,000
 

15. What is the total period cost for the month under the absorption costing approach? 
A. $32,500
B. $71,500
C. $302,500
D. $231,000

16. What is the net operating income for the month under variable costing? 
A. $13,000
B. $5,700
C. $9,500
D. $3,500

 
17. What is the net operating income for the month under absorption costing? 
A. $9,500
B. $3,500
C. $5,700
D. $13,000

18. Denner Company has two divisions, A and B, that reported the following results for
October:

   

If common fixed expenses were $31,000, total fixed expenses must have been: 
A. $31,000
B. $62,000
C. $93,000
D. $52,000

19. Kaighn Corporation has two divisions: the West Division and the East Division. The
corporation's net operating income is $18,500. The West Division's divisional segment margin
is $27,700 and the East Division's divisional segment margin is $49,400. What is the amount
of the common fixed expense not traceable to the individual divisions? 
A. $46,200
B. $67,900
C. $77,100
D. $58,600

20. Anspach Corporation has two divisions: the Governmental Products Division and the
Consumer Products Division. The Governmental Products Division's divisional segment
margin is $11,800 and the Consumer Products Division's divisional segment margin is
$155,500. The total amount of common fixed expenses not traceable to the individual
divisions is $142,200. What is the company's net operating income? 
A. ($167,300)
B. $25,100
C. $309,500
D. $167,300
Differential Analysis

1. Allocated common fixed costs: 

A. can make a product line appear to be unprofitable.
B. are always incremental costs.
C. are always relevant in decisions involving dropping a product line.
D. responses A, B, and C are all correct.

2. Consider a decision facing a company of either accepting or rejecting a special offer for one
of its products. A cost that is 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.

3. Vanikoro Corporation currently has two divisions which had the following operating
results for last year:

   

Since the Rubber Division sustained a loss, the president of Vanikoro is considering the
elimination of this division. All of the fixed costs for the division could be eliminated if the
division was dropped. If the Rubber Division was dropped at the beginning of last year, how
much higher or lower would Vanikoro's total net operating income have been for the year? 
A. $10,000 higher
B. $40,000 lower
C. $50,000 higher
D. $100,000 lower
4. The management of Austin Corporation is considering dropping product R97C. Data from
the company's accounting system appear below:

   

In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $34,000 of the fixed manufacturing expenses
and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is
discontinued. What would be the effect on the company's overall net operating income if
product R97C were dropped? 
A. Overall net operating income would increase by $20,000.
B. Overall net operating income would increase by $10,000.
C. Overall net operating income would decrease by $20,000.
D. Overall net operating income would decrease by $10,000.

5. Green Company produces 1,000 parts per year, which are used in the assembly of one of its
products. The unit product cost of these parts is:

   

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
6. PartJ88 is used in one of Quinney Corporation's products. The company makes 3,000 units
of this part each year. The company's Accounting Department reports the following costs of
producing the part at this level of activity:

   

An outside supplier has offered to produce this part and sell it to the company for $32.10
each. If this offer is accepted, the supervisor's salary and all of the variable costs, including
direct labor, can be avoided. The special equipment used to make the part was purchased
many years ago and has no salvage value or other use. The allocated general overhead
represents fixed costs of the entire company. If the outside supplier's offer were accepted,
only $3,000 of these allocated general overhead costs would be avoided.
If management decides to buy part J88 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income? 
A. Net operating income would decline by $22,200 per year.
B. Net operating income would decline by $16,200 per year.
C. Net operating income would decline by $5,400 per year.
D. Net operating income would decline by $19,200 per year.

7. Scales Corporation has received a request for a special order of 6,000 units of product Y45
for $13.70 each. Product Y45's unit product cost is $11.50, determined as follows:

   

Direct labor is a variable cost. The special order would have no effect on the company's total
fixed manufacturing overhead costs. The customer would like modifications made to product
Y45 that would increase the variable costs by $8.10 per unit and that would require an
investment of $20,000 in special molds that would have no salvage value.
This special order would have no effect on the company's other sales. The company has ample
spare capacity for producing the special order. If the special order is accepted, the company's
overall net operating income would increase (decrease) by: 
A. ($26,600)
B. $13,200
C. ($55,400)
D. ($21,300)
8. An automated turning machine is the current constraint at Greenleaf Corporation. Three
products use this constrained resource. Data concerning those products appear below:

   

Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized. 
A. DK,BG,QU
B. DK,QU,BG
C. QU,BG,DK
D. BG,QU,DK

9. The constraint at Bulman Corporation is time on a particular machine. The company makes
three products that use this machine. Data concerning those products appear below:

   

Assume that sufficient time is available on the constrained machine to satisfy demand for all
but the least profitable product. Up to how much should the company be willing to pay to
acquire more of the constrained resource? 
A. $28.31 per unit
B. $12.20 per minute
C. $14.90 per minute
D. $69.54 per unit

 The Clemson Company reported the following results last year for the manufacture and sale
of one of its products known as a Tam.

   

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.

 
10. Assume that discontinuing the manufacture and sale of Tams will have no effect on the
sale of other product lines. If the company discontinues the Tam product line, the change in
annual operating income (or loss) should be: 
A. $55,000 decrease
B. $65,000 decrease
C. $90,000 decrease
D. $70,000 increase

 11. Assume that discontinuing the Tam product would result in a $120,000 increase in the
contribution margin of other product lines. How many Tams would have to be sold next year
for the company to be as well off as if it just dropped the line and 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

Kleffman Corporation is presently making part X31 that is used in one of its products. A total
of 2,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

   
An outside supplier has offered to produce and sell the part to the company for $23.40 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including direct
labor, can be avoided. The special equipment used to make the part was purchased many
years ago and has no salvage value or other use. The allocated general overhead represents
fixed costs of the entire company. If the outside supplier's offer were accepted, only $1,000 of
these allocated general overhead costs would be avoided.

 12. If
management decides to buy part X31 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income? 
A. Net operating income would decline by $5,600 per year.
B. Net operating income would decline by $1,800 per year.
C. Net operating income would decline by $4,600 per year.
D. Net operating income would decline by $6,600 per year.