Fundamentals of Cost Analysis For Decision Making: True / False Questions

Chapter 04
Fundamentals of Cost Analysis for Decision Making

True / False Questions

1. Differential analysis involves the comparison of one or more alternative courses of action with the status
quo.

True False

2. If there is only one alternative course of action and the status quo is unacceptable, then there really is no
decision to make.

True False

3. A decision must involve at least two alternative courses of action.

True False

4. Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of
revenues and costs (i.e., the time-value of money).

True False

5. Short-run decisions often have long-run implications.

True False

6. Only variable costs can be differential costs.

True False

7. Fixed costs are always classified as sunk costs in differential cost analysis.

True False

8. The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the
product's cost.

True False

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9. When deciding whether or not to accept a special order, a decision-maker should focus on differential costs
instead of full costs.

True False

10. The differential analysis approach to pricing for special orders could lead to under-pricing in the long-run
because fixed costs are not included in the analysis.

True False

11. Target costs equal the difference between the target selling price and the desired profit margin.

True False

12. Dumping occurs when a company exports its product to consumers in another country at an export price
that is below the domestic price.

True False

13. Price discrimination is the practice of selling identical goods or services to different customers at different
prices.

True False

14. Peak load pricing is the practice of setting prices lowest when the quantity demanded for the product
approaches the physical capacity to produce it.

True False

15. The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally or
(b) purchase needed items externally.

True False

16. The reason opportunity costs are not included in the accounting system is because they involve estimates.

True False

17. Financial statements prepared in accordance with generally accepted accounting principles (GAAP)
provide differential cost information.

True False

18. In the short-run, plant capacity is fixed and product choices have to be made that optimize the use of
available capacity.

True False

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19. With constrained resources, the important measure of profitability is the contribution margin per unit of
scarce resource.

True False

20. The theory of constraints focuses on determining the optimal product mix when one or more resources
restrict the attainment of a goal or objective.

True False

Multiple Choice Questions

21. The relevance of a particular cost to a decision is determined by the: (CMA adapted)

A. riskiness of the decision.

B. number of decision variables.
C. amount of the cost.
D. potential effect on the decision.

22. In a decision analysis situation, which one of the following costs is not likely to contain a variable cost
component? (CMA adapted)

A. Labor.
B. Overhead.
C. Straight-line Depreciation.
D. Selling.

23. Differential costs are: (CMA adapted)

A. the difference in total costs that result from selecting one choice instead of another.
B. the profit foregone by selecting one choice instead of another.
C. a cost that continues to be incurred in the absence of activity.
D. a cost common to all choices in questions and not clearly allocable to any of them.

24. The period of time over which capacity will be unchanged is:

A. long run.
B. sunk cost.
C. short run.
D. product life cycle.

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25. Which of the following statements regarding differential costs is (are) false?
(A) The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the
product's cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on differential
costs instead of full costs.

A. Only A.
B. Only B.
C. Neither A nor B is false.
D. Both A and B are false.

26. Which of the following costs are irrelevant for a special order that will allow an organization to utilize
some of its present idle capacity?

A. Direct materials.
B. Indirect materials.
C. Variable overhead.
D. Unavoidable fixed overhead.

27. Which of the following statements regarding special orders is (are) true?
(A) The primary decision for special orders is determining whether the differential revenue is greater than
the differential costs associated with the order.
(B) The differential analysis approach to pricing for special orders could lead to underpricing in the long-
run because fixed costs are not included in the analysis.

A. Only A.
B. Only B.
C. Neither A nor B is true.
D. Both A and B are true.

28. The Arthur Company manufactures kitchen utensils. The company is currently producing well below its
full capacity. The Benton Company has approached Arthur with an offer to buy 20,000 utensils at $0.75
each. Arthur sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is
fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating
profits?

A. $400.
B. $800.
C. $1,600.
D. $2,000.

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29. The Minton Company has gathered the following information for a unit of its most popular product:
Direct materials $6
Direct labor 3
Overhead (40% variable) 5
Cost to manufacture 14
Desired markup (50%) 7
Target selling price 21
The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000 units at
a price of $16 per unit. This special order would not disturb regular sales. Variable shipping and other
selling expenses would be an additional $1 per unit for the special order. If the special order is accepted,
Minton's operating profits will increase by:

A. $1,000.
B. $1,600.
C. $2,000.
D. $4,000.

30. The following information relates to the Magna Company for the upcoming year.
Amount Per Unit

Sales $4,000,000 $10.00
Cost of goods sold 3,200,000 8.00
Gross margin 800,000 2.00
Operating expenses 300,000 .75
Operating profits $500,000 $1.25
The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses
include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per
unit has been made to Magna. Fortunately, there will be no additional operating expenses associated with
the order and Magna has sufficient capacity to handle the order. How much will operate profits be
increased if Magna accepts the special order?

A. $25,000.
B. $62,500.
C. $100,000.
D. $125,000.

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31. The following information relates to a product produced by Faulkland Company:
Direct materials $10

Direct labor 7
Variable overhead 6
Fixed overhead 8
Unit cost $31
Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to cover the
transportation cost. Although production capacity is 500,000 units per year, Faulkland expects to produce
only 400,000 units next year. The product normally sells for $40 each. A customer has offered to buy
60,000 units for $30 each. The customer will pay the transportation charge on the units purchased. If
Faulkland accepts the special order, the effect on income would be a:

A. $60,000 increase.
B. $180,000 increase.
C. $420,000 increase.
D. $600,000 decrease.

32. If there is excess capacity, the minimum acceptable price for a special order must cover:

A. only variable costs associated with the special order.

B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order, plus the contribution margin
usually earned on regular units.

33. Park Corporation is preparing a bid for a special order that would require 720 liters of material SUN100.
The company already has 560 liters of this raw material in stock that originally cost $6.30 per liter.
Material SUN100 is used in the company's main product and is replenished on a periodic basis. The resale
value of the existing stock of the material is $5.80 per liter. New stocks of the material can be readily
purchased for $6.65 per liter. What is the relevant cost of the 720 liters of the raw material when deciding
how much to bid on the special order? (CIMA adapted)

A. $4,592.
B. $4,788.
C. $4,456.
D. $4,176.

4-6
34. Tori Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 as is,
but if reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental effect on
the company's overall profit of reworking and selling the material rather than selling it as is as scrap?
(CIMA adapted)

A. $(69,100)
B. $(700)
C. $29,400
D. $(39,000)

35. Lafferty Corporation is a specialty component manufacturer with idle capacity. Management would like to
use its unused capacity to generate additional profits. A potential customer has offered to buy 6,200 units of
component Rocket. Each unit of Rocket requires 8 units of material CES4 and 6 units of material XES7.
Data concerning these two materials follow:
Current
Original Disposal
Materia Units in Market
Cost Per Value Per
l Stock Price Per
Unit Unit
Unit
CES4 32,420 $3.80 $3.35 $3.10
XES7 31,060 $9.30 $9.60 $8.35
Material CES4 is in use in many of the company's products and is routinely replenished. Material XES7 is
no longer used by the company in any of its normal products and existing stocks would not be replenished
once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a minimum
acceptable price for the order for product Rocket? (CIMA adapted)

A. $528,551.
B. $523,280.
C. $476,350.
D. $484,455.

36. Alpha Inc. regularly uses material FLAV4 and currently has in stock 460 liters of the material for which it
paid $2,622 several weeks ago. If this were to be sold as is on the open market as surplus material, it would
fetch $5.25 per liter. New stocks of the material can be purchased on the open market for $5.85 per liter,
but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 800
liters of the material to be used in a job for a customer. The relevant cost of the 800 liters of material
FLAV4 is: (CIMA adapted)

A. $5,850.
B. $4,200.
C. $4,404.
D. $4,680.

4-7
37. Starla Corporation is a specialty component manufacturer with idle capacity. Management would like to
use its extra capacity to generate additional profits. A potential customer has offered to buy 4,200 units of
component JOLT. Each unit of JOLT requires 6 units of material OX8 and 9 units of material POW6. Data
concerning these two materials follow:
Current
Original Disposal
Cost Per Value Per
l Stock Price Per
Unit Unit
Unit
OX8 18,600 $3.60 $3.70 $3.35
POW6 38,280 $3.20 $2.80 $1.65
Material OX8 is in use in many of the company's products and is routinely replenished. Material POW6 is
no longer used by the company in any of its normal products and existing stocks would not be replenished
once they are used up.
acceptable price for the order for product JOLT? (CIMA adapted)

A. $146,790.
B. $199,080.
C. $155,610.
D. $212,340.

38. Tara Inc. is considering using stocks of an old raw material in a special project. The special project would
require all 160 kilograms of the raw material that are in stock and that originally cost the company $1,136
in total. If the company were to buy new supplies of this raw material on the open market, it would cost
$7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the
discounted price of $6.50 per kilogram if it were not used in the special project. The sale of the raw
material would involve delivery to the purchaser at a total cost of $75.00 for all 160 kilograms. What is the
relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special
project? (CIMA adapted)

A. $1,040.
B. $965.
C. $1,136.
D. $1,160.

39. Which of the following costs are not considered in a differential analysis for a make-or-buy decision?

A. Indirect materials and indirect labor if the item is manufactured internally.

B. Direct materials and direct labor if the item is purchased.
C. Variable overhead if the item is manufactured internally.
D. Fixed overhead that will continue if the item is purchased.

4-8
40. The Crispy Baking Company is considering the expansion of its business into door-to-door delivery
service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles now
used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries.
However, it is estimated that an additional $5,000 would be required per month for gas, oil, and
maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the
existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding into the
home delivery market?

A. $12,500.
B. $17,500.
C. $19,750.
D. $20,425.

41. The time from initial research and development to the time that support to the customer ends is the:

A. product life cycle.

B. short run.
C. target time.
D. predatory price.

42. The price based on customers' perceived value for the product and the price that competitors charge:

A. predatory price.
B. target price.
C. target cost.
D. dumping price.

43. The practice of setting price below cost with the intent to drive competitors out of business:

A. predatory pricing.
B. target pricing.
C. target costing.
D. peak-load pricing.

44. The practice of setting prices highest when the quantity demanded for the product approaches capacity:

B. target pricing.
C. peak-load pricing.
D. price fixing.

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45. Agreement among business competitors to set prices at a particular level:

B. target pricing.
D. price fixing.

46. Exporting a product to another country at a price below domestic cost:

A. dumping.
B. target pricing.
D. price fixing.

47. A target cost is computed as:

A. cost to manufacture plus a desired markup.

B. cost to manufacture plus designated selling expenses.
C. market willingness to pay - cost to manufacture.
D. market willingness to pay - desired profit.

48. The operations of Bridgeton Corporation are divided into the Adams Division and the Carter Division.
Projections for the next year are as follows:
Adams Carter

Division Division Total
Sales $560,000 $336,000 $896,000
Variable costs 196,000 154,000 350,000
Contribution margin $364,000 $182,000 $546,000
Direct fixed costs 168,000 140,000 308,000
Segment margin $196,000 $42,000 $238,000
Allocated common
84,000 63,000 147,000
costs
Operating income (loss) $112,000 ($21,000) $91,000
Operating income for Bridgeton Corporation as a whole if the Carter Division were dropped would be:

A. $133,000.
B. $112,000.
C. $91,000.
D. $49,000.

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49. Damon Industries manufactures 20,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct materials $100,000

Direct labor 160,000
Variable manufacturing overhead 60,000
Fixed manufacturing overhead 80,000
An outside supplier has offered to sell the component for $17. If Damon purchases the component from the
outside supplier, the manufacturing facilities would be unused and could be rented out for $10,000. If
Damon purchases the component from the supplier instead of manufacturing it, the effect on income would
be:

A. a $70,000 increase.

B. a $50,000 decrease.
C. a $10,000 decrease.
D. a $30,000 increase.

50. Brevard Industries produces two products. Information about the products is as follows:
Product 1 Product 2
Units produced and sold $4,000 10,000
Selling price per unit $15 $13
Variable costs per unit 9 8
The company's fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1 and
$40,000 can be directly traced to Product 2. The effect on the firm's profits if Product 2 is dropped would
be a:

C. $35,000 decrease.

51. Which of the following costs would continue to be incurred even if a segment is eliminated?

A. Direct fixed expenses

B. Variable cost of goods sold
C. Common fixed costs
D. Variable selling and administrative expenses

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52. AirStep Shoe Company has two retail stores, one in Gainesville and the other in Orlando. The Gainesville
store had sales of $100,000, a contribution margin of 35 percent, and a segment margin of $14,000. The
company's two stores have total sales of $250,000, contribution margin of 32 percent, and a total segment
margin of $31,000. The contribution margin for the Orlando store must have been:

A. $65,000.
B. $170,000.
C. $105,000.
D. $45,000.

53. Carter Industries has two divisions: the West Division and the East Division. Information relating to the
divisions for the year just ended is as follows:
West East
Units produced and sold 30,000 40,000
Direct fixed cost 48,000 110,000
Common fixed cost 40,000 40,000
Common fixed expenses have been allocated equally to each of the two divisions. Carter's segment margin
for the West Division is:

A. $150,000.
B. $102,000.
C. $30,000.
D. $110,000.

4-12
54. Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components
was determined to be as follows:

Total $600,000
Assume that the fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility. This
facility cannot be used for any other purpose. An outside supplier has offered to sell the component to
Ortega for $34. If Ortega Industries purchases the component from the outside supplier, the effect on
income would be a:

A. $30,000 decrease.
D. $90,000 increase.


Total $600,000
Assume Ortega Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the
component from an outside supplier. An outside supplier has offered to sell the component for $34. If
Ortega purchases the component from the supplier instead of manufacturing it, the effect on income would
be a:


4-13
56. The operations of Ranger Corporation are divided into the Stargate Division and the Cosmos Division.
Stargate Cosmos

Sales $500,000 $360,000 $860,000
Less: Variable Costs 180,000 200,000 380,000
Contribution Margin $320,000 $160,000 $480,000
Less: Direct Fixed
150,000 125,000 275,000
Costs
Segment Margin $170,000 $35,000 $205,000
Less: Allocated
70,000 55,000 125,000
Common Costs
Operating Income
$100,000 ($20,000) $80,000
(Loss)
Operating income for Ranger Corporation, as a whole, if the Cosmos Division were dropped would be

A. $45,000
B. $80,000
C. $100,000
D. $120,000

57. The Hammer Division of Excel Company produces hardened sledge hammers. One-third of Hammer's
output is sold to the Government Products Division of Excel; the remainder is sold to outside customers.
Hammer's estimated operating profit for the year is:
Government
Products Outside
Division Customers
Sales $15,000 $40,000
Variable costs (10,000) (20,000)
Fixed costs (3,000) (6,000)
Operating profits $2,000 $14,000
Unit sales 10,000 20,000
The Government Products Division has an opportunity to purchase 10,000 hammers of the same quality
from an outside supplier on a continuing basis. The Hammer Division cannot sell any additional products
to outside customers. Should the Excel Company allow its Government Products Division to purchase the
hammers from the outside supplier at $1.25 per unit?

A. No; making the hammers will save Excel $1,500.

B. Yes; buying the hammers will save Excel $1,500.
C. No; making the hammers will save Excel $2,500.
D. Yes; buying the hammers will save Excel $2,500.

4-14
58. The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000.

Direct labor 55,000
Variable overhead 45,000
Fixed overhead 70,000
Total $190,000
The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit. If Camel
accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities
could be rented to a third party for $15,000 per year. What are the relevant costs for the "make" alternative?
A. $160,000.
B. $165,000.
C. $175,000.
D. $185,000.


Direct labor 55,000
Total $190,000
accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities
could be rented to a third party for $15,000 per year. At what price would Camel be indifferent to Yukon's
offer?

A. $17.00.
B. $17.50.
C. $18.50.
D. $19.50.

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60. For the past five years, the MAG Company has produced and sold electronic magnets to chemistry labs
throughout the United States. Recently, a strong competitor has entered the market and MAG is considering
whether it should continue to produce and sell the electronic magnets. The following information has been
gathered to assist management in its decision:
A) The machinery used to produce the magnet was purchased five-years ago for $500,000.
B) Four of the employees who produce magnets would be reassigned to the magnifying glass division.
C) The space now used to produce the magnets would be used to eliminate the need to rent warehouse
space.
D) Sales volume (units) is estimated to drop by 50% once the competitor becomes fully operational.
Which of the items listed above is (are) relevant to the decision to continue the production and sale of the
electronic magnets?

A. A and C.
B. B and C.
C. C and D.
D. A, B, and D.

61. Which of the following statements about the theory of constraints is (are) true?
(A) The theory of constraints focuses on determining the optimal product mix when one or more resources
(B) The theory of constraints focuses on maximizing the rate of throughput contribution while minimizing
investment and other operating costs.

A. Only A.
B. Only B.

62. The theory of constraints focuses on maximizing throughput contribution margin while minimizing all of
the following except:

A. selling expenses per unit sold.

B. production bottlenecks.
C. investment in buildings.
D. investment in inventories.

4-16
63. The Widner Company manufactures two products: Stainless Serving Spoons and Stainless Serving Forks.
The costs and revenues are as follows:
Spoons Forks
Sales price $150 $88
Variable cost per unit 80 42
Total demand for Spoons is 14,000 units and for Forks is 9,000 units. Machine time is a scarce resource.
During the year, 54,000 machine hours are available. Spoons requires 5 machine hours per unit, while
Forks requires 3 machine hours per unit.
How many units of Spoons and Forks should Widner produce?
Spoons Forks
A. 14,000 0
B. 8,307 4,154
C. 10,800 0
D. 5,400 9,000

A. Option A
B. Option B
C. Option C
D. Option D

64. Morgan Inc has 5,400 machine hours available each month. The following information on the company's
three products is available:
Product Product Product

1 2 3
Contribution margin per
$15.00 $18.00 $7.50
unit
Machine hours per unit 3 2 1
If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the
company's profits?

A. Product 1 first, product 2 second, and product 3 third.

B. Product 2 first, product 3 second, and product 1 third.
C. Product 3 first, product 2 second, and product 1 third.
D. Product 3 first, product 1 second, and product 2 third.

4-17
65. Xenos Inc has 6,600 machine hours available each month. The following information on the company's

1 2 3
$20.00 $21.00 $17.50
unit
company's profits?

A. Product X first, product Z second, and product Y third.

B. Product Y first, product Z second, and product X third.
C. Product Y first, product X second, and product Z third.
D. Product Z first, product X second, and product Y third.

66. The Garrison Company manufactures two products: Oxy Cleaner and Sonic Cleaner. The costs and
revenues are as follows:
Oxy Cleaner Sonic Cleaner

Sales Price $75 $44
Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine hours is a scarce resource.
During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while Sonic
requires 2.5 machine hours per unit.
How many units of Oxy and Sonic should Garrison produce?

A. 10,000 0
B. 0 6,000
C. 8,750 6,000
D. 10,000 6,000

A. Option A
B. Option B
C. Option C
D. Option D

4-18

Sales Price $75 $44
Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine time is a scarce resource.
During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while Sonic
requires 2.5 machine hours per unit.
What is the maximum contribution margin Garrison can achieve during a year?

A. $444,250.
B. $1,014,000.
C. $488,000.
D. $855,500.

68. Zantaq Inc has 5,400 machine hours available each month. The following information on the company's
Side
Bookcases Chairs
Tables
$15.00 $18.00 $7.50
unit
The market demand is limited to 2,000 units of each of the three products. How many units of each should
Zantaq produce and sell?
Bookcases Chairs Side Tables

A. 2,000 2,000 2,000
B. 0 2,000 2,000
C. 0 2,000 1,400
D. 1,800 0 0

A. Option A
B. Option B
C. Option C
D. Option D

4-19
Side
Bookcases Chairs
Tables
$15.00 $18.00 $7.50
unit
The market demand is limited to 2,000 units of each of the three products. What is the maximum possible
contribution margin that Zantaq could make in any month?

A. $81,000.
B. $46,500.
C. $43,000.
D. $51,000.

70. Warrior Inc has 12,000 machine hours available each month. The following information on the company's
four products is available:
Product Product Product Product

W X Y Z
Selling price
$20.00 $21.00 $17.50 $15.00
per unit
Variable cost
$10.00 $9.00 $7.50 $10.00
per unit
Machine hours
2 3 4 1.5
per unit
company's profits?

A. Product W first, product X second, product Z third, and product Y last.

B. Product Z first, product W second, product X third, and product Y last.
C. Product X first, product W second, product Y third, and product Z last.
D. Product X first, product Z second, product Y third, and product W last.

4-20
71. The Tire Division of Traker Company produces tires for off-road sport vehicles. One-third of Tire's output
is sold to an internal division of Traker; the remainder is sold to outside customers. Tire's estimated
operating profit for the year is:
Internal Outside
Sales $150,000 $400,000
Variable costs 100,000 200,000
Fixed costs 30,000 60,000
Unit sales 10,000 20,000
The internal division has an opportunity to purchase 10,000 tires of the same quality from an outside
supplier on a continuing basis. The Tire Division cannot sell any additional products to outside customers.
Should the Traker Company allow its internal division to purchase the tires from the outside supplier at
$13.00 per unit?

A. No; making the tires will save Traker $15,000.

B. Yes; buying the tires will save Traker $15,000.
C. No; making the tires will save Traker $30,000.
D. Yes; buying the tires will save Traker $30,000.

72. The Tire Division of Traker Company produces tires for off-road sport vehicles. One-third of Tire's output
is sold to an internal division of Traker; the remainder is sold to outside customers. Tire's estimated
operating profit for the year is:
Internal Outside
Sales $150,000 $400,000
Unit sales 10,000 20,000
supplier on a continuing basis. The Tire Division cannot sell any additional products to outside customers.
What is the minimum selling price that Tire should accept from the internal division?

A. $10.00.
B. $13.00.
C. $15.00.
D. $50.00.

4-21
73. The Bogart Company produces 5,000 units of item SLM 46 annually at a total cost of $200,000.

Direct labor 55,000
Total $200,000
The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If Bogart
accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's leased
facilities could be vacated, reducing lease payments by $30,000 per year. What are the relevant costs for
the "make" alternative?

A. $120,000.
B. $175,000.
C. $190,000.
D. $200,000.


Direct labor 55,000
Total $200,000
The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If Bogart
accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's leased
facilities could be vacated, reducing lease payments by $30,000 per year. At what price would Bogart be
indifferent to Conner's offer?

A. $40.
B. $38.
C. $35.
D. $24.

4-22
75. The Rapid Delivery Service is considering the expansion of its business into afternoon retail delivery
service. This would require an additional $25,000 in labor costs per month. Company-owned vehicles now
used to make morning deliveries to local manufacturers could be used in the afternoons to make retail
deliveries. However, it is estimated that an additional $10,000 would be required per month for gas, oil, and
maintenance. It is further estimated that the retail delivery use of the trucks would be allocated 45% of the
existing $13,000 fixed vehicle costs. What is the differential delivery cost per month for expanding into the
retail delivery market?

A. $25,000.
B. $35,000.
C. $39,500.
D. $40,850.

76. The Lamar Company manufactures wiring tools. The company is currently producing well below its full
capacity. The Boston Company has approached Lamar with an offer to buy 10,000 tools at $1.75 each.
Lamar sells its tools wholesale for $1.85 each; the average cost per unit is $1.83, of which $0.27 is fixed
costs. If Lamar were to accept Boston's offer, what would be the increase in Lamar's operating profits?

A. $800.
B. $1,000.
C. $1,900.
D. $2,900.

77. The Young Company has gathered the following information for a unit of its most popular product:

Direct labor 6
Target selling price $42
The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price
of $32 per unit. This special order would not disturb regular sales. Special packaging and other selling
expenses would be an additional $0.50 per unit for the special order. If the special order is accepted,
Young's operating profits will increase by:

A. $4,000.
B. $6,400.
C. $8,000.
D. $19,000.

4-23

Direct labor 6
The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price
of $32 per unit. The distributor claims this special order would not disturb regular sales at $42. Special
packaging and other selling expenses would be an additional $0.50 per unit for the special order. How
many units of regular sales could be lost before this contract is not profitable?

A. 0 units.
B. 950 units.
C. 1, 000 units.
D. 2,000 units.

79. The following information relates to the Jasmine Company for the upcoming year.
Amount Per Unit

Sales $8,000,000 $20.00
Gross margin 1,600,000 4.00
Operating expenses 600,000 1.50
Operating profits $1,000,000 $2.50
unit has been made to Jasmine. Fortunately, there will be no additional operating expenses associated with
the order and Jasmine has sufficient capacity to handle the order. How much will operating profits increase
if Jasmine accepts the special order?

A. $50,000.
B. $125,000.
C. $200,000.
D. $250,000.

4-24
Amount Per Unit

Sales $8,000,000 $20.00
unit has been made to Jasmine. Fortunately, there will be no additional operating expenses associated with
the order; however, Jasmine is operating at full capacity. How much will operating profits increase if
Jasmine accepts the special order?

A. $50,000.
B. $125,000.
C. $200,000.
D. Operating profits will not increase as a result of accepting the special order.

81. The following information relates to a product produced by Orca Company:

Direct labor 14
Variable overhead 12
Fixed overhead 16
Unit cost $62
Fixed selling costs are $1,000,000 per year. Although production capacity is 500,000 units per year, Orca
expects to produce only 400,000 units next year. The product normally sells for $80 each. A customer has
offered to buy 60,000 units for $60 each. The customer will pay the transportation charge on the units
purchased. If Orca accepts the special order, the effect on income would be a:

D. $1,200,000 decrease.

4-25
82. The operations of Winston Corporation are divided into the Blink Division and the Blur Division.
Blink Blur

Sales $280,000 $168,000 $448,000
Variable costs 98,000 77,000 175,000
Segment margin $98,000 $21,000 $119,000
Allocated common
42,000 31,500 73,500
costs
Operating income for Winston Corporation as a whole if the Blur Division were dropped would be:

A. $66,500.
B. $56,000.
C. $45,500.
D. $24,500.

Blink Blur

Sales $280,000 $168,000 $448,000
Variable costs 98,000 77,000 175,000
Segment margin $98,000 $21,000 $119,000
Allocated common
42,000 31,500 73,500
costs
If the Blur Division were dropped, Blink Division's sales would increase by 30%. If this happened, the
operating income for Winston Corporation as a whole would be:

A. $72,800.
B. $56,000.
C. $79,100.
D. $59,150.

4-26
84. Which of the following statements regarding differential costs is (are) true?
(A) The full cost fallacy occurs when a decision-maker includes fixed manufacturing overhead in the
product's cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on differential

A. Only A.
B. Only B.

85. Which of the following statements regarding special orders is (are) false?
(A) The primary decision for special orders is determining whether the differential revenue is greater than
the differential costs associated with the order.
(B) The differential analysis approach to pricing for special orders will always lead to underpricing in the
long-run because fixed costs are not included in the analysis.

A. Only A.
B. Only B.


A. Indirect materials and indirect labor if the item is purchased.

B. Direct materials and direct labor if the item is manufactured internally.
C. Variable overhead if the item is purchased.

4-27
87. For the past five years, the McArthur Company has produced and sold frequency meters to genetics labs
throughout the United States. Recently, a strong competitor has entered the market and McArthur is
considering whether it should continue to produce and sell the frequency meters. The following information
has been gathered to assist management in its decision:
A) Sales volume (units) is estimated to drop by 25% once the competitor becomes fully operational.
B) The equipment used to produce the meters was purchased five-years ago for $1,500,000.
C) The space now used to produce the meters would be reallocated to eliminate the need to rent warehouse
space.
D) Three of the employees who produce meters would be reassigned to the oscillator division.
Which of the items listed above is (are) relevant to the decision to continue the production and sale of the
frequency meters?

A. A and C.
B. B and C.
C. C and D.
D. A, B, and D.

(A) The theory of constraints focuses on determining the optimal product mix when two or more resources
(B) The theory of constraints focuses on maximizing the rate of throughput contribution while maximizing
investment and other operating costs.

A. Only A.
B. Only B.

89. The opportunity cost of making a component part in a factory with no excess capacity is the: (CMA
adapted)

A. variable manufacturing cost of the component.

B. fixed manufacturing cost of the component.
C. total manufacturing cost of the component.
D. net benefit foregone from the best alternative use of the capacity required.

90. When there is a production constraint, a company should emphasize the products with:

A. the highest unit contribution margins.

B. the highest contribution margin ratios.
C. the highest contribution margin per unit of the constrained resource.
D. the highest contribution margins and contribution margin ratios.

4-28
91. A study has been conducted to determine if Product A should be dropped. Sales of the product total
$200,000 per year; variable 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.

92. The King Company has two divisions—North and South. The divisions have the following revenues and
expenses:
North South
Sales $900,000 $800,000
Variable expenses 450,000 300,000
Traceable fixed expenses 260,000 210,000
Allocated common corporate
240,000 190,000
expenses
Net operating income (loss) ($50,000) $100,000
Management at King is pondering the elimination of North Division. If North Division were eliminated, its
traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected.
Given these data, the elimination of North Division would result in an overall company net operating
income of:

A. $100,000.
B. $150,000.
C. $(140,000).
D. $50,000.

93. Parton Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Parton's plant
manager is considering making the headlights now being purchased from an outside supplier for $11.00
each. The Parton plant has idle equipment that could be used to manufacture the headlights. The design
engineer estimates that each headlight requires $4.00 of direct materials, $3.00 of direct labor, and $6.00 of
manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be
unaffected by this decision. A decision by Parton Company to manufacture the headlights should result in a
net gain (loss) for each headlight of: (CMA adapted)

A. $(2.00).
B. $1.60.
C. $0.40.
D. $2.80.

4-29
94. Item I51 is used in one of Policy Corporation's products. The company makes 18,000 units of this Item
each year. The company's Accounting Department reports the following costs of producing the Item at this
level of activity:
Per Unit
Direct materials $1.20
Direct labor $2.20
Variable manufacturing overhead $3.30
Supervisor’s salary $1.00
Depreciation of special equipment $2.70
Allocated general overhead $8.50
An outside supplier has offered to produce this Item and sell it to the company for $15.80 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 Item 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 $26,000 of these allocated general overhead costs would be avoided.
If management decides to buy Item I51 from the outside supplier rather than to continue making the Item,
what would be the annual impact on the company's overall net operating income?

A. Net operating income would decline by $81,800 per year.

B. Net operating income would decline by $55,800 per year.
C. Net operating income would decline by $119,800 per year.
D. Net operating income would decline by $29,800 per year.

4-30
95. Liu Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The
company uses 13,000 of the components each year. The unit product cost of the component according to
the company's cost accounting system is given as follows:

Direct labor 5.80
Variable manufacturing overhead 1.60
Fixed manufacturing overhead 3.60
Unit product cost $19.80
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the
component were bought from the outside supplier. In addition, making the component uses 1 minute on the
machine that is the company's current constraint. If the component were bought, this machine time would
be freed up for use on another product that requires 2 minutes on the constraining machine and that has a
contribution margin of $5.20 per unit.
When deciding whether to make or buy the component, what cost of making the component should be
compared to the price of buying the component? (CIMA adapted)

A. $22.40.
B. $19.80.
C. $17.28.
D. $19.88.

4-31
96. Item N29 is used by Tyner Corporation to make one of its products. A total of 11,000 units of this Item are
produced and used every year. The company's Accounting Department reports the following costs of
producing the Item at this level of activity:
Per Unit
Direct labor 1.70
Supervisor’s salary 2.60
Depreciation of special equipment 3.20
Allocated general overhead 3.30
An outside supplier has offered to make the Item and sell it to the company for $21.20 each. If this offer is
accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The
special equipment used to make the Item was purchased many years ago and has no salvage value or other
use. The allocated general overhead represents fixed costs of the entire company, none of which would be
avoided if the Item were purchased instead of produced internally. In addition, the space used to make Item
N29 could be used to make more of one of the company's other products, generating an additional segment
margin of $29,000 per year for that product. What would be the impact on the company's overall net
operating income of buying Item N29 from the outside supplier?


B. Net operating income would increase by $29,000 per year.
D. Net operating income would increase by $19,100 per year.

4-32
97. Bacon Company makes four products in a single facility. These products have the following unit product
costs:
Products
A B C D
Direct materials $14.30 $10.20 $11.00 $10.60
Direct labor 19.40 27.40 33.60 40.40
Variable manufacturing
4.30 2.70 2.60 3.20
overhead
Fixed manufacturing
26.50 34.80 26.60 37.20
overhead
Unit product cost $64.50 $75.10 $73.80 $91.40
Additional data concerning these products are listed below.
Products
A B C D
Grinding minutes per
3.80 5.30 4.30 3.40
unit
Selling price per unit $76.10 $93.50 $87.40 $104.20
Variable selling cost
$2.20 $1.20 $3.30 $1.60
per unit
Monthly demand in
4,000 4,000 3,000 2,000
units
The grinding machines are 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.

4-33
costs:
Products
A B C D
Direct labor 19.40 27.40 33.60 40.40
4.30 2.70 2.60 3.20
overhead
Fixed manufacturing
26.50 34.80 26.60 37.20
overhead
Products
A B C D
3.80 5.30 4.30 3.40
unit
$2.20 $1.20 $3.30 $1.60
per unit
Monthly demand in
4,000 4,000 3,000 2,000
units
Which product makes the LEAST profitable use of the grinding machines?

A. Product A.
B. Product B.
C. Product C.
D. Product D.

4-34
costs:
Products
A B C D
Direct labor 19.40 27.40 33.60 40.40
4.30 2.70 2.60 3.20
overhead
Fixed manufacturing
26.50 34.80 26.60 37.20
overhead
Products
A B C D
3.80 5.30 4.30 3.40
unit
$2.20 $1.20 $3.30 $1.60
per unit
Monthly demand in
4,000 4,000 3,000 2,000
units
Which product makes the MOST profitable use of the grinding machines?

A. Product A.
B. Product B.
C. Product C.
D. Product D.

4-35
costs:
Products
A B C D
Direct labor 19.40 27.40 33.60 40.40
4.30 2.70 2.60 3.20
overhead
Fixed manufacturing
26.50 34.80 26.60 37.20
overhead
Products
A B C D
3.80 5.30 4.30 3.40
unit
$2.20 $1.20 $3.30 $1.60
per unit
Monthly demand in
4,000 4,000 3,000 2,000
units
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.

4-36
101. Darren Company produces three products with the following costs and selling prices:
Product
X Y Z
Selling price per unit $40 $30 $35
Variable costs per unit 24 16 20
Contribution margin per unit $16 $14 $15
Direct labor hours per unit 4 2 3
If Darren has a limit of 20,000 direct labor hours but no limit on units sold or machine hours, then the
ranking of the products from the most profitable to the least profitable use of the constrained resource is:

A. X, Y, Z.
B. Y, Z, X.
C. X, Z, Y.
D. Z, Y, X.

Product
X Y Z
If Darren has a limit of 30,000 machine hours but no limit on units sold or direct labor hours, then the

A. Y, Z, X.
B. X, Y, Z.
C. X, Z, Y.
D. Z, X, Y.

Essay Questions

4-37
103. The Morris Company manufactures wiring tools. The company is currently producing well below its full
capacity. The Baker Company has approached Morris with an offer to buy 5,000 tools at $17.50 each.
Morris sells its tools wholesale for $18.50 each; the average cost per unit is $18.30, of which $2.70 is fixed
costs.
Required:
a. If Morris were to accept Baker's offer, what would be the increase in Miller's operating profits?
b. Assume that Morris is operating at full capacity. If Morris were to accept Baker's offer, what would be
the change in Morris' operating profits?

104. The Parton Company has gathered the following information for a unit of its most popular product:

Direct labor 15
Cost to manufacture $55
The above cost information is based on 10,000 units. Parton currently sells 8,500 units for $62 per unit. A
distributor has offered to buy 1,000 units at a price of $50 per unit. This special order would not disturb
regular sales.
Required:
a. Calculate Parton's change in operating profits if the special order is accepted.

b. How many units of regular sales could be lost before this contract is not profitable?

4-38
105. The following information relates to the Klear Company for the upcoming year.
Amount Per Unit

Sales $9,000,000 $30.00
unit has been made to Klear. Fortunately, there will be no additional operating expenses associated with
the order and Klear has sufficient capacity to handle the order.
Required:
a. How much will operating profits increase if Klear accepts the special order?
b. Assume that Klear is operating at full capacity. How much will operating profits change if Klear accepts
the special order?

4-39
106. The following information relates to a product produced by Baywatch Company:

Direct labor 35
Fixed overhead 40
Unit cost $155
Fixed selling costs are $1,000,000 per year. Although production capacity is 900,000 units per year,
Baywatch expects to produce only 800,000 units next year. The product normally sells for $180 each. A
customer has offered to buy 60,000 units for $150 each. The customer will pay the transportation charge on
the units purchased.
Required:
a. Compute the effect on income if Baywatch accepts the special order.

b. If Baywatch accepts the special order, how much could normal sales drop before all of the differential
profits disappear?

4-40
107. Douglas Corporation produces and sells three products. The three products, Alpha, Beta, and Gamma, are
sold in a local market and in a regional market. At the end of the first quarter of the current year, the
following income statement (in thousands of dollars) has been prepared:
Total Local Regional

Sales revenue $5,200 $4,000 $1,200
Cost of goods sold 4,040 3,100 940
Gross margin 1,160 900 260
Marketing costs 420 240 180
Administrative costs 208 160 48
Operating profits $532 $500 $32
Management has expressed special concern with the regional market because of the extremely poor return
on sales. This market was entered a year ago because of excess capacity. It was originally believed that the
return on sales would improve with time, but after a year, no noticeable improvement can be seen from the
results as reported in the above quarterly statement. In attempting to decide whether to eliminate the
regional market, the following information has been gathered:
Products Alpha Beta Gamma

Sales revenue $2,000 $1,600 $1,600
Variable
manufacturing cost % 60% 70% 60%
of sales
Variable marketing
3% 2% 2%
cost
Product Sales by Markets Local Regional

Alpha $1,600 $400
Beta 1,200 400
Gamma 1,200 400
All administrative costs and fixed manufacturing costs are common to the three products and the two
markets and are fixed for the period. Remaining marketing costs are fixed for the period and separable by
market. All fixed costs have been arbitrarily allocated to markets.
Required:
(a.) Assuming there are no alternative uses for the Douglas Corporation's present capacity, would you
recommend dropping the regional market? Why or why not?
(b.) Prepare the quarterly income statement showing contribution margins by products. Do not allocate
fixed costs to products.
(c.) It is believed that a new product can be ready for sale next year if the Douglas Corporation decides to
go ahead with continued research. The new product can be produced by simply converting equipment
presently used in producing product Gamma. This conversion will increase fixed costs by $40,000 per
quarter. What must be the minimum contribution margin per quarter be for the new product to make the
changeover financially feasible?

4-41

4-42
108. Macro Electronics manufactures low-cost, consumer-grade computers. It sells these computers to various
electronics retailers to market under store brand names. It manufactures two computers, the Lightning 2.0
and the Lightning 2.4, which differ in terms of speed, memory, and hard drive capacity. The following
information is available:
Lightning 2.0 Lightning 2.4

Direct materials $90 $110
Direct labor 60 90
Variable overhead 30 30
Fixed overhead 180 240
Total cost per unit $360 $470
Selling price 600 780
The average wage rate is $30 per hour. The plant has a capacity of 32,000 direct labor-hours.
Required:
1. A nationwide discount chain has approached Macro with an offer to buy 2,000 Lightning 2.0 computers
and 2,000 Lightning 2.4 computers if the unit prices are lowered to $350 and $450, respectively.
a. If Macro accepts the offer, how many direct labor-hours will be required to produce the additional
computers?
b. How much will the profit increase (or decrease) if Macro accepts this proposal? All other prices will
remain the same.
2. Suppose that the customer has offered instead to buy up to 3,000 each of the two models at $350 and
$450, respectively.
a. How many of each product should be manufactured and sold? Assume current demand will not be
affected by the special order. Also assume that the company cannot increase its production capacity to
meet the extra demand.
b. How much will the profits change if this order is accepted instead?

4-43
109. The operations of Balance Corporation are divided into the Kaplan Division and the Norton Division.
Kaplan Norton

Sales $1,200,000 $600,000 $1,800,000
Variable costs 480,000 360,000 840,000
Contribution
$720,000 $240,000 $960,000
margin
Segment margin $560,000 $150,000 $710,000
Allocated common
360,000 180,000 540,000
costs
Operating income
$200,000 ($30,000) $170,000
(loss)
Required:
a. Operating income for Balance Corporation as a whole if the Norton Division were dropped would be
b. If the Norton Division were dropped, Kaplan Division's sales would increase by 45%. If this happened,
the operating income for Balance Corporation as a whole would be:

4-44
110. The Fortune Company produces 15,000 units of Part QT34 annually at a total cost of $600,000.

Manufacturing overhead 375,000
Total $600,000
Manufacturing overhead is 36% variable. The Xu Company has offered to supply all 15,000 units of Part
QT34 per year for $35 per unit. If Fortune accepts the offer, $8 per unit of the fixed overhead would be
avoided. In addition, some of Fortune's leased facilities could be vacated, reducing lease payments by
$90,000 per year.
Required:
a. By how much would Fortune's profits change if 15,000 of Part QT34 are purchased from Xu?
b. At what price would Fortune be indifferent to Xu's offer?

4-45
111. The Fair Play Division of Fast Company produces wheels for off-road sport vehicles. One-half of Fair
Play's output is sold to the Glow Division of Fast; the remainder is sold to outside customers. Fair Play's
estimated operating profit for the year is:
Internal Outside
Sales $300,000 $400,000
Unit sales 20,000 20,000
Glow Division has an opportunity to purchase 20,000 wheels of the same quality from an outside supplier
on a continuing basis.
Required:
a. The Fair Play Division cannot sell any additional products to outside customers. Should the Fast
Company allow Glow Division to purchase the wheels from the outside supplier at $13.00 per unit?
b. If the Fair Play Division is now operating at full capacity and can sell all its units to outside customers
at the present selling price, what is the differential cost to Fast of requiring that the wheels be made
internally and sold to Glow Division?
c. If the Fair Play Division is now operating at full capacity and can sell all its units to outside customers
at the present selling price, what is the minimum selling price that Fair Play should accept from Glow
Division?
d. The Fair Play Division cannot sell any additional products to outside customers. What is the minimum
selling price that Fair Play should accept from the Glow Division?

4-46
112. Halfway Industries produces two products. Information about the products is as follows:
Clocks Headphones
The company's fixed costs totaled $140,000, of which $30,000 can be directly traced to Clocks and
$90,000 can be directly traced to Headphones.
Required:
The effect on the firm's profits if the Headphone product is dropped would be:

113. Everett Tool Company has two retail stores, one in Dallas and the other in Sand Creek. The Dallas store
had sales of $200,000, a contribution margin of 35 percent, and a segment margin of $28,000. The
company's two stores have total sales of $500,000, an average contribution margin of 32 percent, and a
total segment margin of $62,000.
Required:
Prepare a segmented income statement for Everett.

4-47
114. Dickson Industries has two divisions: the North Division and the South Division. Information relating to
the divisions for the year just ended is as follows:
North South
Common fixed expenses have been allocated equally to each of the two divisions.
Required:
Prepare a segmented income statement for Dickson.

4-48
115. The operations of Jorge Corporation are divided into the Northern Division and the Eastern Division.

Northern Eastern

Sales $750,000 $540,000 $1,290,000
Less: Variable costs 270,000 300,000 570,000
Less: Direct fixed
225,000 190,000 415,000
costs
Segment margin $255,000 $50,000 $305,000
Less: Allocated
130,000 95,000 225,000
common costs
Operating income
$125,000 ($45,000) $80,000
(loss)
Required:
a. Operating income for Jorge Corporation, as a whole, if the Eastern Division were dropped would be:
b. If Eastern Division is dropped, Northern's sales will increase by 20%. What will Jorge Corporation's
operating income be?

4-49
116. The Ramos Company manufactures two products: Treadmills and Elliptical Trainers. The costs and
Treadmill Elliptical Trainer

Sales price per unit $300 $175
Total demand for the Treadmill product is 7,000 units and for the Elliptical Trainer product is 5,000 units.
Machine time is a scarce resource. During the year, 48,000 machine hours are available. A Treadmill
requires 6 machine hours per unit, while an Elliptical Trainer requires 2.5 machine hours per unit.
Required:
a. How many units of Treadmills and Elliptical Trainers should Ramos produce?
b. What will be the maximum possible contribution margin?

4-50
117. Short Inc has 5,200 machine hours available each month. The following information on the company's

1 2 3
$45.00 $54.00 $22.50
unit
Sales demand in units 900 1,000 3,000
Required:
a. What production schedule will maximize the company's profits?


4-51
118. Rainier Inc has 6,400 machine hours available each month. The following information on the company's

X Y Z
$20.00 $21.00 $17.50
unit
Sales demand in units 1,000 1,500 1,500
Required:


4-52
119. The Valor Company manufactures two products: L and M. The costs and revenues are as follows:
Product L Product M
Machine hours per unit 15 10
Total demand for Product L is 2,000 units and for Product M is 1,000 units. Machine time is a scarce
resource. During the year, 36,000 machine hours are available.
Required:
a. How many units of Products L and M should Valor produce?

4-53
120. Giant Inc has 3,600 machine hours available each month. The following information on the company's
three surgical kits is available:
Surgical Surgical Surgical

Kit 1 Kit 2 Kit 3
$5.00 $4.00 $2.50
unit
Sales demand in units 1,000 800 900
Required:


4-54
121. Moxy Inc has 9,600 machine hours available each month. The following information on the company's

X Y Z
$20.00 $21.00 $17.50
unit
Sales demand in units 500 750 1,000
Required:


4-55
122. Frank Industries manufactures 200,000 components per year. The manufacturing cost of the components
was determined as follows:

An outside supplier has offered to sell the component for $3.40. If Frank purchases the component from
the outside supplier, the manufacturing facilities would be unused and could be rented out for $20,000.
Required:
a. If Frank purchases the component from the supplier instead of manufacturing it, the effect on income
would be:
b. What is the maximum price Frank would be willing to pay the outside supplier?

4-56
123. Talent Industries manufactures 30,000 components per year. The manufacturing cost of the components

Total $1,200,000
Required:
a. Assume that the fixed manufacturing overhead reflects the cost of Talent's manufacturing facility. This
Talent for $34. If Talent Industries purchases the component from the outside supplier, the effect on
income would be a
b. Assume Talent Industries could avoid $80,000 of fixed manufacturing overhead if it purchases the
Talent purchases the component from the supplier instead of manufacturing it, the effect on income would
be a

4-57
124. The Sands Company manufactures and sells several products, one of which is called a slip differential. The
company normally sells 30,000 units of the slip differential each month. At this activity level, unit costs
are:
Direct materials $4
Direct labor $3
Variable manufacturing overhead $4
Fixed manufacturing overhead $5
Variable selling $3
Fixed selling $1
An outside supplier has offered to produce the slip differentials for the Sands Company, and to ship them
directly to the Sands Company's customers. This arrangement would permit the Sands Company to reduce
its variable selling expenses by one third (due to elimination of freight costs). The facilities now being used
to produce the slip differentials would be idle and fixed manufacturing overhead would continue at 60
percent of its present level. The total fixed selling expenses of the company would be unaffected by this
decision.
Required:
What is the maximum acceptable price quotation for the slip differentials from the outside supplier?

4-58
125. Carlson Company makes 4,000 units per year of a part called an axial tap for use in one of its products.
Data concerning the unit production costs of the axial tap follow:

Direct labor 10
Variable manufacturing overhead 8
Fixed manufacturing overhead 20
Total manufacturing cost per unit $73
An outside supplier has offered to sell Carlson Company all of the axial taps it requires. If Carlson
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 Carlson 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 Carlson Company accept
the offer? Fully support your answer with appropriate calculations.
b. Assume that Carlson 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 Carlson Company should be willing to pay the outside supplier for
axial taps?

4-59
126. Part XE3 is used in one of Sun Corporation's products. The company's Accounting Department reports the
following costs of producing the 12,000 units of the part that are needed every year.
Per Unit
Direct labor $1.20
Variable overhead $2.70
An outside supplier has offered to make the part and sell it to the company for $14.70 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
offer were accepted, only $5,000 of these allocated general overhead costs would be avoided.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of buying part XE3
from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

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127. Snagless Corporation has received a request for a special order of 9,000 units of product ZX9 for $46.50
each. The normal selling price of this product is $51.60 each, but the units would need to be modified
slightly for the customer. The normal unit product cost of product ZX9 is computed as follows:

Direct labor 6.60
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 some modifications made to product ZX9 that
would increase the variable costs by $6.20 per unit and that would require a one-time investment of
$46,000 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 capacity for producing the special order.
Required:
Determine the effect on the company's total net operating income of accepting the special order. Show
your work!

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128. A customer has asked Balkans Corporation to supply 5,000 units of product DX9, with some
modifications, for $40.20 each. The normal selling price of this product is $52.80 each. The normal unit
product cost of product DX9 is computed as follows:

Direct labor 6.10
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 some modifications made to product DX9 that
$23,000 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 capacity for producing the special order.
Required:
Determine the effect on the company’s total net operating income of accepting the special order. Show
your work!

4-62
129. Florence Corporation makes three products that use the current constraint, which is a particular type of
machine. Data concerning those products appear below:
X1 R2 Z3
Selling price per unit $325.89 $543.15 $508.00
Variable cost per unit $251.94 $420.75 $397.60
Time on the constraint
5.10 8.50 8.00
(minutes)
Required:
a. Rank the products in order of their current profitability from the most profitable to the least profitable.
In other words, rank the products in the order in which they should be emphasized. Show your work!
b. Assume that sufficient constraint time is available 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?

4-63
130. Atuso, Inc. produces three products. Data concerning the selling prices and unit costs of the three products
appear below:
Product
J1 K2 L3
Selling price $80 $60 $90
Variable costs $50 $40 $55
Fixed costs $25 $8 $22
Grinding machine time (minutes) 10 5 7
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?

4-64
131. Varix Company makes three products in a single facility. These products have the following unit product
costs:
Product
A B C
Direct materials $12.80 $9.30 $4.70
Direct labor 14.10 14.90 10.00
1.20 0.90 0.50
overhead
Fixed manufacturing overhead 18.50 17.20 23.70
Unit product cost $46.60 $42.30 $38.90
Product
A B C
Mixing minutes per unit 3.70 3.40 3.90
Variable selling cost per unit $2.90 $2.70 $3.70
Monthly demand in units 2,000 4,000 2,000
The mixing machines are potentially the constraint in the production facility. A total of 24,200 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 three 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.)

4-65
132. Mobley Company makes three products in a single facility. Data concerning these products follow:
Products
A B C
Direct labor $21.40 $24.00 $14.80
$1.20 $0.60 $0.50
overhead
The mixing machines are potentially the constraint in the production facility. A total of 6,300 minutes are
available per month on these machines. Direct labor is a variable cost in this company.
Required:
a. How many minutes of mixing machine time would be required to satisfy demand for all three products?
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.)

4-66
133. The constraint at Trump Inc. is an expensive milling machine. The three products listed below use this
constrained resource.
9P 8L 7N
6.60 7.90 5.80
(minutes)
Required:
a. Rank the products in order of their current profitability from the most profitable to the least profitable.
In other words, rank the products in the order in which they should be emphasized. Show your work!
resource?

134. Are sunk costs ever differential costs? Explain.

4-67
135. A student in your cost accounting class says, "This whole subject of differential costing is easy; variable
costs are the only costs that are relevant." Using an example, what would you tell that student?

136. You just got your first job after graduation. Your immediate supervisor received a special order at a price
that is "below cost" during your first week at the company. The supervisor points to the proposal and says,
"These are the kinds of orders that will get you in trouble. Every sale must bear its share of the full costs of
running the business. If we sell below our full cost, we'll be out of business in no time." You remember
from your course in cost accounting that this may not be as much trouble as the supervisor anticipates.
How would you respond and not lose your first job?

137. Explain the difference between full costs and differential costs.

4-68
138. Explain what is meant by "the full-cost fallacy" in making pricing decisions.

139. Explain the differences between life-cycle product costing and target costing.

140. Explain the distinction between predatory pricing and peak-load pricing.

141. Why is it important to consider opportunity costs in a make-or-buy decision?

4-69
142. On what three main factors does the theory of constraints focus?

143. Flower Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing plant
has the capacity to produce 18,000 medals each month; current monthly production is 17,100 medals. The
company normally charges $88 per medal. Cost data for the current level of production are shown below:
Variable costs:
Direct labor $324,900
Selling and administrative $30,780
Fixed costs:
Manufacturing $345,420
Selling and administrative $164,160
The company has just received a special one-time order for 600 medals at $73 each. For this particular
order, no variable selling and administrative costs would be incurred. This order would also have no effect
on fixed costs.
Required:
Should the company accept this special order? Why? (CMA adapted)

4-70
144. Horton Corporation makes a range of products. The company's predetermined overhead rate is $16 per
direct labor-hour, which was calculated using the following budgeted data:
Variable manufacturing overhead $75,000

Fixed manufacturing overhead $325,000
Direct labor-hours 25,000
Management is considering a special order for 700 units of product Item 48 at $64 each. The normal
selling price of product Item 48 is $75 and the unit product cost is determined as follows:

Direct labor 18.00
Manufacturing overhead applied 16.00
If the special order were accepted, normal sales of this and other products would not be affected. The
company has ample excess capacity to produce the additional units. Assume that direct labor is a variable
cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing
overhead would not be affected by the special order.
Required:
If the special order were accepted, what would be the impact on the company's overall profit? (CIMA
adapted)

4-71
145. Juran 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 70,000 units per month is as follows:

Direct labor $4.30
Fixed manufacturing overhead $11.10
Variable selling & administrative expense $1.50
Fixed selling & administrative expense $9.10
The normal selling price of the product is $56.70 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 $0.70 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 $51.20 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 700 units for regular customers.
What would be the minimum acceptable price per unit for the special order?

4-72
146. Florida Enterprises produces high quality blankets sold to hotels and resorts. Blankets must be well made
because of frequent washings. Currently, Florida sells 10,000 blankets at $60 each with the capacity to
produce 12,000 blankets. Florida is considering a special order from a hotel chain in Mexico for 1,000
blankets at a price of $45. Currently, Florida has the following costs:
Unit Costs $250,000

Product Level Costs $40,000
Facility Costs $125,000
If Florida accepts the special order, it will incur an additional $2 per blanket in foreign currency
transaction costs. No other product or facility costs will change.
Required:
1.) Determine the impact of the special order on Florida. Prepare your analysis in good form.
2.) What other factors should Florida consider in taking the special order?

4-73
147. Brothers Corp. is considering dropping its talking dog product line due to continuing losses.
Revenue and cost data for the talking dog line for the past year follow:
Sales (20,000 units) $300,000

Variable costs 180,000
Contribution margin 120,000
Fixed costs 140,000
If the talking dog is discontinued, then Brothers could avoid $110,000 per year in fixed costs.
Required:
(1.) What is the change in annual operating income from discontinuing the talking dog product line?
(2.) Assuming all other conditions stay the same, at what level of annual sales of the talking dog (in units)
should Brothers be indifferent to discontinuing or continuing the product line?
(3.) Suppose that if the talking dog is dropped, the production and sale of other products would increase so
as to generate a $15,000 increase in the contribution margin received from the other products. If all other
conditions are the same, what is the change in annual operating income from dropping the talking dog?

4-74
148. Price Candies (PC) makes three types of chocolate candy bars. The head of marketing, Nathan Lord found
the chart below and believes PC should drop the Almond line. He asks controller Faye Martin to review the
situation and determine the fate of the Almond Line.
Solid Crispy Almond

Chocolate Chocolate Chocolate
Sales $300,000 $500,000 $400,000
Unit Costs ($100,000) ($150,000) ($250,000)
Facility & Product
($150,000) ($250,000) ($200,000)
Costs
Segment Income $50,000 $100,000 ($50,000)
Required:
1.) Review the information below and determine the fate of the Almond Line. Prepare your answer in good
form. Note-facility and product level costs are fixed and will not change; they are allocated based upon
sales.
2.) Prepare a memo defending your position on this important issue.

4-75
149. Mr. Morgan Henry, accountant for Black & Logan Co. Inc., has prepared the following product-line
income data:
Product
Total A B C
Sales $100,000 $50,000 $20,000 $30,000
Variable
60,000 30,000 10,000 20,000
expenses
Contribution
40,000 20,000 10,000 10,000
margin
Fixed expenses:
Rent 5,000 2,500 1,000 1,500
Depreciation 6,000 3,000 1,200 1,800
Utilities 4,000 2,000 500 1,500
Supervisor's
5,000 1,500 500 3,000
salary
Maintenance 3,000 1,500 600 900
Administrative
10,000 3,000 2,000 5,000
expenses
Total fixed
33,000 13,500 5,800 13,700
expenses
Net operating
$7,000 $6,500 $4,200 ($3,700)
income (loss)
The following additional information is available:
* The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped.
* The company's total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* The supervisor's salary is avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce monthly expenses from
$3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the administrative staff; their
combined salaries total $3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.

4-76

150. Barry Inc. makes a range of products. The company's predetermined overhead rate is $14 per direct labor-
hour, which was calculated using the following budgeted data:

Component ZZ9 is used in one of the company's products. The unit cost of the component according to the
company's cost accounting system is determined as follows:

Direct labor 56.00
An outside supplier has offered to supply component ZZ9 for $108 each. The outside supplier is known
for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is
really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this
decision. Barry chronically has idle capacity. (CIMA adapted)
Required:
Is the offer from the outside supplier financially attractive? Why?

4-77
151. Muzik Corporation uses part X43 in one of its products. The company's Accounting Department reports
the following costs of producing the 16,000 units of the part that are needed every year.
Per Unit
Direct labor $3.90
An outside supplier has offered to make the part and sell it to the company for $28.00 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
offer were accepted, only $22,000 of these allocated general overhead costs would be avoided. In addition,
the space used to produce part X43 could be used to make more of one of the company's other products,
generating an additional segment margin of $22,000 per year for that product.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of buying part
X43from the supplier rather than continuing to make it inside the company.

4-78
152. Ralston Company makes 10,000 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 labor 20.80
An outside supplier has offered to sell the company all of these parts it needs for $42.30 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 $39,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be
avoided. However, $6.40 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 $47.90 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 10,000 units required each year?

4-79
Chapter 04 Fundamentals of Cost Analysis for Decision Making Answer Key
True / False Questions

1. Differential analysis involves the comparison of one or more alternative courses of action with the status
quo.

TRUE
This is a definition of differential analysis.

AACSB: Analytical Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 04-01 Use differential analysis to analyze decisions.
Topic: Differential Analysis

2. If there is only one alternative course of action and the status quo is unacceptable, then there really is
no decision to make.

TRUE
A decision needs at least two alternatives.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

3. A decision must involve at least two alternative courses of action.

TRUE
If there is only one alternative there is no decision to make.

4-80
Blooms: Remember
Difficulty: 2 Medium
Gradable: automatic

4. Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of
revenues and costs (i.e., the time-value of money).

FALSE
The time value of money can be incorporated into the analysis.

Blooms: Remember
Gradable: automatic

5. Short-run decisions often have long-run implications.

TRUE
Most decisions have long-run implications.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

6. Only variable costs can be differential costs.

FALSE
Fixed costs can differ between alternatives as well.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

4-81
7. Fixed costs are always classified as sunk costs in differential cost analysis.

FALSE
Fixed costs can also be differential.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

8. The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the
product's cost.

FALSE
The fallacy occurs when fixed costs are included.

Blooms: Remember
Gradable: automatic
Learning Objective: 04-02 Understand how to apply differential analysis to pricing decisions.

9. When deciding whether or not to accept a special order, a decision-maker should focus on differential

TRUE
Full costs will include some costs that do not differ and should be excluded.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

4-82
10. The differential analysis approach to pricing for special orders could lead to under-pricing in the long-
run because fixed costs are not included in the analysis.

TRUE
In the long run fixed costs become differential and should be included.

Blooms: Apply
Gradable: automatic

11. Target costs equal the difference between the target selling price and the desired profit margin.

TRUE
Target cost focuses on what level of costs would be allowed.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 04-03 Understand several approaches for establishing prices based on costs for long-run pricing decisions.

12. Dumping occurs when a company exports its product to consumers in another country at an export price
that is below the domestic price.

TRUE
This is the definition of dumping.

AICPA: BB Legal
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Topic: Legal Issues Relating to Costs and Sales Prices

4-83
13. Price discrimination is the practice of selling identical goods or services to different customers at
different prices.

TRUE
This is the definition of price discrimination.

AICPA: BB Legal
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

14. Peak load pricing is the practice of setting prices lowest when the quantity demanded for the product
approaches the physical capacity to produce it.

FALSE
Prices are set highest when capacity is being approached.

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

15. The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally
or (b) purchase needed items externally.

TRUE
Make = internal; buy = external

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 04-04 Understand how to apply differential analysis to production decisions.
Topic: Use of Differential Analysis for Production Decisions

4-84
16. The reason opportunity costs are not included in the accounting system is because they involve
estimates.

FALSE
They are not included in the system because they are not the result of a transaction. Many items
included in the accounting system involve estimates (such as depreciation).

AICPA: FN Measurement
Blooms: Remember
Gradable: automatic

17. Financial statements prepared in accordance with generally accepted accounting principles (GAAP)
provide differential cost information.

FALSE
GAAP has a focus of comparability, not decision relevance.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

18. In the short-run, plant capacity is fixed and product choices have to be made that optimize the use of
available capacity.

TRUE
In the short run, capacity is set and cannot be expanded.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

4-85
19. With constrained resources, the important measure of profitability is the contribution margin per unit of
scarce resource.

TRUE
You are concerned with the best use of the resource, so you want to maximize the profit.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 04-05 Understand the theory of constraints.
Topic: The Theory of Constraints

20. The theory of constraints focuses on determining the optimal product mix when one or more resources

TRUE
This is the core idea of the theory of constraints.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

Multiple Choice Questions

21. The relevance of a particular cost to a decision is determined by the: (CMA adapted)

A. riskiness of the decision.

B. number of decision variables.
C. amount of the cost.
D. potential effect on the decision.
Relevance is predicated upon whether it affects a decision.

4-86
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

22. In a decision analysis situation, which one of the following costs is not likely to contain a variable cost
component? (CMA adapted)

A. Labor.
B. Overhead.
C. Straight-line Depreciation.
D. Selling.
Straight-line depreciation is a fixed cost since it is the same amount each period.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

23. Differential costs are: (CMA adapted)

A. the difference in total costs that result from selecting one choice instead of another.
B. the profit foregone by selecting one choice instead of another.
C. a cost that continues to be incurred in the absence of activity.
D. a cost common to all choices in questions and not clearly allocable to any of them.
This is the definition of differential costs.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

4-87
24. The period of time over which capacity will be unchanged is:

A. long run.

B. sunk cost.
C. short run.
D. product life cycle.
In the long run capacity can be adjusted, in the short run it cannot.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

25. Which of the following statements regarding differential costs is (are) false?
(A) The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in
the product's cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on
differential costs instead of full costs.

A. Only A.
B. Only B.
The full cost fallacy is when fixed costs are included.

Blooms: Remember
Gradable: automatic

4-88
26. Which of the following costs are irrelevant for a special order that will allow an organization to utilize
some of its present idle capacity?

A. Direct materials.

B. Indirect materials.
C. Variable overhead.
D. Unavoidable fixed overhead.
Fixed costs will be incurred whether the special order is undertaken or not.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

27. Which of the following statements regarding special orders is (are) true?
(A) The primary decision for special orders is determining whether the differential revenue is greater
than the differential costs associated with the order.
(B) The differential analysis approach to pricing for special orders could lead to underpricing in the
long-run because fixed costs are not included in the analysis.

A. Only A.
B. Only B.
(A) looks at the short-run while (B) has a long run view.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

4-89
28. The Arthur Company manufactures kitchen utensils. The company is currently producing well below its
full capacity. The Benton Company has approached Arthur with an offer to buy 20,000 utensils at $0.75
each. Arthur sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which
$0.12 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's
operating profits?

A. $400.
B. $800.
C. $1,600.
D. $2,000.
[$0.75 - ($0.83 - 0.12)] × 20,000 = $800

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

29. The Minton Company has gathered the following information for a unit of its most popular product:
Direct materials $6
Direct labor 3
Target selling price 21
The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000 units
at a price of $16 per unit. This special order would not disturb regular sales. Variable shipping and other
selling expenses would be an additional $1 per unit for the special order. If the special order is accepted,
Minton's operating profits will increase by:

A. $1,000.
B. $1,600.
C. $2,000.
D. $4,000.
[$16 - 6 - 3 - 2 - 1] × 1,000 = $4,000

Blooms: Apply
4-90
Gradable: automatic

30. The following information relates to the Magna Company for the upcoming year.
Amount Per Unit

Sales $4,000,000 $10.00
Gross margin 800,000 2.00
Operating expenses 300,000 .75
Operating profits $500,000 $1.25
include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50
per unit has been made to Magna. Fortunately, there will be no additional operating expenses associated
with the order and Magna has sufficient capacity to handle the order. How much will operate profits be
increased if Magna accepts the special order?

A. $25,000.
B. $62,500.
C. $100,000.
D. $125,000.
Cost of sales: (3,200,000 - 1,200,000)/400,000 = $5; Operating Exp: (300,000 - 100,000)/400,000 =

0.50; Sales $7.50 - 5 - 0.50 = $2 × 50,000 units = $100,000

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

4-91
31. The following information relates to a product produced by Faulkland Company:

Direct labor 7
Variable overhead 6
Fixed overhead 8
Unit cost $31
Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to cover
the transportation cost. Although production capacity is 500,000 units per year, Faulkland expects to
produce only 400,000 units next year. The product normally sells for $40 each. A customer has offered
to buy 60,000 units for $30 each. The customer will pay the transportation charge on the units
purchased. If Faulkland accepts the special order, the effect on income would be a:


30 - (10 + 7 + 6) = $7 × 60,000 = 420,000 increase: the selling costs do not need to be included since
the customer pays for them

Blooms: Analyze
Gradable: automatic

32. If there is excess capacity, the minimum acceptable price for a special order must cover:

A. only variable costs associated with the special order.

B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order, plus the contribution
margin usually earned on regular units.
The differential costs must be covered. There are no opportunity costs since there is excess capacity.

Blooms: Apply
Gradable: automatic
4-92

33. Park Corporation is preparing a bid for a special order that would require 720 liters of material SUN100.
The company already has 560 liters of this raw material in stock that originally cost $6.30 per liter.
Material SUN100 is used in the company's main product and is replenished on a periodic basis. The
resale value of the existing stock of the material is $5.80 per liter. New stocks of the material can be
readily purchased for $6.65 per liter. What is the relevant cost of the 720 liters of the raw material when
deciding how much to bid on the special order? (CIMA adapted)

A. $4,592.
B. $4,788.
C. $4,456.
D. $4,176.
720 liters × current market $6.65 = $4,788

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

34. Tori Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 as is,
but if reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental effect
on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?
(CIMA adapted)

A. $(69,100)
B. $(700)
C. $29,400
D. $(39,000)
See calculations below.
Sales value of reworked material $30,800

Less: Cost to rework material 1,400
Net sales value $29,400
Current scrap value 30,100
Net disadvantage ($700)

4-93
Blooms: Apply
Gradable: automatic

35. Lafferty Corporation is a specialty component manufacturer with idle capacity. Management would like
to use its unused capacity to generate additional profits. A potential customer has offered to buy 6,200
units of component Rocket. Each unit of Rocket requires 8 units of material CES4 and 6 units of
material XES7. Data concerning these two materials follow:
Current
Original Disposal
Cost Per Value Per
l Stock Price Per
Unit Unit
Unit
CES4 32,420 $3.80 $3.35 $3.10
XES7 31,060 $9.30 $9.60 $8.35
Material CES4 is in use in many of the company's products and is routinely replenished. Material XES7
is no longer used by the company in any of its normal products and existing stocks would not be
replenished once they are used up.
acceptable price for the order for product Rocket? (CIMA adapted)

A. $528,551.
B. $523,280.
C. $476,350.
D. $484,455.
6,200 units Rocket × 8 units CES4 = 49,600

$166,160
units × $3.35 current market
6,200 units Rocket × 6 units XES7 = 37,200

units:
In inventory 31,060 units × $8.35 disposal
259,351
value
Purchase 6,140 units × $9.60 current market 58,944
Relevant cost of materials $484,455

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
4-94

36. Alpha Inc. regularly uses material FLAV4 and currently has in stock 460 liters of the material for which
it paid $2,622 several weeks ago. If this were to be sold as is on the open market as surplus material, it
would fetch $5.25 per liter. New stocks of the material can be purchased on the open market for $5.85
per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant
cost of 800 liters of the material to be used in a job for a customer. The relevant cost of the 800 liters of
material FLAV4 is: (CIMA adapted)

A. $5,850.
B. $4,200.
C. $4,404.
D. $4,680.
800 liters × current market $5.85 = $4,680

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

4-95
37. Starla Corporation is a specialty component manufacturer with idle capacity. Management would like to
use its extra capacity to generate additional profits. A potential customer has offered to buy 4,200 units
of component JOLT. Each unit of JOLT requires 6 units of material OX8 and 9 units of material POW6.
Data concerning these two materials follow:
Current
Original Disposal
Cost Per Value Per
l Stock Price Per
Unit Unit
Unit
OX8 18,600 $3.60 $3.70 $3.35
POW6 38,280 $3.20 $2.80 $1.65
Material OX8 is in use in many of the company's products and is routinely replenished. Material POW6
is no longer used by the company in any of its normal products and existing stocks would not be
replenished once they are used up.
acceptable price for the order for product JOLT? (CIMA adapted)

A. $146,790.
B. $199,080.
C. $155,610.
D. $212,340.
See calculation below.
4,200 units JOLT × 6 units OX8 = 25,200

$93,240
units × $3.70 current market
4,200 units JOLT × 9 units POW6 = 37,800

units:
In inventory 37,800 units × $1.65 disposal
62,370
value
Relevant cost of materials $155,610

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

4-96
38. Tara Inc. is considering using stocks of an old raw material in a special project. The special project
would require all 160 kilograms of the raw material that are in stock and that originally cost the
company $1,136 in total. If the company were to buy new supplies of this raw material on the open
market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material
and would sell it at the discounted price of $6.50 per kilogram if it were not used in the special project.
The sale of the raw material would involve delivery to the purchaser at a total cost of $75.00 for all 160
kilograms. What is the relevant cost of the 160 kilograms of the raw material when deciding whether to
proceed with the special project? (CIMA adapted)

A. $1,040.
B. $965.
C. $1,136.
D. $1,160.
160 kg × discounted price of $6.50 per kg = $1,040

$1,040 - $75.00 delivery cost = $965 relevant cost

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic


A. Indirect materials and indirect labor if the item is manufactured internally.
B. Direct materials and direct labor if the item is purchased.
C. Variable overhead if the item is manufactured internally.
A cost that does not change is not included in the analysis

Blooms: Remember
Gradable: automatic

4-97
40. The Crispy Baking Company is considering the expansion of its business into door-to-door delivery
service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles
now used to make morning deliveries to restaurants could be used in the afternoons to make the home
deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil,
and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45%
of the existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding
into the home delivery market?

A. $12,500.
B. $17,500.
C. $19,750.
D. $20,425.
$12,500 + $5,000 = $17,500

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

41. The time from initial research and development to the time that support to the customer ends is the:

A. product life cycle.

B. short run.
C. target time.
D. predatory price.
This is the definition of product life cycle.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

4-98
42. The price based on customers' perceived value for the product and the price that competitors charge:

A. predatory price.

B. target price.
C. target cost.
D. dumping price.
This is the definition of target price.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

43. The practice of setting price below cost with the intent to drive competitors out of business:


B. target pricing.
C. target costing.
D. peak-load pricing.
This is the definition of predatory pricing.

AICPA: BB Legal
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

44. The practice of setting prices highest when the quantity demanded for the product approaches capacity:


B. target pricing.
D. price fixing.
This is the definition of peak-load pricing.

4-99
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

45. Agreement among business competitors to set prices at a particular level:


B. target pricing.
D. price fixing.
This is the definition of price fixing.

AICPA: BB Legal
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

46. Exporting a product to another country at a price below domestic cost:

A. dumping.
B. target pricing.
D. price fixing.
This is the definition of dumping.

AICPA: BB Legal
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

4-100
47. A target cost is computed as:

A. cost to manufacture plus a desired markup.

B. cost to manufacture plus designated selling expenses.
C. market willingness to pay - cost to manufacture.
D. market willingness to pay - desired profit.
Target cost is based on external market prices and desired profit. In essence, how much can a product
cost?

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic

48. The operations of Bridgeton Corporation are divided into the Adams Division and the Carter Division.
Adams Carter

Sales $560,000 $336,000 $896,000
Variable costs 196,000 154,000 350,000
Segment margin $196,000 $42,000 $238,000
Allocated common
84,000 63,000 147,000
costs
Operating income
$112,000 ($21,000) $91,000
(loss)
Operating income for Bridgeton Corporation as a whole if the Carter Division were dropped would be:
A. $133,000.
B. $112,000.
C. $91,000.
D. $49,000.
$112,000 - 63,000 = $49,000

4-101
Blooms: Analyze
Gradable: automatic

49. Damon Industries manufactures 20,000 components per year. The manufacturing cost of the
components was determined as follows:

An outside supplier has offered to sell the component for $17. If Damon purchases the component from
If Damon purchases the component from the supplier instead of manufacturing it, the effect on income
would be:

A. a $70,000 increase.

B. a $50,000 decrease.
C. a $10,000 decrease.
D. a $30,000 increase.
Make: $100,000 + 160,000 + 60,000 = $320,000

Buy: 20,000 × 17 = $340,000 - 10,000 = $330,000
Make 320,000 - Buy 330,000 = -10,000 decrease in income to Buy

Blooms: Analyze
Gradable: automatic

4-102
50. Brevard Industries produces two products. Information about the products is as follows:
Product 1 Product 2
Units produced and sold $4,000 10,000
The company's fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1 and
$40,000 can be directly traced to Product 2. The effect on the firm's profits if Product 2 is dropped
would be a:


Current profit: (4,000 × 6 + 10,000 × 5) - 70,000 = 4,000

Profit of only Product 1: (4,000 × 6) - (70,000 - 40,000) = 24,000 - 30,000 = -6,000
Current 4,000 - New (-6,000) = -10,000 decrease
Profit of only Product 1

Blooms: Analyze
Gradable: automatic

51. Which of the following costs would continue to be incurred even if a segment is eliminated?

A. Direct fixed expenses

B. Variable cost of goods sold
C. Common fixed costs
D. Variable selling and administrative expenses
Common fixed costs continue even though a segment is eliminated.

Blooms: Remember
Gradable: automatic
4-103

52. AirStep Shoe Company has two retail stores, one in Gainesville and the other in Orlando. The
Gainesville store had sales of $100,000, a contribution margin of 35 percent, and a segment margin of
$14,000. The company's two stores have total sales of $250,000, contribution margin of 32 percent, and
a total segment margin of $31,000. The contribution margin for the Orlando store must have been:

A. $65,000.
B. $170,000.
C. $105,000.
D. $45,000.
Total CM: 250,000 × 32% = $80,000

Gainesville CM: 100,000 × 35% = 35,000
Orlando = 80,000 - 35,000 = 45,000

Blooms: Analyze
Gradable: automatic

4-104
53. Carter Industries has two divisions: the West Division and the East Division. Information relating to the
divisions for the year just ended is as follows:
West East
Common fixed expenses have been allocated equally to each of the two divisions. Carter's segment
margin for the West Division is:

A. $150,000.
B. $102,000.
C. $30,000.
D. $110,000.
(30,000 × 5) - 48,000 = $102,000

Blooms: Analyze
Gradable: automatic

4-105

Total $600,000
Assume that the fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility. This
Ortega for $34. If Ortega Industries purchases the component from the outside supplier, the effect on
income would be a:

A. $30,000 decrease.

Make: 150,000 + 240,000 + 90,000 = $480,000

Buy: 15,000 × 34 = $510,000
Make 480,000 - Buy 510,000 = -30,000 decrease

Blooms: Analyze
Gradable: automatic

4-106

Total $600,000
Assume Ortega Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the
Ortega purchases the component from the supplier instead of manufacturing it, the effect on income
would be a:


Make: $150,000 + 240,000 + 90,000 = $480,000

Buy: 15,000 × $34 = $510,000 - 40,000 = $470,000
Make $480,000 - Buy 470,000 = $10,000 increase

Blooms: Analyze
Gradable: automatic

4-107
56. The operations of Ranger Corporation are divided into the Stargate Division and the Cosmos Division.
Stargate Cosmos

Sales $500,000 $360,000 $860,000
Less: Variable Costs 180,000 200,000 380,000
Contribution Margin $320,000 $160,000 $480,000
Less: Direct Fixed
150,000 125,000 275,000
Costs
Segment Margin $170,000 $35,000 $205,000
Less: Allocated
70,000 55,000 125,000
Common Costs
Operating Income
$100,000 ($20,000) $80,000
(Loss)
Operating income for Ranger Corporation, as a whole, if the Cosmos Division were dropped would be

A. $45,000
B. $80,000
C. $100,000
D. $120,000
170,000 - 125,000 = $45,000

Blooms: Analyze
Gradable: automatic

4-108
57. The Hammer Division of Excel Company produces hardened sledge hammers. One-third of Hammer's
output is sold to the Government Products Division of Excel; the remainder is sold to outside customers.
Hammer's estimated operating profit for the year is:
Government
Products Outside
Division Customers
Sales $15,000 $40,000
Variable costs (10,000) (20,000)
Fixed costs (3,000) (6,000)
Unit sales 10,000 20,000
The Government Products Division has an opportunity to purchase 10,000 hammers of the same quality
from an outside supplier on a continuing basis. The Hammer Division cannot sell any additional
products to outside customers. Should the Excel Company allow its Government Products Division to
purchase the hammers from the outside supplier at $1.25 per unit?

A. No; making the hammers will save Excel $1,500.

B. Yes; buying the hammers will save Excel $1,500.
C. No; making the hammers will save Excel $2,500.
D. Yes; buying the hammers will save Excel $2,500.
Cost to buy externally - $1.25(10,000 units) = $12,500; Cost to make internally - $1.00(10,000 units) =
$10,000

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

4-109

Direct labor 55,000
Total $190,000
accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's
facilities could be rented to a third party for $15,000 per year. What are the relevant costs for the
"make" alternative?

A. $160,000.
B. $165,000.
C. $175,000.
D. $185,000.
$20,000 + 55,000 + 45,000 + (4 × 10,000) + 15,000 = $175,000

Blooms: Apply
Gradable: automatic

4-110

Direct labor 55,000
Total $190,000
accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's
facilities could be rented to a third party for $15,000 per year. At what price would Camel be indifferent
to Yukon's offer?

A. $17.00.
B. $17.50.
C. $18.50.
D. $19.50.
$20,000 + 55,000 + 45,000 + (4 × 10,000) + 15,000 = $175,000

$175,000/10,000 = $17.50

Blooms: Apply
Gradable: automatic

4-111
60. For the past five years, the MAG Company has produced and sold electronic magnets to chemistry labs
throughout the United States. Recently, a strong competitor has entered the market and MAG is
considering whether it should continue to produce and sell the electronic magnets. The following
information has been gathered to assist management in its decision:
A) The machinery used to produce the magnet was purchased five-years ago for $500,000.
B) Four of the employees who produce magnets would be reassigned to the magnifying glass division.
C) The space now used to produce the magnets would be used to eliminate the need to rent warehouse
space.
D) Sales volume (units) is estimated to drop by 50% once the competitor becomes fully operational.
Which of the items listed above is (are) relevant to the decision to continue the production and sale of
the electronic magnets?

A. A and C.
B. B and C.
C. C and D.
D. A, B, and D.
(A) is a sunk cost, (B) will be there anyway, (C & D) would differ

Blooms: Apply
Gradable: automatic

(A) The theory of constraints focuses on determining the optimal product mix when one or more
resources restrict the attainment of a goal or objective.
(B) The theory of constraints focuses on maximizing the rate of throughput contribution while
minimizing investment and other operating costs.

A. Only A.
B. Only B.
Both statements are true.

Blooms: Remember
4-112
Difficulty: 1 Easy
Gradable: automatic

62. The theory of constraints focuses on maximizing throughput contribution margin while minimizing all
of the following except:

A. selling expenses per unit sold.

B. production bottlenecks.
C. investment in buildings.
D. investment in inventories.
Selling expenses are not necessarily minimized.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

4-113
63. The Widner Company manufactures two products: Stainless Serving Spoons and Stainless Serving
Forks. The costs and revenues are as follows:
Spoons Forks
Total demand for Spoons is 14,000 units and for Forks is 9,000 units. Machine time is a scarce
resource. During the year, 54,000 machine hours are available. Spoons requires 5 machine hours per
unit, while Forks requires 3 machine hours per unit.
How many units of Spoons and Forks should Widner produce?
Spoons Forks
A. 14,000 0
B. 8,307 4,154
C. 10,800 0
D. 5,400 9,000

A. Option A
B. Option B
C. Option C
D. Option D
Spoons CM/hr: ($150 - 80)/5 = $14; Forks CM/hr: ($88 - 42)/3 = $15.33: Produce Forks first: 9,000
units of Forks × 3 hrs = 27,000 hours used: 54,000 - 27,000 = 27,000 hours remaining: Spoons: 27,000
hours available/5 = 5,400 units

Blooms: Analyze
Gradable: automatic

4-114
64. Morgan Inc has 5,400 machine hours available each month. The following information on the
company's three products is available:

1 2 3
$15.00 $18.00 $7.50
unit
If market demand exceeds the available capacity, in what sequence should orders be filled to maximize
the company's profits?

A. Product 1 first, product 2 second, and product 3 third.

B. Product 2 first, product 3 second, and product 1 third.
C. Product 3 first, product 2 second, and product 1 third.
D. Product 3 first, product 1 second, and product 2 third.
P1 CM/hr = 15/3 = $5; P2: 18/2 = $9; P3: 7.50/1 = $7.50

Priority would be P2 ($9/hr) followed by P3 ($7.50) and P1 ($5)

Blooms: Analyze
Gradable: automatic

4-115
65. Xenos Inc has 6,600 machine hours available each month. The following information on the company's

1 2 3
$20.00 $21.00 $17.50
unit

A. Product X first, product Z second, and product Y third.

B. Product Y first, product Z second, and product X third.
C. Product Y first, product X second, and product Z third.
D. Product Z first, product X second, and product Y third.
X CM/hr = 20/2 = $10; Y: 21/3 = $7; Z: 17.50/2 = 8.75

Priority would be X ($10/hr) followed by Z ($8.75) and Y ($7)

Blooms: Analyze
Gradable: automatic

4-116

Sales Price $75 $44
Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine hours is a scarce resource.
During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while
Sonic requires 2.5 machine hours per unit.
How many units of Oxy and Sonic should Garrison produce?

A. 10,000 0
B. 0 6,000
C. 8,750 6,000
D. 10,000 6,000

A. Option A
B. Option B
C. Option C
D. Option D
Oxy CM/hr: (75 - 40)/4 = $8.75; Sonic CM/hr: (44 - 21)/2.5 = 9.20: Produce Sonic first: 6,000 units of
Sonic × 2.5 hrs = 15,000 hours used: 50,000 - 15,000 = 35,000 hours remaining: Oxy: 35,000 hours
available/4 = 8,750 units

Blooms: Analyze
Gradable: automatic

4-117

Sales Price $75 $44
Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine time is a scarce resource.
During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while
Sonic requires 2.5 machine hours per unit.
What is the maximum contribution margin Garrison can achieve during a year?

A. $444,250.
B. $1,014,000.
C. $488,000.
D. $855,500.
Oxy CM/hr: (75 - 40)/4 = $8.75; Sonic CM/hr: (44 - 21)/2.5 = 9.20: Produce Sonic first: 6,000 units of
Sonic × 2.5 hrs = 15,000 hours used: 50,000 - 15,000 = 35,000 hours remaining: Oxy: 35,000 hours
available/4 = 8,750 units: CM = 8,750 × $35 + 6,000 × $23 = $444,250

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

4-118
Side
Bookcases Chairs
Tables
Contribution margin
$15.00 $18.00 $7.50
per unit
The market demand is limited to 2,000 units of each of the three products. How many units of each
should Zantaq produce and sell?
Bookcases Chairs Side Tables

A. 2,000 2,000 2,000
B. 0 2,000 2,000
C. 0 2,000 1,400
D. 1,800 0 0

A. Option A
B. Option B
C. Option C
D. Option D
Bookcases CM/hr = 15/3 = $5; Chairs: 18/2 = $9; Side Tables: 7.50/1 = $7.50
Priority would be Chairs ($9/hr) followed by Side Tables ($7.50) and Bookcases ($5): 2,000 units of
Chairs × 2 hrs = 4,000 hrs; 5,400 - 4,000 = 1,400 hrs remaining; Side Tables: 1,400 units, Bookcases: 0
units

Blooms: Analyze
Gradable: automatic

4-119
Side
Bookcases Chairs
Tables
Contribution margin
$15.00 $18.00 $7.50
per unit
The market demand is limited to 2,000 units of each of the three products. What is the maximum
possible contribution margin that Zantaq could make in any month?

A. $81,000.
B. $46,500.
C. $43,000.
D. $51,000.
Bookcases CM/hr = 15/3 = $5; Chairs: 18/2 = $9; Side Tables: 7.50/1 = $7.50
Priority would be Chairs ($9/hr) followed by Side Tables ($7.50) and Bookcases ($5): 2,000 units of
Chairs × 2 hrs = 4,000 hrs; 5,400 - 4,000 = 1,400 hrs remaining; Side Tables: 1,400 units, Bookcases: 0
units
CM: 0 × $15 + 2,000 × $18 + 1,400 × $7.50 = $46,500

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

4-120
70. Warrior Inc has 12,000 machine hours available each month. The following information on the
company's four products is available:
Product Product Product Product

W X Y Z
Selling price
$20.00 $21.00 $17.50 $15.00
per unit
Variable cost
$10.00 $9.00 $7.50 $10.00
per unit
Machine hours
2 3 4 1.5
per unit

A. Product W first, product X second, product Z third, and product Y last.
B. Product Z first, product W second, product X third, and product Y last.
C. Product X first, product W second, product Y third, and product Z last.
D. Product X first, product Z second, product Y third, and product W last.
W CM/hr = (20 - 10)/2 = $5; X: (21 - 9)/3 = $4; Y: (17.50 - 7.50)/4 = 2.50; Z: (15 - 10)/1.5 = $3.33
Priority would be W ($5/hr) followed by X ($4), Z ($3.33) and Y ($2.50)

Blooms: Analyze
Gradable: automatic

4-121
71. The Tire Division of Traker Company produces tires for off-road sport vehicles. One-third of Tire's
output is sold to an internal division of Traker; the remainder is sold to outside customers. Tire's
Internal Outside
Sales $150,000 $400,000
Unit sales 10,000 20,000
supplier on a continuing basis. The Tire Division cannot sell any additional products to outside
customers. Should the Traker Company allow its internal division to purchase the tires from the outside
supplier at $13.00 per unit?

A. No; making the tires will save Traker $15,000.

B. Yes; buying the tires will save Traker $15,000.
C. No; making the tires will save Traker $30,000.
D. Yes; buying the tires will save Traker $30,000.
Cost to buy externally - $13.00 × 10,000 units = $130,000

Cost to make internally - $10.00 × 10,000 units = $100,000

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

4-122
72. The Tire Division of Traker Company produces tires for off-road sport vehicles. One-third of Tire's
output is sold to an internal division of Traker; the remainder is sold to outside customers. Tire's
Internal Outside
Sales $150,000 $400,000
Unit sales 10,000 20,000
supplier on a continuing basis. The Tire Division cannot sell any additional products to outside
customers. What is the minimum selling price that Tire should accept from the internal division?

A. $10.00.
B. $13.00.
C. $15.00.
D. $50.00.
Lost CM: $0; cost to make: $10; cost to make + opportunity cost = $10 + 0 = $10

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

4-123

Direct labor 55,000
Total $200,000
The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If
Bogart accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's
leased facilities could be vacated, reducing lease payments by $30,000 per year. What are the relevant
costs for the "make" alternative?

A. $120,000.
B. $175,000.
C. $190,000.
D. $200,000.
$20,000 + 55,000 + 45,000 + (8 × 5,000) + 30,000 = $190,000

Blooms: Apply
Gradable: automatic

4-124

Direct labor 55,000
Total $200,000
The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If
Bogart accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's
leased facilities could be vacated, reducing lease payments by $30,000 per year. At what price would
Bogart be indifferent to Conner's offer?

A. $40.
B. $38.
C. $35.
D. $24.
$20,000 + 55,000 + 45,000 + (8 × 5,000) + 30,000 = $190,000/5,000 units = $38

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

75. The Rapid Delivery Service is considering the expansion of its business into afternoon retail delivery
service. This would require an additional $25,000 in labor costs per month. Company-owned vehicles
now used to make morning deliveries to local manufacturers could be used in the afternoons to make
retail deliveries. However, it is estimated that an additional $10,000 would be required per month for
gas, oil, and maintenance. It is further estimated that the retail delivery use of the trucks would be
allocated 45% of the existing $13,000 fixed vehicle costs. What is the differential delivery cost per
month for expanding into the retail delivery market?

A. $25,000.
B. $35,000.
C. $39,500.
D. $40,850.
$25,000 + $10,000 = $35,000

4-125
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

76. The Lamar Company manufactures wiring tools. The company is currently producing well below its full
capacity. The Boston Company has approached Lamar with an offer to buy 10,000 tools at $1.75 each.
Lamar sells its tools wholesale for $1.85 each; the average cost per unit is $1.83, of which $0.27 is fixed
costs. If Lamar were to accept Boston's offer, what would be the increase in Lamar's operating profits?

A. $800.
B. $1,000.
C. $1,900.
D. $2,900.
[$1.75 - ($1.83 - 0.27)] × 10,000 = $1,900

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

4-126

Direct labor 6
The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a
price of $32 per unit. This special order would not disturb regular sales. Special packaging and other
selling expenses would be an additional $0.50 per unit for the special order. If the special order is
accepted, Young's operating profits will increase by:

A. $4,000.
B. $6,400.
C. $8,000.
D. $19,000.
[$32 - 12 - 6 - 4 - 0.50] × 2,000 = $19,000

Blooms: Apply
Gradable: automatic

4-127

Direct labor 6
The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a
price of $32 per unit. The distributor claims this special order would not disturb regular sales at $42.
Special packaging and other selling expenses would be an additional $0.50 per unit for the special order.
How many units of regular sales could be lost before this contract is not profitable?

A. 0 units.
B. 950 units.
C. 1, 000 units.
D. 2,000 units.
[$32 - 12 - 6 - 4 - 0.50] × 2,000 = $19,000/($42 - 12 - 6 - 4) = 19,000/20 = 950 units

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic

4-128
Amount Per Unit

Sales $8,000,000 $20.00
per unit has been made to Jasmine. Fortunately, there will be no additional operating expenses
associated with the order and Jasmine has sufficient capacity to handle the order. How much will
operating profits increase if Jasmine accepts the special order?

A. $50,000.
B. $125,000.
C. $200,000.
D. $250,000.
Cost of sales: (6,400,000 - 2,400,000)/400,000 = $10; Operating Exp: (600,000 - 200,000)/400,000 =

1.00; Sales $15.00 - 10 - 1 = $4 × 50,000 units = $200,000

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

4-129
Amount Per Unit

Sales $8,000,000 $20.00
per unit has been made to Jasmine. Fortunately, there will be no additional operating expenses
associated with the order; however, Jasmine is operating at full capacity. How much will operating
profits increase if Jasmine accepts the special order?

A. $50,000.
B. $125,000.
C. $200,000.
D. Operating profits will not increase as a result of accepting the special order.
The lack of excess capacity means there are opportunity costs equal to the lost contribution. Jasmine
should continue to charge $20 per unit.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

4-130
81. The following information relates to a product produced by Orca Company:

Direct labor 14
Fixed overhead 16
Unit cost $62
Orca expects to produce only 400,000 units next year. The product normally sells for $80 each. A
customer has offered to buy 60,000 units for $60 each. The customer will pay the transportation charge
on the units purchased. If Orca accepts the special order, the effect on income would be a:


D. $1,200,000 decrease.
60 - (20 + 14 + 12) = $14 × 60,000 = 840,000 increase: the transportation costs do not need to be
included since the customer pays for them

Blooms: Analyze
Gradable: automatic

4-131
Blink Blur

Sales $280,000 $168,000 $448,000
Variable costs 98,000 77,000 175,000
Segment margin $98,000 $21,000 $119,000
Allocated common
42,000 31,500 73,500
costs
Operating income
$56,000 ($10,500) $45,500
(loss)
Operating income for Winston Corporation as a whole if the Blur Division were dropped would be:

A. $66,500.
B. $56,000.
C. $45,500.
D. $24,500.
$56,000 - 31,500 = $24,500

Blooms: Analyze
Gradable: automatic

4-132
Blink Blur

Sales $280,000 $168,000 $448,000
Variable costs 98,000 77,000 175,000
Segment margin $98,000 $21,000 $119,000
Allocated common
42,000 31,500 73,500
costs
Operating income
$56,000 ($10,500) $45,500
(loss)
If the Blur Division were dropped, Blink Division's sales would increase by 30%. If this happened, the
operating income for Winston Corporation as a whole would be:

A. $72,800.
B. $56,000.
C. $79,100.
D. $59,150.
$182,000 × 130% = $236,600 - 84,000 - 42,000 - 31,500 = $79,100

Blooms: Analyze
Gradable: automatic

4-133
84. Which of the following statements regarding differential costs is (are) true?
(A) The full cost fallacy occurs when a decision-maker includes fixed manufacturing overhead in the
product's cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on
differential costs instead of full costs.

A. Only A.
B. Only B.
Both statements A and B are true.

Blooms: Remember
Gradable: automatic

85. Which of the following statements regarding special orders is (are) false?
(A) The primary decision for special orders is determining whether the differential revenue is greater
than the differential costs associated with the order.
(B) The differential analysis approach to pricing for special orders will always lead to underpricing in
the long-run because fixed costs are not included in the analysis.

A. Only A.
B. Only B.
(B) differential analysis will not always lead to underpricing because there are times the fixed costs are
differential. It may lead to underpricing, but it is not a certainty.

Blooms: Remember
Gradable: automatic

4-134

A. Indirect materials and indirect labor if the item is purchased.

B. Direct materials and direct labor if the item is manufactured internally.
C. Variable overhead if the item is purchased.
A cost that does not change is not included in the analysis

Blooms: Remember
Gradable: automatic

87. For the past five years, the McArthur Company has produced and sold frequency meters to genetics labs
throughout the United States. Recently, a strong competitor has entered the market and McArthur is
considering whether it should continue to produce and sell the frequency meters. The following
information has been gathered to assist management in its decision:
A) Sales volume (units) is estimated to drop by 25% once the competitor becomes fully operational.
B) The equipment used to produce the meters was purchased five-years ago for $1,500,000.
C) The space now used to produce the meters would be reallocated to eliminate the need to rent
warehouse space.
D) Three of the employees who produce meters would be reassigned to the oscillator division.
Which of the items listed above is (are) relevant to the decision to continue the production and sale of
the frequency meters?

A. A and C.
B. B and C.
C. C and D.
D. A, B, and D.
(B) is a sunk cost, (D) will be there anyway, (A & C) would differ

Blooms: Apply
Gradable: automatic

4-135
(A) The theory of constraints focuses on determining the optimal product mix when two or more
resources restrict the attainment of a goal or objective.
(B) The theory of constraints focuses on maximizing the rate of throughput contribution while
maximizing investment and other operating costs.

A. Only A.
B. Only B.
(A) at least one constraining resource, not two; (B) want to minimize the investment and other costs

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic

89. The opportunity cost of making a component part in a factory with no excess capacity is the: (CMA
adapted)

A. variable manufacturing cost of the component.

B. fixed manufacturing cost of the component.
C. total manufacturing cost of the component.
D. net benefit foregone from the best alternative use of the capacity required.
Opportunity costs and benefits are all about amounts foregone.

AACSB: Reflective Thinking
Blooms: Remember
Gradable: automatic

4-136
90. When there is a production constraint, a company should emphasize the products with:

A. the highest unit contribution margins.

B. the highest contribution margin ratios.
C. the highest contribution margin per unit of the constrained resource.
D. the highest contribution margins and contribution margin ratios.
To maximize profits the alternatives must be selected in order of the highest contribution margin per
unit of the constrained resource.

AACSB: Reflective Thinking
Blooms: Remember
Gradable: automatic

4-137
91. A study has been conducted to determine if Product A should be dropped. Sales of the product total
$200,000 per year; variable 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.
Keep the Drop the

Difference
Product Product
Sales $200,000 $0 ($200,000)
Variable expenses 140,000 0 140,000
Contribution
60,000 0 (60,000)
margin
Fixed expenses:
Fixed
manufacturing 90,000 40,000 50,000
expenses
Net operating
($30,000) ($40,000) ($10,000)
income (loss)
Net operating income would decline by $10,000 if Product A were dropped. Therefore, the product
should not be dropped.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

4-138
4-139
92. The King Company has two divisions—North and South. The divisions have the following revenues
and expenses:
North South
Sales $900,000 $800,000
Variable expenses 450,000 300,000
Traceable fixed expenses 260,000 210,000
Allocated common corporate
240,000 190,000
expenses
Net operating income (loss) ($50,000) $100,000
Management at King is pondering the elimination of North Division. If North Division were
eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would
be unaffected. Given these data, the elimination of North Division would result in an overall company
net operating income of:

A. $100,000.
B. $150,000.
C. $(140,000).
D. $50,000.
Keep the Drop the

Division Division Difference
Sales $900,000 $0 ($900,000)
Variable expenses 450,000 0 450,000
Contribution
450,000 0 (450,000)
margin
Fixed expenses:
Traceable fixed
260,000 0 260,000
expenses
Allocated
common corporate 240,000 240,000
expenses
Net operating
($50,000) ($240,000) ($190,000)
income (loss)
South Net
operating income $100,000
(loss)
King Company
Net operating ($140,000)
income (loss)
Net operating loss for King Company would be $140,000 if North Division were dropped. Therefore,
4-140
North Division should not be dropped.

Blooms: Apply
Gradable: automatic

93. Parton Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Parton's plant
manager is considering making the headlights now being purchased from an outside supplier for $11.00
each. The Parton plant has idle equipment that could be used to manufacture the headlights. The design
engineer estimates that each headlight requires $4.00 of direct materials, $3.00 of direct labor, and $6.00
of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be
unaffected by this decision. A decision by Parton Company to manufacture the headlights should result
in a net gain (loss) for each headlight of: (CMA adapted)

A. $(2.00).
B. $1.60.
C. $0.40.
D. $2.80.
Make Buy
Purchase cost $11.00
Direct labor 3.00
Variable manufacturing overhead* 3.60
Total cost $10.60 $11.00
*$6 - (40% × $6 = $2.40) = $3.60
The company should make the part rather than buy it from the outside supplier since it costs $0.40 less.

Blooms: Apply
Gradable: automatic

4-141
4-142
94. Item I51 is used in one of Policy Corporation's products. The company makes 18,000 units of this Item
each year. The company's Accounting Department reports the following costs of producing the Item at
this level of activity:
Per Unit
Direct labor $2.20
An outside supplier has offered to produce this Item and sell it to the company for $15.80 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 Item 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 $26,000 of these allocated general overhead costs
would be avoided.
If management decides to buy Item I51 from the outside supplier rather than to continue making the
Item, what would be the annual impact on the company's overall net operating income?


B. Net operating income would decline by $55,800 per year.
D. Net operating income would decline by $29,800 per year.
Make Buy
Direct materials (18,000 units ×
$21,600
$1.20 per unit)
Direct labor (18,000 units × $2.20
39,600
per unit)
Variable overhead (18,000 units ×
59,400
$3.30 per unit)
Supervisor’s salary (18,000 units
18,000
× $1.00 per unit)
Depreciation of special equipment
0
(not relevant)
Allocated general overhead
26,000
(avoidable only)
Outside purchase price (18,000
$284,400
units × $15.80 per unit)
Total cost $164,600 $284,400
4-143
Net operating income would decline by $119,800 per year.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

4-144
95. Liu Inc. is considering whether to continue to make a component or to buy it from an outside supplier.
The company uses 13,000 of the components each year. The unit product cost of the component
according to the company's cost accounting system is given as follows:

Direct labor 5.80
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if
the component were bought from the outside supplier. In addition, making the component uses 1 minute
on the machine that is the company's current constraint. If the component were bought, this machine
time would be freed up for use on another product that requires 2 minutes on the constraining machine
and that has a contribution margin of $5.20 per unit.
When deciding whether to make or buy the component, what cost of making the component should be
compared to the price of buying the component? (CIMA adapted)

A. $22.40.
B. $19.80.
C. $17.28.
D. $19.88.
Make
Purchase cost
Direct labor 5.80
Fixed manufacturing overhead* 1.08
Opportunity cost ($5.20 ÷ 2 min) 2.60
Total cost $19.88
*$3.60 × .3 = $1.08

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

4-145
4-146
96. Item N29 is used by Tyner Corporation to make one of its products. A total of 11,000 units of this Item
are produced and used every year. The company's Accounting Department reports the following costs of
producing the Item at this level of activity:
Per Unit
Direct labor 1.70
Supervisor’s salary 2.60
Depreciation of special equipment 3.20
Allocated general overhead 3.30
An outside supplier has offered to make the Item and sell it to the company for $21.20 each. If this
offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be
avoided. The special equipment used to make the Item was purchased many years ago and has no
salvage value or other use. The allocated general overhead represents fixed costs of the entire company,
none of which would be avoided if the Item were purchased instead of produced internally. In addition,
the space used to make Item N29 could be used to make more of one of the company's other products,
generating an additional segment margin of $29,000 per year for that product. What would be the
impact on the company's overall net operating income of buying Item N29 from the outside supplier?


B. Net operating income would increase by $29,000 per year.
D. Net operating income would increase by $19,100 per year.
Make Buy
Direct materials (11,000
$64,900
Direct labor (11,000 units ×
18,700
$1.70 per unit)
Variable overhead (11,000
59,400
Supervisor’s salary (11,000
28,600
Depreciation of special
0
equipment (not relevant)
Allocated general overhead
0
(avoidable only)
Outside purchase price
(11,000 units × $21.20 per $233,200
unit)
4-147
Opportunity cost (29,000)
Total cost $171,600 $204,20
Net operating income would decline by $32,600 per year.

Blooms: Apply
Gradable: automatic

4-148
4-149
97. Bacon Company makes four products in a single facility. These products have the following unit
product costs:
Products
A B C D
Direct labor 19.40 27.40 33.60 40.40
Variable
manufacturing 4.30 2.70 2.60 3.20
overhead
Fixed manufacturing
26.50 34.80 26.60 37.20
overhead
Products
A B C D
Grinding minutes
3.80 5.30 4.30 3.40
per unit
$2.20 $1.20 $3.30 $1.60
per unit
Monthly demand in
4,000 4,000 3,000 2,000
units
The grinding machines are the constraint in the production facility. A total of 53,600 minutes are
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.
Products
A B C D
3.80 5.30 4.30 3.40
unit
4-150
Monthly demand in
4,000 4,000 3,000 2,000
units
Minutes of grinding
15,200 21,200 12,900 6,800
time
Total minutes of
56,100
grinding time

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic

4-151
4-152
product costs:
Products
A B C D
Direct labor 19.40 27.40 33.60 40.40
Variable
manufacturing 4.30 2.70 2.60 3.20
overhead
Fixed manufacturing
26.50 34.80 26.60 37.20
overhead
Products
A B C D
Grinding minutes
3.80 5.30 4.30 3.40
per unit
$2.20 $1.20 $3.30 $1.60
per unit
Monthly demand in
4,000 4,000 3,000 2,000
units
Which product makes the LEAST profitable use of the grinding machines?

A. Product A.
B. Product B.
C. Product C.
D. Product D.
Products
A B C D
Direct materials 14.30 10.20 11.00 10.60
Direct labor 19.40 27.40 33.60 40.40
4-153
Variable
manufacturing 4.30 2.70 2.60 3.20
overhead
2.20 1.20 3.30 1.60
per unit
Unit contribution
$35.90 $52.00 $36.90 $48.40
margin
Grinding minutes
3.80 5.30 4.30 3.40
per unit
Contribution unit per
$9.45 $9.81 $8.58 $14.24
minute
3 2 4 1
Product C makes the LEAST profitable use of the grinding machines.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

4-154
4-155
product costs:
Products
A B C D
Direct labor 19.40 27.40 33.60 40.40
Variable
manufacturing 4.30 2.70 2.60 3.20
overhead
Fixed manufacturing
26.50 34.80 26.60 37.20
overhead
Products
A B C D
Grinding minutes
3.80 5.30 4.30 3.40
per unit
$2.20 $1.20 $3.30 $1.60
per unit
Monthly demand in
4,000 4,000 3,000 2,000
units
Which product makes the MOST profitable use of the grinding machines?

A. Product A.
B. Product B.
C. Product C.
D. Product D.
Products
A B C D
Direct materials 14.30 10.20 11.00 10.60
Direct labor 19.40 27.40 33.60 40.40
4-156
Variable
manufacturing 4.30 2.70 2.60 3.20
overhead
2.20 1.20 3.30 1.60
per unit
Unit contribution
$35.90 $52.00 $36.90 $48.40
margin
Grinding minutes
3.80 5.30 4.30 3.40
per unit
Contribution unit per
$9.45 $9.81 $8.58 $14.24
minute
3 2 4 1
Product D makes the MOST profitable use of the grinding machines.

Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic

4-157
product costs:
Products
A B C D
Direct labor 19.40 27.40 33.60 40.40
Variable
manufacturing 4.30 2.70 2.60 3.20
overhead
Fixed manufacturing
26.50 34.80 26.60 37.20
overhead
Products
A B C D
Grinding minutes
3.80 5.30 4.30 3.40
per unit
$2.20 $1.20 $3.30 $1.60
per unit
Monthly demand in
4,000 4,000 3,000 2,000
units
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.

Blooms: Apply
Difficulty: 3 Hard
4-158
Gradable: automatic

Product
X Y Z
If Darren has a limit of 20,000 direct labor hours but no limit on units sold or machine hours, then the
A. X, Y, Z.
B. Y, Z, X.
C. X, Z, Y.
D. Z, Y, X.
Product
X Y Z
Unit CM per direct labor hour $4 $7 $5
3 1 2

Blooms: Apply
Gradable: automatic

4-159
Product
X Y Z
If Darren has a limit of 30,000 machine hours but no limit on units sold or direct labor hours, then the
A. Y, Z, X.
B. X, Y, Z.
C. X, Z, Y.
D. Z, X, Y.
Product
X Y Z
Unit CM per machine hour $3.20 $2.00 $3.75
2 3 1

Blooms: Apply
Gradable: automatic

Essay Questions

4-160
103. The Morris Company manufactures wiring tools. The company is currently producing well below its
full capacity. The Baker Company has approached Morris with an offer to buy 5,000 tools at $17.50
each. Morris sells its tools wholesale for $18.50 each; the average cost per unit is $18.30, of which
$2.70 is fixed costs.
Required:
a. If Morris were to accept Baker's offer, what would be the increase in Miller's operating profits?
b. Assume that Morris is operating at full capacity. If Morris were to accept Baker's offer, what would
be the change in Morris' operating profits?

a. [$17.50 - ($18.30 - 2.70)] × 5,000 = $9,500 increase in profits.

b. (17.50 - 18.50) × 5,000 = 5,000 decrease in profits.

Blooms: Apply
Gradable: manual

104. The Parton Company has gathered the following information for a unit of its most popular product:

Direct labor 15
Cost to manufacture $55
The above cost information is based on 10,000 units. Parton currently sells 8,500 units for $62 per unit.
A distributor has offered to buy 1,000 units at a price of $50 per unit. This special order would not
disturb regular sales.
Required:
a. Calculate Parton's change in operating profits if the special order is accepted.

b. How many units of regular sales could be lost before this contract is not profitable?

a. [$50 - (55 - 40% × 20)] × 1,000 = $3,000 increase in profits

b. $3,000/(62 - 47) = 200 units

Blooms: Analyze
4-161
Gradable: manual

105. The following information relates to the Klear Company for the upcoming year.
Amount Per Unit

Sales $9,000,000 $30.00
per unit has been made to Klear. Fortunately, there will be no additional operating expenses associated
with the order and Klear has sufficient capacity to handle the order.
Required:
a. How much will operating profits increase if Klear accepts the special order?
b. Assume that Klear is operating at full capacity. How much will operating profits change if Klear
accepts the special order?

a. [$25 - ($14* + 0.75**)] × 50,000 = $512,500

*($7.200,000 - 3,000,000) ÷ 300,000 = $14/unit
**($675,000 - 450,000) ÷ 300,000 = $0.75
b. ($25 - $30) × 50,000 = $250,000 decrease in profits

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual

4-162
106. The following information relates to a product produced by Baywatch Company:

Direct labor 35
Fixed overhead 40
Unit cost $155
Baywatch expects to produce only 800,000 units next year. The product normally sells for $180 each. A
customer has offered to buy 60,000 units for $150 each. The customer will pay the transportation charge
on the units purchased.
Required:
a. Compute the effect on income if Baywatch accepts the special order.

b. If Baywatch accepts the special order, how much could normal sales drop before all of the
differential profits disappear?

a. [$150 - ($50 + 35 + 30)] × 60,000 = $2,100,000 increase

b. $2,100,000/($180 - 115) = 32,308 units

Blooms: Analyze
Gradable: manual

4-163
4-164
107. Douglas Corporation produces and sells three products. The three products, Alpha, Beta, and Gamma,
are sold in a local market and in a regional market. At the end of the first quarter of the current year, the
following income statement (in thousands of dollars) has been prepared:
Total Local Regional

Sales revenue $5,200 $4,000 $1,200
Cost of goods sold 4,040 3,100 940
Gross margin 1,160 900 260
Marketing costs 420 240 180
Administrative costs 208 160 48
Operating profits $532 $500 $32
Management has expressed special concern with the regional market because of the extremely poor
return on sales. This market was entered a year ago because of excess capacity. It was originally
believed that the return on sales would improve with time, but after a year, no noticeable improvement
can be seen from the results as reported in the above quarterly statement. In attempting to decide
whether to eliminate the regional market, the following information has been gathered:
Products Alpha Beta Gamma

Sales revenue $2,000 $1,600 $1,600
Variable
manufacturing cost % 60% 70% 60%
of sales
Variable marketing
3% 2% 2%
cost
Product Sales by Markets Local Regional

Alpha $1,600 $400
Beta 1,200 400
Gamma 1,200 400
All administrative costs and fixed manufacturing costs are common to the three products and the two
markets and are fixed for the period. Remaining marketing costs are fixed for the period and separable
by market. All fixed costs have been arbitrarily allocated to markets.
Required:
(a.) Assuming there are no alternative uses for the Douglas Corporation's present capacity, would you
recommend dropping the regional market? Why or why not?
(b.) Prepare the quarterly income statement showing contribution margins by products. Do not allocate
fixed costs to products.
(c.) It is believed that a new product can be ready for sale next year if the Douglas Corporation decides
to go ahead with continued research. The new product can be produced by simply converting equipment
presently used in producing product Gamma. This conversion will increase fixed costs by $40,000 per
quarter. What must be the minimum contribution margin per quarter be for the new product to make the
changeover financially feasible?

4-165
(a.) The regional market should not be dropped as this market not only covers all the variable costs and
separable fixed costs but also gives net market contribution of $232,000 toward the common fixed costs.
Sales $1,200 &400 + 400 + 400

Variable manufacturing $400 × 60% + 400 ×
760
costs 70% + 400 × 60%
$400 × 3% + 400 ×
Variable marketing costs 28
2% + 400 × 2%
Fixed marketing 180
Net segment margin for
$232
Regional
(b.) Quarterly income statement (in thousands):
Alpha Beta Gamma Total

Sales revenue $2,000 $1,600 $1,600 $5,200
Less variable costs:
Manufacturing 1,200 1,120 960 3,280
Marketing 60 32 32 124
Total variable
1,260 1,152 992 3,404
cost
Contribution margin 740 448 608 1,796
Less fixed costs
Manufacturing 760
Marketing 296
Administrative 208
Operating profit $532
(c.) The new product must contribute at least $648 (= $608 + $40) per quarter so as not to leave the
company worse off when product Gamma is replaced.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual

4-166
108. Macro Electronics manufactures low-cost, consumer-grade computers. It sells these computers to
various electronics retailers to market under store brand names. It manufactures two computers, the
Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, memory, and hard drive capacity.
The following information is available:
Lightning Lightning

2.0 2.4
Direct materials $90 $110
Direct labor 60 90
Variable overhead 30 30
Fixed overhead 180 240
Total cost per unit $360 $470
Selling price 600 780
The average wage rate is $30 per hour. The plant has a capacity of 32,000 direct labor-hours.
Required:
1. A nationwide discount chain has approached Macro with an offer to buy 2,000 Lightning 2.0
computers and 2,000 Lightning 2.4 computers if the unit prices are lowered to $350 and $450,
respectively.
a. If Macro accepts the offer, how many direct labor-hours will be required to produce the additional
computers?
b. How much will the profit increase (or decrease) if Macro accepts this proposal? All other prices will
remain the same.
2. Suppose that the customer has offered instead to buy up to 3,000 each of the two models at $350 and
$450, respectively.
a. How many of each product should be manufactured and sold? Assume current demand will not be
affected by the special order. Also assume that the company cannot increase its production capacity to
meet the extra demand.
b. How much will the profits change if this order is accepted instead?

1. a. 2.0: 2 hrs × 2,000 units = 4,000 hrs; 2.4: 3 hrs × 2,000 units = 6,000 hrs. Total hrs = 4,000 + 6,000
= 10,000 hrs
1. b. 2.0: $170 × 2,000 = $340,000; 2.4: $220 × 2,000 = $440,000; $340,000 + 440,000 = $780,000
2. a. Produce original contract first, 6,000 2.0 and 3,000 2.4. With the remaining 11,000 hrs make 2.0
new first 3,000 units × 2 hrs = 6,000 hrs. With the remaining 5,000 hrs make 5,000/3 = 1,666 model 2.4
new.
2. b. 2.0 new: 3,000 × $170 = $510,000; 2.4 new: 1,666 × $220 = $366,520; $510,000 + 366,520 =
$876,520
4-167

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual

109. The operations of Balance Corporation are divided into the Kaplan Division and the Norton Division.
Kaplan Norton

Sales $1,200,000 $600,000 $1,800,000
Variable costs 480,000 360,000 840,000
Contribution
$720,000 $240,000 $960,000
margin
Segment margin $560,000 $150,000 $710,000
Allocated
360,000 180,000 540,000
common costs
Operating income
$200,000 ($30,000) $170,000
(loss)
Required:
a. Operating income for Balance Corporation as a whole if the Norton Division were dropped would be
b. If the Norton Division were dropped, Kaplan Division's sales would increase by 45%. If this
happened, the operating income for Balance Corporation as a whole would be:

a. $560,000 - 540,000 = $20,000

b. $720,000 × 145% = $1,044,000 - 160,000 - 540,000 = $344,000

Blooms: Analyze
Gradable: manual

4-168
110. The Fortune Company produces 15,000 units of Part QT34 annually at a total cost of $600,000.

Manufacturing overhead 375,000
Total $600,000
Manufacturing overhead is 36% variable. The Xu Company has offered to supply all 15,000 units of
Part QT34 per year for $35 per unit. If Fortune accepts the offer, $8 per unit of the fixed overhead
would be avoided. In addition, some of Fortune's leased facilities could be vacated, reducing lease
payments by $90,000 per year.
Required:
a. By how much would Fortune's profits change if 15,000 of Part QT34 are purchased from Xu?
b. At what price would Fortune be indifferent to Xu's offer?

a. purchase: $35 × 15,000 = $525,000; make: 60,000 + 165,000 + 375,000 × 36% + 90,000 = $450,000;
525,000 - 450,000 = $75,000 decrease in profits
b. $450,000/15,000 = $30

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual

4-169
111. The Fair Play Division of Fast Company produces wheels for off-road sport vehicles. One-half of Fair
Play's output is sold to the Glow Division of Fast; the remainder is sold to outside customers. Fair Play's
Internal Outside
Sales $300,000 $400,000
Unit sales 20,000 20,000
Glow Division has an opportunity to purchase 20,000 wheels of the same quality from an outside
supplier on a continuing basis.
Required:
a. The Fair Play Division cannot sell any additional products to outside customers. Should the Fast
Company allow Glow Division to purchase the wheels from the outside supplier at $13.00 per unit?
b. If the Fair Play Division is now operating at full capacity and can sell all its units to outside
customers at the present selling price, what is the differential cost to Fast of requiring that the wheels be
made internally and sold to Glow Division?
c. If the Fair Play Division is now operating at full capacity and can sell all its units to outside
customers at the present selling price, what is the minimum selling price that Fair Play should accept
from Glow Division?
d. The Fair Play Division cannot sell any additional products to outside customers. What is the
minimum selling price that Fair Play should accept from the Glow Division?

a. Make: $10; Buy: $13; income will decrease $3 × 20,000 units = $60,000 if it buys outside
b. Variable cost of $10 + opportunity cost of $10 = $20 per unit × 20,000 = $400,000
c. Minimum price = $400,000/20,000 = $20/unit
d. Minimum price = variable cost = $10/unit

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

4-170
112. Halfway Industries produces two products. Information about the products is as follows:
Clocks Headphones
The company's fixed costs totaled $140,000, of which $30,000 can be directly traced to Clocks and
$90,000 can be directly traced to Headphones.
Required:
The effect on the firm's profits if the Headphone product is dropped would be:

CM of Headphones: (14 - 9) × 20,000 = $100,000 - 90,000 traceable fixed = $10,000 decrease in profits

Blooms: Apply
Gradable: manual

113. Everett Tool Company has two retail stores, one in Dallas and the other in Sand Creek. The Dallas store
had sales of $200,000, a contribution margin of 35 percent, and a segment margin of $28,000. The
company's two stores have total sales of $500,000, an average contribution margin of 32 percent, and a
total segment margin of $62,000.
Required:
Prepare a segmented income statement for Everett.

Dallas Sand Creek Total

Sales revenue $200,000 $300,000 $500,000
Variable costs 130,000 210,000 340,000
Contribution margin 70,000 90,000 160,000
Segment margin $28,000 $34,000 $62,000

4-171
Blooms: Apply
Gradable: manual

114. Dickson Industries has two divisions: the North Division and the South Division. Information relating to
the divisions for the year just ended is as follows:
North South
Common fixed expenses have been allocated equally to each of the two divisions.
Required:
Prepare a segmented income statement for Dickson.

North South Total

Sales revenue $360,000 $800,000 $1,160,000
Variable costs 160,000 300,000 460,000
Contribution margin 200,000 500,000 700,000
Segment margin 52,000 280,000 332,000
Common fixed costs 280,000
Operating profit $52,000

Blooms: Apply
Gradable: manual

4-172
115. The operations of Jorge Corporation are divided into the Northern Division and the Eastern Division.

Northern Eastern

Sales $750,000 $540,000 $1,290,000
Less: Variable costs 270,000 300,000 570,000
Less: Direct fixed
225,000 190,000 415,000
costs
Segment margin $255,000 $50,000 $305,000
Less: Allocated
130,000 95,000 225,000
common costs
Operating income
$125,000 ($45,000) $80,000
(loss)
Required:
a. Operating income for Jorge Corporation, as a whole, if the Eastern Division were dropped would be:
b. If Eastern Division is dropped, Northern's sales will increase by 20%. What will Jorge Corporation's
operating income be?

a. $255,000 - 225,000 = $30,000

b. $480,000 × 120% = $576,000 - 225,000 - 225,000 = $126,000

Blooms: Analyze
Difficulty: 1 Easy
Gradable: manual

4-173
116. The Ramos Company manufactures two products: Treadmills and Elliptical Trainers. The costs and
Treadmill Elliptical Trainer

Sales price per unit $300 $175
Total demand for the Treadmill product is 7,000 units and for the Elliptical Trainer product is 5,000
units. Machine time is a scarce resource. During the year, 48,000 machine hours are available. A
Treadmill requires 6 machine hours per unit, while an Elliptical Trainer requires 2.5 machine hours per
unit.
Required:
a. How many units of Treadmills and Elliptical Trainers should Ramos produce?

a. CM/hr for Treadmills: (300 - 160)/6 = $23.33; CM/hr for Elliptical Trainers: (175 - 85)/2.5 = $36:
produce Elliptical Trainers first 5,000 units of Elliptical Trainers × 2.5 hr = 12,500 hours needed;
48,000 - 12,500 = 35,500 hrs remaining; 35,500/6 = 5,916 units of Treadmills.
b. 5,000 × $140 + 5,916 × $90 = $1,232,440.

Blooms: Analyze
Gradable: manual

4-174
117. Short Inc has 5,200 machine hours available each month. The following information on the company's

1 2 3
$45.00 $54.00 $22.50
unit
Sales demand in units 900 1,000 3,000
Required:


a. CM/hr for P1: 45/3 = $15; P2: 54/2 = $27; P3: 22.50/1 = $22.50; P2 first, then P3, finally P1.
P2: 1,000 units × 2 = 2,000 hrs; 5,200 - 2,000 = 3,200 remaining; P3 3,000 × 1 = 3,000 hrs; 200 hrs
remaining; P1 200/3 = 66 units; P1:66; P2: 1,000; P3: 3,000.
b. 66 × $45 + 1,000 × $54 + 3,000 × $22.50 = $124,470

Blooms: Analyze
Gradable: manual

4-175
118. Rainier Inc has 6,400 machine hours available each month. The following information on the company's

X Y Z
Contribution margin
$20.00 $21.00 $17.50
per unit
Sales demand in units 1,000 1,500 1,500
Required:


a. CM/hr for X: 20/2 = $10; Y: 21/3 = $7; Z: 17.50/2 = $8.75; X first, then Z, finally Y.
X: 1,000 units × 2 = 2,000 hrs; 6,400 - 2,000 = 4,400 remaining; Z 1,500 × 2 = 3,000 hrs; 4,400 - 3,000
= 1,400 hrs remaining; Y 1,400/3 = 466 units; X:1,000;Y: 466; Z: 1,500.
b. (1,000 × $20) + (466 × $21) + (1,500 × $17.50) = $56,036.

Blooms: Analyze
Gradable: manual

4-176
119. The Valor Company manufactures two products: L and M. The costs and revenues are as follows:
Product L Product M
Machine hours per unit 15 10
Total demand for Product L is 2,000 units and for Product M is 1,000 units. Machine time is a scarce
resource. During the year, 36,000 machine hours are available.
Required:
a. How many units of Products L and M should Valor produce?

a. L = 1,733; M = 1,000
CM/hr: L ($150 - 90)/15 hr = $4/hr; M: ($112 - 68)/10 hr = $4.40; M first, then L
M 1,000 × 10 hr = 10,000 hr; 36,000 - 10,000 = 26,000 remaining/15 = 1,733 L

Blooms: Analyze
Gradable: manual

4-177
120. Giant Inc has 3,600 machine hours available each month. The following information on the company's
three surgical kits is available:
Surgical Surgical Surgical

Kit 1 Kit 2 Kit 3
$5.00 $4.00 $2.50
unit
Sales demand in units 1,000 800 900
Required:


a. CM/hr for Kit 1: 5/2 = $2.50; Kit 2: 4/1 = $4; Kit 3: 2.50/3 = $0.83; Kit 2 first, then Kit 1, finally Kit
3.
Kit 2: 800 units × 1 = 800 hrs; 3,600 - 800 = 2,800 remaining; Kit 1 1,000 × 2 = 2,000 hrs; 800 hrs
remaining; Kit 3 800/3 = 266 units; Kit 1:1,000; Kit 2: 800; Kit 3: 266.
b. (1,000 × $5) + (800 × $4) + (266 × $2.50) = $8,865.

Blooms: Analyze
Gradable: manual

4-178
121. Moxy Inc has 9,600 machine hours available each month. The following information on the company's

X Y Z
Contribution margin
$20.00 $21.00 $17.50
per unit
Sales demand in units 500 750 1,000
Required:


a. CM/hr for X: 20/8 = $2.50; Y: 21/12 = $1.75; Z: 17.50/6 = $2.91; Z first, then X, finally Y.
Z: 1,000 units × 6 = 6,000 hrs; 9,600 - 6,000 = 3,600 remaining; X 3,600 hrs/8 = 450 units; no time
remaining; X 450;Y: 0; Z: 1,000.
b. (450 × $20) + (0 × $21) + (1,000 × $17.50) = $26,500.

Blooms: Analyze
Gradable: manual

4-179
122. Frank Industries manufactures 200,000 components per year. The manufacturing cost of the
components was determined as follows:

An outside supplier has offered to sell the component for $3.40. If Frank purchases the component from
Required:
a. If Frank purchases the component from the supplier instead of manufacturing it, the effect on income
would be:
b. What is the maximum price Frank would be willing to pay the outside supplier?

a. Make: $640,000*; Buy: 200,000 × 3.40 = 680,000 - 20,000 = $660,000; income effect: 640,000 -
660,000 = 20,000 decrease in income if units are purchased.
b. ($640,000* + 20,000)/200,000 = $3.30.
*Variable cost to make = $200,000 + 320,000 + 120,000 = $640,000.

Blooms: Analyze
Gradable: manual

4-180
123. Talent Industries manufactures 30,000 components per year. The manufacturing cost of the components

Total $1,200,000
Required:
a. Assume that the fixed manufacturing overhead reflects the cost of Talent's manufacturing facility.
This facility cannot be used for any other purpose. An outside supplier has offered to sell the
component to Talent for $34. If Talent Industries purchases the component from the outside supplier,
the effect on income would be a
b. Assume Talent Industries could avoid $80,000 of fixed manufacturing overhead if it purchases the
Talent purchases the component from the supplier instead of manufacturing it, the effect on income
would be a

a. Make: $960,000*; Buy: $34 × 30,000 = $1,020,000; income effect: $960,000 - 1,020,000 = $60,000
decrease in income if units are purchased.
b. Make: $960,000*; Buy: $1,020,000 - 80,000 = $940,000: income effect: $960,000 - 940,000 =
$20,000 increase in income if units are purchased.
*Variable cost to make: $300,000 + 480,000 + 180,000 = $960,000.

Blooms: Analyze
Gradable: manual

4-181
124. The Sands Company manufactures and sells several products, one of which is called a slip differential.
The company normally sells 30,000 units of the slip differential each month. At this activity level, unit
costs are:
Direct materials $4
Direct labor $3
Variable manufacturing overhead $4
Fixed manufacturing overhead $5
Variable selling $3
Fixed selling $1
An outside supplier has offered to produce the slip differentials for the Sands Company, and to ship
them directly to the Sands Company's customers. This arrangement would permit the Sands Company
to reduce its variable selling expenses by one third (due to elimination of freight costs). The facilities
now being used to produce the slip differentials would be idle and fixed manufacturing overhead would
continue at 60 percent of its present level. The total fixed selling expenses of the company would be
unaffected by this decision.
Required:
What is the maximum acceptable price quotation for the slip differentials from the outside supplier?

The total cost savings from purchasing the slip differentials is $420,000 as computed below:
Direct materials ($4 × 30,000) $120,000

Direct labor ($3 × 30,000) 90,000
Variable manufacturing overhead ($4 ×
120,000
30,000)
Fixed overhead ($5 × 30,000 × 0.40) 60,000
Variable selling expense ($3 × 30,000 × 1/3) 30,000
Total relevant costs $420,000
Therefore, the company would be willing to pay no more than $14 for each unit since the total purchase
price would then be $420,000 ($14 × 30,000 = $420,000), which is exactly the cost savings.
$14 is the relevant cost figure. To be acceptable, the quotation received from the outside supplier must
be less than $14.

Blooms: Apply
Gradable: manual
4-182

4-183
4-184
125. Carlson Company makes 4,000 units per year of a part called an axial tap for use in one of its products.
Data concerning the unit production costs of the axial tap follow:

Direct labor 10
Fixed manufacturing overhead 20
Total manufacturing cost per unit $73
An outside supplier has offered to sell Carlson Company all of the axial taps it requires. If Carlson
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 Carlson 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 Carlson Company
accept the offer? Fully support your answer with appropriate calculations.
b. Assume that Carlson 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 Carlson Company should be willing to pay the outside
supplier for axial taps?

a. The analysis of the alternatives follows below:
Make Buy
Purchase cost $65
Direct labor 10
Fixed manufacturing overhead* 8
Total cost $61 $65
*40% × $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
4-185
Total $81

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

4-186
4-187
126. Part XE3 is used in one of Sun Corporation's products. The company's Accounting Department reports
Per Unit
Direct labor $1.20
An outside supplier has offered to make the part and sell it to the company for $14.70 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 $5,000 of these allocated general overhead costs would be avoided.
Required:
XE3 from the supplier rather than continuing to make it inside the company.

a.
Make Buy
Direct materials
(12,000 units × $54,000
$4.50 per unit)
Direct labor
(12,000 units × 14,400
$1.20 per unit)
Variable overhead
(12,000 units × 32,400
$2.70 per unit)
Supervisor’s
salary (12,000
36,000
units × $3.00 per
unit)
Depreciation of
special equipment 0
(not relevant)
Allocated general 5,000
overhead
4-188
(avoidable only)
Outside purchase
price (12,000 units $176,400
× $14.70 per unit)
Total cost $141,800 $176,400
b. The total cost of the make alternative is lower by $34,600. Thus, net operating income would decline
by $34,600 if the offer from the supplier were accepted. Therefore, the company should continue to
make the part itself.

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

4-189
127. Snagless Corporation has received a request for a special order of 9,000 units of product ZX9 for $46.50
each. The normal selling price of this product is $51.60 each, but the units would need to be modified
slightly for the customer. The normal unit product cost of product ZX9 is computed as follows:

Direct labor 6.60
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 some modifications made to product ZX9 that
$46,000 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 capacity for producing the special order.
Required:
Determine the effect on the company's total net operating income of accepting the special order. Show
your work!

Incremental revenue (9,000 units × $46.50

$418,500
per unit)
Less incremental costs:
Direct materials (9,000 units × $17.30 per
155,700
unit)
Direct labor (9,000 units × $6.60 per unit) 59,400
Variable manufacturing overhead (9,000
34,200
Modifications (9,000 units × $6.20 per
55,800
unit)
Special molds 46,000
Total incremental cost 351,100
Incremental net operating income $67,400

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

4-190
128. A customer has asked Balkans Corporation to supply 5,000 units of product DX9, with some
modifications, for $40.20 each. The normal selling price of this product is $52.80 each. The normal unit
product cost of product DX9 is computed as follows:

Direct labor 6.10
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 some modifications made to product DX9 that
$23,000 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 capacity for producing the special order.
Required:
Determine the effect on the company’s total net operating income of accepting the special order. Show
your work!

Incremental revenue (5,000 units × $40.20

$201,000
per unit)
Less incremental costs:
Direct materials (5,000 units × $12.70 per
63,500
unit)
Direct labor (5,000 units × $6.10 per unit) 30,500
Variable manufacturing overhead (5,000
43,500
Modifications (5,000 units × $3.50 per
17,500
unit)
Special molds 23,000
Total incremental cost 178,000
Incremental net operating income $23,000

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

4-191
4-192
129. Florence Corporation makes three products that use the current constraint, which is a particular type of
machine. Data concerning those products appear below:
X1 R2 Z3
5.10 8.50 8.00
(minutes)
Required:
a. Rank the products in order of their current profitability from the most profitable to the least
profitable. In other words, rank the products in the order in which they should be emphasized. Show
your work!
resource?

a.
X1 R2 Z3
Selling price
$325.89 $543.15 $508.00
per unit
Variable cost
251.94 420.75 397.60
per unit
Contribution
margin per $73.95 $122.40 $110.40
unit (a)
Amount of
the
constrained
resource
5.10 8.50 8.00
required to
produce one
unit (b)
Contribution
margin per
unit of the
constrained $14.50 $14.40 $13.80
resource (a)
÷ (b)
Ranking 1 2 3
Resulting ranking of products: X1, R2, Z3
4-193
b. The company should be willing to pay up to $13.80 per minute to obtain more of the constrained
resource since this is the value to the company of using this constrained resource to make more of
product Z3. By assumption, the other products will already have been produced up to demand.

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

4-194
130. Atuso, Inc. produces three products. Data concerning the selling prices and unit costs of the three
products appear below:
Product
J1 K2 L3
Variable costs $50 $40 $55
Fixed costs $25 $8 $22
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?

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
J1 K2 L3
Variable costs 50 40 55
Contribution margin $30 $20 $35
Contribution margin per minute $3.00 $4.00 $5.00
Product L3 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 L3, the time would be
worth 60 × $5 = $300 per hour.

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual
4-195

4-196
4-197
131. Varix Company makes three products in a single facility. These products have the following unit
product costs:
Product
A B C
Direct labor 14.10 14.90 10.00
1.20 0.90 0.50
overhead
Fixed manufacturing overhead 18.50 17.20 23.70
Unit product cost $46.60 $42.30 $38.90
Product
A B C
The mixing machines are potentially the constraint in the production facility. A total of 24,200 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 three
products?
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

a. Demand on the mixing machine:
Product
A B C
Total minutes required 7,400 13,600 7,800
4-198
Total time required for all products: 28,800
b. Optimal production plan:
Product
A B C
Direct materials 12.80 9.30 4.70
Direct labor 14.10 14.90 10.00
1.20 0.90 0.50
overhead
Variable selling cost per unit 2.90 2.70 3.70
Total variable cost per unit 31.00 27.80 18.90
Contribution margin per unit $28.20 $32.30 $36.40
$7.62 $9.50 $9.33
minute
Rank in terms of profitability 3 1 2
Optimal production 757 4,000 2,000
c. The company should be willing to pay up to the contribution margin per minute for the marginal job,
which is $7.62.

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

4-199
4-200
132. Mobley Company makes three products in a single facility. Data concerning these products follow:
Products
A B C
Direct labor $21.40 $24.00 $14.80
$1.20 $0.60 $0.50
overhead
The mixing machines are potentially the constraint in the production facility. A total of 6,300 minutes
are available per month on these machines. Direct labor is a variable cost in this company.
Required:
a. How many minutes of mixing machine time would be required to satisfy demand for all three
products?
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

a. Demand on the mixing machine:
Products Total
A B C
Total minutes required 2,400 3,200 800 6,400
b. Optimal production plan:
Products
A B C
Direct materials 34.00 50.50 56.90
Direct labor 21.40 24.00 14.80
Variable manufacturing 1.20 0.60 0.50
4-201
overhead
Variable selling cost per unit 1.80 2.30 2.10
Total variable cost per unit 58.40 $77.40 74.30
Contribution margin per unit $11.60 $15.00 $11.60
$9.67 $18.75 $29.00
minute
Rank in terms of profitability 3 2 1
Optimal production 1,917 4,000 2,000
c. The company should be willing to pay up to the contribution margin per minute for the marginal job,
which is $9.67.

Blooms: Apply
Gradable: manual

4-202
133. The constraint at Trump Inc. is an expensive milling machine. The three products listed below use this
constrained resource.
9P 8L 7N
6.60 7.90 5.80
(minutes)
Required:
a. Rank the products in order of their current profitability from the most profitable to the least
profitable. In other words, rank the products in the order in which they should be emphasized. Show
your work!
resource?

a.
9P 8L 7N
Selling price
$404.58 $478.74 $358.44
per unit
Variable cost
308.88 371.30 285.36
per unit
Contribution
margin per $95.70 $107.44 $73.08
unit
Time on the
constraint 6.60 7.90 5.80
(minutes)
Contribution
margin per
unit of the $14.50 $13.60 $12.60
constrained
resource
Ranking 1 2 3
Resulting ranking of products: 9P, 8L, 7N
b. The company should be willing to pay up to $12.60 per minute to obtain more of the constrained
resource since this is the value to the company of using this constrained resource to make more of
product 7N. By assumption, enough of the other two products will already have been produced to fully
satisfy demand.
4-203

Blooms: Apply
Difficulty: 1 Easy
Gradable: manual

134. Are sunk costs ever differential costs? Explain.

Sunk costs can never be differential costs. However, sunk costs can determine the amounts of certain
differential costs. For example, federal income taxes are based on historical (sunk) costs. The disposal
of a fixed asset may result in a tax based on the difference between the sales proceeds and the
undepreciated sunk cost. Many contracts are based on sunk costs as well. Decisions may have contract
implications that arise with changes in plans.

Blooms: Remember
Difficulty: 1 Easy
Gradable: manual

135. A student in your cost accounting class says, "This whole subject of differential costing is easy; variable
costs are the only costs that are relevant." Using an example, what would you tell that student?

While student answers may vary with respect to examples, here is one possible response. Variable costs
are usually relevant when talking about changes in production volumes. However, if the change in
production volume extends beyond the "relevant range," some fixed costs may also be differential. In
addition, there are opportunity costs that may be differential for a certain decision. In some cases there
may be no change in variable costs. For example, if a company were to add a second copier in the office
workroom to expedite copying, the number of copies produced would be unchanged, but the fixed costs
of the equipment would approximately double.

Blooms: Remember
Difficulty: 1 Easy
Gradable: manual

4-204
136. You just got your first job after graduation. Your immediate supervisor received a special order at a
price that is "below cost" during your first week at the company. The supervisor points to the proposal
and says, "These are the kinds of orders that will get you in trouble. Every sale must bear its share of the
full costs of running the business. If we sell below our full cost, we'll be out of business in no time."
You remember from your course in cost accounting that this may not be as much trouble as the
supervisor anticipates. How would you respond and not lose your first job?

Student answers will vary, but they should be logical and diplomatically state the facts. An example
answer might be:
I agree with you that this is a somewhat complex decision. However, I learned in my cost accounting
class that in the short run, sales revenues need only cover the differential costs of production and sale.
But this is only from a short-run perspective and will work as long as the sale does not affect other
output prices or normal sales volume. An occasional "below cost" sale proposal might actually result in
a net increase in income, as long as the revenues cover the differential costs. In the long-run, you are
correct. All costs must be covered or management would not want to reinvest in the same type of assets;
continually selling below the full cost of production would not make sense for a particular product,
especially when it comes time to replace the facilities used for these jobs. Additionally, there may be
some qualitative issues to consider before considering a special order, like will the special order be seen
by some of our customers as a cheaper substitute for our original product, causing lost sales of our
regular customers.

Blooms: Remember
Difficulty: 1 Easy
Gradable: manual

137. Explain the difference between full costs and differential costs.

Full cost is the sum of all fixed and variable costs of manufacturing and selling a unit. Differential cost
is the cost that differs between two alternatives. Differential costs may include just variable costs, just
fixed costs, or some mix of the two.

Blooms: Remember
Difficulty: 1 Easy
Gradable: manual

4-205
138. Explain what is meant by "the full-cost fallacy" in making pricing decisions.

The full-cost fallacy arises in short run pricing decisions when fixed costs are included in the analysis.
In the short run, most fixed costs are not differential.

Blooms: Remember
Gradable: manual

139. Explain the differences between life-cycle product costing and target costing.

Life-cycle product costing tracks costs attributable to each product from the start of the research for a
product until the finish—the final customer support. Life-cycle product costing is based on what costs
are estimated to be. Target costing starts with the target price—what the consumer is willing to pay
minus the target profit. Target costing is a measure of what costs can be.

Blooms: Remember
Gradable: manual

140. Explain the distinction between predatory pricing and peak-load pricing.

Predatory pricing is the practice of setting prices below cost with the intent of driving competitors out of
the market. Peak-load pricing is using different prices based on the demand for the product. At peak
demand times, prices charged will be higher than the prices at off-peak times.

Blooms: Remember
Gradable: manual

4-206
141. Why is it important to consider opportunity costs in a make-or-buy decision?

Opportunity costs can represent a substantial part of the cost of an alternative and the analyst needs to
consider the foregone opportunities.

Blooms: Remember
Gradable: manual

142. On what three main factors does the theory of constraints focus?

The theory of constraints focuses on these three factors:
1. Throughput contribution: Sales dollars minus direct materials and other variable costs.
2. Investments: Inventories, equipment, buildings, and other assets used to generate throughput
contribution.
3. Operating costs: All operating costs other than direct materials and other variable costs.

Blooms: Remember
Gradable: manual

4-207
143. Flower Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing
plant has the capacity to produce 18,000 medals each month; current monthly production is 17,100
medals. The company normally charges $88 per medal. Cost data for the current level of production are
shown below:
Variable costs:
Direct labor $324,900
Selling and
$30,780
administrative
Fixed costs:
Manufacturing $345,420
Selling and
$164,160
administrative
The company has just received a special one-time order for 600 medals at $73 each. For this particular
order, no variable selling and administrative costs would be incurred. This order would also have no
effect on fixed costs.
Required:
Should the company accept this special order? Why? (CMA adapted)

Only the direct materials and direct labor costs are relevant in this decision. To make the decision, we
must compute the average direct materials and direct labor cost per unit.

Total $820,800
Current monthly production 17,100
Average direct materials and direct labor cost
$48
per unit
Since price on the special order is $73 per medal and the relevant cost is only $48, the company would
earn a profit of $25 per medal. Therefore, the special order should be accepted.

Blooms: Apply
Gradable: manual

4-208
4-209
144. Horton Corporation makes a range of products. The company's predetermined overhead rate is $16 per
direct labor-hour, which was calculated using the following budgeted data:

Management is considering a special order for 700 units of product Item 48 at $64 each. The normal
selling price of product Item 48 is $75 and the unit product cost is determined as follows:

Direct labor 18.00
If the special order were accepted, normal sales of this and other products would not be affected. The
company has ample excess capacity to produce the additional units. Assume that direct labor is a
variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed
manufacturing overhead would not be affected by the special order.
Required:
If the special order were accepted, what would be the impact on the company's overall profit? (CIMA
adapted)

Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed
manufacturing overhead is not relevant since it would not be affected by the decision. The variable
portion of the manufacturing overhead rate is computed as follows:

÷ Direct labor-hours 25,000
= Variable portion of the predetermined
$3.00
overhead rate
The direct-labor hours per unit for the special order can be determined as follows:
Manufacturing overhead applied $16.00

÷ Predetermined overhead rate $16.00
= Direct labor-hours 1.00
Consequently, the variable manufacturing overhead for the special order would be:
4-210
Variable portion of the predetermined overhead
$3.00
rate
× Direct labor-hours 1.00
= Variable manufacturing overhead $3.00
Putting this all together:
Special order price $64.00

Variable costs:
Direct materials 37.00
Direct labor 18.00
Total variable cost 58.00
Contribution margin $6.00
× Units ordered 700
= Total increase in profit from the special order $4,200

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

4-211
4-212
145. Juran 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 70,000 units per month is as follows:

Direct labor $4.30
Fixed manufacturing overhead $11.10
Variable selling & administrative expense $1.50
Fixed selling & administrative expense $9.10
The normal selling price of the product is $56.70 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 $0.70 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 $51.20 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 700 units for regular customers.
What would be the minimum acceptable price per unit for the special order?

a.
Variable cost per unit on normal sales:

Direct labor 4.30
Variable selling & administrative expense 1.50
Variable cost per unit on normal sales $34.30
Variable cost per unit on special order:
Normal variable cost per unit $34.30
Reduction in variable selling & admin 0.70
Variable cost per unit on special order $33.60
Selling price for special order $51.20
Variable cost per unit on special order 33.60
4-213
Unit contribution margin on special order $17.60
Number of units in special order 2,000
Increase (decrease) in net operating income $35,200
b. The opportunity cost is just the contribution margin on normal sales:
Normal selling price per unit $56.70

Variable cost per unit on normal sales 34.30
Unit contribution margin on normal sales $22.40
c. Minimum acceptable price:
Unit contribution margin on normal sales $22.40

Displaced normal sales 700
Lost contribution margin displaced sales $15,680
Total variable cost on special order 67,200
$82,880
Number of units in special order 2,000
Minimum acceptable price on special order $41.44

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

4-214
146. Florida Enterprises produces high quality blankets sold to hotels and resorts. Blankets must be well
made because of frequent washings. Currently, Florida sells 10,000 blankets at $60 each with the
capacity to produce 12,000 blankets. Florida is considering a special order from a hotel chain in Mexico
for 1,000 blankets at a price of $45. Currently, Florida has the following costs:
Unit Costs $250,000

Product Level Costs $40,000
Facility Costs $125,000
If Florida accepts the special order, it will incur an additional $2 per blanket in foreign currency
transaction costs. No other product or facility costs will change.
Required:
1.) Determine the impact of the special order on Florida. Prepare your analysis in good form.
2.) What other factors should Florida consider in taking the special order?

1.)
Status Quo Alternative Difference

Revenue $600,000 $645,000 $45,000
Unit Costs ($250,000) ($275,000) ($25,000)
Product Costs ($40,000) ($42,000) ($2,000)
Facility Costs ($125,000) ($125,000) $0
Operating Income $185,000 $203,000 $18,000
Based upon the analysis, Florida should accept the order.
2.) Other factors to consider include:
(a.) Will other customers find out about the special order and demand the same price? (Should our best
customers pay the highest price?)
(b.) What is the added risk from selling in international markets?
(c.) Will there be future orders at the regular price?
(d.) Is the timing of the special order helpful for slack in production or is the time typically busy - while
a company may have sufficient overall capacity, they may encounter excess orders at any particular
time.
(e.) Will the order open new markets for Florida?

Blooms: Apply
4-215
Gradable: manual

147. Brothers Corp. is considering dropping its talking dog product line due to continuing losses.
Revenue and cost data for the talking dog line for the past year follow:
Sales (20,000 units) $300,000

Variable costs 180,000
Contribution margin 120,000
Fixed costs 140,000
If the talking dog is discontinued, then Brothers could avoid $110,000 per year in fixed costs.
Required:
(1.) What is the change in annual operating income from discontinuing the talking dog product line?
(2.) Assuming all other conditions stay the same, at what level of annual sales of the talking dog (in
units) should Brothers be indifferent to discontinuing or continuing the product line?
(3.) Suppose that if the talking dog is dropped, the production and sale of other products would increase
so as to generate a $15,000 increase in the contribution margin received from the other products. If all
other conditions are the same, what is the change in annual operating income from dropping the talking
dog?

(1.) An overall decrease of $10,000 per year. Currently, the talking dog has a net loss of $20,000, but
$30,000 of fixed costs would continue regardless of what decision is made. The $30,000 would be
allocated to other products.
(2.) The annual level of sales where Brothers would be indifferent is that where the avoidable fixed
costs are equal to the contribution margin. $110,000/$6 (contribution margin per unit) = 18,334
(rounded up). At 18,334 units, Brothers would be indifferent as to keeping or dropping the talking dog.
(3.) Brothers would lose $10,000 per year from dropping the talking dog product line, but gain $15,000
from the new product line. Overall, income would increase by $5,000.

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

4-216
4-217
148. Price Candies (PC) makes three types of chocolate candy bars. The head of marketing, Nathan Lord
found the chart below and believes PC should drop the Almond line. He asks controller Faye Martin to
review the situation and determine the fate of the Almond Line.
Solid Crispy Almond

Chocolate Chocolate Chocolate
Sales $300,000 $500,000 $400,000
Unit Costs ($100,000) ($150,000) ($250,000)
Facility &
($150,000) ($250,000) ($200,000)
Product Costs
Segment Income $50,000 $100,000 ($50,000)
Required:
1.) Review the information below and determine the fate of the Almond Line. Prepare your answer in
good form. Note-facility and product level costs are fixed and will not change; they are allocated based
upon sales.
2.) Prepare a memo defending your position on this important issue.

1.) No, the Almond Line should not be dropped. Dropping the Almond line would reduce income by
$150,000 and force the fixed costs to be spread over the remaining two product lines.
Status Alternative Difference

Sales $1,200,000 $800,000 ($400,000)
Unit Costs ($500,000) ($250,000) $250,000
Facility &
($600,000) ($600,000) $0
Product Costs
Segment Income $100,000 ($50,000) ($150,000)
2.) The memo should address the following issues:
a) The company needs to address the cost allocation methods.

b) Unless alternative uses can be found for the abandoned almond line, it is not beneficial to drop it at
this time. It contributes to the overall profitability of PC.
c) If the Almond line is dropped, the following will happen:
Solid Crispy

Chocolate Chocolate
Sales $300,000 $500,000
Unit Costs ($100,000) ($150,000)
Facility and Product
($225,000) ($375,000)
Costs
Segment Income ($25,000) ($25,000)
4-218
Now no line looks profitable-so a company making $100,000 to start, with an overall return on segment
of over 8% would end up going out of business.

Blooms: Apply
Gradable: manual

4-219
4-220
149. Mr. Morgan Henry, accountant for Black & Logan Co. Inc., has prepared the following product-line
income data:
Product
Total A B C
Sales $100,000 $50,000 $20,000 $30,000
Variable
60,000 30,000 10,000 20,000
expenses
Contribution
40,000 20,000 10,000 10,000
margin
Fixed expenses:
Rent 5,000 2,500 1,000 1,500
Depreciation 6,000 3,000 1,200 1,800
Utilities 4,000 2,000 500 1,500
Supervisor's
5,000 1,500 500 3,000
salary
Maintenance 3,000 1,500 600 900
Administrative
10,000 3,000 2,000 5,000
expenses
Total fixed
33,000 13,500 5,800 13,700
expenses
Net operating
$7,000 $6,500 $4,200 ($3,700)
income (loss)
The following additional information is available:
* The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped.
* The company's total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* The supervisor's salary is avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce monthly expenses
from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the administrative staff; their
combined salaries total $3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.

Lost contribution margin ($10,000)

Less fixed expenses avoided:
Rent $1,500
Utilities 700
4-221
Supervisor’s salary 3,000
Maintenance 1,000
Administrative expense 3,000 9,200
Disadvantage in dropping Product C ($800)
Since there is a net $800 disadvantage to dropping Product C, it should not be dropped.

Blooms: Apply
Gradable: manual

4-222
4-223
150. Barry Inc. makes a range of products. The company's predetermined overhead rate is $14 per direct
labor-hour, which was calculated using the following budgeted data:

Component ZZ9 is used in one of the company's products. The unit cost of the component according to
the company's cost accounting system is determined as follows:

Direct labor 56.00
An outside supplier has offered to supply component ZZ9 for $108 each. The outside supplier is known
for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead
is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by
this decision. Barry chronically has idle capacity. (CIMA adapted)
Required:
Is the offer from the outside supplier financially attractive? Why?

Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed
manufacturing overhead is not relevant since it would not be affected by the decision. The variable
portion of the manufacturing overhead rate is computed as follows:
Variable portion of the predetermined overhead rate = Variable manufacturing overhead ÷ Direct labor-
hours = $100,000 ÷ 25,000 direct labor-hours = $4.00 per direct labor-hour
The direct-labor hours per unit for the special order can be determined as follows:
Manufacturing overhead applied $39.20

÷ Predetermined overhead rate $14.00
= Direct labor-hours 2.80
Consequently, the variable manufacturing overhead for the special order would be:
Variable portion of the predetermined overhead

$4.00
rate
× Direct labor-hours 2.80
4-224
= Variable manufacturing overhead $11.20
Putting this all together:

Direct labor 56.00
Total variable cost $95.20
Because the outside supplier has offered to sell the component for $108.00 each, but it only costs the
company $95.20 to make the component internally, this is not a financially attractive offer.

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

4-225
4-226
151. Muzik Corporation uses part X43 in one of its products. The company's Accounting Department reports
Per Unit
Direct labor $3.90
An outside supplier has offered to make the part and sell it to the company for $28.00 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 $22,000 of these allocated general overhead costs would be
avoided. In addition, the space used to produce part X43 could be used to make more of one of the
company's other products, generating an additional segment margin of $22,000 per year for that
product.
Required:
X43from the supplier rather than continuing to make it inside the company.

a.
Make Buy
Direct materials
(16,000 units × $46,400
$2.90 per unit)
Direct labor
(16,000 units × 62,400
$3.90 per unit)
Variable overhead
(16,000 units × 107,200
$6.70 per unit)
Supervisor’s
salary (16,000
115,200
units × $7.20 per
unit)
Depreciation of 0
special equipment
4-227
(not relevant)
Allocated general
overhead 22,000
(avoidable only)
Outside purchase
price (16,000 units $448,000
× $28.00 per unit)
Opportunity cost (22,000)
Total cost $353,200 $426,000
b. The total cost of the make alternative is lower by $72,800. Thus, net operating income would decline
by $72,800 if the offer from the supplier were accepted. Therefore, the company should continue to
make the part itself.

Blooms: Apply
Gradable: manual

4-228
4-229
152. Ralston Company makes 10,000 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 labor 20.80
An outside supplier has offered to sell the company all of these parts it needs for $42.30 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 $39,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be
avoided. However, $6.40 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 $47.90 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 10,000 units required each year?

a. Relevant cost per unit:

Direct labor 20.80
Relevant manufacturing cost $41.50
b. Net advantage (disadvantage):
Manufacturing cost savings $415,000

Additional contribution margin 39,000
Cost of purchasing the part (423,000)
Net advantage (disadvantage) $31,000
c. Maximum acceptable purchase price:
4-230
Manufacturing cost savings $415,000
Additional contribution margin 39,000
Total benefit $454,000
Number of units 10,000
Benefit per unit $45.40

Blooms: Apply
Difficulty: 3 Hard
Gradable: manual

4-231

Fundamentals of Cost Analysis For Decision Making: True / False Questions

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Fundamentals of Cost Analysis For Decision Making: True / False Questions

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Chapter 04

Fundamentals of Cost Analysis for Decision Making

True / False Questions

Multiple Choice Questions

A. riskiness of the decision.

Amount Per Unit

Direct materials $10

A. only variable costs associated with the special order.

A. Indirect materials and indirect labor if the item is manufactured internally.

A. product life cycle.

A. cost to manufacture plus a desired markup.

Direct materials $100,000

A. a $70,000 increase.

A. Direct fixed expenses

Direct materials $150,000

Direct materials $150,000

A. No; making the hammers will save Excel $1,500.

Direct materials $20,000

Direct materials $20,000

A. selling expenses per unit sold.

Product Product Product

A. Product 1 first, product 2 second, and product 3 third.

Product Product Product

A. Product X first, product Z second, and product Y third.

Oxy Cleaner Sonic Cleaner

How many units of Oxy and Sonic should Garrison produce?

Oxy Cleaner Sonic Cleaner

Oxy Cleaner Sonic Cleaner

Bookcases Chairs Side Tables

Product Product Product Product

A. Product W first, product X second, product Z third, and product Y last.

A. No; making the tires will save Traker $15,000.

Direct materials $20,000

Direct materials $20,000

Direct materials $12

Direct materials $12

Amount Per Unit

Amount Per Unit

Direct materials $20

A. Indirect materials and indirect labor if the item is purchased.

A. variable manufacturing cost of the component.

A. the highest unit contribution margins.

A. decrease by $20,000 per year.

A. Net operating income would decline by $81,800 per year.

Direct materials $8.80

A. Net operating income would decline by $38,900 per year.

Additional data concerning these products are listed below.

Additional data concerning these products are listed below.

Additional data concerning these products are listed below.

Additional data concerning these products are listed below.

Direct materials $20

a. Calculate Parton's change in operating profits if the special order is accepted.

Amount Per Unit

Direct materials $50

a. Compute the effect on income if Baywatch accepts the special order.

Total Local Regional

Products Alpha Beta Gamma

Product Sales by Markets Local Regional

Lightning 2.0 Lightning 2.4

Direct materials $60,000

Prepare a segmented income statement for Everett.

Prepare a segmented income statement for Dickson.

Treadmill Elliptical Trainer