TRUE/FALSE

1. Information that is related to past events

events is relevant in
in the decision-making process.

ANS: F DIF: Easy !": 1#-1

$. Information that has a %earing on f&t&re

f&t&re events is relevant
relevant in the decision-making
decision-making process.

ANS: ' DIF: Easy !": 1#-1

(. In eval&ating alternative co&rses

co&rses of action)
action) a manager
manager sho&ld select the alternative that
that provides
provides the
highest incremental %enefit to the company.
company.

ANS: ' DIF: Easy !": 1#-$

*. 'he o&tso&rc
o&tso&rcing
ing decisio
decision
n is also referred
referred to as
as a +make-or-%&y
+make-or-%&y,, decision.
decision.

ANS: ' DIF: Easy !": 1#-(

. A company
company may o&tso&rc
o&tso&rcee some of its prod&cti
prod&ction
on in order to foc&s
foc&s on core competenci
competencies.
es.

ANS: ' DIF: Easy !": 1#-(

. In an o&tso&rci
o&tso&rcing
ng decision
decision)) &navoida%
&navoida%le
le fi/ed costs
costs are irrelevan
irrelevant.
t.

ANS: ' DIF: 0oderate !": 1#-(

. In an o&tso&rci
o&tso&rcing
ng decision
decision)) avoida%le
avoida%le fi/ed
fi/ed costs
costs are irrelevan
irrelevant.
t.

ANS: F DIF: 0oderate !": 1#-(

2. In an o&tso&rci
o&tso&rcing
ng decision
decision)) varia%le
varia%le costs
costs of prod&ction
prod&ction are
are relevant.
relevant.

ANS: ' DIF: 0oderate !": 1#-(

3. In an o&tso&rcing
o&tso&rcing decision)
decision) rent received from an
an o&tside party for facility
facility &se is a relevant
relevant cash inflo4.
inflo4.

ANS: ' DIF: 0oderate !": 1#-(

1#. 5hen m&ltiple

m&ltiple prod&cts are prod&ced and sold) a change in the sales price of one
one prod&ct 4ill ca&se a
change in the sales mi/ of the firm.

ANS: ' DIF: 0oderate !": 1#-

11.
11. In setting
setting compensation
compensation str&ct&
str&ct&res)
res) fi/ed salary
salary e/pense
e/pense is normally not
not considered.
considered.

ANS: ' DIF: 0oderate !": 1#-

1$. In a special
special order decision) &navoida%le
&navoida%le fi/ed
fi/ed costs are
are taken into
into consideration
consideration in setting a sales price.

ANS: F DIF: 0oderate !": 1#-

1(. In a special
special order decision) the sales price sho&ld %e s&fficient to cover a 6o%7s
6o%7s varia%le
varia%le costs) incremental
incremental
fi/ed costs) and generate a profit.

ANS: ' DIF: 0oderate !": 1#-

1*. 'he 8o%inson-9atman

8o%inson-9atman ActAct prohi%its
prohi%its companies from pricing prod&cts at different levels
levels 4hen there are no
significant differences in prod&ction costs.

ANS: ' DIF: Easy !": 1#-

1. 5hen making

making a decision to discontin&e
discontin&e an operating segment) allocated
allocated common
common costs are not
considered.

ANS: ' DIF: Easy !": 1#-

1. 5hen making a decision to discontin&e

discontin&e an operating
operating segment)
segment) avoida%le fi/ed costs are not considered.

ANS: F DIF: Easy !": 1#-

1. Segment margin

margin meas&res
meas&res a segment7s contri%&tion to the coverage of indirect e/penses.

ANS: ' DIF: 0oderate !": 1#-

12. Depreciation on factory e&ipment is

is normally a relevant cost in
in prod&ct
prod&ct line decisions.

ANS: F DIF: 0oderate !": 1#-

13. 0inimi;ation of contri%&tion

contri%&tion margin
margin is a common o%6ective f&nction in linear programming.

ANS: F DIF: Easy !": 1#-2

$#. 0inimi;ati
0inimi;ation
on of varia%le
varia%le costs is a common
common o%6ective
o%6ective f&nction
f&nction in linear
linear programmin
programming.
g.

ANS: ' DIF: Easy !": 1#-2

$1. 0a/imi;ati
0a/imi;ation
on of varia%le
varia%le costs is a common
common o%6ective
o%6ective f&nction
f&nction in linear
linear programmin
programming.
g.

ANS: F DIF: Easy !": 1#-2

$$. 0a/imi;ation of contri%&tion

contri%&tion margin
margin is
is a common o%6ective
o%6ective f&nction
f&nction in linear programming.
programming.

ANS: ' DIF: Easy !": 1#-2

$(. In linear programm

programming)
ing) reso&rce
reso&rce constraint
constraintss are &s&ally e/pressed
e/pressed as ine&ali
ine&alities.
ties.

ANS: ' DIF: 0oderate !": 1#-2

$*. In linear
linear programming
programming)) a slack varia%le
varia%le represents
represents the
the &n&sed portio
portion
n of a reso&rce.
reso&rce.

ANS: ' DIF: 0oderate !": 1#-2

1(. In a special
special order decision) the sales price sho&ld %e s&fficient to cover a 6o%7s
6o%7s varia%le
varia%le costs) incremental
incremental
fi/ed costs) and generate a profit.

ANS: ' DIF: 0oderate !": 1#-

1*. 'he 8o%inson-9atman

8o%inson-9atman ActAct prohi%its
prohi%its companies from pricing prod&cts at different levels
levels 4hen there are no
significant differences in prod&ction costs.

ANS: ' DIF: Easy !": 1#-

1. 5hen making

making a decision to discontin&e
discontin&e an operating segment) allocated
allocated common
common costs are not
considered.

ANS: ' DIF: Easy !": 1#-

1. 5hen making a decision to discontin&e

discontin&e an operating
operating segment)
segment) avoida%le fi/ed costs are not considered.

ANS: F DIF: Easy !": 1#-

1. Segment margin

margin meas&res
meas&res a segment7s contri%&tion to the coverage of indirect e/penses.

ANS: ' DIF: 0oderate !": 1#-

12. Depreciation on factory e&ipment is

is normally a relevant cost in
in prod&ct
prod&ct line decisions.

ANS: F DIF: 0oderate !": 1#-

13. 0inimi;ation of contri%&tion

contri%&tion margin
margin is a common o%6ective f&nction in linear programming.

ANS: F DIF: Easy !": 1#-2

$#. 0inimi;ati
0inimi;ation
on of varia%le
varia%le costs is a common
common o%6ective
o%6ective f&nction
f&nction in linear
linear programmin
programming.
g.

ANS: ' DIF: Easy !": 1#-2

$1. 0a/imi;ati
0a/imi;ation
on of varia%le
varia%le costs is a common
common o%6ective
o%6ective f&nction
f&nction in linear
linear programmin
programming.
g.

ANS: F DIF: Easy !": 1#-2

$$. 0a/imi;ation of contri%&tion

contri%&tion margin
margin is
is a common o%6ective
o%6ective f&nction
f&nction in linear programming.
programming.

ANS: ' DIF: Easy !": 1#-2

$(. In linear programm

programming)
ing) reso&rce
reso&rce constraint
constraintss are &s&ally e/pressed
e/pressed as ine&ali
ine&alities.
ties.

ANS: ' DIF: 0oderate !": 1#-2

$*. In linear
linear programming
programming)) a slack varia%le
varia%le represents
represents the
the &n&sed portio
portion
n of a reso&rce.
reso&rce.

ANS: ' DIF: 0oderate !": 1#-2

 $. In linear
linear programmin
programming)
g) a slack varia%l
varia%lee is associated
associated 4ith
4ith < constraints
constraints..

ANS: ' DIF: 0oderate !": 1#-2

$. In linear
linear programmin
programming)
g) a s&rpl&s
s&rpl&s varia%le
varia%le is associate
associated
d 4ith = constrain
constraints.
ts.

ANS: ' DIF: 0oderate !": 1#-2

$. In linear
linear programming)
programming) a s&rpl&s varia%le represents overachievement of minim&m
minim&m re&irements.
re&irements.

ANS: ' DIF: 0oderate !": 1#-2

$2. In linear
linear programming
programming)) a s&rpl&s varia%l
varia%lee represents
represents the &n&sed
&n&sed portion
portion of a reso&rce.
reso&rce.

ANS: F DIF: 0oderate !": 1#-2

COMPLETION

1. 'he amo&nt
amo&nt of reven&e
reven&e that
that differs
differs across
across decision
decision choices
choices is referred
referred to
to as
>>>>>>>>>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>>>>>>>>>>>. >>.

ANS:
ANS: increm
increment
ental
al reve
reven&e
n&e

DIF: Ea s y !": 1#-1

$. 'he amo&nt of cost that differs

differs across decision
decision choices
choices is referred to as >>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>>>>>>>>>>>
>>>>>>>>>>>..

ANS:
ANS: increm
increment
ental
al cost
cost

DIF: Ea s y !": 1#-1

(. 'he %enefits
%enefits forego
foregone
ne 4hen one
one co&rse of
of action is
is chosen
chosen over another
another are referred
referred to
to as
>>>>>>>>>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>.
>>>>>>.

ANS:
ANS: opp
opport
ort&ni
&nity
ty costs
costs

DIF: Ea s y !": 1#-1

*. ?osts inc&rred
inc&rred in the past
past to ac&ire an asset are referred to as >>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>.
>>>>>>>>>>>.

ANS:
ANS: s&nk
s&nk cos
costs
ts

DIF: Ea s y !": 1#-$

. 5hen a company
company has 4ork
4ork performed
performed %y an
an e/ternal
e/ternal s&pplier
s&pplier)) it is engaging
engaging in
in
>>>>>>>>>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>>>>>>>>>>.>.

ANS:
ANS: o&ts
o&tso&
o&rc
rcin
ing
g
 DIF: Easy !": 1#-(

. 'he relative prod&ct &antities composing a company7s total sales is referred to as a company7s
>>>>>>>>>>>>>>>>>>>>>>>>>>>>.

ANS: sales mi/

DIF: Easy !": 1#-

. 'he e/cess of reven&es over direct varia%le e/penses and avoida%le fi/ed e/penses is referred to as
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>.

ANS: segment margin

DIF: Easy !": 1#-

2. In linear programming) a limiting factor that hampers management7s p&rs&it of an o%6ective is referred to
as a >>>>>>>>>>>>>>>>>>>>>>>>>>.

ANS: constraint

DIF: Easy !": 1#-2

3. In linear programming) the e&ation that specifies management7s o%6ective is referred to as a@n
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>.

ANS: o%6ective f&nction

DIF: Easy !": 1#-2

1#. In linear programming) a >>>>>>>>>>>>>>>>>>>>>>>>>> represents the &n&sed amo&nt of a reso&rce at

any level of operation.

ANS: slack varia%le

DIF: 0oderate !": 1#-2

11. In linear programming) a >>>>>>>>>>>>>>>>>>>>>>>>>> represents the overachievement of a minim&m

re&irement.

ANS: s&rpl&s varia%le

DIF: 0oderate !": 1#-2

MULTIPLE CHOICE

1. 5hich of the follo4ing is not a characteristic of relevant costing informationB It is

a. associated 4ith the decision &nder consideration.
%. significant to the decision maker.
c. readily &antifia%le.
 d. related to a f&t&re endeavor.
ANS: ? DIF: Easy !": 1#-1

$. A fi/ed cost is relevant if it is

a. a f&t&re cost.
%. Avoida%le.
c. s&nk.
d. a prod&ct cost.

ANS: ! DIF: Easy !": 1#-1

(. 8elevant costs are

a. all fi/ed and varia%le costs.
%. all costs that 4o&ld %e inc&rred 4ithin the relevant range of prod&ction.
c. past costs that are e/pected to %e different in the f&t&re.
d. anticipated f&t&re costs that 4ill differ among vario&s alternatives.

ANS: D DIF: Easy !": 1#-1

*. 5hich of the follo4ing is the least likely to %e a relevant item in deciding 4hether to replace an old
machineB
a. ac&isition cost of the old machine
%. o&tlay to %e made for the ne4 machine
c. ann&al savings to %e en6oyed on the ne4 machine
d. life of the ne4 machine

ANS: A DIF: Easy !": 1#-$

. If a cost is irrelevant to a decision) the cost co&ld not %e

a. a s&nk cost.
%. a f&t&re cost.
c. a varia%le cost.
d. an incremental cost.

ANS: D DIF: Easy !": 1#-$

. 5hich of the follo4ing costs 4o&ld %e relevant in short-term decision makingB

a. incremental fi/ed costs
%. all costs of inventory
c. total varia%le costs that are the same in the considered alternatives
d. the cost of a fi/ed asset that co&ld %e &sed in all the considered alternatives

ANS: A DIF: Easy !": 1#-$

. 'he term incremental cost refers to

a. the profit foregone %y selecting one choice instead of another.
%. the additional cost of prod&cing or selling another prod&ct or service.
c. a cost that contin&es to %e inc&rred in the a%sence of activity.
d. a cost common to all choices in &estion and not clearly or feasi%ly alloca%le to any of
them.

ANS: ! DIF: Easy !": 1#-$

 2. A cost is s&nk if it
a. is not an incremental cost.
%. is &navoida%le.
c. has already %een inc&rred.
d. is irrelevant to the decision at hand.
ANS: ? DIF: Easy !": 1#-$

3. 0ost>>>>>>>>>>> are relevant to decisions to ac&ire capacity) %&t not to short-r&n decisions involving
the &se of that capacity.
a. s&nk costs
%. incremental costs
c. fi/ed costs
d. prime costs

ANS: ? DIF: Easy !": 1#-$

1#. Irrelevant costs generally incl&de

S&nk costs Cistorical costs Allocated costs

a. yes yes no
%. yes no no
c. no no yes
d. yes yes yes

ANS: D DIF: Easy !": 1#-$

11. In deciding 4hether an organi;ation 4ill keep an old machine or p&rchase a ne4 machine) a manager
4o&ld ignore the
a. estimated disposal val&e of the old machine.
%. ac&isition cost of the old machine.
c. operating costs of the ne4 machine.
d. estimated disposal val&e of the ne4 machine.

ANS: ! DIF: Easy !": 1#-$

1$. 'he potential rental val&e of space &sed for prod&ction activities
a. is a varia%le cost of prod&ction.
%. represents an opport&nity cost of prod&ction.
c. is an &navoida%le cost.
d. is a s&nk cost of prod&ction.

ANS: ! DIF: Easy !": 1#-(

1(. 'he opport&nity cost of making a component part in a factory 4ith e/cess capacity for 4hich there is no
alternative &se is
a. the total man&fact&ring cost of the component.
%. the total varia%le cost of the component.
c. the fi/ed man&fact&ring cost of the component.
d. ;ero.

ANS: D DIF: Easy !": 1#-(

1*. 5hich of the follo4ing are relevant in a make or %&y decisionB

aria%le Avoida%le fi/ed navoida%le fi/ed

costs costs costs

a. no yes yes
%. yes no yes
c. no no yes
d. yes yes no

ANS: D DIF: Easy !": 1#-(

1. In a make or %&y decision) the opport&nity cost of capacity co&ld

a. %e considered to decrease the price of &nits p&rchased from s&ppliers.
%. %e considered to decrease the cost of &nits man&fact&red %y the company.
c. %e considered to increase the price of &nits p&rchased from s&ppliers.
d. not %e considered since opport&nity costs are not part of the acco&nting records.
ANS: A DIF: Easy !": 1#-(

1. 5hich of the follo4ing are relevant in a make or %&y decisionB

9rime costs S&nk costs Incremental costs

a. yes yes yes

%. yes no yes
c. yes no no
d. no no yes

ANS: ! DIF: Easy !": 1#-(

1. In a make or %&y decision) the relia%ility of a potential s&pplier is

a. an irrelevant decision factor.
%. relevant information if it can %e &antified.
c. an opport&nity cost of contin&ed prod&ction.
d. a &alitative decision factor.

ANS: D DIF: Easy !": 1#-(

12. 5hich of the follo4ing &alitative factors favors the %&y choice in a make or %&y decision for a partB
a. maintaining a long-term relationship 4ith s&ppliers
%. &ality control is critical
c. &tili;ation of idle capacity
d. part is critical to prod&ct

ANS: A DIF: Easy !": 1#-(

13. 5hen a scarce reso&rce) s&ch as space) e/ists in an organi;ation) the criterion that sho&ld %e &sed to
determine prod&ction is
a. contri%&tion margin per &nit.
%. selling price per &nit.
c. contri%&tion margin per &nit of scarce reso&rce.
 d. total varia%le costs of prod&ction.
ANS: ? DIF: Easy !": 1#-*

$#. Fi/ed costs are ignored in allocating scarce reso&rces %eca&se

a. they are s&nk.
%. they are &naffected %y the allocation of scarce reso&rces.
c. there are no fi/ed costs associated 4ith scarce reso&rces.
d. fi/ed costs only apply to long-r&n decisions.

ANS: ! DIF: Easy !": 1#-*

$1. 'he minim&m selling price that sho&ld %e accepta%le in a special order sit&ation is e&al to total
a. prod&ction cost.
%. varia%le prod&ction cost.
c. varia%le costs.
d. prod&ction cost pl&s a normal profit margin.

ANS: ? DIF: Easy !": 1#-

$$. 5hich of the follo4ing costs is irrelevant in making a decision a%o&t a special order price if some of the
company facilities are c&rrently idleB
a. direct la%or
%. e&ipment depreciation
c. varia%le cost of &tilities
d. opport&nity cost of prod&ction

ANS: ! DIF: Easy !": 1#-

$(. 'he >>>>>>>>>>>>>>> prohi%its companies from pricing prod&cts at different amo&nts &nless these
differences reflect differences in the cost to man&fact&re) sell) or distri%&te the prod&cts.
a. Internal 8even&e Service
%. overnmental Acco&nting ffice
c. Sherman Antitr&st Act
d. 8o%inson-9atman Act

ANS: D DIF: Easy !": 1#-

$*. An ad hoc sales disco&nt is

a. an allo4ance for an inferior &ality of marketed goods.
%. a disco&nt that an ad hoc committee m&st decide on.
c. %ro&ght a%o&t %y competitive press&res.
d. none of the a%ove.

ANS: ? DIF: 0oderate !": 1#-

$. A manager is attempting to determine 4hether a segment of the %&siness sho&ld %e eliminated. 'he foc&s
of attention for this decision sho&ld %e on
a. the net income sho4n on the segmentGs income statement.
%. sales min&s total e/penses of the segment.
c. sales min&s total direct e/penses of the segment.
d. sales min&s total varia%le e/penses and avoida%le fi/ed e/penses of the segment.
 ANS: D DIF: Easy !": 1#-

$. Ass&me a company prod&ces three prod&cts: A) !) and ?. It can only sell &p to ()### &nits of each
prod&ct. 9rod&ction capacity is &nlimited. 'he company sho&ld prod&ce the prod&ct @or prod&cts that has
@have the highest
a. contri%&tion margin per ho&r of machine time.
%. gross margin per &nit.
c. contri%&tion margin per &nit.
d. sales price per &nit.

ANS: ? DIF: Easy !": 1#-

$. For a partic&lar prod&ct in high demand) a company decreases the sales price and increases the sales
commission. 'hese changes 4ill not increase
a. sales vol&me.
%. total selling e/penses for the prod&ct.
c. the prod&ct contri%&tion margin.
d. the total varia%le cost per &nit.
ANS: ? DIF: Easy !": 1#-

$2. An increase in direct fi/ed costs co&ld red&ce all of the follo4ing except
a. prod&ct line contri%&tion margin.
%. prod&ct line segment margin.
c. prod&ct line operating income.
d. corporate net income.

ANS: A DIF: Easy !": 1#-

$3. 5hen a company discontin&es a segment) total corporate costs may decrease in all of the follo4ing
categories except
a. varia%le prod&ction costs.
%. allocated common costs.
c. direct fi/ed costs.
d. varia%le period costs.

ANS: ! DIF: Easy !": 1#-

(#. In eval&ating the profita%ility of a specific organi;ational segment) all >>>>>>>>>>>>>>> 4o&ld %e
ignored.
a. segment varia%le costs
%. segment fi/ed costs
c. costs allocated to the segment
d. period costs

ANS: ? DIF: Easy !": 1#-

(1. Hno/ ?ompany &ses 1#)### &nits of a part in its prod&ction process. 'he costs to make a part are: direct
material) 1$J direct la%or) $J varia%le overhead) 1(J and applied fi/ed overhead) (#. Hno/ has
received a &ote of  from a potential s&pplier for this part. If Hno/ %&ys the part) # percent of the
applied fi/ed overhead 4o&ld contin&e. Hno/ ?ompany 4o&ld %e %etter off %y
a. #)### to man&fact&re the part.
%. 1#)### to %&y the part.
c. *#)### to %&y the part.
d. 1#)### to man&fact&re the part.

ANS: ?
?ost to make: K&nit L 1#)### &nits M #)###
?ost to man&fact&re: @1$$1(3M 3K&nit
Incremental difference in favor of %&ying: *K&nit L 1#)### &nits M $!"!!!

DIF: 0oderate !": 1#-(

($. 9a&lson ?ompany has only $)### ho&rs of machine time each month to man&fact&re its t4o prod&cts.
9rod&ct O has a contri%&tion margin of #) and 9rod&ct P has a contri%&tion margin of *. 9rod&ct O
re&ires  ho&rs of machine time) and 9rod&ct P re&ires 2 ho&rs of machine time. If 9a&lson ?ompany
4ants to dedicate 2# percent of its machine time to the prod&ct that 4ill provide the most income) the
company 4ill have a total contri%&tion margin of
a. $#)###.
%. $*#)###.
c. $1#)###.
d. $##)###.
ANS: !
Ass&me 2#Q of capacity applied to 9rod&ct O

O: $#)### hrsK hrs per &nit *)### &nits L # ?0K&nit $##)###
P: )### hrsK2 hrs per &nit $ &nits L * ?0K&nit *#)###
'otal $#!"!!!
MMMMMM

DIF: Diffic&lt !": 1#-

((. Doyle ?ompany has ( divisions: 8) S) and '. Division 8Gs income statement sho4s the follo4ing for the
year ended Decem%er (1:

Sales $1,000,000
?ost of goods sold (800,000)
ross profit $ 200,000
Selling e/penses $100,000
Administrative e/penses 250,000 (350,000)
Net loss $ (150,000)

?ost of goods sold is  percent varia%le and $ percent fi/ed. f the fi/ed costs) # percent are
avoida%le if the division is closed. All of the selling e/penses relate to the division and 4o&ld %e
eliminated if Division 8 4ere eliminated. f the administrative e/penses) 3# percent are applied from
corporate costs. If Division 8 4ere eliminated) Doyle7s income 4o&ld
a. increase %y 1#)###.
 %. decrease %y  )###.
c. decrease %y 1)###.
d. decrease %y $1)###.

ANS: ?
Sales foregone @1)###)###
?S avoided
aria%le ##)###
Fi/ed 1$#)### $#)###
Selling E/pense Avoided 1##)###
Administrative E/pense Avoided $)###
Decrease in income $ %&&"!!!'
(((((((((

DIF: 0oderate !": 1#-

(*. 'homas ?ompany is c&rrently operating at a loss of 1)###. 'he sales manager has received a special
order for )### &nits of prod&ct) 4hich normally sells for ( per &nit. ?osts associated 4ith the prod&ct
are: direct material) J direct la%or) 1#J varia%le overhead) (J applied fi/ed overhead) *J and varia%le
selling e/penses) $. 'he special order 4o&ld allo4 the &se of a slightly lo4er grade of direct material)
there%y lo4ering the price per &nit %y 1.# and selling e/penses 4o&ld %e decreased %y 1. If 'homas
4ants this special order to increase the total net income for the firm to 1#)###) 4hat sales price m&st %e
&oted for each of the )### &nitsB
a. $(.#
%. $*.#
c. $.#
d. (*.##

ANS: A
In order to increase income to 1#)###) there m&st %e an increase of $)### or  per &nit.
Direct materials  *.#
Direct Ra%or 1#.##
aria%le verhead (.##
aria%le Selling E/p 1.##
9rod&ction ?osts 12.#
Additional profit per
&nit .##
Sales price/)nit $#*+&!
(((((

DIF: 0oderate !": 1#-

(. &est ?ompany prod&ces a part that has the follo4ing costs per &nit:

Direct material $ 8
Direct la%or 3
aria%le overhead 1
Fi/ed overhead 5
'otal $17
 Test ?orporation can provide the part to &est for 13 per &nit. &est ?ompany has determined that #
percent of its fi/ed overhead 4o&ld contin&e if it p&rchased the part. Co4ever) if &est no longer
prod&ces the part) it can rent that portion of the plant facilities for #)### per year. &est ?ompany
c&rrently prod&ces 1#)### parts per year. 5hich alternative is prefera%le and %y 4hat marginB
a. 0ake-$#)###
%. 0ake-#)###
c. !&y-1#)###
d. !&y-*#)###

ANS: ?
9&rchase price from Test @13#)###
8ent 8even&e 8eceived #)###
aria%le ?osts Avoided 1$#)###
Fi/ed verhead Avoided $#)###
,i--erence in Favor o- .)in0 $ %!"!!!
(((((((

DIF: 0oderate !": 1#-(

(. !ro4ning ?ompany has 1)### &nits in inventory that had a prod&ction cost of ( per &nit. 'hese &nits
cannot %e sold thro&gh normal channels d&e to a significant technology change. 'hese &nits co&ld %e
re4orked at a total cost of $()### and sold for $2)###. Another alternative is to sell the &nits to a 6&nk
dealer for 2)##. 'he relevant cost for !ro4ning to consider in making its decision is
a. *)### of original prod&ct costs.
%. $()### for re4orking the &nits.
c. 2)### for re4orking the &nits.
d. $2)### for selling the &nits to the 6&nk dealer.

ANS: !
nly the act&al re4orking costs are relevant. riginal p&rchase costs are irrelevant.

DIF: Easy !": 1#-(

Ro1ertson Corporation

8o%ertson ?orporation sells a prod&ct for 12 per &nit) and the standard cost card for the prod&ct sho4s
the follo4ing costs:

Direct material $ 1
Direct la%or 2
verhead @2#Q fi/ed 7
'otal $10

(. 8efer to 8o%ertson ?orporation. 8o%ertson received a special order for 1)### &nits of the prod&ct. 'he
only additional cost to 8o%ertson 4o&ld %e foreign import ta/es of 1 per &nit. If 8o%ertson is a%le to sell
all of the c&rrent prod&ction domestically) 4hat 4o&ld %e the minim&m sales price that 8o%ertson 4o&ld
consider for this special orderB
a. 12.##
%. 11.##
c. .*#
d. 13.##
 ANS: D
'he company 4o&ld increase its minim&m sales price to reflect the foreign import ta/ of 1
per &nit.

DIF: Easy !": 1#-

(2. 8efer to 8o%ertson ?orporation. Ass&me that 8o%ertson has s&fficient idle capacity to prod&ce the 1)###
&nits. If 8o%ertson 4ants to increase its operating profit %y )##) 4hat 4o&ld it charge as a per-&nit
selling priceB
a. 12.##
%. 1#.##
c. 11.##
d. 1.#
ANS: ?
'he company 4o&ld 4ant to charge a price e&al to a per &nit profit of .# pl&s varia%le
costs per &nit of *.*# and the import ta/ per &nit of 1.##. 'he total price is $%%+!!+

DIF: 0oderate !": 1#-(

(3. lamoro&s rooming ?orporation makes and sells %r&shes and com%s. It can sell all of either prod&ct it
can make. 'he follo4ing data are pertinent to each respective prod&ct:

!r&shes ?om%s
nits of o&tp&t per machine ho&r 8 20
Selling price per &nit $12.00 $4.00
9rod&ct cost per &nit
Direct material $1.00 $1.20
Direct la%or 2.00 0.10
aria%le overhead 0.50 0.05

'otal fi/ed overhead is (2#)###.

'he company has *#)### machine ho&rs availa%le for prod&ction. 5hat sales mi/ 4ill ma/imi;e profitsB
a. ($#)### %r&shes and # com%s
%. # %r&shes and 2##)### com%s
c. 1#)### %r&shes and ##)### com%s
d. $$)(# %r&shes and $$)(# com%s

ANS: A

!r&shes have a contri%&tion margin of 2.# per &nitJ com%s have a contri%&tion margin of
$. per &nit.

'he com%ination of ($#)### %r&shes and # com%s provides a net profit of (*#)###.

DIF: Easy !": 1#-

*#. Co&ston Foot4ear ?orporation has %een asked to s&%mit a %id on s&pplying 1)### pairs of military
com%at %oots to the Armed Forces. 'he companyGs costs per pair of %oots are as follo4s:
 Direct material $8
Direct la%or 6
aria%le overhead 3
aria%le selling cost @commission 3
Fi/ed overhead @allocated 2
Fi/ed selling and administrative cost 1

Ass&ming that there 4o&ld %e no commission on this potential sale) the lo4est price the firm can %id is
some price greater than
a. $(.
%. $#.
c. 1.
d. 1*.

ANS: ?
'he lo4est price 4o&ld have to %e greater than the s&m of all varia%le man&fact&ring costs.
aria%le man&fact&ring costs total 1J therefore the price 4o&ld have to %e greater than 1
per pair.

DIF: Easy !": 1#-

*1. Colt Ind&stries has t4o sales territories-East and 5est. Financial information for the t4o territories is
presented %elo4:

East 5est
Sales $980,000 $750,000
Direct costs:
aria%le (343,000) (225,000)
Fi/ed (450,000) (325,000)
Allocated common costs (275,000) (175,000)
Net income @loss $(88,000) $ 25,000

!eca&se the company is in a start-&p stage) corporate management feels that the East sales territory is
creating too m&ch of a cash drain on the company and it sho&ld %e eliminated. If the East territory is
discontin&ed) one sales manager @4hose salary is *#)### per year 4ill %e relocated to the 5est territory.
!y ho4 m&ch 4o&ld ColtGs income change if the East territory is eliminatedB
a. increase %y 22)###
%. increase %y *2)###
c. decrease %y $)###
d. decrease %y $$)###

ANS: D
Sales foregone in East @32#)###
aria%le costs avoided (*()###
Fi/ed costs avoided *1#)###
,ecrease in inco2e -ro2 $##3"!!!'
eli2inatin0 East territor ((((((((

DIF: 0oderate !": 1#-

 4oo5ville Motors

5oodville 0otors is trying to decide 4hether it sho&ld keep its e/isting car 4ashing machine or p&rchase
a ne4 one that has technological advantages @4hich translate into cost savings over the e/isting machine.
Information on each machine follo4s:

ld machine Ne4 machine

riginal cost $9,000 $20,000
Acc&m&lated depreciation 5,000 0
Ann&al cash operating costs 9,000 4,000
?&rrent salvage val&e of old machine 2,000
Salvage val&e in 1# years 500 1,000
8emaining life 10 yrs. 10 yrs.

*$. 8efer to 5oodville 0otors. 'he *)### of ann&al operating costs that are common to %oth the old and the
ne4 machine are an e/ample of a@n
a. s&nk cost.
%. irrelevant cost.
c. f&t&re avoida%le cost.
d. opport&nity cost.

ANS: ! DIF: Easy !": 1#-1

*(. 8efer to 5oodville 0otors. 'he 3)### cost of the original machine represents a@n
a. s&nk cost.
%. f&t&re relevant cost.
c. historical relevant cost.
d. opport&nity cost.

ANS: A DIF: Easy !": 1#-$

**. 8efer to 5oodville 0otors. 'he $#)### cost of the ne4 machine represents a@n
a. s&nk cost.
%. f&t&re relevant cost.
c. f&t&re irrelevant cost.
d. opport&nity cost.

ANS: ! DIF: Easy !": 1#-(

*. 8efer to 5oodville 0otors. 'he estimated ## salvage val&e of the e/isting machine in 1# years
represents a@n
a. s&nk cost.
%. opport&nity cost of selling the e/isting machine no4.
c. opport&nity cost of keeping the e/isting machine for 1# years.
d. opport&nity cost of keeping the e/isting machine and %&ying the ne4 machine.
ANS: ! DIF: Easy !": 1#-(

*. 8efer to 5oodville 0otors. 'he incremental cost to p&rchase the ne4 machine is
a. 11)###.
%. $#)###.
c. 1()###.
 d. 12)###.
ANS: D
Incremental cost M 9&rchase price of ne4 machine - ?&rrent salvage val&e
Incremental cost M @$#)### - $)###
Incre2ental cost ( $%6"!!!

DIF: Easy !": 1#-(

Entertain2ent Sol)tions Corporation

Entertainment Sol&tions ?orporation man&fact&res and sells F0 radios. Information on the prior yearGs
operations @sales and prod&ction 0odel A1 is presented %elo4:

Sales price per &nit $30

?osts per &nit:
Direct material 7
Direct la%or 4
verhead @#Q varia%le 6
Selling costs @*#Q varia%le 10
9rod&ction in &nits 10,000
Sales in &nits 9,500

*. 8efer to Entertainment Sol&tions ?orporation + 'he 0odel !$ radio is c&rrently in prod&ction and it
renders the 0odel A1 radio o%solete. If the remaining ## &nits of the 0odel A1 radio are to %e sold
thro&gh reg&lar channels) 4hat is the minim&m price the company 4o&ld accept for the radiosB
a. (#
%. $
c. 12
d. *

ANS: D
* 4o&ld cover the varia%le selling e/penses.

DIF: 0oderate !": 1#-

*2. 8efer to Entertainment Sol&tions ?orporation. Ass&me that the remaining 0odel A1 radios can %e sold
thro&gh normal channels or to a foreign %&yer for  per &nit. If sold thro&gh reg&lar channels) the
minim&m accepta%le price 4ill %e
a. (#.
%. ((.
c. 1#.
d. *.

ANS: ?
1# 4ill cover the price to the foreign %&yer pl&s the *
in varia%le selling e/penses.

DIF: 0oderate !": 1#-

C7ip ,ivision o- Co2p)ter Sol)tions" Inc+

 'he ?hip Division of ?omp&ter Sol&tions) Inc. prod&ces a high-&ality comp&ter chip. nit prod&ction
costs @%ased on capacity prod&ction of 1##)### &nits per year follo4:

Direct material $50

Direct la%or 20
verhead @$#Q varia%le 10
ther information:
Sales price 100
SUA costs @*#Q varia%le 15

*3. 8efer to ?hip Division of ?omp&ter Sol&tions) Inc. Ass&me) for this &estion only) that the ?hip Division
is prod&cing and selling at capacity. 5hat is the minim&m selling price that the division 4o&ld consider
on a Vspecial orderV of 1)### chips on 4hich no varia%le period costs 4o&ld %e inc&rredB
a. 1##
%. $
c. 21
d. 3*

ANS: D
aria%le period costs are  @1 L *#Q varia%le
'he minim&m selling price 4o&ld have to %e greater than the man&fact&ring costs and fi/ed
period costs.
@1## -  M $8 per )nit

DIF: 0oderate !": 1#-

#. 8efer to ?hip Division of ?omp&ter Sol&tions) Inc. Ass&me) for this &estion only) that the ?hip Division
is operating at a level of #)### chips per year. 5hat is the minim&m price that the division 4o&ld
consider on a Vspecial orderV of 1)### chips to %e distri%&ted thro&gh normal channelsB
a. 2
%. 3
c. 1##
d. 21

ANS: A
'he price 4o&ld have to cover all varia%le costs.
@#  $#  $   M $36 per )nit

DIF: 0oderate !": 1#-

1. 8efer to ?hip Division of ?omp&ter Sol&tions) Inc. Ass&me) for this &estion only) that the ?hip Division
is presently operating at a level of 2#)### chips per year. Accepting a Vspecial orderV on $)### chips at
22 4ill
a. increase total corporate profits %y *)###.
%. increase total corporate profits %y $#)###.
c. decrease total corporate profits %y 1*)###.
d. decrease total corporate profits %y $*)###.

ANS: !
@22 - 2 M 1# profit per &nit L $)### &nits M $#!"!!! pro-it increase
 DIF: 0oderate !": 1#-
Ric72on5 Steel Corporation

'he capital %&dgeting committee of the 8ichmond Steel ?orporation is eval&ating the possi%ility of
replacing its old pipe-%ending machine 4ith a more advanced model. Information on the e/isting machine
and the ne4 model follo4s:

E/isting machine Ne4 machine

riginal cost $200,000 $400,000
0arket val&e no4 80,000
0arket val&e in year  0 20,000
Ann&al cash operating costs 40,000 10,000
8emaining life 5 yrs. 5 yrs.

$. 8efer to 8ichmond Steel ?orporation. 'he ma6or opport&nity cost associated 4ith the contin&ed &se of
the e/isting machine is
a. (#)### of ann&al savings in operating costs.
%. $#)### of salvage in  years on the ne4 machine.
c. lost sales res&lting from the inefficient e/isting machine.
d. *##)### cost of the ne4 machine.

ANS: A DIF: Easy !": 1#-1

(. 8efer to 8ichmond Steel ?orporation. 'he 2#)### market val&e of the e/isting machine is
a. a s&nk cost.
%. an opport&nity cost of keeping the old machine.
c. irrelevant to the e&ipment replacement decision.
d. a historical cost.

ANS: ! DIF: Easy !": 1#-1

*. 8efer to 8ichmond Steel ?orporation. If the company %&ys the ne4 machine and disposes of the e/isting
machine) corporate profit over the five-year life of the ne4 machine 4ill %e >>>>>>>>>>>>>>>>>>>> than
the profit that 4o&ld have %een generated had the e/isting machine %een retained for five years.
a. 1#)### lo4er
%. 1#)### lo4er
c. $(#)### lo4er
d. 1#)### higher

ANS: A
Ann&al savings in operating costs  1#)###
9&rchase of ne4 machine @*##)###
Disposal of e/isting machine 2#)###
Disposal of ne4 machine in  years $#)###
,i--erence in pro-it $%&!"!!!'
((((((((

DIF: 0oderate !": 1#-1

. Emerald ?orporation has %een man&fact&ring )### &nits of 9art 1#*1) 4hich is &sed in the man&fact&re
of one of its prod&cts. At this level of prod&ction) the cost per &nit of man&fact&ring 9art 1#*1 is as
follo4s:

Direct material $ 2
Direct la%or 8
aria%le overhead 4
Fi/ed overhead applied 6
'otal $20

Camilton ?ompany has offered to sell Emerald )### &nits of 9art 1#*1 for 13 a &nit. Emerald has
determined that it co&ld &se the facilities c&rrently &sed to man&fact&re 9art 1#*1 to man&fact&re 9art
8A? and generate an operating profit of *)###. Emerald has also determined that t4o-thirds of the fi/ed
overhead applied 4ill contin&e even if 9art 1#*1 is p&rchased from Camilton. 'o determine 4hether to
accept Camilton7s offer) the net relevant costs to make are
a. #)###.
%. 2*)###.
c. 3#)###.
d. 3)###.
ANS: !
'he relevant costs are the varia%le costs per &nit as 4ell as the portion of fi/ed overhead that
4ill %e avoided for 9art 1#*1.
aria%le costs M 1* per &nit
Fi/ed overhead M  $ per &nit
)### &nits L 1 per &nit M 2#)###  9rofit from 8A? M  *)###
Total Relevant Costs $6"!!!

DIF: 0oderate !": 1#-(

. Carding ?orporation man&fact&res %atons. Carding can man&fact&re (##)### %atons a year at a varia%le
cost of #)### and a fi/ed cost of *#)###. !ased on CardingGs predictions) $*#)### %atons 4ill %e
sold at the reg&lar price of .## each. In addition) a special order 4as placed for #)### %atons to %e sold
at a *# percent disco&nt off the reg&lar price. 'he &nit relevant cost per &nit for CardingGs decision is
a. 1.#.
%. $.#.
c. (.##.
d. *.##.

ANS: !
'he relevant costs 4ill %e the varia%le costs per &nit.
$3&!"!!!/*!!"!!! )nits ( $#+&!/)nit

DIF: 0oderate !": 1#-

. 'he o%6ective in solving the linear programming pro%lem is to determine the optimal levels of the
a. coefficients.
%. dependent varia%les.
c. independent varia%les.
d. slack varia%les.
 ANS: ? DIF: Easy !": 1#-2

2. A linear programming pro%lem can have

a. no more than three reso&rce constraints.
%. only one o%6ective f&nction.
c. no more than t4o dependent varia%les for each constraint e&ation.
d. no more than three independent varia%les.

ANS: ! DIF: Easy !": 1#-2

3. A linear programming model m&st

a. have only one o%6ective f&nction.
%. have as many independent varia%les as it has constraint e&ations.
c. have at least t4o dependent varia%les for each e&ation.
d. consider only the constraints that can %e e/pressed as ine&alities.

ANS: A DIF: Easy !": 1#-2

#. In a linear programming pro%lem) constraints are indicated %y

a. the independent varia%les.
%. the dependent varia%les in the constraint e&ations.
c. the coefficients of the o%6ective f&nction.
d. iso-cost lines.

ANS: ! DIF: Easy !": 1#-2

1. 'he feasi%le region for an R9 sol&tion is

a. defined only %y %inding constraints on the optimal sol&tion.
%. defined as the sol&tion space that satisfies all constraints.
c. identified %y iso-cost and iso-profit lines.
d. identified %y all of the a%ove.

ANS: ! DIF: Easy !": 1#-2

$. A linear programming sol&tion

a. al4ays involves more than one constraint.
%. al4ays involves a corner point.
c. is the one 4ith the highest verte/ coordinates.
d. is provided %y the inp&t-o&tp&t coefficients.

ANS: ! DIF: Easy !": 1#-2

(. 'he o%6ective f&nction and the reso&rce constraints have the same
a. dependent varia%les.
%. coefficients.
c. independent varia%les.
d. all of the a%ove.

ANS: ? DIF: Easy !": 1#-2

*. 5hich of the follo4ing items contin&o&sly checks for an improved sol&tion from the one previo&sly
comp&tedB

An algorithm Simple/ method

a. yes yes
%. yes no
c. no no
d. no yes

ANS: A DIF: Easy !": 1#-2

. 5hich of the follo4ing varia%les is associated 4ith the Vless than or e&al toV constraintsB

S&rpl&s Slack

a. yes yes
%. yes no
c. no yes
d. no no

ANS: ? DIF: Easy !": 1#-2

. >>>>>>>>>>>>>>>>>>>> programming relates to a variety of techni&es that are &sed to allocate limited
reso&rces among activities to achieve a specific o%6ective.
a. Integer
%. Inp&t-o&tp&t
c. 0athematical
d. 8egression

ANS: ? DIF: Easy !": 1#-2

. 'he graphical approach to solving a linear programming pro%lem %ecomes m&ch more comple/ 4hen
there are more than t4o

constraints decision varia%les

a. yes no
%. no yes
c. yes yes
d. no no

ANS: ? DIF: Easy !": 1#-2

2. 'he feasi%le region for a graphical sol&tion to a profit ma/imi;ation pro%lem incl&des
a. all verte/ points.
%. all points on every reso&rce constraint line.
c. the origin.
d. all of the a%ove.

ANS: ? DIF: Easy !": 1#-2

 Unco22on Pro5)cts Corporation

In the t4o follo4ing constraint e&ations) O and P represent t4o prod&cts @in &nits prod&ced %y the
ncommon 9rod&cts ?orporation.

?onstraint 1: (O  P < *)$##

?onstraint $: O  $P = ()###

3. 8efer to ncommon 9rod&cts ?orporation. 5hat is the ma/im&m n&m%er of &nits of 9rod&ct O that can
%e prod&cedB
a. *)$##
%. ()###
c. ##
d. 1)*##

ANS: D
1)*## &nits is the only amo&nt that 4ill not ca&se ?onstraint 1 to %e violated.

DIF: 0oderate !": 1#-2

#. 8efer to ncommon 9rod&cts ?orporation. 5hat is the feasi%le range for the prod&ction of PB
a. 2*# to 1)## &nits
%. # to 2*# &nits
c. # to (1 &nits
d. # to 1## &nits

ANS: !
2*# &nits is the most that can %e prod&ced 4itho&t violating ?onstraint 1.

DIF: 0oderate !": 1#-2

1. 8efer to ncommon 9rod&cts ?orporation. A sol&tion of O M ## and P M ## 4o&ld violate
a. ?onstraint 1.
%. ?onstraint $.
c. %oth constraints.
d. neither constraint.

ANS: A
'his sol&tion 4o&ld yield a res&lt of *)##J this violates ?onstraint 1.

DIF: Easy !": 1#-2

$. ne constraint in an R9 pro%lem is: 1$O  P = *)###. If the optimal sol&tion is O M 1## and P M ##)
this reso&rce has
a. slack varia%le of ##.
%. s&rpl&s varia%le of ##.
c. o&tp&t coefficient of ##.
d. none of the a%ove.
ANS: !
'he sol&tion to the constraint is *)##) a s&rpl&s varia%le of ##.
 DIF: Easy !": 1#-2

(. ?onsider the follo4ing linear programming pro%lem and ass&me that non-negativity constraints apply to
the independent varia%les:

0a/ ?0 M 1*O  $(P

S&%6ect to
?onstraint 1: *O  P < ()$##
?onstraint $: $O  P < $)*##

5hich of the follo4ing are feasi%le sol&tions to the linear programming pro%lemB
a. O M ##) P M $*#
%. O M 2##) P M *#
c. O M #) P M *##
d. O M 1)$##) P M #

ANS: ?
'his is the only sol&tion that does not violate ?onstraints 1 or $.
?onstraint 1: *@#  @*## M $)### < ()$##
?onstraint $: $@#  @*## < $)*## < $)*##

DIF: 0oderate !": 1#-2

*. ?ontracting 4ith vendors o&tside the organi;ation to o%tain or ac&ire goods andKor services is called
a. target costing.
%. inso&rcing.
c. o&tso&rcing.
d. prod&ct harvesting.

ANS: ? DIF: Easy !": 1#-(

. 5hich of the follo4ing activities 4ithin an organi;ation 4o&ld %e least li9el to %e o&tso&rcedB
a. acco&nting
%. data processing
c. transportation
d. prod&ct design

ANS: D DIF: Easy !": 1#-(

. An o&tside firm selected to provide services to an organi;ation is called a

a. contract vendor.
%. lessee.
c. net4ork organi;ation.
d. centrali;ed inso&rcer.
ANS: A DIF: Easy !": 1#-(

. ?osts forgone 4hen an individ&al or organi;ation chooses one option over another are
a. %&dgeted costs.
%. s&nk costs.
c. historical costs.
 d. opport&nity costs.
ANS: D DIF: Easy !": 1#-1

2. 5hich of the follo4ing costs 4o&ld not %e acco&nted for in a companyGs recordkeeping systemB
a. an &ne/pired cost
%. an e/pired cost
c. a prod&ct cost
d. an opport&nity cost

ANS: D DIF: Easy !": 1#-1

SHORT ANS4ER

1. 5hat are three characteristics of relevant informationB

ANS:
8elevant information m&st %e: @1 associated 4ith the decision &nder considerationJ @$ %e important to
the decision makerJ and @( have a connection to or %earing on some f&t&re endeavor.

DIF: Easy !": 1#-1

$. 5hy is depreciation e/pense irrelevant to most managerial decisions) even 4hen it is a f&t&re costB

ANS:
Depreciation e/pense is simply the systematic 4rite-off of a s&nk cost @the cost of a long-lived asset.
Depreciation e/pense is therefore al4ays irrelevant &nless it pertains to an asset that is not yet ac&ired.

DIF: 0oderate !": 1#-$

(. 5hat is an opport&nity cost and 4hy is it a relevant costB

ANS:
An opport&nity cost is not a VcostV in the traditional o&t-of-pocket sense. pport&nity costs are %enefits
that are sacrificed to p&rs&e one alternative rather than another. nce an alternative is selected) the
opport&nity costs associated 4ith that alternative 4ill not appear directly in the acco&nting records of the
firm as other costs of that alternative 4ill. 'hese costs are) ho4ever) relevant %eca&se the company is
giving &p one set of %enefits to accept a second set. 8ational decision making ass&mes that the chosen
alternative provides the greater %enefit.

DIF: 0oderate !": 1#-1

*. Define segment margin and e/plain 4hy it is a relevant meas&re of a segmentGs contri%&tion to overall
organi;ational profita%ility.

ANS:
Segment margin is the amo&nt of income that remains after ded&cting all avoida%le @%oth varia%le and
fi/ed costs from sales. 'his meas&re is the appropriate ga&ge of a segmentGs via%ility %eca&se it is a
direct meas&re of ho4 total organi;ational profits 4o&ld change if the segment 4as discontin&ed.

DIF: 0oderate !": 1#-

. 5hat is the relationship %et4een scarce reso&rces and an organi;ationGs prod&ction capacityB

ANS:
In the long r&n) capacity is likely to %e constrained %y t4o f&ndamental reso&rces: la%or and machinery.
Co4ever) in the short r&n) additional constraints can p&sh capacity to levels %elo4 la%or and machine
capacity. ?onstraints can %e ind&ced %y ra4 material shortages) interr&ptions in distri%&tion channels)
la%or strikes in the plants of s&ppliers of important components) or governmental restrictions on markets
@gas rationing) &otas.

DIF: 0oderate !": 1#-*

. nder 4hat circ&mstances is the s&m of varia%le prod&ction and selling costs the appropriate minim&m
price for special ordersB

ANS:
aria%le costs 4o&ld serve as the %ottom price for a special order only if the special order co&ld %e
prod&ced on prod&ction capacity that 4o&ld other4ise %e idle. 5henever presently employed capacity is
partially or 4holly s&rrendered to prod&ce a special order) the special order price 4o&ld %e %ased on %oth
varia%le costs and the profit sacrificed on the %est alternative &se of the capacity.

DIF: 0oderate !": 1#-

. 5hy are fi/ed costs generally more relevant in long-r&n decisions than short-r&n decisionsB

ANS:
In the long r&n) all costs are relevant. In the short r&n) many costs that apply to the e/isting prod&ction
technology are s&nk. In partic&lar) depreciation charges and lease payments on long-term assets are
&navoida%le. In the long r&n) these assets are replaced and) th&s their associated costs are relevant in the
replacement decision.

DIF: 0oderate !": 1#-$

2. Define and disc&ss o&tso&rcing.

ANS:
&tso&rcing occ&rs 4hen an organi;ation Vfarms o&tV some of its normal %&siness activities or processes.
Several areas that are most fre&ently o&tso&rced %y an organi;ation incl&de payroll) acco&nting)
transportation) and possi%ly legal. 5hen a company o&tso&rces some of its f&nctions) it is a%le to divert
more energy to those areas that prod&ce a firmGs core competencies or have the a%ility to create reven&es
for the firm.

DIF: 0oderate !": 1#-(

 3. 5hat are some factors that a company m&st consider 4hen deciding to raise or lo4er sales prices on
prod&ctsB

ANS:
&antitative factors incl&de the ne4 contri%&tion margin per &nit of the prod&ct) short-term and long-term
changes in demand and prod&ction vol&me %eca&se of the price change) and the %est &se of a company7s
scarce reso&rces.
&alitative factors incl&de the impact of changes on c&stomer good4ill to4ard the company) c&stomer
loyalty to4ard company prod&cts) and competitors7 responses to the firm7s ne4 pricing str&ct&re.

DIF: 0oderate !": 1#-

PRO.LEM

A0ri:Ma0ic Corporation

Agri-0agic ?orporation gro4s corn in r&ral areas of the So&th. Agri-0agicGs costs per %&shel of corn
@%ased on an average yield of 1(# %&shels per acre follo4:

Direct material $1.10

Direct la%or 0.40
aria%le overhead 0.30
Fi/ed overhead 0.60
aria%le selling costs 0.10
Fi/ed selling costs 0

Agri-0agic defines direct material costs as seed) fertili;er) 4ater) and other chemicals. 'he varia%le
overhead costs represent maintenance and repair costs of machinery. 'he fi/ed overhead costs are
completely comprised of depreciation e/pense on machinery and real estate ta/es.

1. 8efer to Agri-0agic ?orporation. Ass&me that the c&rrent date is 0arch 1. n this date) Agri-0agic
m&st make a decision as to 4hether it is financially %etter off to plant a certain farm 4ith corn or leave the
land idle @no income is derived from idle land. ?orn prices have %een severely depressed in recent years
and Agri-0agic7s %est g&ess is that corn prices 4ill %e aro&nd $.## per %&shel at the time the crop is
ready for harvest. Sho&ld the company plant corn or leave the land idleB E/plain.

ANS:
'he company sho&ld make their decision %y comparing the incremental income from planting the corn
crop to the incremental e/penses that 4o&ld %e inc&rred to gro4) harvest) and market the crop. 'he
incremental reven&e is simply the $.## per %&shel and the incremental costs are all varia%le costs @1.1#
 #.*#  #.(#  #.1# M 1.3#. !ased on this comparison) the company 4o&ld %e 1( per acre %etter
off to plant than to let the land remain idle.

DIF: 0oderate !": 1#-(

$. 8efer to Agri-0agic ?orporation. Ass&me for this &estion only that the company
decided to plant the corn. A local oil refiner has approached the company a%o&t converting the crop to
grain alcohol @&sed to make gasohol rather than selling the grain to the local grain elevator. If Agri-
0agic converts the grain to alcohol) it 4ill inc&r additional costs of #.# per %&shel) and the company
4ill %e a%le to sell the crop to the oil refiner for the e&ivalent of $.# per %&shel. ther4ise) the
 company can sell the corn crop to the local grain elevator for 1.2 per %&shel. If Agri-0agic elects to sell
the grain to the refinery) the company 4ill not inc&r the varia%le selling costs. 5hat sho&ld the company
doB S&pport yo&r ans4er 4ith calc&lations.

ANS:
'he company7s alternatives are to sell the corn as a grain or as alcohol. 'his decision can %e made %y
comparing the incremental costs to convert the grain to alcohol to the increase in price he can receive for
marketing the crop as alcohol rather than grain. ! y converting the crop to alcohol) the company increases
total reven&e %y #. per %&shel @$.# - 1.2 and it inc&rs additional costs of #.# @#.# for the
additional processing) less the #.1# savings on the varia%le grain marketing costs. 'h&s) %y converting
the grain to alcohol) the company co&ld increase net income %y #.$ per %&shel.

DIF: 0oderate !": 1#-

(. 8efer to Agri-0agic ?orporation. Ass&me that the c&rrent date is 0arch 1. n this date) Agri-0agic
?orporation m&st make a decision as to 4hether it is financially %etter off to plant a certain far m to corn)
leave the land idle @no income is derived from idle land) or rent the land to another farmer for # per
acre. ?orn prices have %een severely depressed in recent years and Agri-0agic ?orporationGs %est g&ess is
that corn prices 4ill %e aro&nd $.## per %&shel at the time the crop is ready for harvest. 5hat sho&ld the
company doB Sho4 calc&lations.

ANS:
It has already %een determined @ans4er to 9ro%lem W1 that planting corn is preferred to leaving the land
idle @%y 1( per acre. !y renting the land) Agri-0agic ?orporation is even %etter off. nder the rental
alternative) Agri-0agic ?orporation is ( per acre %etter off than if he plants corn @# - 1(. !y
renting the land) the company avoids all costs e/cept the fi/ed prod&ction costs @#.# per %&shel or 2
per acre.

DIF: 0oderate !": 1#-

*. Ne4 I%eria ?orporation makes and sells the V'a%asco 0aiden,) a 4all hanging depicting a magical
pepper plant. 'he 'a%asco 0aidens are sold at specialty shops for # each. 'he capacity of the plant is
1)### 0aidens per year. ?osts to man&fact&re and sell each 4all hanging are as follo4s:

Direct material $ 5.00

Direct la%or 6.00
aria%le overhead 8.00
Fi/ed overhead 10.00
aria%le selling e/penses 2.50

Ne4 I%eria ?orporation has %een approached %y an 'e/as company a%o&t p&rchasing $)## 'a%asco
0aidens. 'he company is c&rrently making and selling 1)### per year. 'he 'e/as company 4ants to
attach its o4n Rone Star la%el) 4hich increases costs %y .# each. No selling e/penses 4o&ld %e inc&rred
on this order. 'he corporation %elieves that it m&st make an additional 1 on each 'a%asco 0aiden to
accept this offer.

a. 5hat is the opport&nity cost per &nit of selling to the 'e/as companyB
%. 5hat is the minim&m selling price that sho&ld %e setB

ANS:
 a. pport&nity cost M Selling price min&s total varia%le costs # - @    2  $.# M
$2.#

%. Direct material @.##  .# $ 5.50

Direct la%or 6.00
aria%le overhead 8.00
Fi/ed overhead 10.00
aria%le selling 0
pport&nity cost Xfrom @a less
fi/ed overhead incl&dedY 18.50
E/tra amo&nt re&ired to accept offer 1.00
0inim&m price $49.00

DIF: 0oderate !": 1#-1

. 0ighty 0ike7s Acco&nting Service provides t4o types of services: a&dit and ta/. All company personnel
can perform either service. In efforts to market its services) 0ighty 0ike relies on radio and %ill%oards for
advertising. Information on 0ighty 0ikeGs pro6ected operations for the coming year follo4s:

A&dit 'a/es
8even&e per %illa%le ho&r $35 $30
aria%le cost of professional la%or 25 20
0aterial cost per %illa%le ho&r 2 3
Allocated fi/ed costs per year 100,000 200,000
9ro6ected %illa%le ho&rs 14,000 10,000

a. 5hat is 0ighty 0ike7s pro6ected profit or @lossB

%. If 1 spent on advertising co&ld increase either a&dit services %illa%le time %y 1 ho&r
or ta/ services %illa%le time %y 1 ho&r) on 4hich service sho&ld the advertising dollar
%e spentB

ANS:

a. A&dit 'a/ 'otal

Reven)e;
1*)### × ( $490,000 $ 490,000
1#)### × (# $ 300,000 300,000
<aria1le Costs;
Ra%or:
1*)### × $ (350,000) (350,000)
1#)### × $# (200,000) (200,000)
0aterial:
1*)### × $ (28,000) (28,000)
1#)### × ( (30,000) (30,000)
?ontri%&tion margin $112,000 $ 70,000 $ 182,000
Fi/ed costs (100,000) (200,000) (300,000)
9rofit @loss $ 12,000 $(130,000) $(118,000)
 %. Each %illa%le ho&r of a&dit services generates 2 of contri%&tion margin
@( - $ - $) ta/ services generates  of contri%&tion margin
@(# - $# - (. 'he advertising sho&ld %e spent on the a&dit services.

DIF: 0oderate !": 1#-)1#-

. 'he management of 5halen Ind&stries has %een eval&ating 4hether the company sho&ld contin&e
man&fact&ring a component or %&y it from an o&tside s&pplier. A 1## cost per component 4as
determined as follo4s:

Direct material $ 15
Direct la%or 40
aria%le man&fact&ring overhead 10
Fi/ed man&fact&ring overhead 35
$100

5halen Ind&stries &ses *)### components per year. After 5ilfert ?orporation s&%mitted a %id of 2# per
component) some mem%ers of management felt they co&ld red&ce costs %y %&ying from o&tside and
discontin&ing prod&ction of the component. If the component is o%tained from 5ilfert ?orporation)
5halen Ind&striesG &n&sed prod&ction facilities co&ld %e leased to another company for #)### per year.

Re=)ire5;
a. Determine the ma/im&m amo&nt per &nit 5halen Ind&stries co&ld pay an o&tside
s&pplier.

%. Indicate if the company sho&ld make or %&y the component and the total dollar
difference in favor of that alternative.

c. Ass&me the company co&ld eliminate one prod&ction s&pervisor 4ith a salary of
(#)### if the component is p&rchased from an o&tside s&pplier. Indicate if the
company sho&ld make or %&y the component and the total dollar difference in favor
of that alternative.

ANS:

a. ?ost to make M incremental man&fact&ring cost and opport&nity cost

M D0  DR   - FC  9 ?S'
.# M 1  *#  1#  @#)###K*)### &nits

%. 0ake: Save @2#.## - .# × *)### M 1#)###

c. Incremental mfg. M   @(#)###K*)### M $.#

 opport&nity cost #)###K*)### M 1$.#
'o make 2.##

!&y: Save @2 - 2# × *)### &nits M $#)###

DIF: 0oderate !": 1#-(

. !a/ter ?orporation is 4orking at f&ll prod&ction capacity prod&cing 1#)### &nits of a &ni&e prod&ct)
"HR. 0an&fact&ring costs per &nit for "HR follo4:

Direct material $ 2
Direct man&fact&ring la%or 3
0an&fact&ring overhead 5
$10

'he &nit man&fact&ring overhead cost is %ased on a varia%le cost per &nit of $ and fi/ed costs of (#)###
@at f&ll capacity of 1#)### &nits. 'he non-man&fact&ring costs) all varia%le) are * per &nit) and the
selling price is $# per &nit. A c&stomer) "acksonville ?ompany) has asked !a/ter to prod&ce $)### &nits
of a modification of "HR to %e called 8S'. 8S' 4o&ld re&ire the same man&fact&ring processes as "HR.
"acksonville ?ompany has offered to share e&ally the non-man&fact&ring costs 4ith !a/ter. 8S' 4ill
sell at 1 per &nit.

Re=)ire5;
a. 5hat is the opport&nity cost to !a/ter of prod&cing the $)### &nits of 8S' @ass&me
that no overtime is 4orkedB

%. 'he raves ?ompany has offered to prod&ce $)### &nits of "HR for !ro4n) so
!ro4n can accept the "acksonville offer. raves ?ompany 4o&ld charge !a/ter 1*
per &nit for the "HR. Sho&ld !a/ter accept the raves ?ompany offerB

c. S&ppose !a/ter had %een 4orking at less than f&ll capacity prod&cing 2)### &nits of
"HR at the time the 8S' offer 4as made. 5hat is the minim&m price !a/ter sho&ld
accept for 8S' &nder these conditions @ignoring the 1 price mentioned
previo&slyB

ANS:

a. "HR
S9 $20
- ? (11) @$  (  $  *
M ?0 $ 9 × $)### &nits M $18,000

8S'
S9 $15
- ? (9) @$  (  $  $
M ?0 $ 6 / $)### &nits M 12,000
pport&nity cost $ 6,000

%. 0ake @1 - 1* M 1 × $)### &nits M $)### 4itho&t giving &p any c&rrent
prod&ction M D I'.

c. 'he varia%le cost to make and sell M 11 @$  (  $  * 4o&ld %e the minim&m.
Any price over 11 4o&ld increase the contri%&tion margin.

DIF: 0oderate !": 1#-(

2. 'he Sam&els ?ompany normally prod&ces 1#)### &nits of 9rod&ct R0 per year. D&e to an economic
do4nt&rn) the company has some idle capacity. 9rod&ct R0 sells for 1 per &nit.

'he firmGs prod&ction) marketing) and administration costs at its normal capacity are:

9er nit
Direct material $1.00
Direct la%or 2.00
aria%le overhead 1.50
Fi/ed overhead
@*#)###K1#)### &nits 3.00
aria%le marketing costs 1.05
Fi/ed marketing and administrative costs
@$1#)###K1#)### &nits 1.40
'otal $9.95

Re=)ire5;
a. ?omp&te the firmGs operating income %efore income ta/es if the firm prod&ced and
sold 11#)### &nits.

%. For the c&rrent year) the firm e/pects to sell the same n&m%er of &nits as it sold in the
prior year. Co4ever) in a trade ne4spaper) the firm noticed an invitation to %id on
selling R0 to a state government. 'here are no marketing costs associated 4ith the
order if Davis is a4arded the contract. 'he company 4ishes to prepare a %id for
*#)### &nits at its f&ll man&fact&ring cost pl&s  #.$ per &nit. Co4 m&ch sho&ld it
%idB If Davis is s&ccessf&l at getting the contract) 4hat 4o&ld %e its effect on
operating incomeB

c. Ass&me that the company is a4arded the contract on "an&ary $) and in addition it
also receives an order from a foreign vendor for *#)### &nits at the reg&lar price of
1 per &nit. 'he foreign shipment 4ill re&ire the firm to inc&r its normal marketing
costs. 'he government contract contains a 1#-day escape cla&se @i.e.) the firm can
re6ect the contract 4ithin 1# days 4itho&t any penalty. If the firm accepts the
government contract) overtime pay at 1 1K$ times the straight time rate 4ill %e paid
on the *#)### &nits. In addition) fi/ed overhead 4ill increase %y #)### and
varia%le overhead 4ill %ehave in its normal pattern. 'he company has the capacity to
prod&ce %oth orders. Decide the follo4ing:

1. Sho&ld the firm accept the foreign offerB Sho4 the effect on operating income of
accepting the order.

$. Ass&ming the foreign order is accepted) sho&ld the firm accept the government orderB
Sho4 the effect on operating income of accepting the government order.

ANS:

a. Sales @11#)### × 1 $1,650,000

- ? @11#)### × . (610,500)
M ?0 $1,039,500
- F? @*#)###  $1#)### (660,000)