Ch13 Relevant Costs for Decision Making.docx

Chapter Relevant Costs for Decision Making True False Questions Sunk costs are costs that have proven to be unproductive Ans False All costs are avoidable in a decision except sunk costs and future costs that do not differ between the alternatives at hand Ans True Consistency demands that a cost that is relevant in one decision be regarded as relevant in other decisions as well Ans False A cost may be relevant for one decision making situation but irrelevant for another situation Ans True A future cost that does not vary among alternatives under consideration is irrelevant Ans True Opportunity costs represent economic benefits that are forgone as a result of pursuing some course of action Ans True An existing asset should not be replaced until its original cost has been fully recovered Ans False Fixed costs are irrelevant in decisions about whether a product line should be dropped Ans False In a special order situation any fixed cost associated with the order would be irrelevant Ans False When a company has a production constraint total contribution margin will be maximized by emphasizing the products with the highest contribution margin per unit of the constrained resource Ans True LO Eliminating nonproductive time is particularly important in a bottleneck operation Ans True LO One way to increase the effective utilization of a bottleneck is to reduce the number of defective units Ans True LO As a general guide it is profitable to continue processing joint products after the split-off point if their total revenues exceed the joint costs Ans False LO Joint costs are irrelevant in the decision of whether to sell a joint product at the split-off point or process it further and then sell it Ans True LO A key advantage of using activity-based costing is that any cost that is assigned to a product is also a relevant cost in any decision involving that product Ans False Multiple Choice Questions Costs which can be eliminated in whole or in part if a particular business segment is discontinued are called A sunk costs B opportunity costs C avoidable costs D irrelevant costs Ans C Consider the following statements Assemble all costs associated with each alternative being considered Eliminate those costs that are sunk Eliminate those costs that differ between alternatives Which of the above statements does not represent a step in identifying the relevant costs in a decision problem A Only I B Only II C Only III D Only I and III Ans C Which of the following cash flows is relevant in a decision about accepting Alternative X or Alternative Y A a cash inflow for Alternative X that is not a cash inflow for Alternative Y B a cash inflow that is lost if Alternative X is accepted and is not lost if Alternative Y is accepted C a cash outflow that is avoided if Alternative X is accepted and is not avoided if Alternative Y is accepted D all of the above Ans D Which of the following best describes an opportunity cost A it is a relevant cost in decision making but is not part of the traditional accounting records B it is not a relevant cost in decision making but is part of the traditional accounting records C it is a relevant cost in decision making and is part of the traditional accounting records D it is not a relevant cost in decision making and is not part of the traditional accounting records Ans A Consider the following statements A division's net operating income after deducting both traceable and allocated common corporate costs is negative The division's avoidable fixed costs exceed its contribution margin The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin Which of the above statements give an economic reason for eliminating the division A Only I B Only II C Only III D Only I and II Ans B The Jabba Company manufactures the Snack Buster which consists of a wooden snack chip bowl with an attached porcelain dip bowl Which of the following would be relevant in Jabba's decision to make the dip bowls or buy them from an outside supplier Fixed overhead cost The variable that can be eliminated if selling the bowls are purchased cost of the from the outside supplier Snack Buster A Yes Yes B Yes No C No Yes D No No Ans B The acceptance of a special order will improve overall net operating income so long as the revenue from the special order exceeds A the contribution margin on the order B the incremental costs associated with the order C the variable costs associated with the order D the sunk costs associated with the order Ans B Kinsi Corporation manufactures five different products All five of these products must pass through a stamping machine in its fabrication department This machine is Kinsi's constrained resource Kinsi would make the most profit if it produces the product that A uses the lowest number of stamping machine hours B generates the highest contribution margin per unit C generates the highest contribution margin ratio D generates the highest contribution margin per stamping machine hour Ans D LO In a sell or process further decision consider the following costs A variable production cost incurred prior to split-off A variable production cost incurred after split-off An avoidable fixed production cost incurred after split-off Which of the above costs is are not relevant in a decision regarding whether the product should be processed further A Only I B Only III C Only I and II D Only I and III Ans A LO Gandy Company has obsolete desk lamps that are carried in inventory at a manufacturing cost of If the lamps are reworked for they could be sold for Alternatively the lamps could be sold for for scrap In a decision model analyzing these alternatives the sunk cost would be A B C D Ans D Hodge Inc has some material that originally cost The material has a scrap value of as is but if reworked at a cost of it could be sold for 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 A - B - C - D Ans C Solution Incremental revenue from reworking Less incremental revenue from selling as scrap Net loss from reworking Milford Corporation has in stock kilograms of material R that it bought five years ago for per kilogram This raw material was purchased to use in a product line that has been discontinued Material R can be sold as is for scrap for per kilogram An alternative would be to use material R in one of the company's current products S Y which currently requires kilograms of a raw material that is available for per kilogram Material R can be modified at a cost of per kilogram so that it can be used as a substitute for this material in the production of product S Y However after modification kilograms of material R is required for every unit of product S Y that is produced Milford Corporation has now received a request from a company that could use material R in its production process Assuming that Milford Corporation could use all of its stock of material R to make product S Y or the company could sell all of its stock of the material at the current scrap price of per kilogram what is the minimum acceptable selling price of material R to the company that could use material R in its own production process A B C D Ans D Solution Product S Y Current cost kg If material R were used kilograms would be needed It currently costs for Product S Y to maintain this same cost material R would need to cost per kilogram kg The company should sell material R for per kilogram Otool Inc is considering using stocks of an old raw material in a special project The special project would require all kilograms of the raw material that are in stock and that originally cost the company in total If the company were to buy new supplies of this raw material on the open market it would cost per kilogram However the company has no other use for this raw material and would sell it at the discounted price of 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 for all kilograms What is the relevant cost of the kilograms of the raw material when deciding whether to proceed with the special project A B C D Ans A Solution Opportunity cost of sales foregone if special project is undertaken Less delivery cost Relevant cost of kilograms of raw material Hamby Corporation is preparing a bid for a special order that would require liters of material W C The company already has liters of this raw material in stock that originally cost per liter Material W C 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 per liter New stocks of the material can be readily purchased for per liter What is the relevant cost of the liters of the raw material when deciding how much to bid on the special order A B C D Ans C Solution Relevant cost per liter liters Schickel Inc regularly uses material B U and currently has in stock liters of the material for which it paid several weeks ago If this were to be sold as is on the open market as surplus material it would fetch per liter New stocks of the material can be purchased on the open market for per liter but it must be purchased in lots of liters You have been asked to determine the relevant cost of liters of the material to be used in a job for a customer The relevant cost of the liters of material B U is A B C D Ans A Solution Relevant cost per liter liters Munafo 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 units of component VGI Each unit of VGI requires unit of material I and units of material M Data concerning these two materials follow Material Units in Stock Original Cost Per Unit Current Market Price Per Unit Disposal Value Per Unit I M Material I is in use in many of the company's products and is routinely replenished Material M 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 VGI A B C D Ans A Solution Material Required per unit Relevant price Total I M Total per unit relevant cost Minimum acceptable price for units of VGI per unit units Winder 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 units of component QEA Each unit of QEA requires units of material F and units of material E Data concerning these two materials follow Material Units in Stock Original Cost Per Unit Current Market Price Per Unit Disposal Value Per Unit F E Material F is in use in many of the company's products and is routinely replenished Material E 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 QEA A B C D Ans A Solution Total needed Inventory of units to purchase on market Relevant price Total cost F E Minimum acceptable price for units of QEA Rice Corporation currently operates two divisions which had operating results last year as follows West Troy Division Division Sales Variable costs Contribution margin Traceable fixed costs Allocated common corporate costs Net operating income loss Since the Troy Division also sustained an operating loss in the prior year Rice's president is considering the elimination of this division Troy Division's traceable fixed costs could be avoided if the division were eliminated The total common corporate costs would be unaffected by the decision If the Troy Division had been eliminated at the beginning of last year Rice Corporation's operating income for last year would have been A higher B lower C lower D higher Ans B Solution Troy Division Contribution margin Less traceable fixed costs Segment margin of Troy Division Rice Corporation s operating income would have been less without the segment margin contributed by the Troy Division Beaver Company a multi-product firm produces units of Product X each year Each unit of Product X sells for and has a contribution margin of If Product X is discontinued of fixed overhead would be eliminated As a result of discontinuing Product X the company's overall operating income would A decrease by B increase by C decrease by D increase by Ans C Solution Fixed overhead savings if Product X is eliminated Less contribution margin lost if Product X is discontinued Decrease in overall operating income if Product X is eliminated Milli Company plans to discontinue a division that generates a total contribution margin of per year Fixed overhead associated with this division is of which cannot be eliminated The effect of this discontinuance on Milli's operating income would be an increase of A B C D Ans C Solution Fixed overhead savings if division is discontinued Less contribution margin lost if division is eliminated Increase in operating income if division is eliminated ABD Realty manages five apartment complexes in its region Shown below are summary income statements for each apartment complex U V W X Y Rental income Expenses Operating income Included in the expenses is of common corporate expenses that have been allocated to the apartment complexes based on rental income These common corporate expenses would have to be incurred regardless of how many apartment complexes ABD Realty manages The apartment complex es that ABD Realty should consider dropping is are A V W X Y B W X Y C X Y D X Ans C Solution Total rental income U V W X Y Rental income Less expenses Add back proportional share of common expenses Rental income in each column Total rental income of Apartment complex margin expenses rounded to nearest whole dollar Since complexes X and Y have negative margins ABD Realty should consider dropping those two divisions The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation Contribution margin Fixed expenses Net operating loss If Children's Division is dropped half of the fixed costs above can be eliminated What will be the effect on Grunge's profit next year if Children's Division is dropped instead of being kept A increase B increase C decrease D increase Ans A Solution Keep the Division Drop the Division Difference Contribution margin Fixed expenses Net operating income loss Net operating income would increase by if the Children s Division were dropped Therefore the division should be dropped The management of Furrow Corporation is considering dropping product L E Data from the company's accounting system appear below Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses In the company's accounting system all fixed expenses of the company are fully allocated to products Further investigation has revealed that of the fixed manufacturing expenses and of the fixed selling and administrative expenses are avoidable if product L E is discontinued What would be the effect on the company's overall net operating income if product L E were dropped A Overall net operating income would increase by B Overall net operating income would decrease by C Overall net operating income would decrease by D Overall net operating income would increase by Ans B Solution Keep the Product Drop the Product Difference Sales Variable expenses Contribution margin Fixed expenses Fixed manufacturing expenses Fixed selling and administrative expenses Total fixed expenses Net operating income loss Net operating income would decline by if product L E were dropped Therefore the product should not be dropped Product U N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether Data from the company's accounting system appear below Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses In the company's accounting system all fixed expenses of the company are fully allocated to products Further investigation has revealed that of the fixed manufacturing expenses and of the fixed selling and administrative expenses are avoidable if product U N is discontinued What would be the effect on the company's overall net operating income if product U N were dropped A Overall net operating income would increase by B Overall net operating income would increase by C Overall net operating income would decrease by D Overall net operating income would decrease by Ans C Solution Keep the Product Drop the Product Difference Sales Variable expenses Contribution margin Fixed expenses Fixed manufacturing expenses Fixed selling and administrative expenses Total fixed expenses Net operating income loss Net operating income would decline by if product U N were dropped Therefore the product should not be dropped Supler Company produces a part used in the manufacture of one of its products The unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost An outside supplier has offered to provide the annual requirement of of the parts for only each It is estimated that percent of the fixed overhead cost above could be eliminated if the parts are purchased from the outside supplier Based on these data the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be A disadvantage B advantage C advantage D disadvantage Ans C Solution Relevant cost per unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Relevant manufacturing cost Net advantage disadvantage Relevant manufacturing cost savings Less cost from outside supplier Net advantage Sharp Company produces parts each year which are used in the production of one of its products The unit product cost of a part is computed as follows Variable production costs Fixed production costs Unit product cost The parts can be purchased from an outside supplier for only each The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth If the parts are purchased from the outside supplier the annual impact on the company's operating income will be A increase B decrease C increase D decrease Ans D Solution Relevant cost per unit Variable production costs Fixed manufacturing overhead Relevant manufacturing cost Relevant manufacturing cost savings Less cost to purchase from outside supplier Net disadvantage of purchasing from outside supplier Motor Company manufactures units of Part M-l each year for use in its production The following total costs were reported last year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing cost Valve Company has offered to sell Motor units of Part M-l for per unit If Motor accepts the offer some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of Additionally per unit of the fixed overhead applied to Part M-l would be totally eliminated Should Motor Company accept Valve Company's offer and why A No because it would be cheaper to make the part B Yes because it would be cheaper to buy the part C No because it would be cheaper to make the part D Yes because it would be cheaper to buy the part Ans A Solution Relevant cost of manufacturing Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Relevant manufacturing cost Net advantage disadvantage Relevant manufacturing cost savings Annual rental of manufacturing facilities given up if manufacture Part M- Cost of purchasing the part Net disadvantage of purchasing part M- Kingston Company needs units of a certain part to be used in its production cycle The following information is available concerning Kingston's unit product cost Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost Utica Company has offered to supply Kingston's entire annual requirements of the part for each If Kingston buys the part from Utica instead of making it Kingston would have no other use for the facilities and percent of the fixed manufacturing overhead would continue In deciding whether to make or buy the part the total relevant costs to make the part internally are A B C D Ans B Solution Relevant cost per unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Relevant manufacturing cost Total relevant costs to make the part internally The following standard costs pertain to a component part manufactured by Bor Company Direct materials Direct labor Manufacturing overhead Standard cost per unit An outside supplier has offered to supply all of the parts needed by Bor Company for each The of the manufacturing overhead cost that is fixed would be unaffected by this decision In the decision to make or buy what is the relevant unit cost to make the part internally A B C D Ans C Solution Relevant cost per unit Direct materials Direct labor Manufacturing overhead Relevant manufacturing cost Gordon Company produces units of a part per year which are used in the assembly of one of its products The unit cost of producing these parts is Variable manufacturing cost Fixed manufacturing cost Total manufacturing cost The part can be purchased from an outside supplier at per unit If the part is purchased from the outside supplier two thirds of the total fixed costs incurred in producing the part can be eliminated The annual increase or decrease on the company's operating incomes as a result of buying the part from the outside supplier would be A increase B decrease C increase D decrease Ans A Solution Relevant cost per unit Variable production costs Fixed manufacturing overhead Relevant manufacturing cost Net advantage disadvantage per unit Manufacturing cost savings Cost of purchasing the part Net advantage disadvantage Total units increase Quikcook Microwave Company currently manufactures the doors that it uses for its microwave ovens The annual costs to manufacture the doors needed each year are as follows Total Cost Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total Delilah Glass Corporation has offered to provide Quikcook with all of its annual door needs for per door If Quikcook accepts this offer only of the fixed overhead above could be totally eliminated Also Quikcook has no alternative use for the idle facilities if the decision was made to go with Delilah's offer Based on this information would Quikcook be better off to make the doors or buy the doors and by how much A better to buy B better to make C better to buy D better to make Ans D Solution Relevant cost Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Relevant manufacturing cost Net advantage disadvantage Manufacturing cost savings Cost of purchasing the part Net advantage disadvantage of buying Sardi Inc is considering whether to continue to make a component or to buy it from an outside supplier The company uses 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 materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost Assume that direct labor is a variable cost Of the fixed manufacturing overhead is avoidable if the component were bought from the outside supplier In addition making the component uses minutes 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 minutes on the constraining machine and that has a contribution margin of 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 A B C D Ans A Solution Relevant cost per unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Relevant manufacturing cost Add contribution margin lost minutes per minute per minute minutes Part S is used in one of Haberkorn Corporation's products The company makes units of this part each year The company's Accounting Department reports the following costs of producing the part at this level of activity Per Unit Direct materials Direct labor Variable manufacturing overhead Supervisor s salary Depreciation of special equipment Allocated general overhead An outside supplier has offered to produce this part and sell it to the company for 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 of these allocated general overhead costs would be avoided If management decides to buy part S from the outside supplier rather than to continue making the part what would be the annual impact on the company's overall net operating income A Net operating income would decline by per year B Net operating income would decline by per year C Net operating income would decline by per year D Net operating income would decline by per year Ans C Solution Make Buy Direct materials units per unit Direct labor units per unit Variable overhead units per unit Supervisor s salary units per unit Depreciation of special equipment not relevant Allocated general overhead avoidable only Outside purchase price units per unit Total cost The total cost of the make alternative is lower by Thus net operating income would decline by if the offer from the supplier were accepted Therefore the company should continue to make the part itself Norgaard Corporation makes units of part G each year This part is used in one of the company's products The company's Accounting Department reports the following costs of producing the part at this level of activity Per Unit Direct materials Direct labor Variable manufacturing overhead Supervisor s salary Depreciation of special equipment Allocated general overhead An outside supplier has offered to make and sell the part to the company for 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 of these allocated general overhead costs would be avoided In addition the space used to produce part G would be used to make more of one of the company's other products generating an additional segment margin of per year for that product What would be the impact on the company's overall net operating income of buying part G from the outside supplier A Net operating income would decline by per year B Net operating income would increase by per year C Net operating income would decline by per year D Net operating income would decline by per year Ans A Solution Make Buy Direct materials units per unit Direct labor units per unit Variable overhead units per unit Supervisor s salary units per unit Depreciation of special equipment not relevant Allocated general overhead avoidable only Outside purchase price units per unit Opportunity cost Total cost The total cost of the make alternative is lower by Thus net operating income would decline by if the offer from the supplier were accepted Therefore the company should continue to make the part itself Rebelo Corporation is presently making part E that is used in one of its products A total of units of this part are produced and used every year The company's Accounting Department reports the following costs of producing the part at this level of activity Per Unit Direct materials Direct labor Variable manufacturing overhead Supervisor s salary Depreciation of special equipment Allocated general overhead An outside supplier has offered to make and sell the part to the company for each If this offer is accepted the supervisor's salary and all of the variable costs 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 none of which would be avoided if the part were purchased instead of produced internally If management decides to buy part E from the outside supplier rather than to continue making the part what would be the annual impact on the company's overall net operating income A Net operating income would decline by per year B Net operating income would decline by per year C Net operating income would increase by per year D Net operating income would increase by per year Ans B Solution Make Buy Direct materials units per unit Direct labor units per unit Variable overhead units per unit Supervisor s salary units per unit Depreciation of special equipment not relevant Allocated general overhead not relevant Outside purchase price units per unit Total cost The total cost of the make alternative is lower by Thus net operating income would decline by if the offer from the supplier were accepted Therefore the company should continue to make the part itself Part U is used by Mcvean Corporation to make one of its products A total of units of this part are produced and used every year The company's Accounting Department reports the following costs of producing the part at this level of activity Per Unit Direct materials Direct labor Variable manufacturing overhead Supervisor s salary Depreciation of special equipment Allocated general overhead An outside supplier has offered to make the part and sell it to the company for 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 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 none of which would be avoided if the part were purchased instead of produced internally In addition the space used to make part U could be used to make more of one of the company's other products generating an additional segment margin of per year for that product What would be the impact on the company's overall net operating income of buying part U from the outside supplier A Net operating income would increase by per year B Net operating income would decline by per year C Net operating income would decline by per year D Net operating income would increase by per year Ans B Solution Make Buy Direct materials units per unit Direct labor units per unit Variable overhead units per unit Supervisor s salary units per unit Depreciation of special equipment not relevant Allocated general overhead not relevant Outside purchase price units per unit Opportunity cost segment margin Total cost The total cost of the make alternative is lower by Thus net operating income would decline by if the offer from the supplier were accepted Therefore the company should continue to make the part itself Landor Appliance Company makes and sells electric fans Each fan regularly sells for The following cost data per fan is based on a full capacity of fans produced each period Direct materials Direct labor Manufacturing overhead variable and unavoidable fixed A special order has been received by Landor for a sale of fans to an overseas customer The only selling costs that would be incurred on this order would be per fan for shipping Landor is now selling fans through regular channels each period What should Landor use as a minimum selling price per fan in negotiating a price for this special order A B C D Ans A Solution Direct materials Direct labor Variable manufacturing overhead Variable selling cost Minimum selling price Ignace Timekeepers Inc manufactures and sells wrist watches Ignace has the capacity to manufacture and sell watches each year but is currently only manufacturing and selling The following costs relate to annual operations at watches Total Cost Variable manufacturing cost Fixed manufacturing cost Variable selling and administrative cost Fixed selling and administrative cost Ignace normally sells its watches for each A discount chain is interesting in purchasing Ignace's excess capacity of watches This special order would not affect regular sales or the cost structure above Ignace's profits for the year will increase as long as the price on this special order exceeds A B C D Ans C Solution Total relevant costs Variable manufacturing cost Variable selling and administrative cost Total relevant costs Divided by watches Minimum selling price for special order Gallerani Corporation has received a request for a special order of units of product A for each Product A 's unit product cost is determined as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost Direct labor is a variable cost The special order would have no effect on the company's total fixed manufacturing overhead costs The customer would like modifications made to product A that would increase the variable costs by per unit and that would require an investment of in special molds that would have no salvage value This special order would have no effect on the company's other sales The company has ample spare capacity for producing the special order If the special order is accepted the company's overall net operating income would increase decrease by A B C D Answer D Ans D Solution Incremental revenue units per unit Less incremental costs Direct materials units per unit Direct labor units per unit Variable manufacturing overhead units per unit Modifications units per unit Special molds Total incremental cost Incremental net operating income A customer has requested that Lewelling Corporation fill a special order for units of product S for a unit While the product would be modified slightly for the special order product S 's normal unit product cost is Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost Direct labor is a variable cost The special order would have no effect on the company's total fixed manufacturing overhead costs The customer would like modifications made to product S that would increase the variable costs by per unit and that would require an investment of in special molds that would have no salvage value This special order would have no effect on the company's other sales The company has ample spare capacity for producing the special order If the special order is accepted the company's overall net operating income would increase decrease by A B C D Ans B Solution Incremental revenue units per unit Less incremental costs Direct materials units per unit Direct labor units per unit Variable manufacturing overhead units per unit Modifications units per unit Special molds Total incremental cost Incremental net operating income Holden Company produces three products with costs and selling prices as follows Product A Product B Product C Selling price per unit Variable costs per unit Contribution margin per unit A particular machine is a bottleneck On that machine machine hours are required to produce each unit of Product A hour is required to produce each unit of Product B and hours are required to produce each unit of Product C In which order should it produce its products A C A B B A C B C B C A D The order of production doesn't matter Ans C LO Solution Product A Product B Product C Contribution margin per unit Machine-hours per unit Contribution margin per hour Rank in terms of profitability Wood Carving Corporation manufactures three products Because of a recent lack of skilled wood carvers the corporation has had a shortage of available labor hours The following per unit data relates to the three products of the corporation Letter Openers Elvis Statues Candle Holders Sales price Variable costs Labor hours required Assume that Wood Carving only has labor hours available next month Also assume that Wood Carving can only sell units of each product in a given month What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage A B C D Ans C LO Solution Demand for wood carvers Letter Openers Elvis Statues Candle Holders Labor-hours per unit Monthly demand in units Total hours required Total time required for all products Optimal production plan Letter Openers Elvis Statues Candle Holders Selling price per unit Variable cost per unit Contribution margin per unit Labor-hours per unit Contribution margin per hour Rank in terms of profitability Optimal production Total hours available Less hours required for Candle Holders Hours remaining Divided by hours required per Letter Opener Number of Letter Openers to produce Maximum contribution margin Candle Holders Letter Openers Maximum contribution margin Banfield Corporation makes three products that use compound W the current constrained resource Data concerning those products appear below VP YI WX Selling price per unit Variable cost per unit Centiliters of compound W Rank the products in order of their current profitability from most profitable to least profitable In other words rank the products in the order in which they should be emphasized A WX VP YI B YI VP WX C WX YI VP D VP WX YI Ans B LO Solution Optimal production plan VP YI WX Selling price per unit Variable cost per unit Contribution margin per unit Centiliters per unit Contribution margin per centiliter Rank in terms of profitability An automated turning machine is the current constraint at Jordison Corporation Three products use this constrained resource Data concerning those products appear below LN JQ RQ Selling price per unit Variable cost per unit Minutes on the constraint Rank the products in order of their current profitability from most profitable to least profitable In other words rank the products in the order in which they should be emphasized A LN JQ RQ B RQ LN JQ C RQ JQ LN D JQ RQ LN Ans A LO Solution Optimal production plan LN JQ RQ Selling price per unit Variable selling cost per unit Contribution margin per unit Machine minutes per unit Contribution margin per minute Rank in terms of profitability The constraint at Rauchwerger Corporation is time on a particular machine The company makes three products that use this machine Data concerning those products appear below WX KD FS Selling price per unit Variable cost per unit Minutes on the constraint Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product Up to how much should the company be willing to pay to acquire more of the constrained resource A per unit B per minute C per unit D per minute Ans B LO Solution WX KD FS Selling price per unit Variable cost per unit Contribution margin per unit Machine minutes per unit Contribution margin per minute Rank in terms of profitability The company should be willing to pay up to the contribution margin per minute for the least profitable job which is The Freed Company produces three products X Y Z from a single raw material input Product Y can be sold at the splitoff point for total revenues of or it can be processed further at a total cost of and then sold for Product Y A should be sold at the split-off point rather than processed further B would increase the company's overall net operating income by if processed further and then sold C would increase the company's overall net operating income by if processed further and then sold D would increase the company's overall net operating income by if processed further and then sold Ans D LO Solution Product Y Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage Pendall Company manufactures products Dee and Eff from a joint process Product Dee has been allocated of the in total joint costs associated with the production of units each of Dee and Eff each year Dee can be sold at the split-off point for per unit or it can be processed further with additional costs of and sold for per unit If Dee is processed further and sold the result would be A A break-even situation B An additional gain of from further processing C A loss of from further processing D An additional gain of from further processing Ans B LO Solution Dee Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage Faustina Chemical Company manufactures three chemicals TX NJ and KS from a joint process The three chemicals are in industrial grade form at the split-off point They can either be sold at that point or processed further into premium grade Costs related to each batch of this chemical process is as follows TX NJ KS Sales value at split-off point Allocated joint costs Sales value after further processing Cost of further processing For which product s above would it be more profitable for Faustina to sell at the split-off point rather than process further A TX only B KS only C TX and KS only D NJ and KS only Ans A LO Solution TX NJ KS Sales value after further processing Sales value at split-off Incremental revenue Further processing costs Incremental income loss Product TX should be sold at the split-off point without any further processing Products NJ and KS should be sold after further processing beyond the split-off point Khiem Inc manufactures baseball gloves that normally sell for each Khiem currently has defective gloves in inventory that have of materials labor and overhead assigned to each glove The defective gloves can either be completely repaired at a cost of per glove or sold as is at a reduced price of per glove Khiem would be better off by A to sell the gloves at the reduced price B to sell the gloves at the reduced price C to repair the gloves and sell them at the normal price D to sell the gloves at the reduced price Ans C LO Solution Sales value after repairing Sales value at split-off Incremental revenue Repair costs Incremental income from further processing Two products QI and VH emerge from a joint process Product QI has been allocated of the total joint costs of A total of units of product QI are produced from the joint process Product QI can be sold at the split-off point for per unit or it can be processed further for an additional total cost of and then sold for per unit If product QI is processed further and sold what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point A less profit B more profit C more profit D less profit Ans D LO Solution Product QI Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Two products UG and BC emerge from a joint process Product UG has been allocated of the total joint costs of A total of units of product UG are produced from the joint process Product UG can be sold at the split-off point for per unit or it can be processed further for an additional total cost of and then sold for per unit If product UG is processed further and sold what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point A less profit B less profit C less profit D more profit Ans C LO Solution Product HG Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Priddy Corporation processes sugar cane in batches The company purchases a batch of sugar cane for from farmers and then crushes the cane in the company's plant at the cost of Two intermediate products cane fiber and cane juice emerge from the crushing process The cane fiber can be sold as is for or processed further for to make the end product industrial fiber that is sold for The cane juice can be sold as is for or processed further for to make the end product molasses that is sold for Which of the intermediate products should be processed further A Cane fiber should NOT be processed into industrial fiber Cane juice should be processed into molasses B Cane fiber should be processed into industrial fiber Cane juice should NOT be processed into molasses C Cane fiber should be processed into industrial fiber Cane juice should be processed into molasses D Cane fiber should NOT be processed into industrial fiber Cane juice should NOT be processed into molasses Ans A LO Solution Cane Fiber Cane Juice Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Vannorman Corporation processes sugar beets in batches A batch of sugar beets costs to buy from farmers and to crush in the company's plant Two intermediate products beet fiber and beet juice emerge from the crushing process The beet fiber can be sold as is for or processed further for to make the end product industrial fiber that is sold for The beet juice can be sold as is for or processed further for to make the end product refined sugar that is sold for How much profit loss does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar A B C D Ans C LO Solution Beet Fiber Beet Juice Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Revenue Industrial fiber Refined sugar Total revenue Less expenses Purchase from farmers Crushing costs Processing fiber further Processing juice further Total expenses Net profit from one batch Stinehelfer Beet Processors Inc processes sugar beets in batches A batch of sugar beets costs to buy from farmers and to crush in the company's plant Two intermediate products beet fiber and beet juice emerge from the crushing process The beet fiber can be sold as is for or processed further for to make the end product industrial fiber that is sold for The beet juice can be sold as is for or processed further for to make the end product refined sugar that is sold for How much profit loss does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is A B C D Ans A LO Solution Beet Juice Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Paine Corporation processes sugar beets in batches that it purchases from farmers for a batch A batch of sugar beets costs to crush in the company's plant Two intermediate products beet fiber and beet juice emerge from the crushing process The beet fiber can be sold as is for or processed further for to make the end product industrial fiber that is sold for The beet juice can be sold as is for or processed further for to make the end product refined sugar that is sold for Which of the intermediate products should be processed further A beet fiber should NOT be processed into industrial fiber beet juice should be processed into refined sugar B beet fiber should NOT be processed into industrial fiber beet juice should NOT be processed into refined sugar C beet fiber should be processed into industrial fiber beet juice should NOT be processed into refined sugar D beet fiber should be processed into industrial fiber beet juice should be processed into refined sugar Ans A LO Solution Beet Fiber Beet Juice Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Use the following to answer questions - Ouzts Corporation is considering two alternatives A and B Costs associated with the alternatives are listed below Alternative A Alternative B Materials costs Processing costs Equipment rental Occupancy costs Are the materials costs and processing costs relevant in the choice between alternatives A and B Ignore the equipment rental and occupancy costs in this question A Both materials costs and processing costs are relevant B Neither materials costs nor processing costs are relevant C Only processing costs are relevant D Only materials costs are relevant Ans D What is the differential cost of Alternative B over Alternative A including all of the relevant costs A B C D Ans B Solution Alternative A Alternative B Differential Costs Materials costs Occupancy costs Differential cost Use the following to answer questions - Two alternatives code-named X and Y are under consideration at Guyer Corporation Costs associated with the alternatives are listed below Alternative X Alternative Y Materials costs Processing costs Equipment rental Occupancy costs Are the materials costs and processing costs relevant in the choice between alternatives X and Y Ignore the equipment rental and occupancy costs in this question A Neither materials costs nor processing costs are relevant B Only processing costs are relevant C Only materials costs are relevant D Both materials costs and processing costs are relevant Ans C What is the differential cost of Alternative Y over Alternative X including all of the relevant costs A B C D Ans D Solution Alternative X Alternative Y Differential Costs Materials costs Occupancy costs Differential cost Use the following to answer questions - The Draper Company is considering dropping its Doombug toy due to continuing losses Revenue and cost data on the toy for the past year follow Sales of units Variable expenses Contribution margin Fixed expenses Net operating loss If the toy were discontinued then Draper could avoid per year in fixed costs Under the given conditions the change in annual operating income from discontinuing the production and sale of Doombugs would be A decrease B increase C decrease D increase Ans C Solution Keep Doombugs Drop Doombugs Difference Sales Variable expenses Contribution margin Avoidable fixed expenses Product margin Net operating income would decline by if Doombugs were dropped Therefore Doombugs should not be dropped Assuming all other conditions stay the same at what level of annual sales of Doombugs in units should Draper be indifferent to discontinuing Doombugs or continuing the production and sale of Doombugs A units B units C units D units Ans D Solution Total contribution margin Divided by units Contribution margin per unit Breakeven point in units Avoidable fixed expenses Unit contribution margin units Suppose that if the Doombug toy is dropped the production and sale of other Draper toys would increase so as to generate a increase in the contribution margin received from these other toys If all other conditions are the same the change in annual operating income from discontinuing the production and sale of Doombugs would be A decrease B increase C decrease D increase Ans A Solution Sales Variable expenses Contribution margin Avoidable fixed expenses Doombug product margin Additional contribution margin Less Doombug product margin Decrease in net operating income Suppose again that if the Doombug toy is dropped the production and sale of other Draper toys would increase so as to generate a increase in the contribution margin received from these other toys At what selling price per Doombug should Draper be indifferent on economic grounds between dropping the Doombug or continuing its production and sale All other conditions remain the same including annual sales of units of the Doombug toy A B C D Ans C Solution Total variable expenses Divided by units Variable expense per unit Total contribution margin Fixed expenses plus increase in contribution margin from other toys Total contribution margin Selling price Variable expense per unit Selling price Selling price Selling price Selling price Use the following to answer questions - The management of Bonga Corporation is considering dropping product D F Data from the company's accounting system appear below Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses All fixed expenses of the company are fully allocated to products in the company's accounting system Further investigation has revealed that of the fixed manufacturing expenses and of the fixed selling and administrative expenses are avoidable if product D F is discontinued According to the company's accounting system what is the net operating income earned by product D F A B C D Ans A Solution Sales Variable expenses Contribution margin Fixed expenses Fixed manufacturing expenses Fixed selling and administrative expenses Total fixed expenses Net operating income loss What would be the effect on the company's overall net operating income if product D F were dropped A Overall net operating income would increase by B Overall net operating income would increase by C Overall net operating income would decrease by D Overall net operating income would decrease by Ans C Solution Keep the Product Drop the Product Difference Sales Variable expenses Contribution margin Fixed expenses Fixed manufacturing expenses Fixed selling and administrative expenses Total fixed expenses Net operating income loss Net operating income would decline by if product D F were dropped Therefore the product should not be dropped Use the following to answer questions - The management of Woznick Corporation has been concerned for some time with the financial performance of its product V O and has considered discontinuing it on several occasions Data from the company's accounting system appear below Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses In the company's accounting system all fixed expenses of the company are fully allocated to products Further investigation has revealed that of the fixed manufacturing expenses and of the fixed selling and administrative expenses are avoidable if product V O is discontinued According to the company's accounting system what is the net operating income earned by product V O A B C D Ans B Solution Sales Variable expenses Contribution margin Fixed expenses Fixed manufacturing expenses Fixed selling and administrative expenses Total fixed expenses Net operating income loss What would be the effect on the company's overall net operating income if product V O were dropped A Overall net operating income would decrease by B Overall net operating income would decrease by C Overall net operating income would increase by D Overall net operating income would increase by Ans A Solution Keep the Product Drop the Product Difference Sales Variable expenses Contribution margin Fixed expenses Fixed manufacturing expenses Fixed selling and administrative expenses Total fixed expenses Net operating income loss Net operating income would decline by if product V O were dropped Therefore the product should not be dropped Use the following to answer questions - Smithtone Company uses units of a certain part in production each year Presently this part is purchased from an outside supplier at per unit For some time now there has been idle capacity in the factory that could be utilized to make this part The following information has been assembled on the unit costs of making this part internally Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead The fixed manufacturing overhead listed above represents an allocation of existing costs to this part However there would be an increase of in fixed manufacturing overhead costs for the salary of a new supervisor If Smithtone chooses to make the part instead of buying it outside the change in the company's operating income per year would be A decrease B increase C decrease D increase Ans B Solution Relevant cost of manufacturing Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost to make Net advantage disadvantage Cost of purchasing part Total cost to make Net savings from making part Assuming other things stay the same at what price per unit from the outside supplier should Smithtone be indifferent on economic grounds to buying or making the part A B C D Ans D Solution Relevant cost of manufacturing Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost to make Total cost to make Divided by units Price per unit from outside supplier Suppose that the idle capacity floor space and machinery is presently being rented to another company for per year All the other conditions are still the same If Smithtone chooses to make the part instead of buying it outside the net advantage or disadvantage per year would be A disadvantage B advantage C disadvantage D advantage Ans C Solution Relevant cost of manufacturing Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost to make Net advantage disadvantage Cost of purchasing part Total cost to make Opportunity cost of rental income Net disadvantage of making part Use the following to answer questions - Elly Industries is a multi-product company that currently manufactures units of Part MR each month for use in production The facilities now being used to produce Part MR have a fixed monthly cost of and a capacity to produce units per month If Elly were to buy part MR from an outside supplier the facilities would be idle but its fixed costs would continue at of their present amount The variable production costs of Part MR are per unit If Elly Industries continues to use units of Part MR each month it would realize a net benefit by purchasing Part MR from an outside supplier only if the supplier's unit price is less than A B C D Ans A Solution Avoidable fixed costs Divided by units Relevant fixed cost per unit Add variable production costs per unit Outside supplier price If Elly industries is able to obtain Part MR from an outside supplier at a unit purchase price of the monthly usage at which it will be indifferent between purchasing and making Part MR is A units B units C units D units Ans D Solution A company will be indifferent between purchasing and making a part when the outside purchase price is equal to the total relevant cost per unit of making the part The total relevant cost per unit of making the part is composed of the variable production cost per unit plus the fixed cost per unit Since the total cost must be equal to then the fixed cost per unit must be The fixed cost per unit is calculated as Fixed cost per unit Total relevant fixed costs Units to be produced Substituting Units to be produced Units to be produced Use the following to answer questions - Ahron Company makes 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 materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost An outside supplier has offered to sell the company all of these parts it needs for 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 per year If the part were purchased from the outside supplier all of the direct labor cost of the part would be avoided However 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 How much of the unit product cost of is relevant in the decision of whether to make or buy the part A B C D Ans D Solution Relevant cost per unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Relevant manufacturing cost What is the net total dollar advantage disadvantage of purchasing the part rather than making it A B C D Ans C Solution Relevant cost per unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Relevant manufacturing cost Net advantage disadvantage Manufacturing cost savings Additional contribution margin Cost of purchasing the part Net advantage disadvantage 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 units required each year A B C D Ans C Solution Relevant cost per unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Relevant manufacturing cost Maximum acceptable purchase price Manufacturing cost savings Additional contribution margin Total benefit Number of units Benefit per unit Use the following to answer questions - Penagos Corporation is presently making part Z that is used in one of its products A total of units of this part are produced and used every year The company's Accounting Department reports the following costs of producing the part at this level of activity Per Unit Direct materials Direct labor Variable overhead Supervisor s salary Depreciation of special equipment Allocated general overhead An outside supplier has offered to produce and sell the part to the company for 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 of these allocated general overhead costs would be avoided If management decides to buy part Z from the outside supplier rather than to continue making the part what would be the annual impact on the company's overall net operating income A Net operating income would decline by per year B Net operating income would decline by per year C Net operating income would decline by per year D Net operating income would decline by per year Ans C Solution Make Buy Direct materials units per unit Direct labor units per unit Variable overhead units per unit Supervisor s salary units per unit Depreciation of special equipment not relevant Allocated general overhead avoidable only Outside purchase price units per unit Total cost The total cost of the make alternative is lower by Thus net operating income would decline by if the offer from the supplier were accepted In addition to the facts given above assume that the space used to produce part Z could be used to make more of one of the company's other products generating an additional segment margin of per year for that product What would be the impact on the company's overall net operating income of buying part Z from the outside supplier and using the freed space to make more of the other product A Net operating income would decline by per year B Net operating income would decline by per year C Net operating income would increase by per year D Net operating income would increase by per year Ans D Solution Make Buy Direct materials units per unit Direct labor units per unit Variable overhead units per unit Supervisor s salary units per unit Depreciation of special equipment not relevant Allocated general overhead avoidable only Outside purchase price units per unit Opportunity cost Total cost The total cost of the make alternative is higher by Thus net operating income would increase by if the offer from the supplier were accepted Use the following to answer questions - Mcfarlain Corporation is presently making part U that is used in one of its products A total of units of this part are produced and used every year The company's Accounting Department reports the following costs of producing the part at this level of activity Per Unit Direct materials Direct labor Variable overhead Supervisor s salary Depreciation of special equipment Allocated general overhead An outside supplier has offered to produce and sell the part to the company for 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 none of which would be avoided if the part were purchased instead of produced internally If management decides to buy part U from the outside supplier rather than to continue making the part what would be the annual impact on the company's overall net operating income A Net operating income would decline by per year B Net operating income would increase by per year C Net operating income would increase by per year D Net operating income would decline by per year Ans A Solution Make Buy Direct materials units per unit Direct labor units per unit Variable overhead units per unit Supervisor s salary units per unit Depreciation of special equipment not relevant Allocated general overhead not relevant Outside purchase price units per unit Total cost The total cost of the make alternative is lower by Thus net operating income would decline by if the offer from the supplier were accepted In addition to the facts given above assume that the space used to produce part U could be used to make more of one of the company's other products generating an additional segment margin of per year for that product What would be the impact on the company's overall net operating income of buying part U from the outside supplier and using the freed space to make more of the other product A Net operating income would decline by per year B Net operating income would decline by per year C Net operating income would increase by per year D Net operating income would decline by per year Ans A Solution Make Buy Direct materials units per unit Direct labor units per unit Variable overhead units per unit Supervisor s salary units per unit Depreciation of special equipment not relevant Allocated general overhead not relevant Outside purchase price units per unit Opportunity cost Total cost The total cost of the make alternative is less by Thus net operating income would decline by if the offer from the supplier were accepted Use the following to answer questions - Younes Inc manufactures industrial components One of its products which is used in the construction of industrial air conditioners is known as P Data concerning this product are given below Per Unit Selling price Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling and administrative expense The above per unit data are based on annual production of units of the component Direct labor can be considered to be a variable cost The company has received a special one-time-only order for units of component P There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order Assuming that Younes has excess capacity and can fill the order without cutting back on the production of any product what is the minimum price per unit on the special order below which the company should not go A B C D Ans A Solution Variable cost per unit on normal sales Direct materials Direct labor Variable manufacturing overhead Variable selling expense Variable cost per unit on normal sales Variable cost per unit on special order Normal variable cost per unit Reduction in variable selling expense Variable cost per unit on special order The company has received a special one-time-only order for units of component P There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order However assume that Younes has no excess capacity and this special order would require minutes of the constraining resource which could be used instead to produce products with a total contribution margin of What is the minimum price per unit on the special order below which the company should not go A B C D Ans A LO Solution Variable cost per unit on normal sales Direct materials Direct labor Variable manufacturing overhead Variable selling expense Variable cost per unit on normal sales Variable cost per unit on special order Normal variable cost per unit Reduction in variable selling expense Opportunity cost of sales given up Variable cost per unit on special order Refer to the original data in the problem What is the current contribution margin per unit for component P based on its selling price of and its annual production of units A B C D Ans C Solution Variable cost per unit Direct materials Direct labor Variable manufacturing overhead Variable selling expense Variable cost per unit Contribution margin per unit Selling price Variable cost per unit Contribution margin Use the following to answer questions - The following are Silver Company's unit costs of making and selling an item at a volume of units per month which represents the company's capacity Manufacturing Direct materials Direct labor Variable overhead Fixed overhead Selling and administrative Variable Fixed Present sales amount to units per month An order has been received from a customer in a foreign market for units at a price of per unit The order would not affect regular sales Fixed costs both manufacturing and selling and administrative are constant within the relevant range between and units per month The variable selling and administrative costs would have to be incurred for this special order as well as all other sales If the company accepts the special order the effect on total operating income will be a A increase B increase C decrease D increase Ans D Solution Variable cost per unit on normal sales Direct materials Direct labor Variable manufacturing overhead Variable selling administrative expense Variable cost per unit on normal sales Selling price for special order Variable cost per unit on special order Unit contribution margin on special order Number of units in special order Increase decrease in net operating income The company has defective units of Product X left over from last year which will have to be sold as scrap at reduced prices The sale of these units would have no effect on the company's other sales The cost figure that is relevant as a guide for setting a minimum price on these units is A B C D Ans B Solution Except for variable selling and administrative expenses all other expenses associated with theses defective units are sunk already incurred and therefore irrelevant Use the following to answer questions - Elfving 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 units per month is as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling administrative expense Fixed selling administrative expense The normal selling price of the product is per unit An order has been received from an overseas customer for 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 less per unit on this order than on normal sales Direct labor is a variable cost in this company Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is per unit By how much would this special order increase decrease the company's net operating income for the month A B C D Ans C Solution Variable cost per unit on normal sales Direct materials Direct labor Variable manufacturing overhead Variable selling administrative expense Variable cost per unit on normal sales Variable cost per unit on special order Normal variable cost per unit Reduction in variable selling and administrative expense Variable cost per unit on special order Selling price for special order Variable cost per unit on special order Unit contribution margin on special order Number of units in special order Increase decrease in net operating income 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 A B C D Ans A Solution Variable cost per unit on normal sales Direct materials Direct labor Variable manufacturing overhead Variable selling administrative expense Variable cost per unit on normal sales Selling price for normal sales Variable cost per unit Unit contribution margin 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 units for regular customers The minimum acceptable price per unit for the special order is closest to A B C D Ans D Solution Variable cost per unit on normal sales Direct materials Direct labor Variable manufacturing overhead Variable selling administrative expense Variable cost per unit on normal sales Lost contribution margin Selling price for normal sales Variable cost per unit on normal sales Contribution margin per unit Number of units cut back in production Total lost contribution margin Number of units in special order Lost contribution margin per unit Variable cost per unit on special order Normal variable cost per unit Add opportunity cost for lost contribution margin Reduction in variable selling and administrative expense Variable cost per unit on special order Use the following to answer questions - The Bharu Violin Company has the capacity to manufacture and sell violins each year but is currently only manufacturing and selling The following per unit numbers relate to annual operations at units Per Violin Selling price Manufacturing costs Variable Fixed Selling and administrative costs Variable Fixed Woolgar Symphony Orchestra is interested in purchasing Bharu's excess capacity of units but only if they can get the violins for each This special order would not affect regular sales or the cost structure above If the special order from Woolgar Symphony Orchestra is accepted Bharu's profits for the year will A increase by B decrease by C decrease by D decrease by Ans A Solution Incremental revenues units Less incremental costs Variable manufacturing units Variable selling units Net advantage of accepting the order Assume that Bharu is manufacturing and selling at capacity units Any special order will mean a loss of regular sales Under these conditions if the special order from Woolgar Symphony Orchestra is accepted Bharu's profits for the year will decrease by A B C D Ans D Solution Contribution margin per unit of regular sales Selling price Variable manufacturing costs Variable selling costs Contribution margin per unit Number of units of lost sales Total lost contribution margin Incremental revenues units Less incremental costs Variable manufacturing units Variable selling units Less lost contribution margin Net disadvantage of accepting special order Use the following to answer questions - Browning Company makes four products in a single facility These products have the following unit product costs Product A Product B Product C Product D Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost Additional data concerning these products are listed below Product A Product B Product C Product D Grinding minutes per unit Selling price per unit Variable selling cost per unit Monthly demand in units The grinding machines are potentially the constraint in the production facility A total of 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 B C D Ans B LO Solution Demand on the grinding machine Product A Product B Product C Product D Grinding minutes per unit Monthly demand in units Total minutes required Total time required for all products Which product makes the LEAST profitable use of the grinding machines A Product A B Product B C Product C D Product D Ans C LO Solution Optimal production plan Product A Product B Product C Product D Selling price per unit Direct materials per unit Direct labor per unit Variable manufacturing overhead per unit Variable selling cost per unit Contribution margin per unit Grinding minutes per unit Contribution margin per minute Rank in terms of profitability Which product makes the MOST profitable use of the grinding machines A Product A B Product B C Product C D Product D Ans D LO Solution Optimal production plan Product A Product B Product C Product D Selling price per unit Direct materials per unit Direct labor per unit Variable manufacturing overhead per unit Variable selling cost per unit Contribution margin per unit Grinding minutes per unit Contribution margin per minute Rank in terms of profitability 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 B C D Ans B LO Solution Optimal production plan Product A Product B Product C Product D Selling price per unit Direct materials per unit Direct labor per unit Variable manufacturing overhead per unit Variable selling cost per unit Contribution margin per unit Grinding minutes per unit Contribution margin per minute Rank in terms of profitability The company should be willing to pay up to the contribution margin per minute for the marginal job which is Use the following to answer questions - Crawshan Company makes four products in a single facility Data concerning these products appear below Product A Product B Product C Product D Selling price per unit Variable manufacturing cost per unit Variable selling cost per unit Milling machine minutes per unit Monthly demand in units The milling machines are potentially the constraint in the production facility A total of minutes are available per month on these machines How many minutes of milling machine time would be required to satisfy demand for all four products A B C D Ans A LO Solution Demand on the milling machine Product A Product B Product C Product D Milling machine minutes per unit Monthly demand in units Total minutes required Total time required for all products Which product makes the LEAST profitable use of the milling machines A Product A B Product B C Product C D Product D Ans B LO Solution Optimal production plan Product A Product B Product C Product D Selling price per unit Variable manufacturing cost per unit Variable selling cost per unit Contribution margin per unit Milling machine minutes per unit Contribution margin per minute Rank in terms of profitability Which product makes the MOST profitable use of the milling machines A Product A B Product B C Product C D Product D Ans C LO Solution Optimal production plan Product A Product B Product C Product D Selling price per unit Variable manufacturing cost per unit Variable selling cost per unit Contribution margin per unit Milling machine minutes per unit Contribution margin per minute Rank in terms of profitability Up to how much should the company be willing to pay for one additional minute of milling machine time if the company has made the best use of the existing milling machine capacity Round off to the nearest whole cent A B C D Ans C LO Solution Optimal production plan Product A Product B Product C Product D Selling price per unit Variable manufacturing cost per unit Variable selling cost per unit Contribution margin per unit Milling machine minutes per unit Contribution margin per minute Rank in terms of profitability The company should be willing to pay up to the contribution margin per minute for the least profitable job which is Use the following to answer questions - Bertucci Corporation makes three products that use the current constraint-a particular type of machine Data concerning those products appear below TC GL NG Selling price per unit Variable cost per unit Minutes on the constraint Rank the products in order of their current profitability from most profitable to least profitable In other words rank the products in the order in which they should be emphasized A TC NG GL B GL NG TC C GL TC NG D TC GL NG Ans B LO Solution TC GL NG Selling price per unit Variable cost per unit Contribution margin per unit Minutes on the constraint Contribution margin per unit of the constrained resource Ranking Resulting ranking of products GL NG TC 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 A per minute B per minute C per unit D per unit Ans A LO Solution TC GL NG Selling price per unit Variable cost per unit Contribution margin per unit Minutes on the constraint Contribution margin per unit of the constrained resource Ranking The company should be willing to pay up to per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product TC By assumption the other products will already have been produced up to demand Use the following to answer questions - The constraint at Pickrel Corporation is time on a particular machine The company makes three products that use this machine Data concerning those products appear below VD JT SM Selling price per unit Variable cost per unit Minutes on the constraint Rank the products in order of their current profitability from most profitable to least profitable In other words rank the products in the order in which they should be emphasized A JT SM VD B JT VD SM C VD SM JT D SM VD JT Ans A LO Solution VD JT SM Selling price per unit Variable cost per unit Contribution margin per unit Time on the constraint minutes Contribution margin per unit of the constrained resource Ranking Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product Up to how much should the company be willing to pay to acquire more of this constrained resource A per minute B per minute C per unit D per unit Ans B LO Solution VD JT SM Selling price per unit Variable cost per unit Contribution margin per unit Time on the constraint minutes Contribution margin per unit of the constrained resource Ranking Resulting ranking of products JT SM VD The company should be willing to pay up to per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product VD By assumption the other products will already have been produced up to demand Use the following to answer questions - The Anthony Company makes two products X and Y in a joint process At the split-off point units of product X and units of product Y are available each month Monthly joint production costs total Product X can be sold at the split-off point for per unit Product Y can be either sold at the split-off point for per unit or it can be processed further and sold for per unit If product Y is processed further additional processing costs of per unit will be incurred If product Y is processed further rather than being sold at the split-off point the impact on monthly operating income should be A decrease B increase C increase D increase Ans C LO Solution Analysis of sell or process further Product Y Final sales value after further processing Less sales value at split-off point Incremental revenue from further processing Less cost of further processing Profit loss from further processing Total increase in monthly operating income units What would the unit selling price of product Y need to be at the split-off point in order for Anthony to be economically indifferent between selling Y at split-off or processing Y further before sale A B C D Ans B LO Solution For Anthony to be economically indifferent between selling Y at the split-off or processing Y further the incremental revenue from further processing would need to be equal to the cost of further processing or Sales value at split-off point Sales value at split-off point Use the following to answer questions - Dodd Company makes two products from a common input Joint processing costs up to the split-off point total a year The company allocates these costs to the joint products on the basis of their total sales values at the split-off point Each product may be sold at the split-off point or processed further Data concerning these products appear below Product X Product Y Total Allocated joint processing costs Sales value at split-off point Costs of further processing Sales value after further processing What is the net monetary advantage disadvantage of processing Product X beyond the split-off point A B C D Ans D LO Solution Product X Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage What is the net monetary advantage disadvantage of processing Product Y beyond the split-off point A B C D Ans D LO Solution Product Y Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point A B C D Ans C LO Solution Product X Sales value after further processing Costs of further processing Benefit of processing Product X further Since the company could earn in incremental benefits from processing Product X further the represents the minimum that the company should accept for Product X if it is sold at the split-off point Use the following to answer questions - Mae Refiners Inc processes sugar cane that it purchases from farmers Sugar cane is processed in batches A batch of sugar cane costs to buy from farmers and to crush in the company's plant Two intermediate products cane fiber and cane juice emerge from the crushing process The cane fiber can be sold as is for or processed further for to make the end product industrial fiber that is sold for The cane juice can be sold as is for or processed further for to make the end product molasses that is sold for How much profit loss does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses A B C D Ans D LO Solution Cane Fiber Cane Juice Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Revenue Industrial fiber Refined sugar Total revenue Less expenses Purchase from farmers Crushing costs Processing fiber further Processing juice further Total expenses Net profit from one batch How much profit loss does the company make by processing the intermediate product cane juice into molasses rather than selling it as is A B C D Ans C LO Solution Cane Juice Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Which of the intermediate products should be processed further A Cane fiber should be processed into industrial fiber Cane juice should be processed into molasses B Cane fiber should be processed into industrial fiber Cane juice should NOT be processed into molasses C Cane fiber should NOT be processed into industrial fiber Cane juice should NOT be processed into molasses D Cane fiber should NOT be processed into industrial fiber Cane juice should be processed into molasses Ans B LO Solution Cane Fiber Cane Juice Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Use the following to answer questions - Boney Corporation processes sugar beets that it purchases from farmers Sugar beets are processed in batches A batch of sugar beets costs to buy from farmers and to crush in the company's plant Two intermediate products beet fiber and beet juice emerge from the crushing process The beet fiber can be sold as is for or processed further for to make the end product industrial fiber that is sold for The beet juice can be sold as is for or processed further for to make the end product refined sugar that is sold for How much profit loss does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar A B C D Ans D LO Solution Beet Fiber Beet Juice Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Revenue Industrial fiber Refined sugar Total revenue Less expenses Purchase from farmers Crushing costs Processing fiber further Processing juice further Total expenses Net profit from one batch How much profit loss does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is A B C D Ans C LO Solution Beet Juice Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Which of the intermediate products should be processed further A beet fiber should be processed into industrial fiber beet juice should be processed into refined sugar B beet fiber should NOT be processed into industrial fiber beet juice should NOT be processed into refined sugar C beet fiber should NOT be processed into industrial fiber beet juice should be processed into refined sugar D beet fiber should be processed into industrial fiber beet juice should NOT be processed into refined sugar Ans C LO Solution Beet Fiber Beet Juice Sales value after further processing Costs of further processing Benefit of further processing Less Sales value at split-off point Net advantage disadvantage Essay Questions Saalfrank Corporation is considering two alternatives that are code-named M and N Costs associated with the alternatives are listed below Alternative M Alternative N Supplies costs Assembly costs Power costs Inspection costs Required Which costs are relevant and which are not relevant in the choice between these two alternatives What is the differential cost between the two alternatives Ans a Supplies costs Relevant since costs differ between alternatives Assembly costs Relevant since costs differ between alternatives Power costs Not relevant since the costs do not differ between alternatives Inspection costs Relevant since costs differ between alternatives b Alternative M Alternative N Differential Supplies costs Assembly costs Power costs Inspection costs Total Costs associated with two alternatives code-named Q and R being considered by Albiston Corporation are listed below Alternative Q Alternative R Supplies costs Power costs Inspection costs Assembly costs Required Which costs are relevant and which are not relevant in the choice between these two alternatives What is the differential cost between the two alternatives Ans a Supplies costs Not relevant since the costs do not differ between alternatives Power costs Relevant since costs differ between alternatives Inspection costs Relevant since costs differ between alternatives Assembly costs Not relevant since the costs do not differ between alternatives b Alternative Q Alternative R Differential Supplies costs Power costs Inspection costs Assembly costs Total The most recent monthly income statement for Benner Stores is given below Total Store A Store B Sales Variable expenses Contribution margin Traceable fixed expenses Store segment margin Common fixed expenses Net operating income Due to its poor showing consideration is being given to closing Store B Studies show that if Store B is closed one-fourth of its traceable fixed expenses will continue unchanged The studies also show that closing Store B would result in a percent decrease in sales in Store A The company allocates common fixed expenses to the stores on the basis of sales dollars Required Compute the overall increase or decrease in the company's operating income if Store B is closed Ans Loss in contribution margin if Store B is closed Store B loss Store A loss Total lost contribution margin Fixed costs avoided if Store B is closed Net disadvantage of closing Store B Companies often allocate common fixed costs among segments For example common fixed corporate costs are often allocated to divisions and appear as part of the divisional performance reports Required What dangers are there in allocating common fixed costs to segments when involved in a decision to possibly drop a segment such as a product or a division Ans A segment such as a product or a division may show a net loss only because of the allocated common fixed cost However if the segment is dropped the common fixed expense will continue A segment should be dropped only if its contribution margin does not cover its own avoidable fixed costs And even in cases where a segment does not cover its own costs it may be beneficial to retain the segment if it has positive effects on other segments For example a losing product may be important in luring customers into a store where they will buy other products The management of Schmader Corporation is considering dropping product M C Data from the company's accounting system appear below Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses All fixed expenses of the company are fully allocated to products in the company's accounting system Further investigation has revealed that of the fixed manufacturing expenses and of the fixed selling and administrative expenses are avoidable if product M C is discontinued Required What is the net operating income earned by product M C according to the company's accounting system Show your work What would be the effect on the company's overall net operating income of dropping product M C Should the product be dropped Show your work Ans Keep the Product Drop the Product Difference Sales Variable expenses Contribution margin Fixed expenses Fixed manufacturing expenses Fixed selling and administrative expenses Total fixed expenses Net operating income loss According to the company s accounting system the product s net operating loss is Net operating income would decline by if product M C were dropped Therefore the product should not be dropped Suire Corporation is considering dropping product D E Data from the company's accounting system appear below Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses All fixed expenses of the company are fully allocated to products in the company's accounting system Further investigation has revealed that of the fixed manufacturing expenses and of the fixed selling and administrative expenses are avoidable if product D E is discontinued Required According to the company's accounting system what is the net operating income earned by product D E Show your work What would be the effect on the company's overall net operating income of dropping product D E Should the product be dropped Show your work Ans Keep the Product Drop the Product Difference Sales Variable expenses Contribution margin Fixed expenses Fixed manufacturing expenses Fixed selling and administrative expenses Total fixed expenses Net operating income loss According to the company s accounting system the product s net operating loss is Net operating income would decline by if product D E were dropped Therefore the product should not be dropped The management of Wengel Corporation is considering dropping product B D Data from the company's accounting system appear below Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses All fixed expenses of the company are fully allocated to products in the company's accounting system Further investigation has revealed that of the fixed manufacturing expenses and of the fixed selling and administrative expenses are avoidable if product B D is discontinued Required What would be the effect on the company's overall net operating income if product B D were dropped Should the product be dropped Show your work Ans Keep the Product Drop the Product Difference Sales Variable expenses Contribution margin Fixed expenses Fixed manufacturing expenses Fixed selling and administrative expenses Total fixed expenses Net operating income loss Net operating income would decline by if product B D were dropped Therefore the product should not be dropped Foubert Company makes 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 materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost An outside supplier has offered to sell the company all of these parts it needs for 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 per year If the part were purchased from the outside supplier all of the direct labor cost of the part would be avoided However 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 How much of the unit product cost of is relevant in the decision of whether to make or buy the part What is the net total dollar advantage disadvantage of purchasing the part rather than making it 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 units required each year Ans a Relevant cost per unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Relevant manufacturing cost b Net advantage disadvantage Manufacturing cost savings Additional contribution margin Cost of purchasing the part Net advantage disadvantage c Maximum acceptable purchase price Manufacturing cost savings Additional contribution margin Total benefit Number of units Benefit per unit Kirsten Corporation makes units per year of a part called a B gasket for use in one of its products Data concerning the unit production costs of the B gasket follow Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing cost per unit An outside supplier has offered to sell Kirsten Corporation all of the B gaskets it requires If Kirsten Corporation decided to discontinue making the B gaskets of the above fixed manufacturing overhead costs could be avoided Required Assume Kirsten Corporation has no alternative use for the facilities presently devoted to production of the B gaskets If the outside supplier offers to sell the gaskets for each should Kirsten Corporation accept the offer Fully support your answer with appropriate calculations Assume that Kirsten Corporation could use the facilities presently devoted to production of the B gaskets to expand production of another product that would yield an additional contribution margin of annually What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B gaskets Ans The analysis of the alternatives follows below Make Buy Purchase cost Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost The company should make the part rather than buy it from the outside supplier since it costs less under that alternative The maximum acceptable price is 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 Opportunity cost per unit Total McGraw Company uses units of Part X each year as a component in the assembly of one of its products The company is presently producing Part X internally at a total cost of computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total costs An outside supplier has offered to provide Part X at a price of per unit If McGraw Company stops producing the part internally one-third of the fixed manufacturing overhead would be eliminated Required Prepare an analysis showing the annual dollar advantage or disadvantage of accepting the outside supplier's offer Ans Cost of Cost of Making Buying Outside purchase Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost Therefore the annual advantage to make the parts is Gottshall Inc makes a range of products The company's predetermined overhead rate is per direct labor-hour which was calculated using the following budgeted data Variable manufacturing overhead Fixed manufacturing overhead Direct labor-hours Component P 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 materials Direct labor Manufacturing overhead applied Unit product cost An outside supplier has offered to supply component P for 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 Gottshall chronically has idle capacity Required Is the offer from the outside supplier financially attractive Why Ans 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 DLHs per DLH The direct-labor hours per unit for the special order can be determined as follows Direct labor-hours Manufacturing overhead applied Predetermined overhead rate per DLH DLHs Consequently the variable manufacturing overhead for the special order would be Variable manufacturing overhead Variable portion of the predetermined overhead rate Direct labor-hours per DLH DLHs Putting this all together Direct materials Direct labor Variable manufacturing overhead Total variable cost Since the outside supplier has offered to sell the component for each but it only costs the company to make the component internally this is not a financially attractive offer Recher Corporation uses part Q in one of its products The company's Accounting Department reports the following costs of producing the units of the part that are needed every year Per Unit Direct materials Direct labor Variable overhead Supervisor s salary Depreciation of special equipment Allocated general overhead An outside supplier has offered to make the part and sell it to the company for 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 of these allocated general overhead costs would be avoided In addition the space used to produce part Q could be used to make more of one of the company's other products generating an additional segment margin of per year for that product Required Prepare a report that shows the effect on the company's total net operating income of buying part Q from the supplier rather than continuing to make it inside the company Which alternative should the company choose Ans a Make Buy Direct materials units per unit Direct labor units per unit Variable overhead units per unit Supervisor s salary units per unit Depreciation of special equipment not relevant Allocated general overhead avoidable only Outside purchase price units per unit Opportunity cost Total cost The total cost of the make alternative is lower by Thus net operating income would decline by if the offer from the supplier were accepted Therefore the company should continue to make the part itself Part U is used in one of Broce Corporation's products The company's Accounting Department reports the following costs of producing the units of the part that are needed every year Per Unit Direct materials Direct labor Variable overhead Supervisor s salary Depreciation of special equipment Allocated general overhead An outside supplier has offered to make the part and sell it to the company for 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 of these allocated general overhead costs would be avoided Required Prepare a report that shows the effect on the company's total net operating income of buying part U from the supplier rather than continuing to make it inside the company Which alternative should the company choose Ans a Make Buy Direct materials units per unit Direct labor units per unit Variable overhead units per unit Supervisor s salary units per unit Depreciation of special equipment not relevant Allocated general overhead avoidable only Outside purchase price units per unit Total cost The total cost of the make alternative is lower by Thus net operating income would decline by if the offer from the supplier were accepted Therefore the company should continue to make the part itself Juline 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 units per month is as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expense Fixed selling and administrative expense The normal selling price of the product is per unit An order has been received from an overseas customer for 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 less per unit on this order than on normal sales Direct labor is a variable cost in this company Required 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 per unit By how much would this special order increase decrease the company's net operating income for the month 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 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 units for regular customers What would be the minimum acceptable price per unit for the special order Ans Variable cost per unit on normal sales Direct materials Direct labor Variable manufacturing overhead Variable selling administrative expense Variable cost per unit on normal sales Variable cost per unit on special order Normal variable cost per unit Reduction in variable selling and administrative expense Variable cost per unit on special order Selling price for special order Variable cost per unit on special order Unit contribution margin on special order Number of units in special order Increase decrease in net operating income The opportunity cost is just the contribution margin on normal sales Normal selling price per unit Variable cost per unit on normal sales Unit contribution margin on normal sales Minimum acceptable price Unit contribution margin on normal sales Displaced normal sales Lost contribution margin displaced sales Total variable cost on special order Number of units in special order Minimum acceptable price on special order Marsdon Company has an annual production capacity of units The costs associated with production and sale of the company's product are given below Manufacturing costs Variable per unit Fixed annual cost Selling and administrative costs Variable sales commissions per unit Fixed annual cost The company presently is selling units annually at a selling price of each A special order has been received from a distributor who wants to purchase units at a special price of each Regular sales would not be affected by this order and the order could be filled without any impact on total fixed costs Sales commissions on the special order would be reduced by one-third Required Determine whether the company should accept the special order Ans Incremental revenues units Less incremental costs Variable manufacturing units Variable selling units Net advantage of accepting the order Yes the order should be accepted Mcniff Corporation makes a range of products The company's predetermined overhead rate is per direct labor-hour which was calculated using the following budgeted data Variable manufacturing overhead Fixed manufacturing overhead Direct labor-hours Management is considering a special order for units of product O S at each The normal selling price of product O S is and the unit product cost is determined as follows Direct materials Direct labor Manufacturing overhead applied Unit product cost 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 Ans 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 direct labor-hours per direct labor-hour The direct-labor hours per unit for the special order can be determined as follows Direct labor-hours Manufacturing overhead applied Predetermined overhead rate per direct labor-hour direct labor-hours Consequently the variable manufacturing overhead for the special order would be Variable manufacturing overhead Variable portion of the predetermined overhead rate Direct labor-hours per direct labor-hour direct labor-hours Putting this all together Special order price Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable cost Contribution margin Units ordered Total increase in profit from the special order Kneller Co manufactures and sells medals for winners of athletic and other events Its manufacturing plant has the capacity to produce medals each month current monthly production is medals The company normally charges per medal Cost data for the current level of production are shown below Variable costs Direct materials Direct labor Selling and administrative Fixed costs Manufacturing Selling and administrative The company has just received a special one-time order for medals at 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 Ans 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 Direct materials Direct labor Total Current monthly production Average direct materials and direct labor cost per unit Since price on the special order is per medal and the relevant cost is only the company would earn a profit of per medal Therefore the special order should be accepted Anglen Co manufactures and sells trophies for winners of athletic and other events Its manufacturing plant has the capacity to produce trophies each month current monthly production is trophies The company normally charges per trophy Cost data for the current level of production are shown below Variable costs Direct materials Direct labor Selling and administrative Fixed costs Manufacturing Selling and administrative The company has just received a special one-time order for trophies at 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 Ans 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 Direct materials Direct labor Total Current monthly production Average direct materials and direct labor cost per unit Because price on the special order is per trophy and the relevant cost is the company would suffer a loss of per trophy Therefore the special order should not be accepted Wehrs Corporation has received a request for a special order of units of product K for each The normal selling price of this product is each but the units would need to be modified slightly for the customer The normal unit product cost of product K is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost 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 K that would increase the variable costs by per unit and that would require a one-time investment of in special molds that would have no salvage value This special order would have no effect on the company's other sales The company has ample spare capacity for producing the special order Required Determine the effect on the company's total net operating income of accepting the special order Show your work Ans Incremental revenue units per unit Less incremental costs Direct materials units per unit Direct labor units per unit Variable manufacturing overhead units per unit Modifications units per unit Special molds Total incremental cost Incremental net operating income A customer has asked Lalka Corporation to supply units of product H with some modifications for each The normal selling price of this product is each The normal unit product cost of product H is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost 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 H that would increase the variable costs by per unit and that would require a one-time investment of in special molds that would have no salvage value This special order would have no effect on the company's other sales The company has ample spare capacity for producing the special order Required Determine the effect on the company's total net operating income of accepting the special order Show your work Ans Incremental revenue units per unit Less incremental costs Direct materials units per unit Direct labor units per unit Variable manufacturing overhead units per unit Modifications units per unit Special molds Total incremental cost Incremental net operating income Gloddy Company makes three products in a single facility These products have the following unit product costs Product A Product B Product C Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost Additional data concerning these products are listed below Product A Product B Product C Mixing minutes per unit Selling price per unit Variable selling cost per unit Monthly demand in units The mixing machines are potentially the constraint in the production facility A total of minutes are available per month on these machines Direct labor is a variable cost in this company Required How many minutes of mixing machine time would be required to satisfy demand for all four products How much of each product should be produced to maximize net operating income Round off to the nearest whole unit 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 Ans Demand on the mixing machine Product A Product B Product C Mixing minutes per unit Monthly demand in units Total minutes required Total time required for all products Optimal production plan Product A Product B Product C Selling price per unit Direct materials Direct labor Variable manufacturing overhead Variable selling cost per unit Total variable cost per unit Contribution margin per unit Mixing minutes per unit Contribution margin per minute Rank in terms of profitability Optimal production The company should be willing to pay up to the contribution margin per minute for the marginal job which is LO Holzmeyer Company makes three products in a single facility Data concerning these products follow Product A Product B Product C Selling price per unit Direct materials Direct labor Variable manufacturing overhead Variable selling cost per unit Mixing minutes per unit Monthly demand in units The mixing machines are potentially the constraint in the production facility A total of minutes are available per month on these machines Direct labor is a variable cost in this company Required How many minutes of mixing machine time would be required to satisfy demand for all four products How much of each product should be produced to maximize net operating income Round off to the nearest whole unit 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 Ans Demand on the mixing machine Product A Product B Product C Total Mixing minutes per unit Monthly demand in units Total minutes required Optimal production plan Product A Product B Product C Selling price per unit Direct materials Direct labor Variable manufacturing overhead Variable selling cost per unit Total variable cost per unit Contribution margin per unit Mixing minutes per unit Contribution margin per minute Rank in terms of profitability Optimal production The company should be willing to pay up to the contribution margin per minute for the marginal job which is LO Garson Inc produces three products Data concerning the selling prices and unit costs of the three products appear below Product F Product G Product H Selling price Variable costs Fixed costs Milling machine time minutes 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 milling machine is the constraint with only minutes of milling machine time available this week Required Given the milling