Chapter 07 Incremental Analysis for Short-Term Decision Making
Answer Key
True / False Questions
1. When managers make a decision, they base it strictly on the numerical analysis performed in
step three of the decision making process.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
2. A relevant cost is one that will not change depending upon which alternative is selected.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Relevant versus irrelevant costs and benefits
3. A sunk cost is never a relevant cost.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Relevant versus irrelevant costs and benefits
7-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
4. An avoidable cost is one that has already been spent.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Relevant versus irrelevant costs and benefits
5. An opportunity cost is the foregone benefit of choosing to do one thing instead of another.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Opportunity costs and capacity considerations
6. If a company has idle capacity, it means it has reached the limit on its resources.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Opportunity costs and capacity considerations
7. Opportunity costs are not relevant when a company has idle capacity.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
7-2
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: 2 Medium
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Opportunity costs and capacity considerations
8. Opportunity costs are important in special-order and make-or-buy decisions, but not in keep-
or-drop decisions.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Opportunity costs and capacity considerations
9. A special-order decision analysis should not be used to make long-term pricing decisions.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
10. A special-order decision analysis should not be used if the firm is operating at full capacity.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-3
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
11. The quality of the goods in question is irrelevant to a make-or-buy decision.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
12. In deciding whether to eliminate a business segment, managers should consider which costs
and benefits will change as a result of the decision.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
13. The segment margin is the contribution margin of a particular segment.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
14. A product should be processed further if no additional fixed costs are incurred in its
processing.
7-4
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
15. If machine hours are a constraining factor, the product with the highest contribution margin per
machine hour should be prioritized in production.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
Multiple Choice Questions
16. The first step in the managerial decision making process is to:
C. make the decision.
D. evaluate costs and benefits.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
7-5
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
17. The final step in the decision making process is to:
B. identify the decision problem.
C. evaluate costs and benefits of alternatives.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
18. Which of the following is not a step in the managerial decision-making process?
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
19. Which of the following steps in the managerial decision-making process involves differential
analysis?
B. Determine the decision alternatives.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
7-6
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: 1 Easy
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
20. Which of the following is not a step in the managerial decision-making process?
C. Determine the alternatives.
D. Evaluate the costs and benefits of the alternatives.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
21. Which of the following is not a step in the managerial decision-making process?
B. Review the results of the decision-making process.
C. Determine the decision alternatives.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
7-7
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
22. Which of the following is not a step in the managerial decision-making process?
B. Review the results of the decision-making process.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
23. The decision-making approach that focuses on factors that will change between alternatives is
sometimes called all of the following except:
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
7-8
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
24. You wish to take an Excel course. (Step 1 of the decision-making process.) You may enroll at
one within your school or you may take a community class at the local library. (Step 2 of the
decision-making process.) You’ve gathered the following information to aid in your decision-
making process.
Costs/Benefits College Course Community
Course
Cost $3,000 $1,000
Distance to
course
0.25 miles
(walking
distance)
15 miles
(driving
distance)
Timing of course Weekday Weekend
Number of
meetings 16 8
Qualitative
considerations
Convenience,
quality of
instruction
Flexibility, brief
duration
This information illustrates which step in the decision-making process?
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
7-9
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
25. You wish to take an Excel course. You may enroll at one within your school or you may take a
community class at the local library. You’ve gathered the following information to aid in your
decision-making process.
Costs/Benefits College Course Community
Course
Cost $3,000 $1,000
Distance to
course
0.25 miles
(walking
distance)
15 miles
(driving
distance)
Timing of course Weekday Weekend
Number of
meetings 16 8
Qualitative
considerations
Convenience,
quality of
instruction
Flexibility, brief
duration
Considering solely the enrollment cost of each alternative, which would you choose?
B. College course
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Steps in the decision-making process
7-10
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
26. You wish to take an Excel course. You may enroll at one within your school or you may take a
community class at the local library. You’ve gathered the following information to aid in your
decision-making process.
Costs/Benefits College Course Community
Course
Cost $3,000 $1,000
Distance to
course
0.25 miles
(walking
distance)
15 miles
(driving
distance)
Timing of course Weekday Weekend
Number of
meetings 16 8
Qualitative
considerations
Convenience,
quality of
instruction
Flexibility, brief
duration
Pretend transportation (gas, mileage, and parking) cost $200 per class session at the library.
If you consider solely the cost – including transportation – of each alternative, which would you
choose?
B. College course
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Steps in the decision-making process
7-11
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
27. You wish to take an Excel course. You may enroll at one within your school or you may take a
community class at the local library. You’ve gathered the following information to aid in your
decision-making process.
Costs/Benefits College Course Community
Course
Cost $3,000 $1,000
Distance to
course
0.25 miles
(walking
distance)
15 miles
(driving
distance)
Timing of course Weekday Weekend
Number of
meetings 16 8
Qualitative
considerations
Convenience,
quality of
instruction
Flexibility, brief
duration
Consider the transportation cost. At what point would you be indifferent between alternatives?
B. Transportation cost of $150 per class for the community course
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Steps in the decision-making process
7-12
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
28. You wish to take an Excel course. You may enroll at one within your school or you may take a
community class at the local library. You’ve gathered the following information to aid in your
decision-making process.
Costs/Benefits College Course Community
Course
Cost $3,000 $1,000
Distance to
course
0.25 miles
(walking
distance)
15 miles
(driving
distance)
Timing of course Weekday Weekend
Number of
meetings 16 8
Qualitative
considerations
Convenience,
quality of
instruction
Flexibility, brief
duration
If you enroll in the community class, you will be unable to work at your regular job on
weekends for the eight weekend days when the class meets. If you typically earn $500 per
weekend shift, which option would you choose (considering enrollment cost and opportunity
cost)?
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Steps in the decision-making process
7-13
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
29. You wish to take an Excel course. You may enroll at one within your school or you may take a
community class at the local library. You’ve gathered the following information to aid in your
decision-making process.
Costs/Benefits College Course Community
Course
Cost $3,000 $1,000
Distance to
course
0.25 miles
(walking
distance)
15 miles
(driving
distance)
Timing of course Weekday Weekend
Number of
meetings 16 8
Qualitative
considerations
Convenience,
quality of
instruction
Flexibility, brief
duration
If you earn a scholarship that covers 95% of your tuition costs at the college (but cannot be
applied to other learning opportunities), which option would you choose (based on net
enrollment cost)?
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Steps in the decision-making process
30. Which of the following is not another term for relevant costs?
B. incremental costs
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
7-14
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Relevant versus irrelevant costs and benefits
31. Costs that change across decision alternatives are:
B. activity-based costs.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Relevant versus irrelevant costs and benefits
32. A relevant cost is:
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Relevant versus irrelevant costs and benefits
33. Which of the following statements is false?
B. Sunk costs are costs that occurred in the past.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
7-15
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Relevant versus irrelevant costs and benefits
34. The manager of Hampton, Inc. is trying to decide whether to make or buy a component of the
product it sells. Which of the following costs and benefits is not relevant to the decision?
B. The purchase price of the component if it is bought
C. Variable manufacturing overhead involved in making the component
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Relevant versus irrelevant costs and benefits
7-16
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
35. You wish to take an Excel course. You may enroll at one within your school or you may take a
community class at the local library. You’ve gathered the following information to aid in your
decision-making process.
Costs/Benefits College Course Community
Course
Cost $3,000 $1,000
Distance to
course
0.25 miles
(walking
distance)
15 miles
(driving
distance)
Timing of course Weekday Weekend
Number of
meetings 16 8
Qualitative
considerations
Convenience,
quality of
instruction
Flexibility, brief
duration
Which of the following is not relevant to the decision?
B. Distance to course
C. Perceived value of convenience
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Relevant versus irrelevant costs and benefits
36. The foregone benefit of choosing one alternative over another is measured by:
C. differential costs.
D. capital costs.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Opportunity costs and capacity considerations
7-17
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
37. Which of the following is not a true statement about capacity?
A. Capacity is a measure of the limit placed on a specific resource.
B. Opportunity costs are relevant when capacity of a critical resource is limited.
C. Opportunity costs are relevant when capacity of a critical resource is unlimited.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Opportunity costs and capacity considerations
38. Which of the following is true of a firm that has reached the limit on its resources?
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Define and identify relevant costs and benefits.
Topic: Opportunity costs and capacity considerations
39. Which of the following types of decisions involves deciding whether to accept or reject an
order that is outside the scope of normal sales?
C. Continue or discontinue
D. Sell-or-process further
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-03 Analyze a special-order decision.
7-18
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Topic: Special-order decisions
40. ___________ is/are excluded from the incremental analysis because they will be incurred
regardless of whether or not the company accepts the special order.
B. Direct labor
C. Variable overhead costs
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
41. A make-or-buy decision is the same as:
C. a keep-or-drop decision.
D. a sunk cost.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-19
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
42. Which of the following is an example of how a service firm might turn unused capacity into
revenue using incremental analysis?
season.
C. A manufacturing firm that rents assembly line space to a complementary company.
D. A train company uses a last-minute app to fill empty seats and makes long-term pricing
decisions based on average revenue.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
43. What are the decision alternatives in a special-order decision?
B. To continue or discontinue the product.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
44. Which of the following costs is not relevant in a special-order decision?
B. Direct materials
C. Variable overhead
7-20
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
45. Cranberry has received a special order for 100 units of its product at a special price of $2,100.
The product normally sells for $2,800 and has the following manufacturing costs:
Per unit
Direct materials $840
Direct labor 420
Variable manufacturing overhead 560
Fixed manufacturing overhead 700
Unit cost $2,520
Assume that Cranberry has sufficient capacity to fill the order without harming normal
production and sales. If Cranberry accepts the order, what effect will the order have on the
company’s short-term profit?
B. $42,000 increase
C. $70,000 decrease
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-21
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
46. Potter has received a special order for 10,000 units of its product at a special price of $24. The
product normally sells for $32 and has the following manufacturing costs:
Per unit
Direct materials $9.60
Direct labor 4.80
Variable manufacturing overhead 3.20
Fixed manufacturing overhead 9.60
Unit cost $27.20
Potter is currently operating at full capacity and cannot fill the order without harming normal
production and sales. If Potter accepts the order, what effect will the order have on the
company’s short-term profit?
B. $64,000 increase
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-22
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
47. Ross has received a special order for 10,000 units of its product at a special price of $30. The
product normally sells for $40 and has the following manufacturing costs:
Per unit
Direct materials $12
Direct labor 6
Variable manufacturing overhead 4
Fixed manufacturing overhead 12
Unit cost $34
Assume that Ross has sufficient capacity to fill the order. If Ross accepts the order, what
effect will the order have on the company’s short-term profit?
B. $180,000 increase
C. $60,000 decrease
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-23
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
48. Pinto Co. has received a special order for 2,000 units of its product at a special price of $75.
The product normally sells for $100 and has the following manufacturing costs:
Per unit
Direct materials $30
Direct labor 20
Variable manufacturing overhead 15
Fixed manufacturing overhead 25
Unit cost $90
Assume that Pinto Co. has sufficient capacity to fill the order without harming normal
production and sales. If Pinto Co. accepts the order, what effect will the order have on the
company’s short-term profit?
B. $30,000 increase
C. $50,000 decrease
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-24
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
49. Walnut has received a special order for 2,000 units of its product at a special price of $270.
The product normally sells for $360 and has the following manufacturing costs:
Per unit
Direct materials $108
Direct labor 72
Variable manufacturing overhead 54
Fixed manufacturing overhead 36
Unit cost $270
Walnut is currently operating at full capacity and cannot fill the order without harming normal
production and sales. If Walnut accepts the order, what effect will the order have on the
company’s short-term profit?
B. $108,000 increase
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-25
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
50. Almond has received a special order for 6,000 units of its product at a special price of $90.
The product normally sells for $120 and has the following manufacturing costs:
Per unit
Direct materials $36
Direct labor 24
Variable manufacturing overhead 18
Fixed manufacturing overhead 12
Unit cost $90
Assume that Almond has sufficient capacity to fill the order. If Almond accepts the order, what
effect will the order have on the company’s short-term profit?
C. $252,000 decrease
D. zero
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-26
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
51. Peach has received a special order for 10,000 units of its product. The product normally sells
for $20 and has the following manufacturing costs:
Per unit
Direct materials $6
Direct labor 3
Variable manufacturing overhead 2
Fixed manufacturing overhead 6
Unit cost $17
Assume that Peach has sufficient capacity to fill the order. What price should Peach charge to
make a $10,000 incremental profit?
B. $17
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-27
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
52. Violet has received a special order for 100 units of its product. The product normally sells for
$2,000 and has the following manufacturing costs:
Per unit
Direct materials $600
Direct labor 300
Variable manufacturing overhead 400
Fixed manufacturing overhead 500
Unit cost $1,800
Assume that Violet has sufficient capacity to fill the order without harming normal production
and sales. What minimum price should Violet charge to achieve a $25,000 incremental profit?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-28
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
53. Avocado has received a special order for 2,000 units of its product at a special price. The
product normally sells for $400 and has the following manufacturing costs:
Per unit
Direct materials $120
Direct labor 80
Variable manufacturing overhead 60
Fixed manufacturing overhead 100
Unit cost $360
Assume that Avocado has sufficient capacity to fill the order. What special order price should
Avocado charge to make a $20,000 incremental profit?
B. $360
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-29
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
54. Dot has received a special order for 2,000 units of its product at a special price. The product
normally sells for $200 and has the following manufacturing costs:
Per unit
Direct materials $60
Direct labor 40
Variable manufacturing overhead 30
Fixed manufacturing overhead 50
Unit cost $180
Assume that Dot has sufficient capacity to fill the order without harming normal production and
sales. What minimum price should Dot charge to achieve a $50,000 incremental profit?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-30
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
55. Crystal has received a special order for 2,000 units of its product. The product normally sells
for $200 and has the following manufacturing costs:
Per unit
Direct materials $60
Direct labor 40
Variable manufacturing overhead 30
Fixed manufacturing overhead 20
Unit cost $150
Crystal is currently operating at full capacity and cannot fill the order without harming normal
production and sales. What minimum price should Crystal charge to earn an incremental profit
of $50,000?
B. $200
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
56. Which of the following types of decisions involves deciding whether to perform a particular
activity in-house or purchase it from an outside supplier?
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-31
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
57. Be cautious of __________ expressed on a per-unit basis when weighing make-or-buy
decisions. The total value (instead of the per unit value) is relevant to the decision.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
58. Cotton Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit
costs to produce are:
Per unit
Direct materials $32.50
Direct labor 13.00
Variable manufacturing overhead 19.50
Fixed manufacturing overhead 26.00
Total unit cost $91.00
An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a
$84.50 per unit price. Fixed overhead is not avoidable. If Cotton Corp accepts the outside
offer, what will be the effect on short-term profits?
AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-32
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
59. Cotton Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit
costs to produce are:
Per unit
Direct materials $32.50
Direct labor 13.00
Variable manufacturing overhead 19.50
Fixed manufacturing overhead 26.00
Total unit cost $91.00
An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a
$84.50 per unit price. Fixed overhead is not avoidable. If Cotton Corp rejects the outside offer,
what will be the effect on short-term profits?
B. $195,000 decrease
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-33
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
60. Cotton Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit
costs to produce are:
Per unit
Direct materials $32.50
Direct labor 13.00
Variable manufacturing overhead 19.50
Fixed manufacturing overhead 26.00
Total unit cost $91.00
An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a
$84.50 per unit price. Fixed overhead is not avoidable. What is the maximum price Cotton
Corp should pay the outside supplier?
C. $91.00
D. $58.50
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-34
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
61. Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit
costs to produce are:
Per unit
Direct materials $12
Direct labor 8
Variable manufacturing overhead 12
Fixed manufacturing overhead 8
Total unit cost $40
An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at a
$36 per unit price. Fixed overhead is not avoidable. If Olive Corp accepts the outside offer,
what will be the effect on short-term profits?
B. $320,000 increase
C. $160,000 increase
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-35
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
62. Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit
costs to produce are:
Per unit
Direct materials $12
Direct labor 8
Variable manufacturing overhead 12
Fixed manufacturing overhead 8
Total unit cost $40
An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at a
$36 per unit price. Fixed overhead is not avoidable. If Olive Corp rejects the outside offer, what
will be the effect on short-term profits?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-36
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
63. Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit
costs to produce are:
Per unit
Direct materials $12
Direct labor 8
Variable manufacturing overhead 12
Fixed manufacturing overhead 8
Total unit cost $40
An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at a
$36 per unit price. Fixed overhead is not avoidable. What is the maximum price Olive Corp
should pay the outside supplier?
C. $40
D. $44
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-37
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
64. Clifford, Inc. currently manufactures 2,000 subcomponents in one of its factories. The current
unit costs to produce the subcomponents are:
Per unit
Direct materials $60
Direct labor 100
Variable manufacturing overhead 75
Fixed manufacturing overhead 90
Total unit cost $325
Due to a labor strike, Clifford is considering purchasing the subcomponents from an outside
supplier for $250 per unit rather than paying the 10% increase in direct labor costs demanded
by the union. Fixed overhead is not avoidable. If Clifford purchases the subcomponent from
the outside supplier, how much will profit differ from what it would be if it manufactured the
subcomponents with the increase in direct labor cost?
B. $20,000 less
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-38
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
65. Chafford, Inc. currently manufactures 2,000 subcomponents in one of its factories. The unit
costs to produce the subcomponents are:
Per unit
Direct materials $60
Direct labor 100
Variable manufacturing overhead 75
Fixed manufacturing overhead 90
Total unit cost $325
Due to a labor strike, Chafford is considering purchasing the subcomponents from an outside
supplier for $250 per unit. The union is demanding a 20% increase in pay for direct labor.
Fixed overhead is not avoidable. How much could Chafford increase their pay before it would
be more advantageous to purchase the subcomponents from the outside supplier?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-39
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
66. Moss, Inc. currently processes payroll in its accounting department, which costs the following
per month:
Supplies $475
Labor 900
Allocated fixed overhead 450
Total monthly cost $1,825
Moss could use a payroll processing firm instead, which would cost $1,350 per month, but the
firm would provide all supplies. If Moss used the outside firm, the accountants who currently
process payroll would be reassigned to other accounting tasks. How much would monthly
costs be affected if Moss switched to the payroll processing firm?
C. Increase $225
D. Decrease $225
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-40
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
67. Manor, Inc. currently manufactures 1,000 subcomponents per month in one of its factories.
The unit costs to produce the subcomponents are:
Per unit
Direct materials $50
Direct labor 150
Variable manufacturing overhead 75
Fixed manufacturing overhead 100
Total unit cost $375
Manor is considering purchasing the subcomponents from an outside supplier, who normally
charges $300 per unit. The supplier also has an “Exclusive Buyer’s Club” which costs $30,000
per month to join, but whose members can purchase the subcomponents for $250 per unit.
Fixed overhead is not avoidable. If Manor chose to purchase the subcomponents using the
cheaper of the two buying options, what would be the effect on profit?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-41
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
68. Manor, Inc. currently manufactures 1,000 subcomponents per month in one of its factories.
The unit costs to produce the subcomponents are:
The unit costs to produce are:
Per unit
Direct materials $50
Direct labor 150
Variable manufacturing overhead 75
Fixed manufacturing overhead 100
Total unit cost $375
Manor is considering purchasing the subcomponents from an outside supplier, who normally
charges $300 per unit. The supplier also has an “Exclusive Buyer’s Club” which costs $30,000
per month to join, but whose members can purchase the subcomponents for $250 per unit.
Fixed overhead is not avoidable. How many units would Manor need to order per month to
make it worth it to join the “Exclusive Buyer’s Club”?
B. 1,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
69. Which of the following types of decisions involves deciding whether to eliminate a particular
division or segment of the business?
B. Make-or-buy
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
7-42
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
70. Which of the following is irrelevant to the decision to eliminate an unprofitable segment?
B. Direct fixed costs
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
71. A ______________ is one that can be attributed to a specific segment of the business.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-43
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
72. Clay Inc. has two divisions, Myrtle and Laurel. Following is the income statement for the
previous year:
Myrtle Laurel Total
Sales $560,000 $336,000 $896,000
Variable Costs 176,000 174,000 350,000
Contribution
Margin 384,000 162,000 546,000
Fixed Costs
(allocated) 284,375 170,625 455,000
Profit Margin $99,625 ($8,625) $91,000
What would Clay’s profit margin be if the Laurel division was dropped and all fixed costs are
unavoidable?
B. $91,000 profit
C. $384,000 profit
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-44
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
73. Market Inc. has two divisions, Talbot and Heather. Following is the income statement for the
past month:
Talbot Heather Total
Sales $280,000 $168,000 $448,000
Variable Costs 168,000 67,000 235,000
Contribution Margin 112,000 101,000 213,000
Fixed Costs
(allocated) 112,500 67,500 180,000
Profit Margin ($500) $33,500 $33,000
What would Market’s profit margin be if the Talbot division was dropped and all fixed costs are
unavoidable?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-45
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
74. Power Inc. has two divisions, Windsor and Ridge. Following is the income statement for the
past month:
Windsor Ridge Total
Sales $360,000 $320,000 $680,000
Variable Costs 280,000 150,000 $430,000
Contribution
Margin $80,000 $170,000 $250,000
Fixed Costs
(allocated) 122,000 128,000 $250,000
Profit Margin $(42,000) $42,000 $0
What would Power’s profit margin be if the Windsor division was dropped and all fixed costs
are unavoidable?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
75. The law firm of Regal and Porter is examining its client base to determine how profitable its
regular clients are. Its analysis indicates that Hawthorne, Inc. paid $179,200 in fees last year,
but cost the firm $208,600 ($168,000 in billable labor, supplies, and copying, and $40,600 in
allocated common fixed costs). If Regal and Porter dropped Hawthorne, Inc. as a client, and
all fixed costs are unavoidable, how would profit be affected?
B. Increase $29,400
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-05 Analyze a keep-or-drop decision.
7-46
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Topic: Keep-or-drop decisions
76. The accounting firm of Pie and Lowell is examining its client base to determine how profitable
its regular clients are. Its analysis indicates that Chico, Inc. paid $116,000 in fees last year, but
cost the firm $124,000 ($106,000 in billable labor, supplies, and copying, and $18,000 in
allocated common fixed costs). If Pie and Lowell dropped Chico, Inc. as a client, and all fixed
costs are unavoidable, how would profit be affected?
B. Increase $8,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
77. Davenport Inc. has two divisions, Howard and Jones. Following is the income statement for
the past month:
Howard Jones Total
Sales $800,000 $600,000 $1,400,000
Variable Costs 600,000 580,000 $1,180,000
Contribution
Margin $200,000 $20,000 $220,000
Fixed Costs
(allocated) 150,000 150,000 300,000
Profit Margin $50,000 ($130,000) ($80,000)
What would Davenport’s profit margin be if the Jones division was dropped?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
7-47
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
78. Franklin, Inc. has two divisions, Seward and Charles. Following is the income statement for
the previous year:
Seward Charles
Sales $600,000 $400,000
Variable Costs 195,000 250,000
Contribution Margin $405,000 $150,000
Fixed Costs 175,000 170,000
Profit Margin $230,000 ($20,000)
Of the total fixed costs, $300,000 are common fixed costs that are allocated equally between
the divisions. What is Seward’s segment margin?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-48
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
79. Franklin, Inc. has two divisions, Seward and Charles. Following is the income statement for
the previous year:
Seward Charles
Sales $600,000 $400,000
Variable Costs 195,000 250,000
Contribution Margin $405,000 $150,000
Fixed Costs 175,000 170,000
Profit Margin $230,000 ($20,000)
Of the total fixed costs, $300,000 are common fixed costs that are allocated equally between
the divisions. How much did the Charles division incur in direct fixed costs?
C. $170,000
D. $300,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-49
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
80. Franklin, Inc. has two divisions, Seward and Charles. Following is the income statement for
the previous year:
Seward Charles
Sales $600,000 $400,000
Variable Costs 195,000 250,000
Contribution Margin $405,000 $150,000
Fixed Costs 175,000 170,000
Profit Margin $230,000 ($20,000)
Of the total fixed costs, $300,000 are common fixed costs that are allocated equally between
the divisions. What would Franklin’s profit margin be if Charles were dropped?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-50
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
81. Hamilton, Inc. has two divisions, Parker and Blaine. Following is the income statement for the
previous year:
Parker Blaine
Sales $1,200,000 $800,000
Variable Costs 600,000 450,000
Contribution Margin $600,000 $350,000
Fixed Costs 450,000 390,000
Profit Margin $150,000 ($40,000)
Of the total fixed costs, $600,000 are common fixed costs that are allocated equally between
the divisions. What is Parker’s segment margin?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-51
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
82. Hamilton, Inc. has two divisions, Parker and Blaine. Following is the income statement for the
previous year:
Parker Blaine
Sales $1,200,000 $800,000
Variable Costs 600,000 450,000
Contribution Margin $600,000 $350,000
Fixed Costs 450,000 390,000
Profit Margin $150,000 ($40,000)
Of the total fixed costs, $600,000 are common fixed costs that are allocated equally between
the divisions. What would Hamilton’s profit margin be if Blaine were dropped?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
83. Which of the following types of decisions involves deciding whether to sell a product as is or
continue to refine it so that it can be sold at a higher price?
B. Make-or-buy
C. Continue-or-discontinue
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
7-52
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
84. Which of the following is not relevant to a sell-or-process further decision?
C. The opportunity cost of spending resources processing the product further.
D. The incremental revenue from processing the product further.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
85. Dundee Company currently produces three products from a joint process. The joint process
has total costs of $250,000 per month. All three products, A, B & C, are immediately saleable
as they come out of the joint process. Alternatively, any of the products could continue on with
additional processing and be sold as a more complete product. The following information is
available:
Units
Immediate
Sales Price
Later
Sales
Price
Unit Cost of
Further
Processing
A 50,000 $5 $10 $6
B 75,000 $10 $15 $4
C 100,000 $15 $20 $3
Which of the products should be sold after further processing?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
7-53
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
86. Dardon Company currently produces three products from a joint process. The joint process
has total costs of $250,000 per month. All three products, A, B & C, are immediately saleable
as they come out of the joint process. Alternatively, any of the products could continue on with
additional processing and be sold as a more complete product. The following information is
available:
Units
Immediate
Sales Price
Later
Sales
Price
Unit Cost of
Further
Processing
A 50,000 $5 $10 $6
B 75,000 $10 $15 $4
C 100,000 $15 $17 $3
Which of the products should be sold immediately without further processing?
B. Products B and C
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
87. Henry Sweet Co. currently makes 6″ candy sticks that it sells for $0.20 each. Henry can make
12″ candy sticks out of two 6″ candy sticks by melting them together, which costs an additional
$0.03 per 12″ stick. Henry can sell the 12″ sticks for $0.45. Henry has enough capacity to
make 10,000 6″ candy sticks per month, and enough demand to sell all the candy sticks it can
manufacture, whether 6″ or 12″. Should Henry sell 6″ or 12″ candy sticks, and how much
additional profit will its decision bring in per month?
B. Sell 6″ sticks, additional $250
7-54
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
88. It costs Camp, Inc. $35 per unit to manufacture 1,000 units per month of a product that it can
sell for $50 each. Alternatively, Camp could process the units further into a more complex
product, which would cost an additional $30 per unit. Camp could sell the more complex
product for $75 each. How would processing the product further affect Camp’s profit?
B. Profit would increase by $25,000.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
89. It costs Elmwood, Inc. $78 per unit to manufacture 1,000 units per month of a product that it
can sell for $90 each. Alternatively, Elmwood could sell the units at an earlier stage of
processing, which would save $36 per unit. Elmwood could sell the simpler product for $60
each. How would selling the simpler product affect Elmwood’s profit?
C. Profit would decrease by $6,000.
D. Profit would decrease by $30,000.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
7-55
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
90. It costs Glenwood, Inc. $70 per unit to manufacture 1,000 units per month of a product that it
can sell for $100 each. Alternatively, Glenwood could process the units further into a more
complex product, which would cost an additional $40 per unit. Glenwood could sell the more
complex product for $145 each. How would processing the product further affect Glenwood’s
profit?
C. Profit would decrease by $5,000.
D. Profit would decrease by $45,000.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
91. It costs Hickory, Inc. $220 per unit to manufacture 1,000 units per month of a product that it
can sell for $290 each. Alternatively, Hickory could sell the units at an earlier stage of
processing, which would save $80 per unit. Hickory could sell the simpler product for $200
each. How would selling the simpler product affect Hickory’s profit?
B. Profit would increase by $50,000.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
7-56
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
92. Spencer Inc. manufactures a product that costs $36 per unit plus $32,000 in fixed costs each
month. Spencer currently sells 1,000 of these units per month for $80 each. If Spencer leased
a machine for $8,000 a month, it could add features to the product that would allow it to sell for
$120 each. It would cost an additional $12 per unit to add these features. How much would
Spencer’s profit be affected if it leased the machine and added features to its product?
B. Decrease $32,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
93. Spencer Inc. manufactures a product that costs $36 per unit plus $32,000 in fixed costs each
month. Spencer currently sells 1,000 of these units per month for $80 each. If Spencer leased
a machine for $8,000 a month, it could add features to the product that would allow it to sell for
$120 each. It would cost an additional $12 per unit to add these features. How much would
Spencer have to charge for the product with additional features to make it worthwhile to lease
the machine?
B. $76
C. $88
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
7-57
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
94. Maple Inc. manufactures a product that costs $45 per unit plus $50,000 in fixed costs each
month. Maple currently sells 5,000 of these units per month for $60 each. If Maple leased a
machine for $30,000 a month, it could add features to the product that would allow it to sell for
$75 each. It would cost an additional $10 per unit to add these features. How much would
Maple’s profit be affected if it leased the machine and added features to its product?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
95. Maple Inc. manufactures a product that costs $45 per unit plus $50,000 in fixed costs each
month. Maple currently sells 5,000 of these units per month for $60 each. If Maple leased a
machine for $30,000 a month, it could add features to the product that would allow it to
increase the selling price. It would cost an additional $10 per unit to add these features. How
much would Maple have to charge for the product with additional features to make it
worthwhile to lease the machine?
B. $60
C. $71
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
7-58
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
96. When a firm has limited direct labor hours, it should prioritize the product with:
B. the highest contribution margin per unit.
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
97. What is the term for the most constrained resource?
B. The constrainment
C. The opportunity cost
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-59
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
98. Underwood, Inc. manufactures two products. It currently has 2,000 hours of direct labor and
1,000 hours of machine time available per month. The table below lists the contribution
margin, labor and machine time requirements, and demand for each product.
Product A Product B
Unit contribution margin $15.00 $12.00
Demand 1,000 units 2,000 units
Labor time ¾ hour ½ hour
Machine time 1 hour ½ hour
What is the contribution margin per machine hour for Product A?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
99. Underwood, Inc. manufactures two products. It currently has 2,000 hours of direct labor and
1,000 hours of machine time available per month. The table below lists the contribution
margin, labor and machine time requirements, and demand for each product.
Product A Product B
Unit contribution margin $15.00 $12.00
Demand 1,000 units 2,000 units
Labor time ¾ hour ½ hour
Machine time 1 hour ½ hour
What is the contribution margin per machine hour for Product B?
B. $12.00
C. $15.00
7-60
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
100. Castle Corp. produces three products, and is currently facing a labor shortage. The selling
price, costs, and labor requirements of the three products are as follows:
Product
A
Product
B
Product
C
Selling price $50.00 $30.00 $40.00
Variable cost per
unit $35.00 $10.00 $30.00
Direct labor hours
per unit 1.5 3 2
Castle has unlimited demand for all its products. Which product/s should Castle Corp produce
to maximize profit during the labor shortage?
C. Product A and B
D. Product A, B, and C
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-61
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
101. Pine Corp. produces three products, and currently has a shortage of machine hours since one
of its two machines is down. The selling price, costs, and machine time requirements of the
three products are as follows:
Product
A
Product
B
Product
C
Selling price $5.00 $3.00 $5.00
Variable cost per
unit $3.50 $2.00 $2.00
Machine hours
per unit 0.75 0.25 1
Pine has unlimited demand for all its products. Which product/s should Pine Corp produce to
maximize profit while the machine is down?
C. Product B and C
D. Product A, B, and C
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-62
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
102. Underwood, Inc. manufactures two products. It currently has 2,000 hours of direct labor and
1,000 hours of machine time available per month. The table below lists the contribution
margin, labor and machine time requirements, and demand for each product.
Product A Product B
Unit contribution margin $15.00 $12.00
Demand 1,000 units 2,000 units
Labor time ¾ hour ½ hour
Machine time 1 hour ½ hour
How much of each product should Underwood manufacture per month?
B. 1,000 units of A and 0 units of B
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-63
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
103. Spring, Inc. manufactures two products. It currently has 1,000 hours of direct labor and 2,000
hours of machine time available per month. The table below lists the contribution margin, labor
and machine time requirements, and demand for each product.
Product A Product B
Unit contribution margin $15.00 $12.00
Demand 1,000 units 2,000 units
Labor time ¾ hour 1 hour
Machine time 1 hour ½ hour
How much of each product should Spring manufacture per month?
B. 1,000 units of A and 0 units of B
C. 0 units of A and 2,000 units of B
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-64
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
104. Grover Corp. manufactures three products produces three products, and is currently facing a
labor shortage. The selling price, costs, and labor requirements of the three products are as
follows:
Product
A
Product
B
Product
C
Selling price $50.00 $30.00 $40.00
Variable cost per
unit $35.00 $10.00 $30.00
Direct labor hours
per unit 1.5 3 2
In what order should Grover Corp prioritize production of its products to maximize profit during
the labor shortage?
C. B, A, C
D. B, C, A
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-65
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
105. Pepper Corp. produces three products, and currently has a shortage of machine hours since
one of its two machines is down. The selling price, costs, and machine time requirements of
the three products are as follows:
Product
A
Product
B
Product
C
Selling price $5.00 $3.00 $5.00
Variable cost per
unit $3.50 $2.00 $2.00
Machine hours
per unit 0.75 0.25 1
In what order should Pepper Corp prioritize production of its products to maximize profit while
the machine is down?
B. C, A, B
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-66
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
106. Castor Corp. produces three products, and is currently facing a labor shortage – only 3,000
hours are available this month. The selling price, costs, labor requirements, and demand of the
three products are as follows:
Product
A
Product
B
Product
C
Selling price $50.00 $30.00 $40.00
Variable cost per
unit $35.00 $10.00 $30.00
Direct labor hours
per unit 1.5 3 2
Demand 1,000 2,000 500
How many of each product should be sold during the labor shortage to maximize profit?
A. 2,000 of Product A, 0 of Product B, and 0 of Product C.
B. 1,000 of Product A, 500 of Product B, and 0 of Product C.
C. 0 of Product A, 1,000 of Product B, and 0 of Product C.
D. 1,000 of Product A, 2,000 of Product B, and 500 of Product C.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-67
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
107. Pinter Corp. produces three products, and is currently short on machine hours since one of its
two machines is down – only 360 hours are available this month. The selling price, costs, labor
requirements, and demand of the three products are as follows:
Product
A
Product
B
Product
C
Selling price $5.00 $3.00 $5.00
Variable cost per
unit $3.50 $2.00 $2.00
Machine hours
per unit 0.75 0.25 1
Demand 300 400 210
How many of each product should be sold while the machine is down to maximize profit?
A. 200 of Product A, 0 of Product B, and 210 of Product C.
B. 0 of Product A, 1,440 of Product B, and 0 of Product C.
C. 66 of Product A, 400 of Product B, and 210 of Product C.
D. 300 of Product A, 400 of Product B, and 210 of Product C.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-68
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
108. Underwood, Inc. manufactures two products. It currently has 2,000 hours of direct labor and
1,000 hours of machine time available per month. The table below lists the contribution
margin, labor and machine time requirements, and demand for each product.
Product A Product B
Unit contribution margin $15.00 $12.00
Demand 1,000 units 2,000 units
Labor time ¾ hour ½ hour
Machine time 1 hour ½ hour
What is the total contribution margin if Underwood, Inc. prioritizes production according to its
limited resources?
B. $15,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-69
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
109. Spring, Inc. manufactures two products. It currently has 1,000 hours of direct labor and 2,000
hours of machine time available per month. The table below lists the contribution margin, labor
and machine time requirements, and demand for each product.
Product A Product B
Unit contribution margin $15.00 $12.00
Demand 1,000 units 2,000 units
Labor time ¾ hour 1 hour
Machine time 1 hour ½ hour
What is the total contribution margin if Spring, Inc. prioritizes production according to its
limited resources?
B. $15,000
C. $24,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-70
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
110. Castor Corp. produces three products, and is currently facing a labor shortage – only 3,000
hours are available this month. The selling price, costs, labor requirements, and demand of the
three products are as follows:
Product
A
Product
B
Product
C
Selling price $50.00 $30.00 $40.00
Variable cost per
unit $35.00 $10.00 $30.00
Direct labor hours
per unit 1.5 3 2
Demand 1,000 2,000 500
What is the total contribution margin if Castor Corp. prioritizes production according to its
limited resources?
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
111. Managerial decision makers must often consider non-economic factors as well. For example,
when considering whether to outsource to another country, in addition to considering the cost
of that decision, managerial accountants with an emphasis on sustainability should consider
the human capital impact as well. This represents sustainability within a:
C. sell-or-process further decision.
D. special-order decision.
Make-or-buy decisions (or outsourcing decisions) are influenced by the cost of either
alternative. However, in the context of outsourcing, labor practices in the outsource destination
AICPA: BB Resource Management
Accessibility: Keyboard Navigation
Blooms: Apply
7-71
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: 2 Medium
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Sustainability reporting and managerial decision making
112. Managerial decision makers must often consider non-economic factors as well. For example,
when considering whether to eliminate a product line, managerial accountants with an
emphasis on sustainability should consider the employee job loss implications as well. This
represents sustainability within a:
AICPA: BB Resource Management
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Sustainability reporting and managerial decision making
Essay Questions
7-72
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
113. Paul has a problem: He is thirsty. Put his decision-making steps in the right order based on the
steps in the decision-making process.
Decision Steps:
A. Paul is thirsty.
E. At the café, Paul can choose a 16-ounce latte, a 12-ounce iced green tea, or a 20-ounce
diet soft drink.
C. The price of the latte is $4.50; the price of the green tea is $3.50, and the price of the soft
drink is $2.00. Paul absolutely loves lattes, especially from this café. The foam is deliciously
fluffy, and the caffeine will help energize him for the afternoon. The green tea is delicious, and
also caffeinated. Paul prefers the natural taste of green tea to lattes. The soft drink has no
health benefits, and Paul isn’t comfortable with the ingredients in this particular brand.
Nevertheless, it is a very affordable (caffeinated) option.
B. Paul decides to order the 12-ounce iced green tea.
D. As he takes the first sip, Paul knows he makes the right choice for an afternoon beverage
on a hot day. But the latte at the next table looks delicious.
AICPA: BB Critical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Describe the five steps in the decision-making process.
Topic: Steps in the decision-making process
7-73
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
114. Capitol has received a special order for 2,000 units of its product at a special price of $195.
The product normally sells for $260 and has the following manufacturing costs:
Per unit
Direct materials $78
Direct labor 52
Variable manufacturing overhead 39
Fixed manufacturing overhead 65
Unit cost $234
Assume that Capitol has sufficient capacity to fill the order without harming normal production
and sales and all fixed overhead is unavoidable.
a. If Capital accepts the order, what effect will the order have on the company’s short-term
profit?
b. What minimum price should Capital charge to achieve a $65,000 incremental profit?
c. Now assume Capital is currently operating at full capacity and cannot fill the order without
harming normal production and sales. If Capitol accepts the order, what effect will the order
have on the company’s short-term profit?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-74
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
115. Mason has received a special order for 1,000 units of its product at a special price of $250.
The product currently sells 18,000 units for $300 and has the following manufacturing costs:
Per unit
Direct materials $90
Direct labor 60
Variable manufacturing overhead 75
Fixed manufacturing overhead 50
Unit cost $275
Assume that Mason has sufficient capacity to fill the order without harming normal production
and sales and all fixed overhead is unavoidable.
a. If Mason accepts the order, what effect will the order have on the company’s short-term
profit?
For the next two questions, now assume that Mason has sufficient capacity to fill 500 units of
the order without harming normal sales.
b. If Mason accepts the order and fills it completely, what effect will the order have on the
company’s short-term profit?
c. If Mason accepts the special order, what average price should Mason charge to make a
$20,000 incremental profit?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-75
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
116. Marcy has received a special order for 2,000 units of its product at a special price of $60. The
product normally sells for $80 and has the following manufacturing costs:
Per unit
Direct materials $24
Direct labor 16
Variable manufacturing overhead 12
Fixed manufacturing overhead 20
Unit cost $72
Assume that Marcy has sufficient capacity to fill the order without harming normal production
and sales and all fixed overhead is unavoidable.
a. If Marcy accepts the order, what effect will the order have on the company’s short-term
profit?
b. What minimum price should Marcy charge to achieve a $20,000 incremental profit?
c. Now assume Marcy is currently operating at full capacity and cannot fill the order without
harming normal production and sales. If Marcy accepts the order, what effect will the order
have on the company’s short-term profit?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-76
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
117. Poppy has received a special order for 1,000 units of its product at a special price of $125.
The product currently sells 18,000 units for $150 and has the following manufacturing costs:
Per unit
Direct materials $45
Direct labor 30
Variable manufacturing overhead 35
Fixed manufacturing overhead 25
Unit cost $135
Assume that Poppy has sufficient capacity to fill the order without harming normal production
and sales and all fixed overhead is unavoidable.
a. If Poppy accepts the order, what effect will the order have on the company’s short-term
profit?
For the next two questions, now assume that Poppy has sufficient capacity to fill 500 units of
the order without harming normal sales.
b. If Poppy accepts the order and fills it completely, what effect will the order have on the
company’s short-term profit?
c. If Poppy accepts the special order, what average price should Poppy charge to make a
$10,000 incremental profit?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-03 Analyze a special-order decision.
Topic: Special-order decisions
7-77
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
118. Bancroft currently manufactures a subcomponent that is used in its main product. A supplier
has offered to supply all the subcomponents needed at a price of $240. Bancroft currently
produces 20,000 subcomponents at the following manufacturing costs:
Per unit
Direct materials $90
Direct labor 60
Variable manufacturing overhead 70
Fixed manufacturing overhead 50
Unit cost $270
a. If Bancroft has no alternative uses for the manufacturing capacity, what would be the profit
impact of buying the subcomponents from the supplier?
b. If Bancroft has no alternative uses for the manufacturing capacity, what would be the
maximum price per unit they would be willing to pay the supplier?
c. Now assume Bancroft would avoid $640,000 in equipment leases and salaries if the
subcomponent were purchased from the supplier. Now what would be the profit impact of
buying from the supplier?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-78
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
119. Deer currently manufactures a subcomponent that is used in its main product. A supplier has
offered to supply all the subcomponents needed at a price of $12. Deer currently produces
80,000 subcomponents at the following manufacturing costs:
Per unit
Direct materials $4.50
Direct labor 3.00
Variable manufacturing overhead 3.50
Fixed manufacturing overhead 2.50
Unit cost $13.50
a. If Deer has no alternative uses for the manufacturing capacity, what would be the profit
impact of buying the subcomponents from the supplier?
b. If Deer has no alternative uses for the manufacturing capacity, what would be the maximum
price per unit they would be willing to pay the supplier?
c. Now assume Deer would avoid $120,000 in equipment leases and salaries if the
subcomponent were purchased from the supplier. Now what would be the profit impact of
buying from the supplier?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-79
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
120. Edward currently manufactures a subcomponent that is used in its main product. A supplier
has offered to supply all the subcomponents needed at a price of $22. Edward currently
produces 100,000 subcomponents at the following manufacturing costs:
Per unit
Direct materials $7.50
Direct labor 8.00
Variable manufacturing overhead 5.00
Fixed manufacturing overhead 7.50
Unit cost $28.00
a. If Edward has no alternative uses for the manufacturing capacity, what would be the profit
impact of buying the subcomponents from the supplier?
b. If Edward has no alternative uses for the manufacturing capacity, what would be the
maximum price per unit they would be willing to pay the supplier?
c. Now assume Edward would avoid $300,000 in equipment leases and salaries if the
subcomponent were purchased from the supplier. Now what would be the profit impact of
buying from the supplier?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-80
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
121. Archer currently manufactures a subcomponent that is used in its main product. A supplier has
offered to supply all the subcomponents needed at a price of $42. Archer currently produces
100,000 subcomponents at the following manufacturing costs:
Per unit
Direct materials $15.00
Direct labor 9.00
Variable manufacturing overhead 10.00
Fixed manufacturing overhead 15.00
Unit cost $49.00
a. If Archer has no alternative uses for the manufacturing capacity, what would be the profit
impact of buying the subcomponents from the supplier?
b. If Archer has no alternative uses for the manufacturing capacity, what would be the
maximum price per unit they would be willing to pay the supplier?
c. Now assume Archer would avoid $150,000 in equipment leases and salaries if the
subcomponent were purchased from the supplier. Now what would be the profit impact of
buying from the supplier?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Analyze a make-or-buy decision.
Topic: Make-or-buy decisions
7-81
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
122. Rock Inc. has three divisions, Granite, Lime and Nina. All fixed costs are unavoidable.
Following is the income statement for the previous year:
Granite Lime Nina Total
Sales $500,00
0
$275,00
0
$225,00
0
$1,000,00
0
Variable
Costs
175,00
0
125,00
0
100,00
0 400,000
Contributio
n Margin 325,000 150,000 125,000 600,000
Fixed
Costs
(allocated)
275,00
0
151,25
0
123,75
0 550,000
Profit
Margin $50,000 ($1,250
)$1,250 $50,000
a. What would Rock’s profit margin be if the Lime division were dropped?
b. What would Rock’s profit margin be if the Nina division were dropped?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-82
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
123. Shirley Inc. has three divisions, King, West and Gold. All fixed costs are unavoidable.
Following is the income statement for the previous year:
King West Gold Total
Sales $1,000,00
0
$575,00
0
$425,00
0
$2,000,00
0
Variable
Costs 400,000 345,00
0
300,00
0
1,045,00
0
Contributio
n Margin 600,000 230,000 125,000 955,000
Fixed
Costs
(allocated)
375,000 215,62
5
159,37
5 750,000
Profit
Margin 225,000 14,375 (34,375) 205,000
a. What would Shirley’s profit margin be if the West division were dropped?
b. What would Shirley’s profit margin be if the Gold division were dropped?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-83
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
124. Valley Inc. has three divisions, Almond, Grover and Oak. Following is the income statement for
the previous year:
Almond Grover Oak Total
Sales $500,00
0
$275,00
0
$225,00
0
$1,000,00
0
Variable
Costs
175,00
0
125,00
0
100,00
0 400,000
Contributio
n Margin 325,000 150,000 125,000 600,000
Fixed
Costs
275,00
0
151,25
0
123,75
0 550,000
Profit
Margin $50,000 ($1,250
)$1,250 $50,000
Of the fixed costs, $300,000 is for corporate costs and is allocated equally to the three
divisions.
a. How much does Grover Division have in direct fixed costs?
b. What is Grover Division’s segment margin?
c. What would Valley’s profit margin be if Grover Division were dropped?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-84
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
125. Shirley Inc. has three divisions, King, West and Gold. Following is the income statement for
the previous year:
King West Gold Total
Sales $1,000,00
0
$575,00
0
$425,00
0
$2,000,00
0
Variable
Costs 400,000 345,00
0
300,00
0
1,045,00
0
Contributio
n Margin 600,000 230,000 125,000 955,000
Fixed
Costs 375,000 215,62
5
159,37
5 750,000
Profit
Margin 225,000 14,375 (34,375
)205,000
Of the fixed costs, $300,000 is for corporate costs and is allocated equally to the three
divisions.
a. How much does Gold Division have in direct fixed costs?
b. What is Gold Division’s segment margin?
c. What would Shirley’s profit margin be if Gold Division were dropped?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-05 Analyze a keep-or-drop decision.
Topic: Keep-or-drop decisions
7-85
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
126. Center Company currently produces three products from a joint process. The joint process has
total costs of $500,000 per month. All three products, A, B & C, are immediately saleable as
they come out of the joint process. Alternatively, any of the products could continue on with
additional processing and be sold as a more complete product. The following information is
available:
Units
Immediate
Sales
Price
Later
Sales
Price
Unit Cost of
Further
Processing
A 5,000 $15 $20 $6
B 17,500 $20 $25 $4
C 10,000 $25 $32 $3
a. Should Product A be sold immediately or sold after processing further? How much will the
decision affect profit?
b. Should Product B be sold immediately or sold after processing further? How much will the
decision affect profit?
c. Should Product C be sold immediately or sold after processing further? How much will the
decision affect profit?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
7-86
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
127. Legacy Company currently produces three products from a joint process. The joint process
has total costs of $1,200,000 per month. All three products, A, B & C, are immediately saleable
as they come out of the joint process. Alternatively, any of the products could continue on with
additional processing and be sold as a more complete product. The following information is
available:
Units
Immediate
Sales
Price
Later
Sales
Price
Unit Cost of
Further
Processing
A 50,000 $5 $10 $6
B 75,000 $10 $15 $4
C 100,000 $15 $17 $3
a. Should Product A be sold immediately or sold after processing further? How much will the
decision affect profit?
b. Should Product B be sold immediately or sold after processing further? How much will the
decision affect profit?
c. Should Product C be sold immediately or sold after processing further? How much will the
decision affect profit?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
7-87
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
128. Elmwood, Inc. currently sells 12,000 units of its product per year for $100 each. Variable costs
total $75 per unit. Elmwood’s manager believes that if a new machine is leased for $147,000
per year, modifications can be made to the product that will increase its retail value. These
modifications will increase variable costs by $20 per unit, but Elmwood is hoping to sell the
modified units for $130 each.
a. Should Elmwood modify the units or sell them as is? How much will the decision affect
profit?
b. What is the least Elmwood could charge for the modified units to make it worthwhile to
modify them?
c. The leasing company is willing to negotiate the price of the machine lease. What is the most
Elmwood would be willing to pay to lease the machine if they plan to charge $130 for the
modified units?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
7-88
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
129. Pinehurst, Inc. currently sells 20,000 units of its product per year for $200 each. Variable costs
total $75 per unit. Pinehurst’ manager believes that if a new machine is leased for $250,000
per year, modifications can be made to the product that will increase its retail value. These
modifications will increase variable costs by $50 per unit, but Pinehurst is hoping to sell the
modified units for $275 each.
a. Should Pinehurst modify the units or sell them as is? How much will the decision affect
profit?
b. What is the least Pinehurst could charge for the modified units to make it worthwhile to
modify them?
c. The leasing company is willing to negotiate the price of the machine lease. What is the most
Pinehurst would be willing to pay to lease the machine if they plan to charge $275 for the
modified units?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-06 Analyze a sell-or-process-further decision.
Topic: Sell-or-process-further decisions
7-89
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
130. Hanson Corp. produces three products, and is currently facing a labor shortage – only 3,000
hours are available this month. The selling price, costs, and labor requirements of the three
products are as follows:
Product
A
Product
B
Product
C
Selling price $50.00 $30.00 $40.00
Variable cost per
unit $35.00 $10.00 $30.00
Direct labor hours
per unit 1.5 3 2
a. What is the contribution margin per unit for each product?
b. What is the contribution margin per direct labor hour for each product?
c. Assume Hanson has unlimited demand for each product. Which product should Hanson
focus on producing?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-90
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
131. Pasadena Corp. produces three products, and currently has a shortage of machine hours
since one of its two machines is down – only 360 hours are available this month. The selling
price, costs, and labor requirements of the three products are as follows:
Product
A
Product
B
Product
C
Selling price $5.00 $3.00 $5.00
Variable cost per
unit $3.50 $2.00 $2.00
Machine hours
per unit 0.75 0.25 1
a. What is the contribution margin per unit for each product?
b. What is the contribution margin per machine hour for each product?
c. Assume Pasadena has unlimited demand for each product. Which product should
Pasadena focus on producing?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-91
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
132. Hanson Corp. produces three products, and is currently facing a labor shortage – only 3,000
hours are available this month. The selling price, costs, labor requirements, and demand of the
three products are as follows:
Product
A
Product
B
Product
C
Selling price $50.00 $30.00 $40.00
Variable cost per
unit $35.00 $10.00 $30.00
Direct labor hours
per unit 1.5 3 2
Demand 1,000 2,000 500
a. In what order should Hanson prioritize production of the products?
b. How many of each product should be sold during the labor shortage to maximize profit?
c. What is the total contribution margin if Hanson prioritizes production according to its limited
resources?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-92
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
133. Pasadena Corp. produces three products, and currently has a shortage of machine hours
since one of its two machines is down – only 360 hours are available this month. The selling
price, costs, labor requirements, and demand of the three products are as follows:
Product
A
Product
B
Product
C
Selling price $5.00 $3.00 $5.00
Variable cost per
unit $3.50 $2.00 $2.00
Machine hours
per unit 0.75 0.25 1
Demand 300 400 210
a. In what order should Pasadena prioritize production of the products?
b. How many of each product should be sold while the machine is down to maximize profit?
c. What is the total contribution margin if Pasadena prioritizes production according to its
limited resources?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-93
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
7-94
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
134. Consider the most constrained resource you have: Your time. The bottleneck is 24 hours (the
amount you – and everyone else – has in any given day). After considering time spent sleeping,
eating, and working, you are left with eight hours per week of extra time, which you may spend
studying for the CPA exam or playing the piano.
As a CPA, your potential earnings per hour are $125.00, while as a pianist your potential
earnings per hour are $55.00. The variable cost per direct labor hour of your time is $25.00.
Study for CPA
Exam
Play
Piano
Potential Earnings per
hour $125.00 $55.00
Variable cost per hour $25.00 $25.00
Contribution margin $100.00 $30.00
Personal demand 10 hours 3 hours
a. Based on the data in the table above, how many hours should you spend studying each
week? (Pretend the available hours are consecutive hours.)
b. You find you retain less information the longer you study, such that the variable cost of each
hour of studying actually doubles with each additional hour spent studying. Given this new
information, how many hours should you spend studying each week? (Pretend the available
hours are consecutive hours.)
AICPA: BB Critical Thinking
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-07 Prioritize products to maximize short-term profit with constrained resources.
Topic: Prioritize products with constrained resources
7-96
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.