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31. Zap Video Inc. produces two basic types of video games, Clash and Slash. Pertinent data
follow:
Clash Slash
Sales price (per unit) $240 $168
Costs (per unit):
Direct materials 67 31
Direct labor 36 60
Variable factory overhead (@ $15 per DLH) 60 30
Allocated fixed factory overhead (based on DLHs) 24 12
Marketing expenses (all variable) 35 24
Total costs 221 157
Operating income (per unit) $18 $11
There is insufficient labor capacity in the plant to meet the combined demand for both Clash and
Slash.
Both products are produced through the same production departments.
In view of the labor shortage, which of the two products is most profitable, and how much is the
contribution margin, per direct labor hour?
32. The following cost information pertained to the Violin Division of Stringing Music Co. and
was based on monthly demand and sales of 100 units:
Per-Unit Costs
Variable production costs:
Direct materials $120
Direct labor 150
Variable factory overhead 60
Fixed production costs:
Depreciation (equipment) 20
Factory rent 48
Other 12
Total production cost $410
Variable selling & administrative costs $24 per unit
Fixed selling & administrative costs $36 per unit
Assume that the Violin Division was evaluating whether or not it would accept a special sales
order for 10 violins at $390 per unit. For this purpose, total relevant cost per unit (given the costs
stated above) is:
33. The following cost information pertained to the Violin Division of Stringing Music Co. and
was based on monthly demand and sales of 100 units:
Per-Unit Costs
Variable production costs:
Direct materials $120
Direct labor 150
Variable factory overhead 60
Fixed production costs:
Depreciation (equipment) 20
Factory rent 48
Other 12
Total production cost $410
Variable selling & administrative costs $24 per unit
Fixed selling & administrative costs $36 per unit
Given a normal selling price per unit of $750, what is the contribution margin per unit sold for
recurring (i.e., normal) sales?
34. In a "make-or-buy" decision:
35. For the past 12 years, the Blue Company has produced the small electric motors that fit
into its main product line of dental drilling equipment. As material costs have steadily increased,
the controller of the company is reviewing the decision to continue to make the small motors and
has identified the following facts:
(1) The equipment used to manufacture the electric motors has a net book value (NBV) of
$150,000.
(2) The space now occupied by the electric motor manufacturing department could be used to
eliminate the need for storage space now being rented by the company.
(3) Comparable units can be purchased from an outside supplier for $59.75.
(4) Four of those who work in the electric motor manufacturing department would be terminated
and given eight weeks' severance pay.
(5) A $10,000 unsecured note is still outstanding on the equipment used in the manufacturing
process.
Which of the items above are relevant to the controller's decision analysis (i.e., to make vs. buy
the motors)?
36. In deciding whether to manufacture a part or buy it from an outside vendor, a cost that is
irrelevant to this short-run decision is:
37. Kingston Company, which needs 10,000 units of a certain part to be used in its
production cycle, can make or buy the part. If Kingston buys the part from Utica Company,
Kingston could not use the released facilities in another manufacturing activity within the coming
year. 60% of the fixed overhead applied will continue regardless of which decision is made. The
following information is available: Per-unit cost to Kingston to make the part:
Direct materials $6
Direct labor 24
Variable overhead 12
Fixed overhead applied 15
$57
Cost to buy the part from Utica Company $53
In deciding whether to make or buy the part, Kingston's total relevant cost to make the part
would be:
38. Which of the following statements regarding "opportunity costs" is true?
39. The Blade Division of Dana Company produces hardened steel blades. Approximately
one-third of the Blade Division's output is sold to the Lawn Products Division of Dana; the
remainder is sold to outside customers. Blade Division's estimated sales and cost data for the
year ending June 30th are as follows:
Lawn
Products
Division
Outsiders
Sales $15,000 $40,000
Variable costs 10,000 20,000
Fixed costs 3,000 6,000
Gross margin $2,000 $14,000
Unit sales 10,000 20,000
The Lawn Products Division has an opportunity to purchase on a continual basis 10,000 blades
(of identical quality) from an outside supplier, at a cost of $1.25 per unit. Assume that the Blade
Division cannot sell any additional products to outside customers. Assume, too, that there are no
short-term avoidable fixed costs. Based solely on short-term financial considerations, should
Dana allow its Lawn Products Division to purchase the blades from the outside supplier, and
why?
40. Plainfield Company manufactures part G for use in its production cycle. The full cost per
unit for each of 10,000 units of part G are as follows:
Direct materials $3
Direct labor 15
Variable overhead 6
Fixed overhead 8
$32
Verona Company has offered to sell Plainfield 10,000 units of part G for $30 per unit. If Plainfield
accepts Verona's offer, the released facilities could be used to save $45,000 in relevant costs in
the manufacture of part H. In addition, $5 per unit of the fixed overhead applied to part G would
be eliminated. Which alternative is more desirable and by what amount?
Alternative Amount
A) Manufacture $10,000
B) Manufacture $15,000
C) Buy $35,000
D) Buy $65,000
E) Buy $10,000
41. A company owns equipment that is used to manufacture important parts for its
production process. Because the equipment is repeatedly breaking down, the company plans to
sell the equipment for $10,000 and to select one of the following alternatives: (1) acquire new
equipment for $80,000 and continue to manufacture the part at the same variable cost, or (2)
purchase the parts from an outside company at $4 per part. In the short run the company should
quantitatively analyze the alternatives by comparing the variable cost of manufacturing the parts:
42. In deciding whether to accept or a reject a "special sales order," which of the following
costs are likely relevant to the decision?
43. Management accountants are frequently asked to analyze various decision situations
including the following:
(1) Alternative uses of plant space, to be considered in a make/buy decision.
(2) Joint production costs incurred, to be considered in a sell-at-split-off versus a process-further
decision.
(3) Research and development costs incurred in prior months, to be considered in a product-
introduction decision.
(4) The cost of a special device that is necessary if a special order is accepted.
(5) The cost of obsolete inventory to be considered in a keep-versus-disposal decision.
The costs described in situations 1 and 4 above are:
44. Management accountants are frequently asked to analyze various decision situations
including the following:
(1) Alternative uses of plant space, to be considered in a make/buy decision.
(2) Joint production costs incurred, to be considered in a sell-at-split-off versus a process-further
decision.
(3) Research and development costs incurred in prior months, to be considered in a product-
introduction decision.
(4) The cost of a special device that is necessary if a special order is accepted.
(5) The cost of obsolete inventory to be considered in a keep-versus-disposal decision.
The costs described in situations 2, 3, and 5 above are:
45. Lyman Company has the opportunity to increase annual credit sales $100,000 by selling
to a new, riskier group of customers. The expenses of collecting credit sales are expected to be
15 percent of credit sales. The company's manufacturing and selling expenses are projected at
70% of sales, and its effective tax rate is 40%. If Lyman accepts this opportunity, its after-tax
profits would increase by an estimated:
46. The opportunity cost of making a component part in a factory with no excess capacity is
the:
47. The opportunity cost of making a component part in a factory with excess capacity for
which there is no alternative use is:
48. Sea and Sand is a takeout food store at a popular beachside resort. Tommy Tillett, owner
of Sea and Sand, was deciding how much refrigerator space to devote to each of four different
beverages. Appropriate data on the four beverages follow:
Limeade
Lemonade Ginger
Ale Grape
Juice
Sales price per case $21.60 $23.00 $21.60 $46.10
Variable mfg. costs per case 12.20 14.20 12.10 32.20
Variable selling cost per case 4.00 4.00 4.00 4.00
Cases sold per foot of
shelf space per day
30
28
5
6
Sea and Sand has a maximum 14 feet of front shelf space to devote to the four beverages
combined. Tommy wants to use a minimum of two feet and a maximum of seven feet of front
shelf space for each beverage. The contribution margin per case for Limeade is:
49. The Sand Cruiser is a takeout food store at a popular beachside resort. Teresa Texton,
owner of the Sand Cruiser, was deciding how much refrigerator space to devote to four different
beverages. Appropriate data on the four beverages follow:
Limeade
Lemonade Ginger
Ale Grape
Juice
Sales price per case $21.60 $23.00 $21.60 $46.10
Variable cost per case 16.20 18.20 16.10 36.20
Cases sold per foot of
shelf space per day
30
28
5
6
The contribution margin per case for Lemonade is:
