44) Kirkland Company manufactures a part for use in its production of hats. When 10,000 items are
produced, the costs per unit are:
Direct materials $0.60
Direct manufacturing labor 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Total $6.40
Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The
plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the
offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be
eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Kirkland Company? By how much?
45) What are opportunity costs? Explain why opportunity costs are not recorded in financial accounting
systems.
Objective 11.4
1) Determining which products should be produced when the plant is operating at full capacity is
referred to as a(n) ________.
A) outsourcing analysis
B) total alternative approach
C) product-mix decision
D) short-run focus decision
2) Product mix decisions ________.
A) have a long-run focus
B) help determine how to maximize operating profits
C) focus on selling price per unit
D) help maximizing opportunity costs
3) Capacity constraints include ________.
A) increased demand of warranty services for a pharmaceutical product
B) increased need of display space for a retailer
C) decreased demand for a pharmaceutical product
D) increased fuel efficiency of cars
4) With a constraining resource, managers should choose the product with the ________.
A) lowest contribution margin per unit of the constraining resource
B) highest sales price
C) highest contribution margin per unit of the constraining resource
D) highest gross profit
5) Which of the following methods is used to determine the most profitable production schedule and the
most profitable product mix?
A) balanced scorecard
B) cause and effect diagram
C) transfer pricing
D) linear programming
6) In product-mix decisions, managers should ________.
A) always focus on maximizing total contribution margin
B) only focus on the product with the greatest contribution margin per machine-hour
C) only focus on the full costs of the product
D) always focus on maximizing the selling price of the product
Answer the following questions using the information below:
Dynondo’s Brakes manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:
Model X Model Y Model Z
Selling price $50 $60 $70
Direct materials 6 6 6
Direct labor ($12 per hour) 12 12 24
Variable support costs ($4 per machine-hour) 4 8 8
Fixed support costs 10 10 10
7) Which model has the greatest contribution margin per unit?
A) Model X
B) Model Y
C) Model Z
D) Both Model X and Model Y have the highest and same contribution margin per unit
8) Which model has the greatest contribution margin per machine-hour?
A) Model X
B) Model Y
C) Model Z
D) Both Model X and Model Y have the highest and same contribution margin per machine-hour
9) If there is excess capacity, which model is the most profitable to produce?
A) Model X
B) Model Y
C) Model Z
D) Both Model X and Model Y have same and highest profitability
10) If there is a machine breakdown, which model is the most profitable to produce?
A) Model X
B) Model Y
C) Model Z
D) Both Model X and Model Y have same and highest profitability
11) How can Lisa Dynondo encourage her salespeople to promote the more profitable model?
A) Put all sales persons on fixed salary.
B) Provide higher sales commissions for higher priced items.
C) Provide higher sales commissions for items with the greatest contribution margin per constrained
resource.
D) Provide higher sales commissions for items which has the lowest cost and lower sales commissions for
items with highest cost.
Answer the following questions using the information below:
Helmer’s Rockers manufactures two models, Standard and Premium. Weekly demand is estimated to be
100 units of the Standard Model and 70 units of the Premium Model. The following per unit data apply:
Standard Premium
Contribution margin per unit $18 $20
Number of machine-hours required 3 4
12) The contribution per machine-hour is ________.
A) $18 for Standard, $20 for Premium
B) $54 for Standard, $80 for Premium
C) $15 for Standard, $16 for Premium
D) $6 for Standard, $5 for Premium
13) If there are 496 machine-hours available per week, how many rockers of each model should Jim
Helmer produce to maximize profits?
A) 100 units of Standard and 49 units of Premium
B) 72 units of Standard and 70 units of Premium
C) 100 units of Standard and 70 units of Premium
D) 85 units of Standard and 60 units of Premium
14) If there are 600 machine-hours available per week, how many rockers of each model should Jim
Helmer produce to maximize profits?
A) 100 units of Standard and 49 units of Premium
B) 72 units of Standard and 70 units of Premium
C) 100 units of Standard and 70 units of Premium
D) 85 units of Standard and 60 units of Premium
Answer the following questions using the information below:
Aurum Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product
information is provided below.
Small Medium Large
Unit selling price $400 $600 $1,200
Unit costs:
Variable manufacturing (220) (280) (500)
Fixed manufacturing (80) (130) (240)
Fixed selling and administrative (60) (75) (120)
Unit profit $ 40 $ 115 $340
Demand in units 100 120 100
Machine-hours per unit 20 40 100
The maximum machine-hours available are 6,000 per week.
15) What is the contribution margin per machine-hour for a medium appliance?
A) $1.15
B) $2.34
C) $6.13
D) $4.90
16) Which of the three product models should be produced first if management incorporates a short-run
profit maximizing strategy?
A) small appliance
B) medium appliance
C) large appliance
D) both medium and large appliance
17) How many of each product should be produced per month using the short-run profit maximizing
strategy?
Small Medium Large
A) 0 120 12
B) 60 120 0
C) 100 100 0
D) 100 20 40
18) Favata Corporation manufactures two products, AA and CC. The following information was
available:
AA CC
Selling price per unit $37 $26
Variable cost per unit 32 22
Total fixed costs $18,000
If Favata Corporation could produce and sell either 10,000 units of AA or 5,000 units of CC at full
capacity, it should produce and sell ________.
A) 10,000 units of AA and none of CC
B) 3,000 units of CC and 6,000 units of AA
C) 5,000 units of CC and none of AA
D) 4,000 units of AA and 5,000 units of CC
19) Product-mix decisions usually have only a short-run focus because they typically arise in the context
of capacity constraints that can be relaxed in the long run.
20) For short-run product-mix decisions, managers should focus on minimizing total fixed costs.
21) For short-run product-mix decisions, maximizing contribution margin will also result in maximizing
operating income.
22) To maximize profits, managers should produce more of the product with the greatest contribution
margin per unit of the constraining resource.
23) When there is a constraining resource, a firm should attempt to maximize sales of the product or
service with the greatest contribution margin per unit.
24) Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000
items are produced, the costs per unit are:
Direct materials $ 12
Direct manufacturing labor 60
Variable manufacturing overhead 24
Fixed manufacturing overhead 32
Total $128
Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The
plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts
the supplier’s offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would
be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Lewis Auto Company? By how much?
25) Ralph’s Mufflers manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:
Model X Model Y Model Z
Selling price $160 $180 $200
Direct materials 60 60 60
Direct labor ($20 per hour) 30 30 40
Variable support costs ($10 per machine-hour) 10 20 20
Fixed support costs 40 40 40
a. For each model, compute the contribution margin per unit.
b. For each model, compute the contribution margin per machine-hour.
c. If there is excess capacity, which model is the most profitable to produce? Why?
d. If there is a machine breakdown, which model is the most profitable to produce? Why?
e. How can Ralph encourage her sales people to promote the more profitable model?
26) How does a manager go about choosing which of three products to produce and sell when each
product uses a single machine with a limited capacity?
Objective 11.5
1) The theory of constraints (TOC) defines throughput margin as ________.
A) operating income minus the direct material costs of the goods sold
B) operating income minus the direct labor costs of the goods sold
C) revenues minus the direct material costs of the goods sold
D) revenues minus the full costs of the goods sold
2) Based on the theory of constraints, investments equal ________.
A) the sum of material costs in direct and indirect materials, work-in-process, and finished goods
inventories; R&D costs; and business function costs
B) the sum of material costs in direct materials, work-in-process, and finished goods inventories; R&D
costs; and capital costs of equipment and buildings
C) the sum of material costs in direct and indirect materials, work-in-process, and finished goods
inventories; R&D costs; and full costs
D) the sum of material costs in direct materials, work-in-process, and finished goods inventories; R&D
costs; sunk costs, full costs, and business function costs
3) Operating costs include all operating costs except depreciation.
4) The theory of constraints is more useful for the long-run management of costs since it takes a long-run
perspective and focuses on improving processes by eliminating non-value-added activities and reducing
the costs of performing value-added activities.
5) Activity based costing (ABC) systems are less useful than the theory of constraints (TOC) for long-run
pricing, cost control, and capacity management.
6) Compare and contrast the theory of constraints and activity based costing. Which is more useful in
short-run and long-run management of costs?
Answer the following questions using the information below:
Genent’s Preserves currently makes jams and jellies and a variety of decorative jars used for packaging.
An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision,
a cost analysis revealed the following avoidable unit costs for the decorative jars:
Direct materials $0.50
Direct labor 0.06
Unit-related support costs 0.20
Batch-related support costs 0.24
Product-sustaining support costs 0.44
Facility-sustaining support costs 0.56
Total cost per jar $2.00
7) The relevant cost per jar is ________.
A) $0.56 per jar
B) $0.76 per jar
C) $1.44 per jar
D) $2.00 per jar
8) The maximum price that Genent’s Preserves should be willing to pay for the decorative jars is
________.
A) $0.56 per jar
B) $0.76 per jar
C) $0.44 per jar
D) $2.00 per jar
Objective 11.6
1) Which of the following is an irrelevant cost?
A) warranty costs
B) advertising expenses
C) depreciation
D) prepaid insurance
2) When deciding to lease a new cutting machine or continue using the old machine, the irrelevant cost is
________.
A) $50,000, cost of the old machine
B) $20,000, cost of the new machine
C) $10,000, selling price of the old machine
D) $3,000, annual savings in operating costs if the new machine is purchased
3) Which of the following is true of depreciation cost?
A) Depreciation cost on equipment is irrelevant in decision making because depreciation on equipment
that has already been purchased is a past cost.
B) Depreciation cost on equipment is relevant in decision making because depreciation on equipment that
has already been purchased is an opportunity cost.
C) Depreciation cost on equipment is irrelevant in decision making because there is no cash transaction.
D) Depreciation cost on equipment is irrelevant in decision making because depreciation on equipment
that has already been purchased is an opportunity cost.
4) When deciding whether to discontinue a segment of a business, relevant costs include ________.
A) auditing expenses for the whole company
B) fees paid to a management consultant to study the feasibility of the business segment
C) annual insurance costs of the company
D) future administrative costs that can be eliminated
5) Zephyr Energies, Inc. is considering eliminating one of its product lines. The fixed costs currently
allocated to the product line will be allocated to other product lines upon discontinuance. What financial
effects occur if the product line is discontinued?
A) net income will decrease by the amount of the contribution margin of the product line being
discontinued
B) the company’s total fixed costs will increase by the amount of the contribution margin of the product
line being discontinued
C) the company’s total fixed costs will decrease by the amount of the product line’s fixed costs
D) net income will decrease by the amount of the product line’s fixed costs
6) Discontinuing unprofitable products will ________.
A) increase profitability if the resources no longer required by the discontinued product can be
eliminated
B) increase profitability if capacity constraints are adjusted
C) decrease profitability if the fixed costs does not change after discontinuing the particular business
segment
D) increase profitability when a large portion of the fixed costs are unavoidable
7) A segment has the following data:
Sales $630,000
Variable costs 336,000
Fixed costs 325,500
What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs
will be allocated to profitable segments?
A) $304,500 increase
B) $304,000 decrease
C) $294,000 decrease
D) $325,500 decrease