8) Camera Corner is considering eliminating Model AE2 from its camera line because of losses over the
past quarter. The past three months of information for Model AE2 are summarized below:
Sales (1,000 units) $300,000
Manufacturing costs:
Direct materials 150,000
Direct labor ($15 per hour) 60,000
Overhead 100,000
Operating loss ($10,000)
Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for model
AE2 that has no resale value.
If Model AE2 is dropped from the product line, operating income will ________.
A) increase by $10,000
B) decrease by $20,000
C) increase by $30,000
D) decrease by $10,000
Answer the following questions using the information below:
The management accountant for Giada’s Book Store has prepared the following income statement for the
most current year:
Cookbook Travel Book Classics Total
Sales $60,000 $100,000 $40,000 $200,000
Cost of goods sold 36,000 65,000 20,000 121,000
Contribution margin 24,000 35,000 20,000 79,000
Order and delivery processing 18,000 21,000 8,000 47,000
Rent (per sq. foot used) 2,000 1,000 3,000 6,000
Allocated corporate costs 7,000 7,000 7,000 21,000
Corporate profit $ (3,000) $ 6,000 $ 2,000 $ 5,000
9) If the cookbook product line had been discontinued prior to this year, the company would have
reported ________.
A) greater corporate profits
B) the same amount of corporate profits
C) less corporate profits
D) resulting profits cannot be determined
10) If the travel book line had been discontinued, corporate profits for the current year would have
decreased by ________.
A) $35,000
B) $14,000
C) $13,000
D) $6,000
11) Rambo Company has three products, A, B, and C. The following information is available:
Product A Product B Product C
Sales $60,000 $90,000 $24,000
Variable costs 36,000 48,000 15,000
Contribution margin 24,000 42,000 9,000
Fixed costs:
Avoidable 6,000 15,000 4,000
Unavoidable 7,000 9,000 5,400
Operating income $ 11,000 $18,000 $ (400)
Rambo Company is thinking of dropping Product C because it is reporting a loss. Assuming Rambo
drops Product C and does NOT replace it, operating income will ________.
A) increase by $400
B) increase by $4,000
C) decrease by $5,000
D) decrease by $9,400
12) Overhead costs allocated to the sales office and individual customers are always relevant.
13) Avoidable variable and fixed costs should be evaluated when deciding whether to discontinue a
product, product line, business segment, or customer.
14) Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.
15) In a decision as to whether or not to drop a product, fixed costs that have been allocated to that
product are generally not relevant.
16) A company is considering adding a fourth product to use available capacity. A relevant factor to
consider is that corporate costs can now be allocated over four products rather than only three.
17) Hasselhoff Camera is considering eliminating Model EOS1 from its camera line because of losses over
the past quarter. The past three months of information for model EOS1 is summarized below:
Sales (1,000 units) $250,000
Manufacturing costs:
Direct materials 90,000
Direct labor ($15 per hour) 80,000
Support 100,000
Operating loss ($20,000)
Support costs are 70% variable and the remaining 30% is depreciation of special equipment for model
EOS1 that has no resale value.
Should Hasselhoff Camera eliminate Model EOS1 from its product line? Why or why not?
18) The management accountant for the Chocolate S’more Company has prepared the following income
statement for the most current year:
Chocolate Other Candy Fudge Total
Sales $40,000 $25,000 $35,000 $100,000
Cost of goods sold 26,000 15,000 19,000 60,000
Contribution margin 14,000 10,000 16,000 40,000
Delivery and ordering costs 2,000 3,000 2,000 7,000
Rent (per sq. foot used) 3,000 3,000 2,000 8,000
Allocated corporate costs 5,000 5,000 5,000 15,000
Corporate profit $4,000 $(1,000) $7,000 $10,000
a. Do you recommend discontinuing the Other Candy product line? Why or why not?
b. If the Chocolate product line had been discontinued, corporate profits for the current year would
have decreased by what amount?
19) Clinton Company sells two items, product A and product B. The company is considering dropping
product B. It is expected that sales of product A will increase by 405 as a result. Dropping product B will
allow the company to cancel its monthly equipment rental costing $100 per month. The other existing
equipment will be used for additional production of product A. One employee earning $200 per month
can be terminated if product B production is dropped. Clinton’s other fixed costs are allocated and will
continue regardless of the decision made. A condensed, budgeted monthly income statement with both
products follows:
Product A Product B Total
Sales $10,000 $ 8,000 $18,000
Direct materials 2,500 2,000 4,500
Direct labor 2,000 1,200 3,200
Equipment rental 300 2,600 2,900
Other allocated overhead 1,000 2,100 3,100
Operating income $4,200 $ 100 $ 4,300
Required:
Prepare an incremental analysis to determine the financial effect of dropping product B.
Objective 11.7
1) Managers tend to favor the alternative that makes their performance look best. Therefore, they tend to
focus on ________.
A) how to implement the chosen alternative
B) the measures used in the decision model
C) the measures used in the performance evaluation model
D) gathering the required information
2) Book value is defined as the ________.
A) sum of the original cost of an asset and the accumulated depreciation
B) difference between the market value of an asset and the accumulated depreciation
C) difference between the original cost of an asset and the accumulated depreciation
D) sum of the market value of an asset and the accumulated depreciation
3) If management takes a multiple-year view in the decision model and judges success according to the
current year’s results, a problem will occur in the ________.
A) decision model
B) performance evaluation model
C) production evaluation model
D) quantitative model
4) ________ is relevant in a decision to replace equipment.
A) Warehouse rent costs
B) Book value of old equipment
C) Accumulated depreciation on old equipment
D) Salvage value
5) Which of the following is true in a decision to keep or replace existing equipment?
A) The book value of the old equipment is relevant.
B) The disposal value of the old equipment is relevant.
C) Property taxes is relevant.
D) Depreciation on the new equipment is relevant.
6) A company decided to replace an old machine with a new machine. Which of the following is
considered a relevant cost?
A) the book value of the old equipment
B) the depreciation expense on the old equipment
C) the loss on the disposal of the old equipment
D) the setup cost of the new equipment
7) What role does a trade-in allowance on old equipment play in a decision to retain or replace
equipment?
A) It is relevant since it increases the cost of the new equipment.
B) It is irrelevant since it reduces the cost of the old equipment.
C) It is irrelevant to the decision since it does not impact the cost of the new equipment.
D) It is relevant since it reduces the cost of the new equipment.
Answer the following questions using the information below:
Pizza For Everyone is considering replacing its existing delivery van with a new one. The new van can
offer considerable savings in operating costs. Information about the existing van and the new van follow:
Existing van New van
Original cost $50,000 $90,000
Annual operating cost $ 17,500 $ 10,000
Accumulated depreciation $ 30,000 —
Current salvage value of the existing van $ 22,500 —
Remaining life 10 years 10 years
Salvage value in 10 years $ 0 $ 0
Annual depreciation $ 2,000 $ 9,000
8) Sunk costs include ________.
A) the accumulated depreciation of the existing van
B) the original cost of the new van
C) the current salvage value of the existing van
D) the annual operating cost of the new van
9) Relevant costs for this decision include ________.
A) the original cost of the existing van
B) accumulated depreciation
C) the annual operating cost
D) the book value of the existing van
10) If Pizza For Everyone replaces the existing delivery van with the new one, over the next 10 years
operating income will ________.
A) decrease by $90,000
B) increase by $75,000
C) decrease by $75,000
D) increase by $90,000
Answer the following questions using the information below:
Indium Services, Inc., is considering replacing a machine. The following data are available:
Replacement
Old Machine Machine
Original cost $630,000 $490,000
Useful life in years 10 5
Current age in years 5 0
Book value $350,000 —
Disposal value now $112,000 —
Disposal value in 5 years 0 0
Annual cash operating costs $98,000 $56,000
11) Which of the data provided in the table is a sunk cost?
A) the annual cash operating costs of the old machine
B) the annual cash operating costs of the replacement machine
C) the disposal value of the old machine
D) the original cost of the old machine
12) For the decision to keep the old machine, the relevant costs of keeping the old machine is ________.
A) $840,000
B) $490,000
C) $958,000
D) $98,000
13) The difference between keeping the old machine and replacing the old machine is ________.
A) $518,000 in favor of keeping the old machine
B) $168,000 in favor of keeping the old machine
C) $518,000 in favor of replacing the old machine
D) $168,000 in favor of replacing the old machine
14) When replacing an old machine with a new machine, general administration costs are irrelevant.
15) When replacing an old machine with a new machine, the book value of the old machine is a relevant
cost.
16) Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens
Manufacturing announced the availability of a new convection oven that cooks more quickly with lower
operating expenses. Pat is considering the purchase of this faster, lower-operating cost convection oven to
replace the existing one they recently purchased. Selected information about the two ovens is given
below:
Existing New Turbo Oven
Original cost $60,000 $50,000
Accumulated depreciation $ 5,000 —
Current salvage value $40,000 —
Remaining life 5 years 5 years
Annual operating expenses $10,000 $ 7,500
Disposal value in 5 years $ 0 $ 0
Required:
a. What costs are sunk?
b. What costs are relevant?
c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new
convection oven?
d. What other items should Pat, as manager of the Pizzeria, consider when making this decision?
17) Why is the depreciation of an old equipment irrelevant to decision making?
1) Top management faces a persistent challenge to make sure that the performance evaluation model of
lower level managers is ________.
A) focused on short-term performance
B) based solely on quantitative factors
C) consistent with the decision model
D) based solely on qualitative factors
2) Performance evaluation focuses on responsibility centers for a specific period, not on projects or
individual items of equipment over their useful lives.
3) How can conflicts arise between the decision model and the performance evaluation model used to
evaluate managers? Provide an example of this type of conflict.
Objective 11.A
1) Linear programming is a tool that maximizes total contribution margin of a mix of products with
multiple constraints.
2) Which of the following is an assumption of linear programming?
A) Average variable costs remain constant throughout the year.
B) Opportunity costs are irrelevant in decision making.
C) Few sunk costs are relevant in decision making.
D) All costs are either variable or fixed for a single cost driver.
3) In linear programming, the goals of management are expressed in ________.
A) an objective function
B) constraints
C) operating policies
D) business functions
4) A mathematical inequality or equality that must be appeased is known as a(n) ________.
A) objective function
B) constraint
C) operating policy
D) business function
5) Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit
contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand
for Regulars exceeds Computer Product’s production capacity, which is limited by available machine-
hours and direct manufacturing labor-hours. The maximum demand for Special keyboards is 80 per
month. Management desires a product mix that will maximize the contribution toward fixed costs and
profits.
Direct manufacturing labor is limited to 1,600 hours a month and machine-hours are limited to 1,200 a
month. The Regular keyboards require 20 hours of labor and 8 machine-hours. Special keyboards require
34 labor-hours and 20 machine-hours.
Let R represent Regular keyboards and S represent Special keyboards. The correct set of equations for the
keyboard production process is ________.
A) Maximize: $128R + $720S
Constraints:
Labor-hours: 20R + 34S ≤ 1,600
Machine-hours: 8R + 20S ≤ 1,200
Special: S ≤ 80
S ≥ 0
Regular: R ≥ 0
B) Maximize: $128R + $720S
Constraints:
Labor-hours: 20R + 34S ≥ 1,600
Machine-hours: 8R + 20S ≥≤ 1,200
Special: S ≥ 80
S ≥ 0
Regular: R ≥ 0
C) Maximize: $720S + $128R
Constraints:
Labor-hours: 20R + 8S ≤ 1,600
Machine-hours: 34R + 20S ≤ 1,200
Special: S ≤ 80
S ≥ 0
Regular: R ≥ 0
D) Maximize: $128R + $720S
Constraints:
Labor-hours: 20R + 34S ≤ 1,600
Machine-hours: 8R + 20S ≤ 1,200
Special: S ≥ 80
S ≤ 0
Regular: R ≤ 0
6) In linear programming, a constraint is a mathematical inequality or equality that must be satisfied by
the variables in a mathematical model.
7) Local Steel Construction Company produces two products, steel and wood beams. Steel beams have a
unit contribution margin of $200, and wood beams have a unit contribution margin of $150. The demand
for steel beams exceeds Local Steel Construction Company’s production capacity, which is limited by
available direct labor and machine-hours. The maximum demand for wood beams is 90 per week.
Management desires that the product mix should maximize the weekly contribution toward fixed costs
and profits.
Direct manufacturing labor is limited to 3,000 hours a week and 1,000 hours is all that the company’s
outdated machines can run a week. The steel beams require 120 hours of labor and 60 machine-hours.
Wood beams require 150 labor hours and 120 machine-hours.
Required:
Formulate the objective function and constraints necessary to determine the optimal product mix.