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62) For one-time-only special orders, fixed costs may be relevant but NOT variable costs.
63) In the decision making of a one-time-only special order, it is assumed that accepting the special order
is not expected to affect the selling price to other customers.
64) Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-
time-only special orders.
65) Qualitative factors are important in the decision-making process even though they cannot be
measured numerically.
66) In a one-time special order situation, if the price offered by the buyer is less than the absorption cost
per unit, the special order may still be profitable since absorption costs include allocated fixed
manufacturing overhead.
67) In relevant-cost analysis, managers should not consider all variable as relevant and all fixed costs as
irrelevant.
68) An incremental product cost is generally a fixed cost.
69) If Option 1 costs $120 and Option 2 costs $90, then the differential cost is $30.
70) Variable cost per unit is the best product cost to use for one-time-only special order decisions.
71) Fluty Corporation manufactures a product that has two parts, A and B. It is currently considering two
alternative proposals related to these parts.
The first proposal is for buying Part A. This would free up some of the plant space for the manufacture of
more of Part B and assembly of the final product. The product vice president believes the additional
production of the final product can be sold at the current market price. No other changes in
manufacturing would be needed.
The second proposal is for buying new equipment for the production of Part B. The new equipment
requires fewer workers and uses less power to operate. The old equipment has a net disposal value of
zero.
Required:
Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal
independently.
a. Total variable manufacturing overhead, Part A
b. Total variable manufacturing overhead, Part B
c. Cost of old equipment for manufacturing Part B
d. Cost of new equipment for manufacturing Part B
e. Total variable selling and administrative costs
f. Sales revenue of the product
g. Total variable costs of assembling final products
h. Total direct manufacturing materials, Part A
i. Total direct manufacturing materials, Part B
j. Total direct manufacturing labor, Part A
k. Total direct manufacturing labor, Part B
72) Parker and Spitzer Manufacturing is approached by a European customer to fulfill a one-time-only
special order for a product similar to one offered to domestic customers. The following per unit data
apply for sales to regular customers:
Direct materials $1,782
Direct labor 810
Variable manufacturing support 1,296
Fixed manufacturing support 2,808
Total manufacturing costs 6,696
Markup (50%) 3,348
Targeted selling price $ 10,044
Parker and Spitzer Manufacturing has excess capacity.
Required:
a. What is the full cost of the product per unit if the marketing costs is $3,000?
b. What is the contribution margin per unit?
c. Which costs are relevant for making the decision regarding this one-time-only special order? Why?
d. For Parker and Spitzer Manufacturing, what is the minimum acceptable price of this one-time-only
special order?
e. For this one-time-only special order, should Parker and Spitzer Manufacturing consider a price of
$5,400 per unit? Why or why not?
73) Loft Lake Cabinets is approached by Ms. Jenny Zhang, a new customer, to fulfill a large one-time-only
special order for a product similar to one offered to regular customers. The following per unit data apply
for sales to regular customers:
Direct materials $50.00
Direct labor 62.50
Variable manufacturing support 30.00
Fixed manufacturing support 37.50
Total manufacturing costs 180.00
Markup (60%) 108.00
Targeted selling price $288.00
Loft Lake Cabinets has excess capacity. Ms. Zhang wants the cabinets in cherry rather than oak, so direct
material costs will increase by $15 per unit.
Required:
a. For Loft Lake Cabinets, what is the minimum acceptable price of this one-time-only special order?
b. Other than price, what other items should Loft Lake Cabinets consider before accepting this one-
time-only special order?
c. How would the analysis differ if there was limited capacity?
74) Southwestern Company needs 1,000 motors in its manufacture of automobiles. It can buy the motors
from Jinx Motors for $1,250 each. Southwestern's plant can manufacture the motors for the following
costs per unit:
Direct materials $ 500
Direct manufacturing labor 250
Variable manufacturing overhead 200
Fixed manufacturing overhead 350
Total $1,300
If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead applied will not be
avoided.
Required:
a. Should the company make or buy the motors?
b. What additional factors should Southwestern consider in deciding whether or NOT to make or buy
the motors?
75) Sarasota Bicycles has been manufacturing its own wheels for its bikes. The company is currently
operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of
30% of direct labor cost. The direct materials and direct labor cost per unit to make the wheels are $3.00
and $3.60 respectively. Normal production is 200,000 wheels per year.
A supplier offers to make the wheels at a price of $8 each. If the bicycle company accepts this offer, all
variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead
currently being charged to the wheels will have to be absorbed by other products.
Required:
a. Prepare an incremental analysis for the decision to make or buy the wheels.
b. Should Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer.
76) Explain what revenues and costs are relevant when choosing among alternatives.
77) Explain why sunk costs are not considered relevant when choosing among alternatives with example.
78) Assume you are a sophomore in college and are committed to earning an undergraduate degree. Your
current decision is whether to finish college in four consecutive years or take a year off and work for
some extra cash.
a. Identify at least two revenues or costs that are relevant to making this decision. Explain why each is
relevant.
b. Identify at least two costs that would be considered sunk costs for this decision.
c. Identify at least two opportunity costs for this decision.
d. Comment on at least one qualitative consideration for this decision.
79) A restaurant is deciding whether it wants to update its image or not. It currently has a cozy appeal
with an outdated d cor that is still in good condition, menus and carpet that need to be replaced anyway,
and loyal customers.
Identify for the restaurant management
a. those costs that are relevant to this decision,
b. those costs that are not differential,
c. and qualitative considerations.
80) Are relevant revenues and relevant costs the only information needed by managers to select among
alternatives? Explain using examples.
81) Under what conditions might a manufacturing firm sell a product for less than its long-term price?
Why?
Objective 11.3
1) Relevant costs in a make-or-buy decision of a part include ________.
A) setup overhead for the manufacture of the product using the outsourced part
B) currently used manufacturing capacity that has alternative uses
C) annual plant insurance costs that will remain the same
D) management consultant fees to restructure the organization framework of the company
2) Which of the following is an example of outsourcing?
A) a smartphone manufacturing company factoring its receivables as a source of capital
B) a large conglomerate company selling a business wing to its competitor
C) an automobile company merging with a manufacturing firm to create economic synergies
D) a petrochemical company assigning a vendor to make software for its supply chain management
3) Which of the following is an example of insourcing?
A) a pharmaceutical company's research team developing a new patent using current resources
B) a smartphone manufacturing company factoring its receivables as a source of capital
C) a large conglomerate company selling a business wing to its competitor
D) a petrochemical company assigning a vendor to make software for its supply chain management
4) Which of the following is a relevant cost to be included in a make-or-buy decision?
A) fixed salaries that will not be incurred if the part is outsourced
B) pension costs to the current employees
C) increase in the price of all equipment of the firm
D) material-handling costs that cannot be eliminated
5) Which of following is a firm's risk of outsourcing the production of a part?
A) fluctuation in the manufacturing costs
B) leakage of intellectual property
C) increased need of skilled workers
D) scarcity of indirect labor
6) Which of the following minimizes the risks of outsourcing?
A) the use of short-term contracts that specify price
B) shifting the firm's responsibility for on-time delivery to the supplier
C) building close partnerships with the supplier
D) increasing the contract price
7) The cost to produce Part A was $20 per unit in 2013 and in 2014 it has increased to $22 per unit. In 2014,
Supplier ABC has offered to supply Part A for $18 per unit. For the make-or-buy decision ________.
A) incremental revenues are $4 per unit
B) incremental costs are $2 per unit
C) net relevant costs are $2 per unit
D) differential costs are $4 per unit
8) When evaluating a make-or-buy decision, which of the following needs to be considered?
A) alternative uses of the production capacity
B) the original cost of the production equipment
C) pension costs to the current employees
D) material-handling costs that cannot be eliminated
9) For make-or-buy decisions, a supplier's ability to maintain secrecy of intellectual property is
considered a(n) ________.
A) qualitative factor
B) irrelevant cost
C) differential factor
D) opportunity cost
10) Schmidt Sewing Company incorporates the services of Deb's Sewing. Schmidt purchases pre-cut
dresses from Deb's. This is primarily known as ________.
A) insourcing
B) outsourcing
C) fragmentation
D) in-housing
11) Smiley Face Company manufactures signs from direct materials to the finished product. This is
considered ________.
A) insourcing
B) outsourcing
C) right-shoring
D) fragmentation
12) Which of the following would be considered in a make-or-buy decision?
A) fixed costs that will no longer be incurred
B) prepaid rent expense for warehousing finished goods and inventories
C) potential rental income from space occupied by the production area
D) unchanged supervisory costs
Answer the following questions using the information below:
Genent's Engine Company manufactures part TE456 used in several of its engine models. Monthly
production costs for 1,000 units are as follows:
Direct materials $46,000
Direct labor 11,500
Variable overhead costs 34,500
Fixed overhead costs 23,000
Total costs $115,000
It is estimated that 8% of the fixed overhead costs assigned to TE456 will no longer be incurred if the
company purchases TE456 from the outside supplier. Genent's Engine Company has the option of
purchasing the part from an outside supplier at $97.75 per unit.
13) If Genent's Engine Company accepts the offer from the outside supplier, the monthly avoidable costs
(costs that will no longer be incurred) total ________.
A) $93,840
B) $92,000
C) $115,000
D) $116,840
14) If Genent's Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then
its monthly operating income will ________.
A) increase by $3,910
B) increase by $19,090
C) decrease by $3,910
D) decrease by $19,090
15) The maximum price that Genent's Engine Company should be willing to pay the outside supplier is
________.
A) $92 per TE456 part
B) $93.84 per TE456 part
C) $115 per TE456 part
D) $116.84 per TE456 part
16) If Talium Services Inc. does not use one of its limited resources in the best possible way, the lost
contribution to income could be called a(n) ________.
A) business function cost
B) carrying cost
C) opportunity cost
D) sunk cost
17) Opportunity costs is defined as ________.
A) the cost of manufacturing a one-time-only special order when a firm has excess capacity to make more
products
B) the contribution to operating income that is forgone by not using a limited resource in its next-best
alternative use
C) the sum of variable and fixed costs in a particular business function of the value chain, such as
manufacturing costs or marketing costs
D) the sum of variable and fixed costs in all business functions of the value chain, such as manufacturing
costs or marketing costs
18) Which of the following is true of an opportunity cost?
A) It is the income foregone by not using a resource in an alternative way.
B) The higher the opportunity costs, the lower is the relevant cost.
C) It is recorded as an expense in the accounting records.
D) It is an unavoidable cost that cannot be changed no matter what action is taken.
19) Which of the following would be a consideration in a make-or-buy decision?
A) excess capacity
B) wages to CEO
C) marketing costs
D) audit expenses
20) If a company has excess capacity, the most it would pay for buying a product that it currently makes
would be the ________.
A) total variable cost of producing the product
B) full cost of producing the product
C) total cost of producing the product
D) business function cost of the product
21) For make-or-buy decisions, relevant costs include ________.
A) incremental costs plus sunk costs
B) incremental costs plus opportunity costs
C) differential costs plus fixed costs
D) incremental costs plus differential costs
22) The opportunity cost of holding significant inventory includes ________.
A) the interest forgone on an alternative investment
B) additional insurance costs
C) additional storage costs
D) the rent of the warehouse
Answer the following questions using the information below:
Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are
as follows:
Direct materials $ 45.00
Direct labor 35.00
Variable overhead 33.00
Fixed overhead 30.00
Total $143.00
Crayola Technologies Inc. has contacted Rubium with an offer to sell 5,000 of the subassemblies for
$135.00 each. Rubium will eliminate $85,000 of fixed overhead if it accepts the proposal.
23) What are the relevant costs for Rubium?
A) $480,000
B) $485,000
C) $650,000
D) $800,000
24) Should Rubium make or buy the subassemblies? What is the difference between the two alternatives?
A) Buy; savings = $85,000
B) Buy; savings = $50,000
C) Make; savings = $25,000
D) Make; savings = $120,000
25) A recent college graduate has the choice of buying a new car for $33,500 or investing the money for
four years with an 8% expected annual rate of return. He has an investment of $40,000 in equities and
bonds which yields 6% expected annual rate of return. If the graduate decides to purchase the car, the
best estimate of the opportunity cost of that decision is ________.
A) $2,400
B) $10,720
C) $40,000
D) $9,600
26) A supplier offers to make Part A for $35. Altec Services Corporation has relevant costs of $40 a unit to
manufacture 1,000 units of Part A. If there is excess capacity, the opportunity cost of buying Part A from
the supplier is ________.
A) $0
B) $40,000
C) $35,000
D) $75,000
27) Altec Services Corporation has relevant costs of $40 per unit to manufacture 1,000 units of Part A. A
current supplier offers to make Part A for $35 per unit. Alternatively, the company can rent out the
capacity for $25,000. If capacity is constrained, the opportunity cost of buying Part A from the supplier is
________.
A) $0
B) $5,000
C) $35,000
D) $25,000
28) Opportunity costs are not recorded in financial accounting systems because historical record keeping
is limited to transactions involving alternatives that managers actually selected rather than alternatives
that they rejected.
29) For decision making, differential costs assist in choosing between alternatives.
30) Differential revenue is the additional total revenue from an activity.
31) Differential revenue is the difference in total revenue between two alternatives.
32) Outsourcing is purchasing goods and services from outside vendors.
33) If a company is deciding whether to outsource a part, the quality of the parts manufactured is an
important factor to consider.
34) Outsourcing is risk free to the manufacturer because the supplier now has the responsibility of
producing the part.
35) Decisions about whether a producer of goods or services will insource or outsource are also called
make-or-buy decisions.
36) In a make-or-buy decision when there are alternative uses for capacity, the opportunity cost of idle
capacity is relevant.
37) An incremental cost is the difference in total irrelevant costs between two alternatives.
38) When opportunity costs exist, they are always relevant.
39) When capacity is constrained, relevant costs equal incremental costs plus opportunity costs.
40) Incremental revenue is the sum of differential revenues of two alternatives.
41) Under the opportunity cost approach, the cost of each alternative includes the incremental costs and
the opportunity cost.
42) When capacity is constrained, the relevant revenues and costs of any alternative equal the incremental
future revenues and costs plus the opportunity cost.
43) Quiett Truck manufactures part WB23 used in several of its truck models. 10,000 units are produced
each year with production costs as follows:
Direct materials $ 45,000
Direct manufacturing labor 15,000
Variable support costs 35,000
Fixed support costs 25,000
Total costs $120,000
Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If WB23
is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.
a. Describe avoidable costs. What amount of the WB23 production costs is avoidable?
b. Should Quiett Truck outsource WB23? Why or why not?
c. What other items should Quiett Truck consider before outsourcing any of the parts it currently
manufactures?
