111) The management of Bonga Corporation is considering dropping product D74F. Data from
the company’s accounting system for this product for last year appear below:
Sales
$830,000
Variable expenses
$390,000
Fixed manufacturing expenses
$266,000
Fixed selling and administrative expenses
$232,000
All fixed expenses of the company are fully allocated to products in the company’s accounting
system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses
and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is
discontinued.
What would be the financial advantage (disadvantage) from dropping product D74F?
A) $226,000
B) $58,000
C) ($226,000)
D) ($58,000)
Sales
Variable expenses
Contribution margin
Less avoidable fixed expenses:
Fixed manufacturing expenses
Fixed selling and administrative expenses
Profit
112) Key Corporation is considering the addition of a new product. The expected cost and
revenue data for the new product are as follows:
Annual sales
2,500
units
Selling price per unit
$
304
Variable costs per unit:
Production
$
125
Selling
$
49
Avoidable fixed costs per year:
Production
$
50,000
Selling
$
75,000
Allocated common fixed corporate costs per year
$
55,000
If the new product is added, the combined contribution margin of the other, existing products is
expected to drop $65,000 per year. Total common fixed corporate costs would be unaffected by
the decision of whether to add the new product.
If the new product is added next year, the financial advantage (disadvantage) resulting from this
decision would be:
A) $325,000
B) $200,000
C) $145,000
D) $135,000
Sales (2,500 units × $304 per unit)
760,000
Less costs:
Variable production costs (2,500 units × $125 per unit)
312,500
Variable selling costs (2,500 units × $49 per unit)
122,500
Avoidable fixed production costs
50,000
Avoidable fixed selling costs
75,000
Decline in existing product line contribution margin
65,000
Total cost
625,000
Financial advantage (disadvantage)
135,000
113) Key Corporation is considering the addition of a new product. The expected cost and
revenue data for the new product are as follows:
Annual sales
2,500
units
Selling price per unit
$
304
Variable costs per unit:
Production
$
125
Selling
$
49
Avoidable fixed costs per year:
Production
$
50,000
Selling
$
75,000
Allocated common fixed corporate costs per year
$
55,000
If the new product is added, the combined contribution margin of the other, existing products is
expected to drop $65,000 per year. Total common fixed corporate costs would be unaffected by
the decision of whether to add the new product.
At what selling price would the new product be just breaking even?
A) $246 per unit
B) $250 per unit
C) $232 per unit
D) $282 per unit
Costs:
Variable production costs (2,500 units × $125 per unit)
312,500
Variable selling costs (2,500 units × $49 per unit)
122,500
Avoidable fixed production costs
50,000
Avoidable fixed selling costs
75,000
Decline in existing product line contribution margin
65,000
Total cost
625,000
The Draper Corporation is considering dropping its Doombug toy due to continuing losses. Data
on the toy for the past year follow:
Sales of 15,000 units
$
150,000
Variable expenses
120,000
Contribution margin
30,000
Fixed expenses
40,000
Net operating loss
$
(10,000
)
If the toy were discontinued, Draper could avoid $8,000 per year in fixed costs. The remainder of
the fixed costs are not avoidable.
114) The annual financial advantage (disadvantage) for the company from discontinuing the
production and sale of Doombugs would be:
A) ($30,000)
B) $10,000
C) ($22,000)
D) $18,000
Sales
$
150,000
Variable expenses
Contribution margin
Avoidable fixed expenses
Profit from Doombugs
$
115) Assuming all other conditions stay the same, at what level of annual sales of Doombugs (in
units) should Draper be indifferent between discontinuing Doombugs or continuing the
production and sale of Doombugs?
A) 20,000 units
B) 18,000 units
C) 6,000 units
D) 4,000 units
116) Suppose that if the Doombug toy is dropped, the production and sale of other Draper toys
would increase so as to generate a $16,000 increase in the contribution margin received from
these other toys. If all other conditions are the same, the financial advantage (disadvantage) from
discontinuing the production and sale of Doombugs would be:
A) ($6,000)
B) $14,000
C) ($2,000)
D) $28,000
117) The management of Woznick Corporation has been concerned for some time with the
financial performance of its product V86O and has considered discontinuing it on several
occasions. Data from the company’s accounting system for this product for last year appear
below:
Sales
$150,000
Variable expenses
$72,000
Fixed manufacturing expenses
$50,000
Fixed selling and administrative expenses
$33,000
In the company’s accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $30,000 of the fixed manufacturing expenses
and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is
discontinued.
According to the company’s accounting system, what is the net operating income earned by
product V86O? Include all costs in this calculation—whether relevant or not.
A) $78,000
B) ($5,000)
C) ($78,000)
D) $5,000
Sales
Less expenses:
Variable expenses
Fixed manufacturing expenses
Fixed selling and administrative expenses
Net operating income (loss)
)
118) The management of Woznick Corporation has been concerned for some time with the
financial performance of its product V86O and has considered discontinuing it on several
occasions. Data from the company’s accounting system for this product for last year appear
below:
Sales
$150,000
Variable expenses
$72,000
Fixed manufacturing expenses
$50,000
Fixed selling and administrative expenses
$33,000
In the company’s accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $30,000 of the fixed manufacturing expenses
and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is
discontinued.
What would be the financial advantage (disadvantage) from dropping product V86O?
A) ($35,000)
B) ($5,000)
C) $35,000
D) $5,000
Sales
Variable expenses
Contribution margin
Less avoidable fixed expenses:
Fixed manufacturing expenses
Fixed selling and administrative expenses
Profit
119) Balser Corporation manufactures and sells a number of products, including a product called
JYMP. Results for last year for the manufacture and sale of JYMPs are as follows:
Sales
$
960,000
Less expenses:
Variable production costs
$
464,000
Sales commissions
144,000
Salary of product manager
100,000
Fixed product advertising
160,000
Fixed manufacturing overhead
132,000
1,000,000
Net operating loss
$
(40,000
)
Balser is trying to decide whether to discontinue the manufacture and sale of JYMPs. All
expenses other than fixed manufacturing overhead are avoidable if the product is dropped. None
of the fixed manufacturing overhead is avoidable.
Assume that dropping Product JYMP will have no effect on other products. The annual financial
advantage (disadvantage) for the company of eliminating this product should be:
A) $40,000
B) ($132,000)
C) ($92,000)
D) ($172,000)
Sales
$
960,000
Less avoidable expenses:
Variable production costs
$
464,000
Sales commissions
144,000
Salary of product manager
100,000
Fixed product advertising
160,000
868,000
Profit
$
(92,000
)
120) Balser Corporation manufactures and sells a number of products, including a product called
JYMP. Results for last year for the manufacture and sale of JYMPs are as follows:
Sales
$
960,000
Less expenses:
Variable production costs
$
464,000
Sales commissions
144,000
Salary of product manager
100,000
Fixed product advertising
160,000
Fixed manufacturing overhead
132,000
1,000,000
Net operating loss
$
(40,000
)
Balser is trying to decide whether to discontinue the manufacture and sale of JYMPs. All
expenses other than fixed manufacturing overhead are avoidable if the product is dropped. None
of the fixed manufacturing overhead is avoidable.
Assume that dropping Product JYMP would result in a $90,000 increase in the contribution
margin of other products. If Balser chooses to discontinue JYMP, the annual financial advantage
(disadvantage) of eliminating this product should be:
A) ($40,000)
B) $40,000
C) ($2,000)
D) $50,000
Sales
$
960,000
Less avoidable expenses:
Variable production costs
$
464,000
Sales commissions
144,000
Salary of product manager
100,000
Fixed product advertising
160,000
868,000
Profit
$
121) Mcfarlain Corporation is presently making part U98 that is used in one of its products. A
total of 7,000 units of this part are produced and used every year. The company’s Accounting
Department reports the following costs of producing the part at this level of activity:
Per Unit
Direct materials
$
3.70
Direct labor
$
3.60
Variable overhead
$
1.40
Supervisor’s salary
$
4.00
Depreciation of special equipment
$
3.90
Allocated general overhead
$
4.10
An outside supplier has offered to produce and sell the part to the company for $17.10 each. If
this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor,
can be avoided. The special equipment used to make the part was purchased many years ago and
has no salvage value or other use. The allocated general overhead represents fixed costs of the
entire company, none of which would be avoided if the part were purchased instead of produced
internally.
If management decides to buy part U98 from the outside supplier rather than to continue making
the part, what would be the annual financial advantage (disadvantage)?
A) ($30,800)
B) $25,200
C) $30,800
D) ($25,200)
122) Mcfarlain Corporation is presently making part U98 that is used in one of its products. A
total of 7,000 units of this part are produced and used every year. The company’s Accounting
Department reports the following costs of producing the part at this level of activity:
Per Unit
Direct materials
$
3.70
Direct labor
$
3.60
Variable overhead
$
1.40
Supervisor’s salary
$
4.00
Depreciation of special equipment
$
3.90
Allocated general overhead
$
4.10
An outside supplier has offered to produce and sell the part to the company for $17.10 each. If
this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor,
can be avoided. The special equipment used to make the part was purchased many years ago and
has no salvage value or other use. The allocated general overhead represents fixed costs of the
entire company, none of which would be avoided if the part were purchased instead of produced
internally.
In addition to the facts given above, assume that the space used to produce part U98 could be
used to make more of one of the company’s other products, generating an additional segment
margin of $24,000 per year for that product. What would be the financial advantage
(disadvantage) of buying part U98 from the outside supplier and using the freed space to make
more of the other product?
A) ($6,800)
B) ($1,200)
C) $24,000
D) ($49,200)
123) Penagos Corporation is presently making part Z43 that is used in one of its products. A total
of 5,000 units of this part are produced and used every year. The company’s Accounting
Department reports the following costs of producing the part at this level of activity:
Per Unit
Direct materials
$
1.10
Direct labor
$
3.10
Variable overhead
$
6.90
Supervisor’s salary
$
5.80
Depreciation of special equipment
$
5.20
Allocated general overhead
$
5.60
An outside supplier has offered to produce and sell the part to the company for $20.80 each. If
this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor,
can be avoided. The special equipment used to make the part was purchased many years ago and
has no salvage value or other use. The allocated general overhead represents fixed costs of the
entire company. If the outside supplier’s offer were accepted, only $4,000 of these allocated
general overhead costs would be avoided.
If management decides to buy part Z43 from the outside supplier rather than to continue making
the part, what would be the annual financial advantage (disadvantage)?
A) ($34,500)
B) ($30,500)
C) ($15,500)
D) ($38,500)
Direct materials (5,000 units × $1.10 per unit)
Direct labor (5,000 units × $3.10 per unit)
Variable overhead (5,000 units × $6.90 per unit)
Supervisor’s salary (5,000 units × $5.80 per unit)
Depreciation of special equipment (not relevant)
Allocated general overhead (avoidable only)
Outside purchase price (5,000 units × $20.80 per unit)
Total cost
124) Penagos Corporation is presently making part Z43 that is used in one of its products. A total
of 5,000 units of this part are produced and used every year. The company’s Accounting
Department reports the following costs of producing the part at this level of activity:
Per Unit
Direct materials
$
1.10
Direct labor
$
3.10
Variable overhead
$
6.90
Supervisor’s salary
$
5.80
Depreciation of special equipment
$
5.20
Allocated general overhead
$
5.60
An outside supplier has offered to produce and sell the part to the company for $20.80 each. If
this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor,
can be avoided. The special equipment used to make the part was purchased many years ago and
has no salvage value or other use. The allocated general overhead represents fixed costs of the
entire company. If the outside supplier’s offer were accepted, only $4,000 of these allocated
general overhead costs would be avoided.
In addition to the facts given above, assume that the space used to produce part Z43 could be
used to make more of one of the company’s other products, generating an additional segment
margin of $24,000 per year for that product. What would be the annual financial advantage
(disadvantage) of buying part Z43 from the outside supplier and using the freed space to make
more of the other product?
A) ($10,500)
B) ($58,500)
C) $24,000
D) $8,500
125) Elly Industries is a multi-product company that currently manufactures 30,000 units of part
MR24 each month for use in production of its products. The facilities now being used to produce
part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per
month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but
its fixed costs would continue at 40% of their present amount. The variable production costs of
Part MR24 are $11 per unit.
If Elly Industries continues to use 30,000 units of part MR24 each month, it would realize a
financial advantage by purchasing this part from an outside supplier only if the supplier’s unit
price is less than:
A) $14 per unit
B) $11 per unit
C) $16 per unit
D) $13 per unit
126) Elly Industries is a multi-product company that currently manufactures 30,000 units of part
MR24 each month for use in production of its products. The facilities now being used to produce
part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per
month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but
its fixed costs would continue at 40% of their present amount. The variable production costs of
Part MR24 are $11 per unit.
If Elly industries is able to obtain part MR24 from an outside supplier at a purchase price of $10
per unit, the monthly financial advantage (disadvantage) of buying the part rather than making it
would be:
A) $30,000
B) $180,000
C) $90,000
D) $120,000
127) Melbourne Corporation has traditionally made a subcomponent of its major product.
Annual production of 30,000 subcomponents results in the following costs:
Direct materials
$
250,000
Direct labor
$
200,000
Variable manufacturing overhead
$
190,000
Fixed manufacturing overhead
$
120,000
Melbourne has received an offer from an outside supplier who is willing to provide the 30,000
units of the subcomponent each year at a price of $28 per unit. Melbourne knows that the
facilities now being used to manufacture the subcomponent could be rented to another company
for $80,000 per year if the subcomponent were purchased from the outside supplier. There would
be no effect of this decision on the total fixed manufacturing overhead of the company. Assume
that direct labor is a variable cost.
If Melbourne decides to purchase the subcomponent from the outside supplier, the annual
financial advantage (disadvantage) would be:
A) $120,000
B) $20,000
C) ($120,000)
D) ($20,000)
Direct materials
$
250,000
Direct labor
200,000
Variable manufacturing overhead
190,000
relevant)
$28 per unit)
Opportunity cost
$
)
Total cost
$
640,000
$
760,000