128) 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.
At what price per unit charged by the outside supplier would Melbourne be indifferent between
making or buying the subcomponent?
A) $29 per unit
B) $25 per unit
C) $21 per unit
D) $24 per unit
Direct materials
$
250,000
Direct labor
200,000
Variable manufacturing overhead
190,000
Fixed manufacturing overhead (not relevant)
Opportunity cost
Total cost
$
720,000
Ahrends Corporation makes 70,000 units per year of a part it uses in the products it
manufactures. The unit product cost of this part is computed as follows:
Direct materials
$
17.80
Direct labor
19.00
Variable manufacturing overhead
1.00
Fixed manufacturing overhead
17.10
Unit product cost
$
54.90
An outside supplier has offered to sell the company all of these parts it needs for $48.50 a unit. If
the company accepts this offer, the facilities now being used to make the part could be used to
make more units of a product that is in high demand. The additional contribution margin on this
other product would be $273,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would
be avoided. However, $8.20 of the fixed manufacturing overhead cost being applied to the part
would continue even if the part were purchased from the outside supplier. This fixed
manufacturing overhead cost would be applied to the company’s remaining products.
129) How much of the unit product cost of $54.90 is relevant in the decision of whether to make
or buy the part?
A) $37.80 per unit
B) $46.70 per unit
C) $54.90 per unit
D) $19.00 per unit
Direct materials
$
17.80
Direct labor
19.00
Variable manufacturing overhead
1.00
Avoidable fixed manufacturing overhead ($17.10 – $8.20)
8.90
Total relevant cost to make
$
46.70
130) What is the financial advantage (disadvantage) of purchasing the part rather than making it?
A) $273,000
B) ($126,000)
C) $147,000
D) $448,000
131) What is the maximum amount the company should be willing to pay an outside supplier per
unit for the part if the supplier commits to supplying all 70,000 units required each year?
A) $50.60 per unit
B) $3.90 per unit
C) $58.80 per unit
D) $54.90 per unit
132) The following are Silver Corporation’s unit costs of making and selling an item at a volume
of 8,000 units per month (which represents the company’s capacity):
Manufacturing:
Direct materials
$
4
Direct labor
$
5
Variable overhead
$
2
Fixed overhead
$
8
Selling and administrative:
Variable
$
1
Fixed
$
6
Present sales amount to 7,000 units per month. An order has been received from a customer in a
foreign market for 1,000 units. The order would not affect regular sales. Total fixed costs, both
manufacturing and selling and administrative, would not be affected by this order. The variable
selling and administrative costs would have to be incurred for this special order as well as all
other sales. Assume that direct labor is a variable cost.
What is the financial advantage (disadvantage) for the company from this special order if it
prices the 1,000 units at $20 per unit?
A) $1,000
B) $9,000
C) ($6,000)
D) $8,000
133) The following are Silver Corporation’s unit costs of making and selling an item at a volume
of 8,000 units per month (which represents the company’s capacity):
Manufacturing:
Direct materials
$
4
Direct labor
$
5
Variable overhead
$
2
Fixed overhead
$
8
Selling and administrative:
Variable
$
1
Fixed
$
6
Present sales amount to 7,000 units per month. An order has been received from a customer in a
foreign market for 1,000 units. The order would not affect regular sales. Total fixed costs, both
manufacturing and selling and administrative, would not be affected by this order. The variable
selling and administrative costs would have to be incurred for this special order as well as all
other sales. Assume that direct labor is a variable cost.
Assume the company has 50 units left over from last year which have small defects and which
will have to be sold at a reduced price for scrap. The sale of these defective units will have no
effect on the company’s other sales. Which of the following costs is relevant in this decision?
A) $11 variable manufacturing cost
B) $19 unit product cost
C) $1 variable selling and administrative cost
D) $26 full cost
134) The Bharu Violin Corporation has the capacity to manufacture and sell 5,000 violins each
year but is currently only manufacturing and selling 4,800. The following data relate to annual
operations at 4,800 units:
Per Violin
Selling price
$
600
Manufacturing costs:
Variable
$
130
Fixed
$
270
Selling and administrative costs:
Variable
$
20
Fixed
$
40
Woolgar Symphony Orchestra is interested in purchasing Bharu’s excess capacity of 200 units
but only if they can get the violins for $350 each. This special order would not affect regular
sales or the total fixed costs.
If the special order from Woolgar Symphony Orchestra is accepted, the financial advantage
(disadvantage) Bharu for the year should be:
A) $40,000
B) ($10,000)
C) ($22,000)
D) ($28,000)
Incremental revenue (200 units × $350 per unit)
$
70,000
Less incremental costs:
Variable manufacturing costs (200 units × $130 per unit)
26,000
per unit)
Total incremental cost
30,000
Financial advantage (disadvantage)
$
40,000
135) The Bharu Violin Corporation has the capacity to manufacture and sell 5,000 violins each
year but is currently only manufacturing and selling 4,800. The following data relate to annual
operations at 4,800 units:
Per Violin
Selling price
$
600
Manufacturing costs:
Variable
$
130
Fixed
$
270
Selling and administrative costs:
Variable
$
20
Fixed
$
40
Woolgar Symphony Orchestra is interested in purchasing Bharu’s excess capacity of 200 units
but only if they can get the violins for $350 each. This special order would not affect regular
sales or the total fixed costs.
Assume that Bharu is manufacturing and selling at capacity (5,000 units). Any special order will
mean a loss of regular sales. Under these conditions if the special order from Woolgar Symphony
Orchestra is accepted, the financial advantage (disadvantage) Bharu for the year should be:
A) $20,000
B) ($22,000)
C) ($28,000)
D) ($50,000)
109
Elfalan Corporation produces a single product. The cost of producing and selling a single unit of
this product at the company’s normal activity level of 80,000 units per month is as follows:
Per Unit
Direct materials
$
22.50
Direct labor
$
7.50
Variable manufacturing overhead
$
1.70
Fixed manufacturing overhead
$
19.00
Variable selling & administrative expense
$
2.70
Fixed selling & administrative expense
$
8.60
The normal selling price of the product is $67.80 per unit.
An order has been received from an overseas customer for 3,000 units to be delivered this month
at a special discounted price. This order would not change the total amount of the company’s
fixed costs. The variable selling and administrative expense would be $1.90 less per unit on this
order than on normal sales.
Direct labor is a variable cost in this company.
136) Suppose there is ample idle capacity to produce the units required by the overseas customer
and the special discounted price on the special order is $60.60 per unit. The monthly financial
advantage (disadvantage) for the company as a result of accepting this special order should be:
A) ($4,200)
B) $84,300
C) ($15,900)
D) $27,300
137) What is the contribution margin per unit on normal sales?
A) $7.20 per unit
B) $33.40 per unit
C) $5.80 per unit
D) $7.70 per unit
138) Suppose there is not enough idle capacity to produce all of the units for the overseas
customer and accepting the special order would require cutting back on production of 1,600 units
for regular customers. The minimum acceptable price per unit for the special order is closest to:
A) $62.00 per unit
B) $50.70 per unit
C) $67.80 per unit
D) $50.31 per unit
The Melville Corporation produces a single product called a Pong. Melville has the capacity to
produce 60,000 Pongs each year. If Melville produces at capacity, the per unit costs to produce
and sell one Pong are as follows:
Direct materials
$
15
Direct labor
$
12
Variable manufacturing overhead
$
8
Fixed manufacturing overhead
$
9
Variable selling expense
$
8
Fixed selling expense
$
3
The regular selling price for one Pong is $80. A special order has been received by Melville from
Mowen Corporation to purchase 6,000 Pongs next year. If this special order is accepted, the
variable selling expense will be reduced by 75%. However, Melville will have to purchase a
specialized machine to engrave the Mowen name on each Pong in the special order. This
machine will cost $9,000 and it will have no use after the special order is filled. The total fixed
manufacturing overhead and selling expenses would be unaffected by this special order. Assume
that direct labor is a variable cost.
139) Assume Melville anticipates selling only 50,000 units of Pong to regular customers next
year. If Mowen Corporation offers to buy the special order units at $65 per unit, the annual
financial advantage (disadvantage) for the company as a result of accepting this special order
should be:
A) $60,000
B) ($90,000)
C) $159,000
D) $36,000
140) Assume Melville anticipates selling only 50,000 units of Pong to regular customers next
year. At what selling price for the 6,000 special order units would Melville be financially
indifferent between accepting or rejecting the special order from Mowen?
A) $51.50 per unit
B) $49.00 per unit
C) $37.00 per unit
D) $38.50 per unit
141) Assume Melville can sell 58,000 units of Pong to regular customers next year. If Mowen
Corporation offers to buy the 6,000 special order units at $65 per unit, the annual financial
advantage (disadvantage) for Melville as a result of accepting this special order should be:
A) $36,000
B) $11,000
C) $192,000
D) $47,000
Younes Inc. manufactures industrial components. One of its products, which is used in the
construction of industrial air conditioners, is known as P06. Data concerning this product are
given below:
Per
Unit
Selling price
$
220
Direct materials
$
38
Direct labor
$
1
Variable manufacturing overhead
$
8
Fixed manufacturing overhead
$
16
Variable selling expense
$
4
Fixed selling and administrative expense
$
16
The above per unit data are based on annual production of 4,000 units of the component. Assume
that direct labor is a variable cost.
142) The company has received a special, one-time-only order for 400 units of component P06.
There would be no variable selling expense on this special order and the total fixed
manufacturing overhead and fixed selling and administrative expenses of the company would not
be affected by the order. Assuming that Younes has excess capacity and can fill the order
without cutting back on the production of any product, what is the minimum price per unit below
which the company should not accept the special order?
A) $47 per unit
B) $83 per unit
C) $63 per unit
D) $220 per unit
Direct materials
38
Direct labor
Variable manufacturing overhead
Variable cost per unit
47
143) The company has received a special, one-time-only order for 500 units of component P06.
There would be no variable selling expense on this special order and the total fixed
manufacturing overhead and fixed selling and administrative expenses of the company would not
be affected by the order. However, assume that Younes has no excess capacity and this special
order would require 30 minutes of the constraining resource, which could be used instead to
produce products with a total contribution margin of $10,000. What is the minimum price per
unit below which the company should not accept the special order?
A) $67 per unit
B) $103 per unit
C) $20 per unit
D) $83 per unit
144) What is the current contribution margin per unit for component P06 based on its selling
price of $220 and its annual production of 4,000 units?
A) $51 per unit
B) $137 per unit
C) $169 per unit
D) $173 per unit