Boney Corporation processes sugar beets that it purchases from farmers. Sugar beets are
processed in batches. A batch of sugar beets costs $53 to buy from farmers and $18 to crush in
the company’s plant. Two intermediate products, beet fiber and beet juice, emerge from the
crushing process. The beet fiber can be sold as is for $25 or processed further for $18 to make
the end product industrial fiber that is sold for $39. The beet juice can be sold as is for $32 or
processed further for $28 to make the end product refined sugar that is sold for $79.
164) What is the financial advantage (disadvantage) for the company from processing one batch
of sugar beets into the end products industrial fiber and refined sugar rather than not processing
that batch at all?
A) $15 per batch
B) ($14) per batch
C) ($117) per batch
D) $1 per batch
165) What is the financial advantage (disadvantage) for the company from processing the
intermediate product beet juice into refined sugar rather than selling it as is?
A) $1 per batch
B) ($17) per batch
C) $19 per batch
D) ($52) per batch
166) Which of the intermediate products should be processed further?
A) beet fiber should be processed into industrial fiber; beet juice should be processed into refined
sugar
B) beet fiber should NOT be processed into industrial fiber; beet juice should NOT be processed
into refined sugar
C) beet fiber should NOT be processed into industrial fiber; beet juice should be processed into
refined sugar
D) beet fiber should be processed into industrial fiber; beet juice should NOT be processed into
refined sugar
Dock Corporation makes two products from a common input. Joint processing costs up to the
split-off point total $33,600 a year. The company allocates these costs to the joint products on the
basis of their total sales values at the split-off point. Each product may be sold at the split-off
point or processed further. Data concerning these products appear below:
Product X
Product Y
Total
Allocated joint processing costs
$
16,800
$
16,800
$
33,600
Sales value at split-off point
$
24,000
$
24,000
$
48,000
Costs of further processing
$
15,000
$
18,700
$
33,700
Sales value after further processing
$
35,500
$
45,100
$
80,600
167) What is the financial advantage (disadvantage) for the company of processing Product X
beyond the split-off point?
A) ($3,500)
B) $27,700
C) $20,500
D) $3,700
Final sales value after further processing
$
35,500
Less sales value at split-off point
24,000
Less cost of further processing
15,000
processing
168) What is the financial advantage (disadvantage) for the company of processing Product Y
beyond the split-off point?
A) $9,600
B) $2,400
C) $33,600
D) $26,400
169) What is the minimum amount the company should accept for Product X if it is to be sold at
the split-off point?
A) $31,800
B) $20,500
C) $16,800
D) $35,500
170) Costs associated with two alternatives, code-named Q and R, being considered by Albiston
Corporation are listed below:
Alternative Q
Alternative R
Supplies costs
$
65,000
$
65,000
Power costs
$
30,000
$
29,000
Inspection costs
$
18,000
$
29,000
Assembly costs
$
33,000
$
33,000
Required:
a. Which costs are relevant and which are not relevant in the choice between these two
alternatives?
b. What is the differential cost between the two alternatives?
Supplies costs
Not relevant because the costs do not differ between alternatives
Power costs
Relevant, since costs differ between alternatives
Inspection costs
Relevant, since costs differ between alternatives
Assembly costs
Not relevant because the costs do not differ between alternatives
Alternative Q
Differential
Supplies costs
$
65,000
Power costs
29,000
)
Inspection costs
29,000
Assembly costs
33,000
Total
$
156,000
171) Saalfrank Corporation is considering two alternatives that are code-named M and N. Costs
associated with the alternatives are listed below:
Alternative M
Alternative N
Supplies costs
$
43,000
$
53,000
Assembly costs
$
43,000
$
56,000
Power costs
$
26,000
$
26,000
Inspection costs
$
19,000
$
26,000
Required:
a. Which costs are relevant and which are not relevant in the choice between these two
alternatives?
b. What is the differential cost between the two alternatives?
Supplies costs
Relevant, since costs differ between alternatives
Assembly costs
Relevant, since costs differ between alternatives
Power costs
Not relevant because the costs do not differ between alternatives
Inspection costs
Relevant, since costs differ between alternatives
Differential
Supplies costs
$
53,000
10,000
Assembly costs
56,000
13,000
Power costs
26,000
Inspection costs
26,000
7,000
Total
$
161,000
30,000
172) Companies often allocate common fixed costs among segments. For example, common
fixed corporate costs are often allocated to divisions and appear as part of the divisional
performance reports.
Required:
What dangers are there in allocating common fixed costs to segments when involved in a
decision to possibly drop a segment such as a product or a division?
173) The most recent monthly income statement for Benner Stores is given below:
Total
Store A
Store B
Sales
$1,000,000
$400,000
$600,000
Variable expenses
580,000
160,000
420,000
Contribution margin
420,000
240,000
180,000
Traceable fixed expenses
300,000
100,000
200,000
Store segment margin
120,000
140,000
(20,000)
Common fixed expenses
50,000
20,000
30,000
Net operating income
$70,000
$120,000
$(50,000)
Due to its poor showing, consideration is being given to closing Store B. Studies show that if
Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged. The studies
also show that closing Store B would result in a 10 percent decrease in sales in Store A. The
company allocates common fixed expenses to the stores on the basis of sales dollars.
Required:
Determine the monthly financial advantage (disadvantage) of closing Store B.
Store B loss
$(180,000)
Store A loss (10% × $240,000)
Total lost contribution margin
(204,000)
Fixed costs avoided if Store B is closed (75% × $200,000)
150,000
Financial advantage (disadvantage) of closing Store B
$(54,000)
151
174) Lakeshore Tours Inc., operates a large number of tours throughout the United States. A
study has indicated that some of the tours are not profitable, and consideration is being given to
dropping these tours in order to improve the company’s overall operating performance. One such
tour is a two-day Battlefields of the French and Indian Wars bus tour. An income statement from
one of these tours is given below:
Ticket revenue
(100 seats x 45% occupancy x $80 ticket price)
$3,600
100%
Variable expenses ($24 per person)
1,080
30%
Contribution margin
2,520
70%
Fixed tour expenses:
Tour promotion
$620
Salary of bus driver
400
Fee, tour guide
825
Fuel for bus
100
Depreciation of bus
400
Liability insurance, bus
250
Overnight parking fee, bus
50
Room and meals, bus driver and tour guide
75
Bus maintenance and preparation
325
Total fixed tour expenses
3,045
Net operating loss
$(525)
Dropping this tour would not affect the number of buses in the company’s fleet or the number of
bus drivers on the company’s payroll. Buses do not wear out through use; rather, they eventually
become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour
conducted. The “Bus maintenance and preparation” cost above is an allocation of the salaries of
mechanics and other service personnel who are responsible for keeping the company’s fleet of
buses in good operating condition. There would be no change in the number of mechanics and
other service personnel as a result of dropping this tour. The liability insurance depends upon the
number of buses in the company’s fleet and not upon how much they are used.
Required:
a. Prepare an analysis showing the financial advantage (disadvantage) if this tour is discontinued.
b. The company’s tour director has been criticized because only about 50% of the seats on the
company’s tours are being filled as compared to an average of 60% for the industry. The tour
director has explained that the company’s average seat occupancy could be improved
considerably by eliminating about 10% of the tours, but that doing so would reduce profits. Do
you agree with the tour director’s conclusion? Explain your response.
175) The management of Wengel Corporation is considering dropping product B90D. Data from
the company’s accounting system appear below:
Sales
$720,000
Variable expenses
$374,000
Fixed manufacturing expenses
$245,000
Fixed selling and administrative expenses
$209,000
All fixed expenses of the company are fully allocated to products in the company’s accounting
system. Further investigation has revealed that $173,000 of the fixed manufacturing expenses
and $150,000 of the fixed selling and administrative expenses are avoidable if product B90D is
discontinued.
Required:
What would be the financial advantage (disadvantage) of dropping B90D? Should the product be
dropped? Show your work!
Sales
)
Variable expenses
Contribution margin
)
Fixed expenses:
Fixed manufacturing expenses
expenses
Total fixed expenses
Net operating income (loss)
)
)
)
154
176) The management of Schmader Corporation is considering dropping product M12C. Data
from the company’s accounting system appear below:
Sales
$550,000
Variable expenses
$242,000
Fixed manufacturing expenses
$215,000
Fixed selling and administrative expenses
$132,000
All fixed expenses of the company are fully allocated to products in the company’s accounting
system. Further investigation has revealed that $137,000 of the fixed manufacturing expenses
and $79,000 of the fixed selling and administrative expenses are avoidable if product M12C is
discontinued.
Required:
a. What is the net operating income earned by product M12C according to the company’s
accounting system? Show your work!
b. Determine the financial advantage (disadvantage) for the company of dropping product M12C.
Should the product be dropped? Show your work!
156
177) The Anaconda Mining Company currently is operating at less than 50 percent of practical
capacity. The management of the company expects sales to drop below the present level of
15,000 tons of ore per month very soon. The selling price per ton of ore is $2 and the variable
cost per ton is $1. Fixed costs per month total $15,000.
Management is concerned that a further drop in sales volume will generate a loss and,
accordingly, is considering the temporary suspension of operations until demand in the metals
markets returns to normal levels and prices rebound. Management has implemented a cost
reduction program over the past year that has been successful in reducing costs. Nevertheless,
suspension of operations appears to be the only viable alternative. Management estimates that
suspension of operations would reduce fixed costs from $15,000 to $5,000 per month.
Required:
a. Why does management estimate that fixed costs will persist at $5,000 per month even though
the mine is temporarily closed?
b. At what sales volume should management suspend operations at the mine?
158
178) Suire Corporation is considering dropping product D14E. Data from the company’s
accounting system appear below:
Sales
$340,000
Variable expenses
$156,000
Fixed manufacturing expenses
$116,000
Fixed selling and administrative expenses
$75,000
All fixed expenses of the company are fully allocated to products in the company’s accounting
system. Further investigation has revealed that $72,000 of the fixed manufacturing expenses and
$48,000 of the fixed selling and administrative expenses are avoidable if product D14E is
discontinued.
Required:
a. According to the company’s accounting system, what is the net operating income earned by
product D14E?
b. What would be the financial advantage (disadvantage) of dropping product D14E? Should the
product be dropped?
160
179) Recher Corporation uses part Q89 in one of its products. The company’s Accounting
Department reports the following costs of producing the 8,000 units of the part that are needed
every year.
Per Unit
Direct materials
$
8.10
Direct labor
$
4.40
Variable overhead
$
8.60
Supervisor’s salary
$
3.20
Depreciation of special equipment
$
2.60
Allocated general overhead
$
1.30
An outside supplier has offered to make the part and sell it to the company for $27.60 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 $3,000 of these allocated
general overhead costs would be avoided. In addition, the space used to produce part Q89 could
be used to make more of one of the company’s other products, generating an additional segment
margin of $16,000 per year for that product.
Required:
a. Prepare a report that shows the financial impact of buying part Q89 from the supplier rather
than continuing to make it inside the company.
b. Which alternative should the company choose?