a.
$40
b.
$65
c.
$25.50
d.
$13.33
e.
$15.67
70. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test B?
a.
$20.50
b.
$33
c.
$16.25
d.
$16.50
e.
$18
71. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test C?
a.
$48
b.
$35
c.
$13
d.
$16
e.
$24
72. Refer to Figure 13-9. What is the contribution margin per unit of machine time for Test D?
a.
$20
b.
$32
c.
$8
d.
$48
e.
$24
73. Raffles Company routinely bids on construction jobs. Raffles first determines the budgeted product
cost of the job and then applies a markup of 50%. If a bid of $15,000 is submitted for a new job, which
of the following is true?
a.
Budgeted product cost is $15,000.
b.
$5,000 is pure profit.
c.
All costs pertaining to the job total $15,000.
d.
$5,000 includes fixed overhead, selling and administrative expense, and profit.
e.
$5,000 includes selling and administrative expense, and profit.
74. The method of determining the cost of a product or service based on the price that customers are
willing to pay is called
a.
relevant costing.
b.
differential costing.
c.
target costing.
d.
product costing.
e.
overall costing.
75. Moss Company charges cost plus 35%. What is the price of an item with cost equal to $65?
a.
$73.25
b.
$95.80
c.
$87.75
d.
$65.50
e.
$22.75
76. Stadium Company charges cost plus 60%. If the price of an item is $260, what is the item’s cost?
a.
$180
b.
$162.50
c.
$100
d.
$125.50
e.
$150.75
77. Mattson Construction charges each customer a price equal to the cost of direct materials, direct labor,
and overhead plus 40%. Job #1845 included the following costs:
Direct materials
$39,000
Direct labor
$67,000
Overhead
$26,000
What is price charged for Job 1845?
a.
$86,000
b.
$42,400
c.
$106,000
d.
$184,800
e.
$166,154
78. Super Pet Supplies sets prices at cost plus 70% of cost. The cost of an aquarium start-up kit is $110.
What price does Super Pet Supplies charge for the aquarium start-up kit?
a.
$195
b.
$200
c.
$187
d.
$77
e.
$180
79. Curtis Company sets price equal to cost plus 50%. Recently, Curtis charged a customer a price of $150
for an item. What was the cost of the item to Curtis?
a.
$50
b.
$75
c.
$100
d.
$40
e.
$80
80. Wilson Custom Cabinetry makes cabinets to order and prices the completed jobs at product cost plus
40%. Recently, Wilson finished a job and billed the customer $560. If direct materials for the job cost
$130, and direct labor cost $180, what was the applied overhead for the job?
a.
$250
b.
$179
c.
$350
d.
$400
e.
$90
81. Welker Company is designing an all-in-one grill and cooler aimed at sports fans. The company
believes that the product can be sold for $180; and it requires a 30% profit on new products. What is
the target cost of the all-in-one grill and cooler?
a.
$140
b.
$54
c.
$175
d.
$126
e.
$168
82. Shear-it, Inc., produces paper shredders. Shear-it is considering a new shredder design for home
offices. The marketing vice president believes that a basic unit in a variety of attractive colors could be
sold for $70. Shear-it requires that all new products yield 30% profit. What is the target cost of the new
shredder?
a.
$21
b.
$91
c.
$49
d.
$100
e.
$63.70
83. Brorsen, Inc., has just designed a new product with a target cost of $64. Brorsen requires new product
to have a profit of 20%. What is the target price for the new product?
a.
$64
b.
$12.80
c.
$320
d.
$80
e.
$53
84. Teller Company has designed a caller ID machine with a large screen that can be seen easily from
across the room. The Sales Department believes that this product can be sold for $30 each. Teller
requires that all new products yield 15% profit. What is the target cost of the new product?
a.
$26
b.
$4.50
c.
$30
d.
$25.50
e.
$28.50
85. Fester Company was making a product for $60 and selling it for $80. A competitor began selling the
same product for $68. If Fester is to meet the competition’s price, and maintain the same amount of
profit per unit, what is target cost?
a.
$40
b.
$60
c.
$48
d.
$17
e.
$63
86. Victor’s Detailing customers would be willing to pay $57 per detail. The company requires an 80%
markup on each job. The average job would cost $30.
Victor’s Detailing uses markup pricing to set the price on each job. What is the price Victor should
quote a new customer?
a.
$30
b.
$24
c.
$54
d.
$84
e.
$240
87. Victor’s Detailing customers would be willing to pay $57 per detail. The company requires a 40%
profit on each job. The average job would cost $30.
Victor’s Detailing uses target-costing. What is the price they should quote a new customer?
a.
$30
b.
$24
c.
$57
d.
$54
e.
$84
88. Victor’s Detailing customers would be willing to pay $57 per detail. The company requires a 40%
profit on each job. The average job would cost $30.
Victor’s uses target costing. Victor’s Detailing should:
a.
sell their business.
b.
ask their customers to pay more.
c.
sell their services at the price customers are willing to pay.
d.
find a way to reduce costs.
e.
reduce their required percentage to stay in business.
PROBLEM
1. Sherrell Washington owns a successful hole-in-the-wall bagel shop called Big Apple Bagels. Sherrell
wants to expand the shop by leasing the space next door for $500 per month, and adding tables and
chairs so that customers can dine in. She figures that the tables and chairs will cost $4,000 and that the
bagel machine, that cost $3,500 five years ago, would have to be scrapped in favor of a larger machine
costing $6,400. She thinks sales would increase by $4,000 per month. Variable costs are 50% of sales.
A.
What are the relevant costs and benefits of expanding into the new space?
B.
What are the irrelevant costs and benefits of expanding into the new space?
The relevant costs and benefits include:
Rent on additional space
Table and chairs $4,000
New bagel machine $6,400
Increased sales $4,000
Variable costs on new sales
2. Kara Ring owns a successful flower shower called Always Blooming. Kara wants to expand the shop
by leasing the space next door for $1,200 per month, and adding refrigerators to keep the flowers fresh
and two checkout counters so the customers do not have to wait in long lines. She currently pays
$1,000 per month for her current store space and has two refrigerators that cost her $6,000 each two
years ago. She figures that the new refrigerators and counters will cost $25,000. She also has
determined that the current cash register that initially cost her $1,000 two years ago and has been
depreciated $250 each year would have to be replaced with two new cash registers costing $1,500
each. She thinks sales would increase by $10,000 per month. Variable costs are 40% of sales.
Required:
A.
What are the relevant costs and benefits of expanding into the new space?
B.
What are the irrelevant costs and benefits of expanding into the new space?
3. Veblen Company manufactures a variety of athletic shoes: basketball, running, and tennis. Sales of the
tennis shoes have fallen off. Veblen is considering several options: 1) drop the tennis shoe line; 2)
replace the tennis shoe line with golf shoes; 3) retool the tennis shoe line to make “Airtennies.” Price
and cost data are as follows:
Basketball
Running
Tennis
Golf
Airtennies
Irrelevant costs and benefits include:
Rent paid for current space
Current bagel machine cost $3,500
Current sales
Current variable costs
Price
$90
$65
$40
$60
$70
Variable cost/unit
$45
$40
$35
$43
$50
Fixed costs
$200,000
$210,000
$50,000
$50,000
$90,000
Number of units
10,000
15,000
2,500
25,000
6,000
If the tennis shoe line is dropped, the $50,000 fixed cost is totally avoidable.
A.
Calculate the impact on operating income, using relevant amounts only, for keeping
the tennis shoe line.
B.
Calculate the impact on operating income, using relevant amounts only, for option 1.
C.
Calculate the impact on operating income, using relevant amounts only, for option 2.
D.
Calculate the impact on operating income, using relevant amounts only, for option 3.
E.
Which option is best?
4. Tyler Company has been approached by a new customer with an offer to purchase 6,000 units of its
product KR200 at a price of $11 each. The existing sales would not be affected by this special order.
Tyler normally produces 40,000 units but plans to produce and sell 30,000 in the coming year. The
normal sales price is $18 per unit. Unit cost information is as follows:
B. Option 1
C. Option 2
COGS & Net FC
987,500
Net Change
(replace tennis shoes with golf shoes) is the most profitable.
Option 2
Sales Increase = 25,000 $60
$1,500,000 − 100,000 = $1,400,000
$1,075,000 +$50,000 − 137,500 = $987,500
Net Increase = $1,400,000 − $987,500 = $412,500
Option 3
Sales Increase = 6,000 $70
$420,000 − 100,000 = $320,000
Option 3 COGS and Fixed Cost Increase
= 6,000 $50
$300,000 +90,000 − 137,500 = $252,500
Net Increase = $320,000 − $252,500 = $67,500
Direct materials
$4.00
Direct labor
$2.75
Variable overhead
$1.50
Fixed overhead
$3.25
Total
$11.50
If Tyler accepts the order, no fixed manufacturing activities will be affected because there is sufficient
excess capacity.
Required:
A. By how much will profit increase or decrease if the order is accepted?
B. Should Tyler accept the special order?
5. Junior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit.
Recently the supplier informed Junior Company that a 20% increase will take effect next year. Junior
has some additional space and could produce the units for the following per-unit costs (based on
30,000 units):
Direct materials
$16
Direct labor
12
Variable overhead
12
Fixed overhead
10
Total
$50
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In
addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.
Required: Should Junior Company buy the part externally or make it internally?
If purchased externally:
Purchase price (30,000 $40 1.20)
Direct materials
$4.00
Direct labor
$2.75
Variable overhead
$1.50
$8.25
$2.75 x 6,000 = $16,500 increase
6. Tapeo Company has always made its electronic components that go into their GPS systems in-house.
Streeter Company has offered to supply these electronic components at a price of $38 each. Tapeo
uses 18,000 units of these components each year. The cost per unit of this component is as follows:
Direct material
$13.75
Direct labor
$16.00
Variable overhead
$7.00
Fixed overhead
$8.25
Total
$45.00
Assume that 45% of Tapeo Company’s fixed overhead would be eliminated if the electronic
component was no longer produced in-house.
Required:
A. If Tapeo decided to purchase the electronic component from Streeter Company how much would its
operating income increase or decrease?
B. Should Tapeo continue to make the electronic component or buy it from Streeter Company?
Direct material
$13.75
$0.00
Direct labor
$16.00
$0.00
Variable overhead
$7.00
$0.00
Avoidable Fixed overhead
$3.71
$0.00
Purchase cost
$0.00
$38.00
Total
$40.46
$38.00
$2.46 x 18,000 = $44,280 increase in operating income