NOT: 4 min.
26. Houston Corporation manufacturers a part for its production cycle. The costs per unit for 5,000 units
of this part are as follows:
Direct materials
$ 32
Direct labor
40
Variable overhead
16
Fixed overhead
32
Total
$120
Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If
Houston Corporation accepts Johnson Company’s offer, total fixed costs will be reduced to $60,000.
What alternative is more desirable and by what amount is it more desirable?
Alternative Amount
a.
Make $ 20,000
b.
Make $120,000
c.
Buy $ 40,000
d.
Buy $100,000
Make ($120 5,000)
Buy [($112 5,000) + $60,000]
Make increases profits by
27. The operations of Smits Corporation are divided into the Child Division and the Jackson Division.
Projections for the next year are as follows:
Child
Jackson
Division
Division
Total
Sales revenue
$250,000
$180,000
$430,000
Variable expenses
90,000
100,000
190,000
Contribution margin
$160,000
$ 80,000
$240,000
Direct fixed expenses
75,000
62,500
137,500
Cost to buy ($17 20,000)
Cost to make:
Variable costs ($16.50 20,000)
Opportunity costs
348,000
Profit will increase by
Segment margin
$ 85,000
$ 17,500
$102,500
Allocated common costs
35,000
27,500
62,500
Total relevant benefit (loss)
$ 50,000
$(10,000)
$ 40,000
Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be
a.
$22,500.
b.
$40,000.
c.
$50,000.
d.
$60,000.
28. The operations of Knickers Corporation are divided into the Pacers Division and the Bulls Division.
Projections for the next year are as follows:
Pacers
Bulls
Division
Division
Total
Sales revenue
$420,000
$252,000
$672,000
Variable expenses
147,000
115,500
262,500
Contribution margin
$273,000
$136,500
$409,500
Direct fixed expenses
126,000
105,000
231,000
Segment margin
$147,000
$ 31,500
$178,500
Allocated common costs
63,000
47,250
110,250
Total relevant benefit (loss)
$ 84,000
$(15,750)
$ 68,250
Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be
a.
$99,750.
b.
$84,000.
c.
$68,250.
d.
$36,750.
29. The following information pertains to Dodge Company’s three products:
A
B
C
Unit sales per year
250
400
250
Selling price per unit
$9.00
$12.00
$ 9.00
Variable costs per unit
3.60
9.00
9.90
Unit contribution margin
$5.40
$ 3.00
$(0.90)
Contribution margin ratio
60%
25%
(10)%
Assume that product C is discontinued and the extra space is rented for $300 per month. All other
information remains the same as the original data. Annual profits will
a.
increase by $75.
b.
decrease by $75.
c.
increase by $525.
d.
remain the same.
30. The following information relates to a product produced by Creamer Company:
Direct materials
$24
Direct labor
15
Variable overhead
30
Fixed overhead
18
Unit cost
$87
Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although
production capacity is 600,000 units per year, the company expects to produce only 400,000 units next
year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90
each.
The incremental cost per unit associated with the special order is
a.
$84.
b.
$81.
c.
$69.
d.
$64.
Direct materials
$24
Direct labor
15
Variable overhead
30
Variable selling
12
$81
31. Meco Company produces a product that has a regular selling price of $360 per unit. At a typical
monthly production volume of 2,000 units, the product’s average unit cost of goods sold amounts to
$270. Included in this average is $120,000 of fixed manufacturing costs. All selling and administrative
costs are fixed and amount to $30,000 per month.
Meco Company has just received a special order for 1,000 units at $240 per unit. The buyer will pay
transportation, and the regular selling price will not be affected if Meco accepts the order.
Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be
a.
$60,000 increase.
b.
$60,000 decrease.
c.
$30,000 increase.
d.
$30,000 decrease.
32. The following information relates to a product produced by Creamer Company:
Direct materials
$24
Direct labor
15
Variable overhead
30
Fixed overhead
18
Unit cost
$87
Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although
production capacity is 600,000 units per year, the company expects to produce only 400,000 units next
year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90
each.
If the firm produces the special order, the effect on income would be a
a.
$360,000 increase.
b.
$360,000 decrease.
c.
$540,000 increase.
d.
$540,000 decrease.
Incremental revenue (60,000 $90)
Less: Incremental costs (60,000 $81)
Incremental profit
33. Gundy Company manufactures a product with the following costs per unit at the expected production
of 30,000 units:
Direct materials
$ 4
Direct labor
12
Variable overhead
6
Fixed overhead
8
The company has the capacity to produce 30,000 units. The product regularly sells for $40. A
wholesaler has offered to pay $32 per unit for 2,000 units.
If the firm chooses to accept the special order and reject some regular sales, the effect on operating
income would be
a.
a $20,000 increase.
b.
a $16,000 decrease.
c.
a $4,000 increase.
d.
$-0-.
34. Walton Company manufactures a product with the following costs per unit at the expected production
level of 84,000 units:
Direct materials
$12
Direct labor
36
Variable overhead
18
Fixed overhead
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120. A
wholesaler has offered to pay $110 per unit for 7,500 units. If the special order is accepted, the effect
on operating income would be a
a.
$75,000 decrease.
b.
$429,000 increase.
c.
$495,000 increase.
d.
$249,000 increase.
35. Rose Manufacturing Company had the following unit costs:
Direct materials
$24
Direct labor
8
Variable overhead
10
Fixed overhead (allocated)
18
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that
sufficient unused production capacity exists to produce the order and no regular customers will be
affected by the order, how much additional profit or loss will be generated by accepting the special
order?
a.
$12,000 profit
b.
$96,000 profit
c.
$84,000 loss
d.
$24,000 loss
36. Reggie Corporation manufactures a single product with the following unit costs for 1,000 units:
Direct materials
$2,400
Direct labor
960
Overhead (30% variable)
1,800
Selling expenses (50% variable)
900
Administrative expenses (10% variable)
840
Total per unit
$6,900
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each.
Currently, the models are sold to dealers for $7,800. Reggie Corporation’s capacity is sufficient to
produce the extra 100 units. No additional selling expenses would be incurred on the special order.
How much will income change if the special order is accepted?
a.
increase by $398,400
b.
decrease by $180,000
c.
increase by $111,600
d.
no change
37. Boone Products had the following unit costs:
Direct materials
$24
Direct labor
10
Variable overhead
8
Fixed factory (allocated)
18
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of
capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is $8
per unit. How much additional profit or loss will be generated by accepting the special order?
a.
$30,000 loss
b.
$4,000 loss
c.
$24,000 loss
d.
$4,000 profit
1,000 ($48 − $42) =
1,000 ($48 − $50) =
38. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint process. The
joint costs amount to $200,000.
If Processed Further
Units
Sales Value
Additional
Sales
Product
Produced
at Split-Off
Costs
Value
A1
3,000
$10,000
$2,500
$15,000
B2
5,000
30,000
3,000
35,000
C3
4,000
20,000
4,000
25,000
D4
6,000
40,000
6,000
45,000
If Product B2 is processed further, profits will
a.
increase by $30,000.
b.
decrease by $3,000.
c.
increase by $32,000.
d.
increase by $2,000.
39. Manning Company uses a joint process to produce products W, X, Y, and Z. Each product may be sold
at its split-off point or processed further. Additional processing costs of specific products are entirely
variable. Joint processing costs for a single batch of joint products are $120,000. Other relevant data
are as follows:
Sales Value
Additional
Sales Value of
Product
at Split-Off
Processing Costs
Final Product
W
$ 40,000
$ 60,000
$ 80,000
X
$ 12,000
$ 4,000
$ 20,000
Y
$ 20,000
$ 32,000
$120,000
Z
$ 28,000
$ 20,000
$ 32,000
$100,000
$116,000
$252,000
Which products should Manning process further?
a.
All.
b.
All except Z.
c.
Y and X.
d.
None.
Product
Revenues
Decision
W
$ 40,000
($20,000)
Sell now
X
$ 4,000
$ 4,000
Process on
Y
$100,000
Process on
Z
($16,000)
Sell now
40. Information about three joint products follows:
A
B
C
Anticipated production
5,000 lbs.
1,000 lbs.
2,000 lbs.
Selling price/lb. at split-off
$10
$30
$16
Additional processing costs/lb. after split-off
(all variable)
$ 6
$12
$24
Selling price/lb. after further processing
$20
$40
$50
The cost of the joint process is $60,000. Which of the joint products should be sold at split-off?
a.
A.
b.
B.
c.
C.
d.
Both A and B.
41. Information about three joint products follows:
X
Y
Z
Anticipated production
12,000 lbs.
8,000 lbs.
7,000 lbs.
Selling price/lb. at split-off
$16
$26
$48
Additional processing costs/lb. after split-off
(all variable)
$ 8
$20
$20
Selling price/lb. after further processing
$20
$40
$70
The cost of the joint process is $140,000. Which of the joint products should be processed further?
a.
X.
b.
Y.
c.
Z.
d.
Both X and Y.
Process Further
Figure 13-2.
ColorPro uses part 87A in the production of color printers. Unit manufacturing costs for part 87A are:
Direct materials
$8
Direct labor
2
Variable overhead
1
Fixed overhead
4
Process Further
ColorPro uses 100,000 units of 87A per year. Filbert Company has offered to sell ColorPro 100,000
units of 87A per year for $12. Fixed overhead is unavoidable.
42. Refer to Figure 13-2. Should ColorPro make or buy the part?
a.
Make the part because it will save $100,000 over buying it.
b.
Buy the part because it will save $100,000 over making it.
c.
Make the part because it will save $1,100,000 over buying it.
d.
Buy the part because it will save 1,100,000 over making it.
e.
Buy the part because it will save $300,000 over making it.
43. Refer to Figure 13-2. Now suppose that ColorPro discovers that other costs will increase by $7,000 per
year if the component is purchased rather than made internally. Should ColorPro make or buy the part?
a.
Make the part because it will save $100,000 over buying it.
b.
Buy the part because it will save $100,000 over making it.
c.
Make the part because it will save $107,000 over buying it.
d.
Buy the part because it will save $107,000 over making it.
e.
Make the part because it will save $10,000 over buying it.
44. Refer to Figure 13-2. Which of the following is a qualitative factor that might affect ColorPro’s
decision?
a.
Filbert has an outstanding reputation for quality.
b.
Ordering from Filbert would give ColorPro a chance to see how well Filbert could meet
JIT standards for ColorPro’s other products.
c.
Filbert is known for the reliability of its products.
d.
Making the part in-house would help ColorPro avoid layoffs of direct and indirect labor.
e.
All of these.
Figure 13-6.
Autry Company manufactures veterinary products. One joint process involves refining a chemical
(dactylyte) into two chemicals − dac and tyl. One batch of 5,000 gallons of dactylyte can be converted
to 2,000 gallons of dac and 3,000 gallons of tyl at a total joint processing cost of $12,000. At the
split-off point, dac can be sold for $3 per gallon and tyl can be sold for $4 per gallon. Autry has just
learned of a new process to convert dac into prodac. The new process costs $4,000 and yields 1,700
gallons of prodac for every 2,000 gallons of dac. Prodac sells for $5 per gallon.
45. Refer to Figure 13-6. What is Autry’s profit from refining one batch of dactylyte if both dac and tyl are
sold at the split-off point?
a.
$6,000
b.
$12,000
c.
$7,000
d.
$18,000
e.
$15,000
46. Refer to Figure 13-6. Should Autry process dac further?
a.
No, income will be $1,500 lower.
b.
No, income will be $5,000 lower.
c.
Yes, income will be $1,500 higher.
d.
Yes, income will be $5,000 higher.
e.
It doesn’t matter; income will be the same.
Figure 13-7.
Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house.
An outside company has offered to supply one component, part number X76, for $12 each. Ring uses
22,000 of these components per year. Costs of X76 are as follows:
Direct materials
$3.00
Direct labor
$1.50
Variable overhead
$2.75
Fixed overhead
$5.00
47. Refer to Figure 13-7. Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by
Ring. Should Ring purchase the part from the outside supplier?
a.
No, income will decrease by $71,500.
b.
No, income will decrease by $15,000.
c.
Yes, income will increase by $74,500.
d.
No, income will decrease by $10,500.
e.
Yes, income will increase by $10,500.
48. Refer to Figure 13-7. Assume that all of the fixed overhead is allocated and cannot be avoided. Should
Ring purchase the part from the outside supplier?
a.
Yes, income will increase by $104,500.
b.
No, income will decrease by $104,500.
c.
Yes, income will increase by $78,500.
d.
Yes, income will increase by $95,500.
e.
Yes, income will increase by $137,500.
Figure 13-8.
Kerrigan Lumber Yard receives 12,000 large trees each year that they process into rough logs.
Currently, Kerrigan sells the rough logs for $75 each. Kerrigan is considering processing the logs
further into refined lumber. Each log can be processed into 200 feet of refined lumber at an additional
cost of $0.40 per foot. The refined lumber can be sold for $0.95 per foot.
49. Refer to Figure 13-8. Should Kerrigan process the rough logs into refined lumber?
a.
Yes, income will increase by $35 per log.
b.
Yes, income will increase by $110 per log.
c.
Yes, income will increase by $75 per log.
d.
No, income will decrease by $35 per log.
e.
No, income will decrease by $110 per log.
50. Refer to Figure 13-8. Assume that the cost of getting the 12,000 large trees falls by half. Should
Kerrigan sell the rough logs at split-off or process it further?
a.
Process further, the reduction in the cost of trees makes that option more profitable than it
was before.
b.
Sell at split-off because the decrease in the cost of the trees makes that option more
profitable than it was before.
c.
Sell at split-off, the reduction in the cost of the trees is irrelevant.
d.
Process further, the reduction in the cost of the trees will lower further processing costs.
e.
Process further because the reduction in the cost of the trees is irrelevant.
51. A decision that involves potential further processing of joint products is which kind of decision?
a.
relevant
b.
make-or–buy
c.
sell-or-process-further
d.
special-order
e.
keep-or-drop
52. When managers are considering the optimal product mix, they are most concerned with
a.
maximizing revenue.
b.
minimizing cost.
c.
maximizing profit.
d.
minimizing selling and administrative expense.
e.
balancing productive capacity.
53. Limited resources and limited demand for a product are generally referred to as
a.
resources.
b.
problems.
c.
constraints.
d.
optima.
e.
contribution factors.
54. The solution of the product mix problem in the presence of multiple constraints requires the use of
a.
linear programming.
b.
relevant costing.
c.
differential costing.
d.
excel programming.
e.
contribution margin per unit of scarce resource.
Figure 13-3.
Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed
a line of sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and
have variable costs of $80. The tubs sell for $600 and have variable costs of $450. The glass and
ceramic sinks and tubs require the use of specialized molding equipment. The specialized molding
equipment has 4,050 hours of capacity per year. A sink uses an average of 2 hours of specialized
molding equipment time; a tub uses an average of 5 hours of specialized molding equipment time.
55. Refer to Figure 13-3. What is the contribution margin per hour of specialized molding equipment time
for sinks?
a.
$35
b.
$33.33
c.
$70
d.
$200
e.
$68.33
56. Refer to Figure 13-3. Assume that EBP can sell as many as 1,000 sinks and 500 tubs per year. How
many tubs should EBP produce?
a.
1,000
b.
500
c.
410
d.
675
e.
0
57. Refer to Figure 13-3. What is the contribution margin per hour of specialized molding time for tubs?
a.
$35
b.
$68.33
c.
$70
d.
$200
e.
$30
58. Refer to Figure 13-3. Assuming that specialized molding equipment time is the only constrained
resource, and that EBP can sell as many tubs and sinks as it can produce, how many sinks should be
sold?
a.
2,050
b.
2,025
c.
0
d.
4,050
e.
810
NOT: 4 min.
Figure 13-4.
Connolly Company produces two types of lamps, classic and fancy, with unit contribution margins of
$13 and $21, respectively. Each lamp must spend time on a special machine. The firm owns four
machines that together provide 18,000 hours of machine time per year. The classic lamp requires 0.20
hours of machine time, the fancy lamp requires 0.50 hours of machine time.
59. Refer to Figure 13-4. What is the contribution margin per hour of machine time for a classic lamp?
a.
$26
b.
$104
c.
$16
d.
$65
e.
$13
60. Refer to Figure 13-4. What is the contribution margin per hour of machine time for a fancy lamp?
a.
$21
b.
$42
c.
$13
d.
$8
e.
$6
61. Refer to Figure 13-4. How many of each type of lamp must be sold to optimize total contribution
margin?
a.
18,000 classic lamps; 0 fancy lamps
b.
0 classic lamps; 30,000 fancy lamps
c.
10,000 classic lamps; 10,000 fancy lamps
d.
0 classic lamps; 9,000 fancy lamps
e.
90,000 classic lamps; 0 fancy lamps
62. Refer to Figure 13-4. What is the total contribution margin of the optimal mix of classic and fancy
lamps?
a.
$1,280,000
b.
$950,000
c.
$1,000,000
d.
$1,170,000
e.
$90,000
Figure 13-5.
Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit
contribution margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14. Each
model must spend time on a special machine. The firm owns two machines that together provide 4,000
hours of machine time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires
30 minutes of machine time.
63. Refer to Figure 13-5. What is the amount of machine time for model K-3 in terms of percent of a
machine hour?
a.
10%
b.
20%
c.
25%
d.
40%
e.
50%
64. Refer to Figure 13-5. What is the contribution margin per unit of scarce resource (machine time) for
Model K-3?
a.
$24
b.
$12
c.
$6
d.
$14
e.
$28
65. Refer to Figure 13-5. What is the amount of machine time for model P-4 in terms of percent of a
machine hour?
a.
10%
b.
20%
c.
25%
d.
30%
e.
50%
66. Refer to Figure 13-5. What is the contribution margin per unit of scarce resource (machine time) for
Model P-4?
a.
$6
b.
$12
c.
$24
d.
$14
e.
$28
67. Refer to Figure 13-5. Now suppose that Santorino Company can sell only 5,500 units of each model.
How many units of Model K-3 should be produced?
a.
5,500
b.
312
c.
1,250
d.
2,750
e.
5,000
68. Refer to Figure 13-5. Now suppose that Santorino Company can sell only 5,500 units of each model.
How many units of Model P-4 should be produced?
a.
5,500
b.
5,000
c.
1,250
d.
2,750
e.
1,375
Figure 13-9.
Sabor Inc. is a medical testing laboratory that performs several tests and analyses for hospitals in the
area. Four of the tests that they perform require the use of a specialized machine that can supply
14,000 hours per year. Information on the four lab tests follows:
Test A
Test B
Test C
Test D
Charging rate
$65
$51
$48
$32
Variable cost
$25
$18
$13
$8
Machine hours
3
2
1
0.5
69. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test A?