Chapter 14 – Decision Making: Relevant Costs and Benefits
44. Brilliant, Inc. reported the following results from the sale of 24,000 units of IT-54:
Sales
$528,000
Variable manufacturing costs
288,000
Fixed manufacturing costs
120,000
Variable selling costs
52,800
Fixed administrative costs
35,200
Extra Company has offered to purchase 3,000 IT-54s at $16 each. Brilliant has available
capacity, and the president is in favor of accepting the order. She feels it would be profitable
because no variable selling costs will be incurred. The plant manager is opposed because the
“full cost” of production is $17. Which of the following correctly notes the change in income
if the special order is accepted?
45. Deltones, a manufacturer of computer peripherals, has excess capacity. The company’s
Alabama plant has the following per-unit cost structure for item no. 89:
Variable manufacturing
$40
Fixed manufacturing
15
Variable selling
8
Fixed selling
11
Traceable fixed administrative
4
Allocated administrative
2
The traceable fixed administrative cost was incurred at the Alabama plant; in contrast, the
allocated administrative cost represents a “fair share” of Deltones’ corporate overhead.
Alabama has been presented with a special order of 5,000 units of item no. 89 on which no
selling cost will be incurred. The proper relevant cost in deciding whether to accept this
special order would be:
46. Forrest Corporation manufactures parts that are used in the production of washers and
dryers. The following costs are associated with part no. 65:
Direct materials
$50
Direct labor
19
Variable manufacturing overhead
22
Fixed manufacturing overhead
15
Variable selling costs
11
The company received a special-order inquiry from an appliance manufacturer in Brazil for
15,000 units of part no. 65. Only $3 of fixed manufacturing will be incurred on the order, and
the variable selling costs per unit will amount to only $5. Since Forrest has excess capacity,
the minimum price that Forrest should charge the Brazil manufacturer is:
47. The term “outsourcing” is most closely associated with:
48. Canyon Trails is studying whether to outsource its Human Resources (H/R) activities.
Salaried professionals who earn $390,000 would be terminated; in contrast, administrative
assistants who earn $120,000 would be transferred elsewhere in the organization.
Miscellaneous departmental overhead (e.g., supplies, copy charges, overnight delivery) is
expected to decrease by $30,000, and $25,000 of corporate overhead, previously allocated to
Human Resources, would be picked up by other departments. If Canyon Trails can secure
needed H/R services locally for $410,000, how much would the company benefit by
outsourcing?
49. Elkhart, a division of Indiana Enterprises, currently makes 100,000 units of a product that
has created a number of manufacturing problems. Elkhart’s costs follow.
Manufacturing costs:
Variable
$540,000
Fixed
180,000
Allocated corporate administrative cost
60,000
If Elkhart were to discontinue production, fixed manufacturing costs would be reduced by
70%. The relevant cost of deciding whether the division should purchase the product from an
outside supplier is:
50. Boise, a division of Price Enterprises, currently performs computer services for various
departments of the firm. One of the services has created a number of operating problems, and
management is exploring whether to outsource the service to a consultant. Traceable variable
and fixed operating costs total $80,000 and $25,000, respectively, in addition to $18,000 of
corporate administrative overhead allocated from Price. If Boise were to use the outside
consultant, fixed operating costs would be reduced by 70%. The irrelevant costs in Boise’s
outsourcing decision total:
51. Which of the following statements regarding costs and decision making is correct?
52. An architecture firm currently offers services that appeal to both individuals and
commercial clients. If the firm decides to discontinue services to individuals because of
ongoing losses, which of the following costs could the company likely avoid?
53. Haverton Industries is studying whether to drop a product because of ongoing losses.
Costs that would be relevant in this situation would include variable manufacturing costs as
well as:
54. Fairline Skyways has a significant presence at the Charlotte International Airport and
therefore operates the Diamond Club, which is across from gate 36 in terminal 1. The
Diamond Club provides food and business services for the company’s frequent flyers.
Consider the following selected costs of Club operation:
1. Receptionist and supervisory salaries
2. Catering
3. Terminal depreciation (based on square footage)
4. Airport fees (computed as a percentage of club revenue)
5. Allocated Fairline administrative overhead
Management is exploring whether to close the club and expand the seating area for gate 36.
Which of the preceding expenses would the airline classify as unavoidable?
55. The Boot Department at the Omaha Department Store is being considered for closure. The
following information relates to boot activity:
Sales revenue
$350,000
Variable costs:
Cost of goods sold
280,000
Sales commissions
30,000
Fixed operating costs
90,000
If 70% of the fixed operating costs are avoidable, should the Boot Department be closed?
56. Carlton Corporation is composed of five divisions. Each division is allocated a share of
Carlton’s overhead to make divisional managers aware of the cost of running the corporate
headquarters. The following information relates to the Metro Division:
Sales revenue
$7,500,000
Variable operating costs
5,100,000
Traceable fixed operating costs
1,900,000
Allocated corporate overhead
300,000
If the Metro Division is closed, 100% of the traceable fixed operating costs can be eliminated.
What will be the impact on Carlton’s overall profitability if the Metro Division is closed?
57. San Ruiz Interiors provides design services to residential and commercial clients. The
residential services produce a contribution margin of $450,000 and have traceable fixed
operating costs of $480,000. Management is studying whether to drop the residential
operation. If closed, the fixed operating costs will fall by $370,000 and San Ruiz’ income
will:
58. Howard Enterprises, which has three departments, recently reported the following results:
A
B
C
Sales revenue
$12,000
$48,000
$40,000
Less: Operating costs
11,400
59,800
50,500
Operating income (loss)
$ 600
$(11,800)
$(10,500)
The company incurred variable operating costs as well as $25,000 of fixed operating costs.
The $25,000 amount was allocated to A, B, and C on the basis of sales revenue and is
included in the cost figures noted above. Which department(s), if any, should be closed if
none of the fixed operating costs can be avoided?
Chapter 14 – Decision Making: Relevant Costs and Benefits
Use the following information to answer Questions 59 and 60.
Omar Industries manufactures two products: Regular and Super. The results of operations for
20×1 follow.
Regular
Super
Total
Units
10,000
3,700
13,700
Sales revenue
$240,000
$740,000
$980,000
Less: Cost of goods sold
180,000
481,000
661,000
Gross Margin
$ 60,000
$259,000
$319,000
Less: Selling expenses
60,000
134,000
194,000
Operating income (loss)
$ 0
$125,000
$125,000
Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular
and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per
unit for Super; remaining selling amounts are fixed.
59. Omar Industries wants to drop the Regular product line. If the line is dropped, company-
wide fixed manufacturing costs would fall by 10% because there is no alternative use of the
facilities. What would be the impact on operating income if Regular is discontinued?
60. Disregard the information in the previous question. If Omar Industries eliminates Regular
and uses the available capacity to produce and sell an additional 1,500 units of Super, what
would be the impact on operating income?
61. When deciding whether to sell a product at the split-off point or process it further, joint
costs are not usually relevant because:
62. Product costs incurred after the split-off point in a joint processing environment are
called:
63. Product costs incurred before the split-off point in a joint processing environment are
called:
64. Kranston Company is considering whether to sell Retox at the split-off point or subject it
to further processing and produce a more refined product known as Retox-F. Consider the
following items:
I. The selling price of Retox-F
II. The joint processing cost of Retox.
III. The separable cost of producing Retox-F.
Which of the above items is (are) relevant to Kranston’s decision to process Retox into Retox-
F?
65. Phillippe Inc. manufactures A and B from a joint process (cost = $80,000). Five thousand
pounds of A can be sold at split-off for $20 per pound or processed further at an additional
cost of $20,000 and then sold for $25 per pound. If Phillippe decides to process A beyond the
split-off point, operating income will:
66. Phillippe manufactures A and B from a joint process (cost = $80,000). Ten thousand
pounds of B can be sold at split-off for $15 per pound or processed further at an additional
cost of $20,000 and later sold for $16. If Phillippe decides to process B beyond the split-off
point, operating income will:
Use the following information to answer Questions 67-69.
Cheyenne Enterprises manufactures Nuts and Bolts from a joint process (cost = $80,000).
Five thousand pounds of Nuts can be sold at split-off for $20 per pound; ten thousand pounds
of Bolts can be sold at split-off for $15 per pound. For product costing purposes Cheyenne
allocates joint costs using the relative sales value method.
67. The amount of joint cost allocated to Nuts would be:
68. The amount of joint cost allocated to Bolts would be:
69. The amount of joint cost allocated to Nuts and Bolts, respectively, would be:
70. Galveston Corporation has $200,000 of joint processing costs and is studying whether to
process J and K beyond the split-off point. Information about J and K follows.
Product J
Product K
Tons produced
25,000
15,000
Separable variable processing costs beyond split-off
$64,000
$100,000
Selling price per ton at split-off
15
52
Selling price per ton after additional processing
21
58
If Galveston desires to maximize total company income, what should the firm do with regard
to Products J and K?
Product J
Product K
Sell at split-off
Sell at split-off
Sell at split-off
Process beyond split-off
Process beyond split-off
Sell at split-off
Process beyond split-off
Process beyond split-off
There is not enough information to judge.
71. A company that is operating at full capacity should emphasize those products and services
that have the:
72. A firm that decides to emphasize those goods with the highest contribution margin per
unit may have made an incorrect decision when the company:
73. Homer Enterprises, which produces various goods, has limited processing hours at its
manufacturing plant. The following data apply to product no. 607:
Sales price per unit: $9.60
Variable cost per unit: $6.20
Process time per unit: 4 hours
Management is now studying whether to devote the firm’s limited hours to product no. 607 or
to other products. What key dollar amount should management focus on when determining
no. 607’s “value” to the firm and deciding the best course of action to follow?