31) Perfect Time Company manufactures and sells watches for $36 each. Great Products Company has offered
Perfect Time $21 per watch for a one time order of 5,000 watches. The total manufacturing cost per watch, using
standard absorption costing, is $24 per unit, and consists of variable costs of $18 per watch and fixed overhead costs
of $6 per watch. Assume that Perfect Time has excess capacity and that the special order would not adversely
impact regular sales. What is the change in operating income that would result from accepting the special sales
order?
A) Increase of $15,000
B) Decrease of $15,000
C) Increase of $105,000
D) Decrease of $60,000
32) Perfect Time Company manufactures and sells watches for $36 each. Value Products Company has offered
Perfect Time $16 per watch for a one time order of 1,000 watches. The total manufacturing cost per watch, using
standard absorption costing, is $24 per unit, and consists of variable costs of $18 per watch and fixed overhead costs
of $6 per watch. Assume that Perfect Time has excess capacity and that the special order would not adversely
impact regular sales. What is the change in operating income that would result from accepting the special sales
order?
A) Increase of $2,000
B) Decrease of $18,000
C) Increase of $16,000
D) Decrease of $2,000
33) Burr Hill golf course is planning for the coming season. Investors would like to earn a 10% return on the
company’s $50,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed
costs are projected to be $25,000,000 for the golfing season. About 500,000 rounds of golf are expected to be played
each year. Variable costs are about $10 per round of golf. The Burr Hill golf course has a favorable reputation in the
area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should
Burr Hill charge for a round of golf?
A) $50
B) $60
C) $70
D) $80
34) Burr Hill golf course is planning for the coming season. Investors would like to earn a 10% return on the
company’s $50,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed
costs are projected to be $25,000,000 for the golfing season. About 500,000 rounds of golf are expected to be played
each year. Variable costs are about $10 per round of golf. The Burr Hill golf course is a price-taker and won’t be
able to charge more than its competitors, who charge $65 per round of golf. What profit will it earn in terms of
dollars?
A) $2,500,000
B) $25,000,000
C) $30,000,000
D) $32,500,000
35) Dane Metalworks produces a special kind of metal ingots which are unique, and it allows Dane to follow a cost–
plus pricing strategy. Dane has $9,000,000 of assets and shareholders expect approximately 8% return on assets.
Additional data are as follows:
Sales volume
200,000
Units per year
Variable costs
$16.00
Per unit
Fixed cost
$1,200,000
Per year
Using the cost-plus approach, what should the price per unit be? (Please round to the nearest cent.)
A) $22.00
B) $21.67
C) $25.60
D) $22.50
36) Outdoor Recworld produces a special kind of light-weight recreational vehicle that has a unique design, and it
allows the company to follow a cost-plus pricing strategy. Outdoor Recworld has $8,000,000 of assets and
shareholders expect a 12% return on assets. Additional data are as follows:
Sales volume
5,000
Units per year
Variable costs
$1,800.00
Per unit
Fixed cost
$2,200,000
Per year
Using the cost-plus approach, what should the price per unit be?
A) $2,432
B) $2,240
C) $2,560
D) $2,232
37) Able Specialty Foods sells jars of special spices used in Spanish cooking. The variable cost is $0.90 per unit.
Fixed costs are $8,400,000 per year. Able has $20,000,000 of assets, and investors expect a return of 10% on their
assets. Able sells 4,000,000 units per year. Because they are the only company which produces this kind of
product, they use cost-plus pricing. Using cost-plus methodology, how much should the price per unit be? (Please
round to the nearest cent.)
A) $3.00
B) $3.50
C) $3.16
D) $3.24
38) If a company is a price-taker, which of the following is probably TRUE?
A) The company is in a highly competitive market.
B) The company’s product is unique.
C) The company has considerable flexibility in setting prices of its products.
D) The company clearly differentiates its product from the competitors.
39) Grove Company makes special equipment used in cell towers. Each unit sells for $400. Grove uses just–in-time
inventory procedures; they produce and sell 10,000 units per year. They have provided the following income
statement data:
A foreign company has offered to buy 80 units for a reduced price of $300 per unit. The marketing manager says
the sale will not negatively impact the company’s regular sales. The sales manager says that this sale will not
require any incremental selling & administrative costs, as it is a one-time deal. The production manager reports that
there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs. If Grove
accepts the deal, how will this impact operating income?
A) Up $16,000
B) Down $8,000
C) Up $24,000
D) Down $42,000
40) Grove Company makes special equipment used in cell towers. Each unit sells for $400. Grove uses just–in-time
inventory procedures: they produce and sell 10,000 units per year. They have provided the following income
statement data:
A European company has offered to buy 50 units for a reduced price of $380 per unit. The marketing manager says
the sale will not negatively impact the company’s regular sales. The sales manager says that this sale will require the
same amount of variable selling & marketing costs as their regular sales. The production manager reports that there
is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs. If Grove accepts
the deal, how will this impact operating income?
A) Up $6,000
B) Down $8,000
C) Up $12,000
D) Down $12,000
41) Grove Company makes special equipment used in cell towers. Each unit sells for $400. Grove uses just–in-time
inventory procedures: they produce and sell 10,000 units per year. They have provided the following income
statement data:
An African cell phone company has offered a one-time deal to buy 200 units for a specially reduced price of $210
per unit. The marketing manager says the sale will not negatively impact the company’s regular sales. The sales
manager says that this sale will not require any variable selling & marketing costs. The production manager reports
that it would require an additional $25,000 of fixed manufacturing costs to accommodate the specifications of the
buyer. If Grove accepts the deal, how will this impact operating income?
A) Up $5,000
B) Down $8,000
C) Up $1,000
D) Down $3,000
42) Majestic Products is a price-setter, and they use cost-plus methodology for pricing their products which are
unique, artistically designed architectural decorations. They produce and sell 5,000 units per year, at their maximum
capacity. Variable costs are $270 per unit. Total fixed costs are $800,000 per year. The CEO has a target of
$40,000 operating profit which he wants to hit by year-end. Using the cost-plus method, what price should Majestic
use? (Please round to nearest whole dollar.)
A) $322 per unit
B) $430 per unit
C) $438 per unit
D) $278 per unit
43) Vacuum Products is a price-setter, and they use cost-plus methodology for pricing their products which are
specialty vacuum tubes used in sound equipment. The CEO is certain that he can produce and sell 200,000 units per
year, due to the high demand for the product. Variable costs are $1.40 per unit. Total fixed costs are $950,000 per
year. The CEO will receive stock options if he reports $100,000 of operating income for the year. Using the cost–
plus method, what price would allow the CEO to achieve his target? (Please round to nearest cent.)
A) $3.75 per unit
B) $6.50 per unit
C) $1.90 per unit
D) $6.15 per unit
44) Maxi Production is a price-taker. They produce large spools of electrical wire in a highly competitive market,
and so they practice target pricing. The current market price is $800 per unit. The company has $2,000,000 in
assets and shareholders expect a return of 5% on assets. The company provides the following information:
Sales volume
Units per year
Variable costs
Per unit
Fixed costs
Per year
Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If
variable costs CANNOT be reduced, how much reduction in fixed costs will be needed to achieve the profit target?
A) Reduce fixed costs by $1,300,000
B) Reduce fixed costs by $1,050,000
C) Reduce fixed costs by $990,000
D) Reduce fixed costs by $1,200,000
45) Maxi Production is a price-taker. They produce large spools of electrical wire in a highly competitive market,
and so they practice target pricing. The current market price is $800 per unit. The company has $2,000,000 in
assets and shareholders expect a return of 5% on assets. The company provides the following information:
Sales volume
Units per year
Variable costs
Per unit
Fixed costs
Per year
Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If fixed
costs cannot be reduced, how much reduction in total variable costs will be needed to achieve the profit target?
A) Reduce variable costs by $1,300,000
B) Reduce variable costs by $1,050,000
C) Reduce variable costs by $990,000
D) Reduce variable costs by $1,200,000
46) Maxi Production is a price-taker. They produce large spools of electrical wire in a highly competitive market,
and so they practice target pricing. The current market price is $800 per unit. The company has $2,000,000 in
assets and shareholders expect a return of 5% on assets. The company provides the following information:
Sales volume
Units per year
Variable costs
Per unit
Fixed costs
Per year
Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If fixed
costs CANNOT be reduced, how much does the variable cost per unit need to be in order to hit the profit goal?
(Please round to the nearest cent.)
A) $675.67 per unit
B) $642.00 per unit
C) $665.56 per unit
D) $694.20 per unit
47) Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells
5,000 of them per year. Cost data are as follows:
Variable manufacturing
$105.00
Per unit
Variable marketing
$5.00
Per unit
Fixed manufacturing
$270,000
Per year
Fixed marketing & admin
$140,000
Per year
A foreign company has offered to make a one-time purchase of 20 units at a price of $150 per unit. The marketing
manager says that this sale will not affect Potlatch’s normal sales activity, and it will not require any variable
marketing costs. The production manager says that the company is working nearly at capacity and will have to take
on additional fixed costs of $1,000 per year in order to accommodate the deal. If Potlatch accepts the sale, how will
it affect operating income?
A) Decrease by $100
B) Increase by $1,500
C) Increase by $900
D) Decrease by $900
48) Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells
5,000 of them per year. Cost data are as follows:
Variable manufacturing
$105.00
Per unit
Variable marketing
$5.00
Per unit
Fixed manufacturing
$270,000
Per year
Fixed marketing & admin
$140,000
Per year
An offer has come in for a one time sale of 100 units at a special price of $120 per unit. The marketing manager
says that the sale will not negatively impact the company’s regular sales activities, and that it will not require any
variable marketing costs. The production manager says that there’s plenty of excess capacity and the deal will not
impact fixed costs in any way. What is the effect of this deal on operating income?
A) Increase $200
B) Increase $500
C) Increase $1,000
D) Increase $1,500
49) The Squash Company has 5,500 machine hours available annually to manufacture racquets.
The following information is available for the two different racquets produced by Squash:
Pro
Unit sales price
$200
Unit variable costs
$120
Annual demand
2,000 units
Machine time
2 hours per unit
Mid
Unit sales price
$120
Unit variable costs
$66
Annual demand
4,000 units
Machine time
1.25 hours per unit
How many units of each racquet should be manufactured for Squash to maximize its operating income?
A) 2,000 units of Pro and 1,200 units of Mid
B) 4,000 units of Mid and 250 units of Pro
C) 2,000 units of Pro and 4,000 units of Mid
D) 4,000 units of Mid and 500 units of Pro
Learning Objective 20-3
1) A company has two different products that sell to separate markets. Financial data are as follows:
Product A
Product B
Total
Revenue
$12,000
$8,000
$20,000
Variable cost
($7,500)
($8,100)
($15,600)
Fixed cost (allocated)
($3,000)
($1,000)
($4,000)
Operating income
$1,500
($1,100)
$400
Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other.
Because the contribution margin of Product B is negative, it should be dropped.
2) The income statement for Sweet Dreams Company is divided by its two product lines-blankets and pillows-as
follows:
Blankets
Pillows
Total
Sales revenue
$620,000
$300,000
$920,000
Variable expenses
465,000
240,000
705,000
Contribution margin
155,000
60,000
215,000
Fixed expenses
76,000
76,000
152,000
Operating income (loss)
$79,000
$(16,000)
$63,000
If total fixed costs remain unchanged and Sweet Dreams drops the pillow line, operating income will fall by
$60,000.
3) The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as
follows:
Blankets
Pillows
Total
Sales revenue
$620,000
$300,000
$920,000
Variable expenses
465,000
240,000
705,000
Contribution margin
155,000
60,000
215,000
Fixed expenses
76,000
76,000
152,000
Operating income (loss)
$79,000
$(16,000)
$63,000
If Sweet Dreams can eliminate total fixed costs of $20,000 by dropping the pillow line, operating income will go up
by $36,000.
4) The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as
follows:
Blankets
Pillows
Total
Sales revenue
$620,000
$300,000
$920,000
Variable expenses
465,000
240,000
705,000
Contribution margin
155,000
60,000
215,000
Fixed expenses
76,000
76,000
152,000
Operating income (loss)
$79,000
$(16,000)
$63,000
Sweet Dreams should eliminate the pillows product line only, if by doing so, they can eliminate more than $60,000
of fixed costs.
5) Clay Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp. The following per unit
data are available:
Bedford Lamp
Lowell Lamp
Sale price
$25
$35
Variable costs
$17
$23
Machine hours required for 1 lamp
2
4
Total fixed costs are $30,000. Machine hour capacity is 25,000 hours per year. The Lowell lamp has the highest
contribution margin per unit, and also has the highest contribution margin per machine hour, so the company should
focus sales on the Lowell lamp.
6) RS Company‘s western territory’s forecasted income statement for the upcoming year is as follows:
Sales
$750,000
Variable expenses
420,000
Contribution margin
$330,000
Fixed expenses
396,000
Operating income
($66,000)
RS Company’s management is considering dropping the western territory. This move would be financially
advantageous only if the company could eliminate $330,000 of fixed costs or more.
7) DM Corporation has provided you with the following budgeted income statement for one of their products:
Sales
$650,000
Variable expenses
455,000
Contribution margin
$195,000
Fixed expenses
240,000
Operating income
($45,000)
DM Corporation believes that 70% of the fixed costs would be avoidable if the product line was dropped. Based on
impact to the company operating income, DM should NOT drop the product line.
8) Custom Furniture manufactures a small table and a large table. The small table sells for $800, has variable costs
of $520 per table, and takes eight direct labor hours to manufacture. The large table sells for $1,200, has variable
costs of $720, and takes sixteen direct labor hours to manufacture. If the company has no sales limitations on either
product, they should make and sell as many of the large tables as possible to maximize operating income.
9) Custom Furniture manufactures a small table and a large table. The small table sells for $800, has variable costs
of $520 per table, and takes eight direct labor hours to manufacture. The large table sells for $1,200, has variable
costs of $720, and takes sixteen direct labor hours to manufacture. The small table has a lower contribution margin
per unit, but a higher contribution margin per direct labor hour.
10) In making product mix decisions under constraining factors, a company should maximize sales of the product
with the highest contribution margin per unit.
11) A company sells two products with information as follows:
A
B
Price per unit
$10.00
$16.00
Variable cost per unit
$8.00
$11.00
Products are made by machine. 4 units of Product A can be made with one machine hour and 2 units of Product B
can be made with one machine hour. If there are no constraints on production or sales of either product, then the
company should emphasize sales of Product B.
12) If a product line has a negative contribution margin, the product line should probably be dropped, assuming no
other significant considerations.
13) In deciding whether to drop its electronics product line, a company’s manager should consider all of the
following EXCEPT:
A) the variable and fixed costs it could save by dropping the product line.
B) the revenues it would lose from dropping the product line.
C) how dropping the electronics product line would affect sales of its other products, like CDs.
D) the amount of unavoidable fixed costs.
14) Sports Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the
most recent year follow:
Total
Baseball Helmets
Football
Helmets
Sales revenue
$460,000
$310,000
$150,000
Variable expenses
355,000
235,000
120,000
Contribution margin
105,000
75,000
30,000
Fixed expenses
76,000
38,000
38,000
Operating income (loss)
$29,000
$37,000
$(8,000)
Assuming fixed costs remain unchanged, and that there would be no adverse effect on other sales, how would
dropping the Football Helmets line affect operating income?
A) Operating income will increase $8,000.
B) Operating income will increase $38,000.
C) Operating income will decrease $30,000.
D) Operating income will decrease $150,000.
15) Sports Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the
most recent year follow:
Total
Baseball Helmets
Football
Helmets
Sales revenue
$460,000
$310,000
$150,000
Variable expenses
355,000
235,000
120,000
Contribution margin
105,000
75,000
30,000
Fixed expenses
76,000
38,000
38,000
Operating income (loss)
$29,000
$37,000
$(8,000)
If $20,000 of fixed costs will be eliminated by dropping the Football Helmets line, how will operating income be
affected?
A) Operating income will increase $12,000.
B) Operating income will increase $20,000.
C) Operating income will decrease $10,000.
D) Operating income will decrease $14,000.