16) 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 the Football Helmets line is dropped, total fixed costs remain unchanged, and the space formerly used to
produce the line is rented for $45,000 per year, how will operating income be affected?
A) Operating income will increase $15,000.
B) Operating income will increase $37,000.
C) Operating income will decrease $7,000.
D) Operating income will decrease $37,000.
17) 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 the Football Helmet line is dropped, total fixed costs remain unchanged, and the space formerly used to
produce the Football Helmet line is used to double the production of Baseball Helmets, how will operating income
be affected?
A) Operating income will increase $37,000.
B) Operating income will increase $45,000.
C) Operating income will decrease $37,000.
D) Operating income will decrease $45,000.
18) 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. If
Product B is dropped, what would the impact be on total operating income?
A) Increase $1,100
B) Increase $100
C) Decrease $1,100
D) Decrease $100
19) 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 of $500 could be eliminated if product B was dropped; assume furthermore that dropping
one product would not impact sales of the other. If Product B is dropped, what would the impact be on total
operating income?
A) Increase $1,100
B) Increase $600
C) Increase $500
D) Increase $100
20) Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are
available:
Toaster Ovens
Bread Machines
$60
$135
$38
$62
Easy Cook can manufacture five toaster ovens per machine hour and three bread machines per machine hour. Easy
Cook’s production capacity is 1,500 machine hours per month. What is the contribution margin per machine hour for
bread machines?
A) $73
B) $110
C) $219
D) $365
21) Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are
available:
Toaster Ovens
Bread Machines
$60
$135
$38
$62
Easy Cook can manufacture five toaster ovens per machine hour and three bread machines per machine hour. Easy
Cook’s production capacity is 1,500 machine hours per month. What is the contribution margin per machine hour
for toaster ovens?
A) $110
B) $125
C) $219
D) $365
22) Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are
available:
Toaster Ovens
Bread Machines
$60
$135
$38
$62
Easy Cook can manufacture five toaster ovens per machine hour and three bread machines per machine hour. Easy
Cook’s production capacity is 1,500 machine hours per month, and Easy Cook can sell as many units of either type
as it can produce. To maximize profits, what product and how many units should the company produce in a month?
A) 4,500 bread machines
B) 2,250 toaster ovens and 3,750 bread machines
C) 3,750 toaster ovens and 2,250 bread machines
D) 7,500 toaster ovens
23) Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are
available:
Toaster Ovens
Bread Machines
$60
$135
$38
$62
Easy Cook can manufacture five toaster ovens per machine hour and three bread machines per machine hour. Easy
Cook’s production capacity is 1,500 machine hours per month. Marketing limitations indicate that Easy Cook can
sell a maximum of 5,000 toasters a month, and 3,000 bread machines per month. To maximize profits, what product
and how many units should the company produce in a month?
A) 4,500 bread machines
B) 2,500 toaster ovens and 3,000 bread machines
C) 3,750 toaster ovens and 2,250 bread machines
D) 7,500 toaster ovens
24) Shine Bright Company has three product lines-D, E, and F. The following information is available:
D
E
F
Sales
$60,000
$38,000
$26,000
Variable costs
36,000
18,000
12,000
Contribution margin
24,000
20,000
14,000
Fixed expenses
12,000
15,000
16,000
Operating income (loss)
$12,000
$5,000
$(2,000)
Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assuming
fixed costs are unavoidable, if Shine Bright Company drops product line F and does not replace it, what effect will
this have on operating income?
A) Operating income will increase $2,000.
B) Operating income will increase $14,000.
C) Operating income will increase $16,000.
D) Operating income will decrease $14,000.
25) Shine Bright Company has three product lines-D, E, and F. The following information is available:
D
E
F
Sales
$60,000
$38,000
$26,000
Variable costs
36,000
18,000
12,000
Contribution margin
24,000
20,000
14,000
Fixed expenses
12,000
15,000
16,000
Operating income (loss)
$12,000
$5,000
$(2,000)
Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assuming
fixed costs are unavoidable, if Shine Bright Company drops product line F and rents the space formerly used to
produce product F for $17,000 per year, what effect will this have on operating income?
A) Operating income will increase $3,000.
B) Operating income will increase $15,000.
C) Operating income will decrease $14,000.
D) Operating income will decrease $3,000.
26) Shine Bright Company has three product lines: D, E, and F. The following information is available:
D
E
F
Sales
$60,000
$38,000
$26,000
Variable costs
36,000
18,000
12,000
Contribution margin
24,000
20,000
14,000
Fixed expenses
12,000
15,000
16,000
Operating income (loss)
$12,000
$5,000
$(2,000)
Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assume that
$8,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating
income?
A) Operating income will increase $3,000.
B) Operating income will increase $15,000.
C) Operating income will decrease $6,000.
D) Operating income will decrease $3,000.
27) Shine Bright Company has three product lines: D, E, and F. The following information is available:
D
E
F
Sales
$60,000
$38,000
$26,000
Variable costs
36,000
18,000
12,000
Contribution margin
24,000
20,000
14,000
Fixed expenses
12,000
15,000
16,000
Operating income (loss)
$12,000
$5,000
$(2,000)
Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assume that
$15,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating
income?
A) Operating income will increase $3,000.
B) Operating income will increase $1,000.
C) Operating income will decrease $6,000.
D) Operating income will decrease $3,000.
28) 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 is considering eliminating the pillow product line. If they do so, they will be able to eliminate
$76,000 of total fixed costs. In that event, how would that business decision impact operating income?
A) Increase $76,000
B) Decrease $60,000
C) Increase $42,000
D) Increase $16,000
29) Which of the following statements describes a scenario when management should consider dropping a business
division?
A) The division has consistently reported an operating loss.
B) The division‘s avoidable fixed costs are less than its contribution margin.
C) The division‘s avoidable fixed costs are greater than its contribution margin.
D) The division’s unavoidable fixed costs are greater than its operating loss.
30) 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
$25
$35
$17
$23
2
4
Total fixed costs are $30,000, and Clay can sell a maximum of 10,000 units of each style of lamp annually.
Machine hour capacity is 25,000 hours per year. What is the contribution margin per unit for the Bedford lamp?
A) $4 per machine hour
B) $2 per machine hour
C) $6 per machine hour
D) $8 per machine hour
31) 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
$25
$35
$17
$23
2
4
Total fixed costs are $30,000, and Clay can sell a maximum of 10,000 units of each style of lamp annually.
Machine hour capacity is 25,000 hours per year. What is the contribution margin per unit for the Lowell lamp?
A) $4 per machine hour
B) $2 per machine hour
C) $3 per machine hour
D) $12 per machine hour
32) 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
$25
$35
$17
$23
2
4
Total fixed costs are $30,000. Machine hour capacity is 25,000 hours per year. Assuming that the company can sell
as many products as it can make, which product mix would deliver the highest operating income?
A) 10,00 Bedford lamps, 1,250 Lowell lamps
B) Zero Bedford lamps, 6,250 Lowell lamps
C) 12,500 Bedford lamps, zero Lowell lamps
D) 12,500 Bedford lamps, 12,500 Lowell lamps
33) 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
$25
$35
$17
$23
2
4
Total fixed costs are $30,000. Marketing data indicate that the company can sell up to 8,000 units of the Bedford
lamp and up to 4,000 units of the Lowell lamp. Machine hour capacity is 25,000 hours per year. What product mix
will deliver the optimum operating income?
A) 4,500 Bedford lamps, 4,000 Lowell lamps
B) 12,500 Bedford lamps, zero Lowell lamps
C) 8,000 Bedford lamps, 2,250 Lowell lamps
D) 7,500 Bedford lamps, 3,000 Lowell lamps
34) Foster Corporation produces two products-P and Q. P sells for $4.00 per unit; Q sells for $5.25 per unit.
Variable costs for P and Q are respectively, $2.50 and $3.09. There are 3,570 direct labor hours per month available
for producing the two products. Product P requires 3 direct labor hours per unit and Product Q requires 4.5 direct
labor hours per unit. The company can sell as many of either product as it can produce.
What is the maximum monthly contribution margin that Foster can generate under the circumstances? (Please round
to nearest whole dollar.)
A) $1,785
B) $1,714
C) $1,650
D) $2,567
35) Foster Corporation produces two products-P and Q. P sells for $4.00 per unit; Q sells for $5.25 per unit.
Variable costs for P and Q are respectively, $2.50 and $3.09. There are 3,570 direct labor hours per month available
for producing the two products. Product P requires 3 direct labor hours per unit and Product Q requires 4.5 direct
labor hours per unit. The company can sell up to 800 units of each kind per month.
What is the maximum monthly contribution margin that Foster can generate under the circumstances? (Please round
to nearest whole dollar.)
A) $1,785
B) $1,714
C) $1,762
D) $2,567
36) 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 and has determined that 90% of the fixed
expenses are avoidable. What is the change in RS Company’s forecasted operating income for the upcoming year if
the western territory is dropped?
A) Up $26,400
B) Up $1,640
C) Down $330,000
D) Up $66,000
37) 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 and has determined that $300,000 of the
fixed expenses are avoidable. What is the change in RS Company’s forecasted operating income for the upcoming
year if the western territory is dropped?
A) Up $26,400
B) Up $30,000
C) Down $30,000
D) Down $6,000
38) 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 has just encountered environmental problems with the product and will be forced to drop the product line
altogether. They will be able to eliminate 75% of the fixed expenses. What will the impact on operating income be?
A) Down $45,000
B) Down $15,000
C) Up $8,500
D) Up $7,500
39) 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. Calculate the contribution margin per direct
labor hour for the small table.
A) $29 per direct labor hour
B) $32 per direct labor hour
C) $35 per direct labor hour
D) $36 per direct labor hour
40) 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. Calculate the contribution margin per direct
labor hour for the large table.
A) $30 per direct labor hour
B) $32 per direct labor hour
C) $35 per direct labor hour
D) $36 per direct labor hour
41) In making product mix decisions under constraining factors, which of the following is the key to choosing the
product type to be maximized?
A) Revenue per unit
B) Contribution margin per unit of product
C) Contribution margin per unit of the constraining factor
D) Gross profit per unit using absorption costing
42) 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 company has a maximum of 4,800 direct
labor hours per month when operating at full capacity. If there are no constraints on sales of either product, and the
company could choose any proportions of product mix that they wanted, what is the maximum contribution margin
the company could earn?
A) $122,000
B) $176,000
C) $154,500
D) $168,000
43) 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 company has a maximum of 4,800 direct
labor hours per month when operating at full capacity. If there are no constraints on sales of either product, and the
company could choose any proportions of product mix that they wanted, what is the optimum product mix to
maximize operating income?
A) 900 units of small, 100 units of large
B) Zero units of small, 300 units of large
C) 300 units of small, 200 units of large
D) 600 units of small, zero units of large
44) 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. The company has a maximum of 2,000 machine hours available per month.
Assume there are no constraints on sales of either product, and the company could choose any product mix they
wish. What is the maximum amount of contribution margin that the company could earn in a month?
A) $16,000
B) $18,000
C) $20,000
D) $22,000
45) 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. The company has a maximum of 2,000 machine hours available per month.
The company can sell up to 5,000 units of Product A per month, and up to 2,000 units of Product B for the month.
What is the maximum amount of contribution margin that the company could earn in a month given the stated
constraints?
A) $16,000
B) $18,000
C) $20,000
D) $22,000
46) 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. The company has a maximum of 2,000 machine hours available per month.
The company can sell up to 5,000 units of Product A per month, and up to 2,000 units of Product B for the month.
What is the optimum product mix given the stated constraints?
A) 2,000 units of A, 4,000 units of B
B) 4,000 units of A, 2,000 units of B
C) Zero units of A, 4,000 units of B
D) 6,000 units of A, zero units of B
Learning Objective 20-4
1) Dong Fang Company fabricates inexpensive automobiles for sale to 3rd world countries. Each auto includes one
wiring harness, which is currently made in-house. Details of the harness fabrication are as follows:
Volume
900
Units per month
Variable cost per unit
$8.00
Per unit
Fixed costs
$14,000
Per month
A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14.00 each.
Assume that Dong Fang’s fixed costs are unavoidable, and that Dong Fang will not be able to use the excess
capacity in any profitable manner. In order to maximize operational income, Dong Fang should not outsource.
2) Dong Fang Company fabricates inexpensive automobiles for sale to 3rd world countries. Each auto includes one
wiring harness, which is currently made in-house. Details of the harness fabrication are as follows:
Volume
900
Units per month
Variable cost per unit
$8.00
Per unit
Fixed costs
$14,000
Per month
A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14.00 each.
Assume that Dong Fang’s fixed costs are unavoidable, but that Dong could use the vacated production facilities to
earn an additional $7,500 of profit per month. In order to maximize operational income, Dong Fang should
outsource.
3) A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The
company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of
$28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs
of $5,000 per month.
The controller says that they could outsource production of the circuit, and then as long as they could get fixed cost
reductions greater than $200 per month, it would improve earnings. Is his statement true or false?
4) Arlo Company makes bulk quantities of cleaning fluids. They currently sell 1,000 containers a month at a price of
$22 per unit. If they added a newer scent, they could charge $22.75 per unit for the improved product. It would cost
them a total of $700 per month to make that alteration. If they decide to process further, it will improve their
operational income.
5) When a company is considering the possibility of processing their product further to achieve higher sales
revenues, the rule is as follows: if incremental revenues exceed incremental costs, then further processing will
enhance operational profits.
6) When a company is considering the possibility of processing their product further to achieve higher sales
revenues, the rule is as follows: as long as the additional processing generates higher sales revenues, it is the
preferred alternative.
7) When a company is considering the possibility of processing their product further to achieve higher sales
revenues, they must carefully study the production costs needed to make the basic product before processing
further in order to come to an informed decision.
8) Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and
requires $2,000 per month in fixed costs. If they process the radio further to enhance its functionality, it will require
an additional $25 per unit of variable costs, but no change to the fixed costs. The marketing manager believes they
would be able to boost their price of the radio from $260 to $280. In making this decision, the amount of fixed costs
per month is a relevant piece of information.