9) Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per
month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe
they can boost the price to $342. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%.
The CEO wishes to increase his operational income by 25%. If Victory decides to upgrade the product according to
the data above, the CEO will reach his goal.
10) DC Electronics uses a standard part in the manufacture of several of its radios. The total cost of producing
30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy
the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs.
If DC Electronics decides to outsource the production of the part, how will it impact operating income?
A) Up $15,000
B) Down $24,900
C) Up $132,000
D) Down $132,000
11) DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000
parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part
from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by
purchasing the part from an outside source can be used to manufacture another product that can earn profit of
$11,600. If DC outsources, what will the effect on operating income be?
A) Up $15,000
B) Down $13,300
C) Down $24,900
D) Up $3,400
12) Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing
costs of this part, assuming a production level of 5,000 units, are as follows:
Direct materials
$3
Direct labor (variable cost)
5
Variable manufacturing overhead
4
Fixed manufacturing overhead
2
Total cost
$14
Erickson Company has offered to sell 5,000 units of the same part to Lincoln Company for $13 per unit. Assuming
the company has no other use for its facilities and that the fixed manufacturing costs are unavoidable, what should
Lincoln Company do?
A) Buy from Erickson and save $1.20 per unit.
B) Continue making the part in house.
C) Buy from Erickson and save $1.00 per unit.
D) Buy from Erickson and save $3.00 per unit.
13) Gnome Company is trying to decide whether to continue to manufacture a particular component or to buy the
component from an outside supplier. Which of the following is RELEVANT to this decision?
A) The potential uses of the facilities that are currently used to manufacture the component
B) The insurance on the manufacturing facility which will continue regardless of the decision
C) Allocated corporate fixed costs which would have to be allocated to other products if the component is no longer
manufactured
D) The cost of the equipment that is currently being used to manufacture the component
14) Shasta Company is trying to decide whether to continue to manufacture a particular component or to buy the
component from an outside supplier. Which of the following is IRRELEVANT with respect to this decision?
A) The quality of the component purchased from the outside supplier
B) The outside supplier’s ability to deliver the component on a timely basis
C) The alternative uses of the facilities being used to currently manufacture the component
D) The unavoidable fixed manufacturing costs associated with the manufacture of the component
15) Which of the following phrases MOST accurately describe opportunity cost?
A) The cost incurred to gain the opportunity to make a sale
B) The benefit gained by choosing a certain course of action
C) The benefit given up by not choosing an alternative course of action
D) Costs which have been incurred in the past
16) Action Products is deciding whether to outsource production of a certain component that is included in all of its
products. It currently costs Action Products $0.95 to make each component in-house. If Action Products
outsources, it can buy the component ready-made for $0.80 each. If Action Products outsources, it could shut down
the production facilities it is currently using to manufacture the component, and save $10,000 a year in fixed costs.
After analyzing both options, Action Products decided to continue making the component in-house. In the analysis
done, which of the following items would be considered an opportunity cost?
A) The difference between $0.95 and $0.80 per component
B) The savings of $10,000 per year in fixed costs
C) The difference between the fixed and variable costs to make the component in-house
D) The contract cost of $0.80 to buy from outside source
17) CM Manufacturing has provided the following unit costs pertaining to a component they manufacture and use in
the production of one of their main products:
Direct materials
$315
Direct labor (variable)
96
Variable manufacturing overhead
72
Fixed manufacturing overhead
29
A supplier has offered to provide the component to CM manufacturing for $500 per unit. If CM Manufacturing were
to buy the component from the supplier, they could use the released facilities to manufacture a product which would
generate contribution margin of $16,000 annually. Assuming that CM Manufacturing needs 2,000 components
annually and the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if the
company outsources?
A) Operating income would go down by $18,000.
B) Operating income would go up by $2,000.
C) Operating income would go down by $12,000.
D) Operating income would go up by $4,000.
18) A chemical company spent $480,000 to produce 144,000 gallons of a chemical, which can be sold for $4.32 per
gallon. The chemical can be further processed into a weed killer which can be sold for $6.40 per gallon; it will cost
$256,320 to process the chemical into a weed killer. Which of the following is TRUE?
A) To maximize operating income, the company should continue to sell the chemical as is.
B) If the company decides to process further, it will increase operating income by $299,520.
C) If the company decides to process further, it will increase operating income by $43,200.
D) If the company decides to process further, it will decrease operating income by $256,320.
19) Alexandria Semiconductors produces 300,000 hi–tech computer chips per month. Each chip uses a component
which Alexandria makes in-house. The variable costs to make the component are $0.80 per unit, and the fixed costs
run $956,000 per month. Alexandria has been approached by a foreign producer who can supply the component,
ready-made and with acceptable quality standards for $0.60 each. The fixed costs are unavoidable, and Alexandria
would have no other use for the facilities currently employed in making the component. If Alexandria decides to
outsource, how would that affect the operating income?
A) There would be no effect on operating income.
B) Alexandria could save $120,000 per month in costs.
C) Alexandria could save $60,000 per month in costs.
D) Alexandria’s costs would go up by $2,000 per month.
20) Alexandria Semiconductors produces 300,000 hi–tech computer chips per month. Each chip uses a component
which Alexandria makes in-house. The variable costs to make the component are $0.80 per unit, and the fixed costs
run $956,000 per month. Alexandria has been approached by a foreign producer who can supply the component,
ready-made and with acceptable quality standards for $0.60 each. If Alexandria chooses to outsource, it could
reduce the fixed costs by 50%. Alexandria would have no other use for the facilities currently employed in making
the component. If Alexandria decides to outsource, how would that affect the operating income?
A) There would be no effect on operating income.
B) Operating income would go up by $538,000.
C) Operating income would go up by $180,000.
D) Operating income would go down by $60,000.
21) 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:
lume
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. If Dong Fang decides to outsource, what will be the impact on Dong Fang‘s
monthly operational income?
A) It will go up by $2,600.
B) It will go down by $14,000.
C) It will go up by $8,600.
D) It will go down by $5,400.
22) 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 could be reduced by $5,000 if they outsource, and that Dong Fang will not be
able to use the excess capacity in any profitable manner. If Dong Fang decides to outsource, what will be the impact
on Dong Fang‘s monthly operational income?
A) It will go up by $2,600.
B) It will go down by $14,000.
C) It will go up by $8,600.
D) It will go down by $400.
23) 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:
lume
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. If Dong Fang decides to outsource, what will be the impact on Dong
Fang’s monthly operational income?
A) It will go up by $2,100.
B) It will go down by $14,000.
C) It will go up by $8,600.
D) It will go down by $400.
24) 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.
Assume the company could not reduce any fixed costs by outsourcing, and that there is no alternative use for the
facilities presently being used to make circuits. If the company outsources, how will it affect monthly operating
income?
A) Operating income will go up by $4,800.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will stay the same.
25) 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.
Assume the company could cut fixed costs in half by outsourcing, and that there is no alternative use for the
facilities presently being used to make circuits. If the company outsources, how will it affect monthly operating
income?
A) Operating income will go up by $2,300.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will stay the same.
26) 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.
Assume the company could eliminate all fixed costs by outsourcing, and that there is no alternative use for the
facilities presently being used to make circuits. If the company outsources, how will it affect monthly operating
income?
A) Operating income will go up by $2,300.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will go up by $4,800.
27) 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.
Assume the fixed costs are unavoidable, but that company could employ the vacated premises to earn rental income
of $700 per month. If the company outsources, how will it affect monthly operating income?
A) Operating income will go up by $500.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will go up by $4,800.
28) Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media
center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that
function, in order to close down some of their facilities and reduce the administrative costs. At present, the variable
cost per unit is $275 and the fixed costs are $39,000 per month. Assuming that if they outsource, and the fixed costs
could be eliminated entirely, at what contract rate would outsourcing pay off for Seven Seas? (Please round to
nearest whole dollar.)
A) At any rate lower than $844 per unit
B) At any rate lower than $796 per unit
C) At any rate lower than $775 per unit
D) At any rate lower than $665 per unit
29) Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media
center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that
function, in order to close down some of their facilities and reduce the administrative costs. At present, the variable
cost per unit is $275 and the fixed costs are $39,000 per month. Assume that if they outsource, fixed costs could be
reduced by 40%. The production manager advised the company to contract with a foreign supplier which offered a
contract rate of $420 per unit. If they outsource, how would that affect operational income?
A) Operational income would improve by $1,100.
B) Operational income would improve by $4,000.
C) Operational income would decline by $14,500.
D) Operational income would remain the same.
30) Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media
center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that
function. At present, the variable cost per unit is $275, and the fixed costs are $39,000 per month. If they
outsource, fixed costs could be reduced by half, and the vacant facilities could be rented out to earn $1,000 per
month of rental income. At what contract rate would the two alternatives produce the same operational income?
A) $480 per unit
B) $499 per unit
C) $388 per unit
D) $295 per unit
31) Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media
center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that
function. At present, the variable cost per unit is $275, and the fixed costs are $39,000 per month. The CEO wishes
to boost operational income by $5,000. He has an offer from a foreign producer to provide the media centers at a
contract rate of $300 per unit. In order to achieve his objective, how much fixed costs would he have to cut?
A) Cut $4,250 of fixed costs
B) Cut $2,000 of fixed costs
C) Cut $7,500 of fixed costs
D) Cut $19,500 of fixed costs
32) 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 disinfectant, they could charge $25 per unit for the improved product. It would cost
them a total of $3,800 per month to make that alteration. If so, what would be the effect on operational income?
A) It would decline by $1,200.
B) It would increase by $3,000.
C) It would increase by $400.
D) It would decline by $800.
33) 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 so, what would be the effect on operational income?
A) It would decline by $120.
B) It would increase by $300.
C) It would increase by $50.
D) It would decline by $800.
34) When a company is considering the option of processing their product further to achieve higher sales revenues,
they must consider all of the following factors EXCEPT:
A) how much additional costs are necessary to process further?
B) how much incremental revenue can be earned if processed further?
C) how much cost is required to produce the basic product, before processing further?
D) will the additional processing produce any environmental toxins?
35) 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. If they do so, how would the change affect
operational income?
A) It would remain the same.
B) It would go up by $25 per unit.
C) It would go up by $20 per unit.
D) It would go down by $5 per unit.
36) 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, plus an increase in fixed costs of $800 per month. The marketing
manager believes they would be able to boost their price of the radio from $260 to $300. Nordin sells 30 radios per
month. If they decide to process further, what would the impact be on monthly operational income?
A) It would increase by $1,050.
B) It would increase by $250.
C) It would decrease by $350.
D) It would decrease by $750.
37) Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and
requires $2,000 per month in fixed costs. Nordin sells 30 radios per month. If they process the radio further to
enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of
$800 per month. The current price of the radio is $260. The marketing manager is sure they can charge a higher
price for the improved version. At what price level would the newer, improved radio begin to improve operational
earnings? (Please round to nearest whole dollar.)
A) At a price of $312 or higher
B) At a price of $309 or higher
C) At a price of $420 or higher
D) At a price of $295 or higher
38) Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and
requires $2,000 per month in fixed costs. Nordin sells 30 radios per month. If they process the radio further to
enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of
$800 per month. The current price of the radio is $260. The CEO wishes to improve operational income by $1,000
per month by selling the enhanced version of the radio. In order to hit his target, what price would be needed for the
enhanced product? (Please round to nearest whole dollar.)
A) $212 per unit
B) $345 per unit
C) $440 per unit
D) $367 per unit
39) A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is
$1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to
improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, but there will be no
change in fixed costs. The company will price the new product at $4.25 to compete with other producers. If they do
so, how will this affect operational income?
A) Go down $150 per month
B) Go up $250 per month
C) Go down $400 per month
D) Remain unchanged
40) A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is
$1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to
improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go
up by 20%. The company will price the new product at $5.00 per pack. If they do so, how will this affect
operational income?
A) Go down $150 per month
B) Remain unchanged
C) Go down $400 per month
D) Go up by $240 per month
41) A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is
$1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to
improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go
up by 20%. At what price for the new product will the two alternatives (sell as is or process further) produce the
same operational income? (Please round to nearest cent.)
A) $5.00
B) $4.76
C) $3.99
D) $4.40
42) A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is
$1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to
improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go
up by 20%. The CEO wishes to price the new product at a level which will bring operational income up to $1,000
per month. What price is needed?
A) $5.00
B) $5.06
C) $4.99
D) $4.76
43) Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per
month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe
they can boost the price up to $325. If so, the variable cost will go up to $230 and the fixed costs will remain the
same. If Victory decides to upgrade, how will it affect operational income?
A) Go down $1,250
B) Go down $5,000
C) Go up $12,500
D) Go up $7,500
44) Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per
month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe
they can boost the price up to $325. If so, the variable cost will go up to $230 and the fixed costs will rise by 40%.
If Victory decides to upgrade, how will it affect operational income?
A) Go down $1,250
B) Go down $4,500
C) Go up $12,500
D) Go up $7,500
45) Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per
month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe
they can boost the price up to $340. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%.
If Victory decides to upgrade, how will it affect operational income?
A) Go down $1,250
B) Go down $4,500
C) Go up $12,500
D) Remain the same
46) Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per
month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe
they can boost the price. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. The CEO
wishes to increase his operational income by 25%. What price level would give the desired results?
A) $330 per unit
B) $370 per unit
C) $320 per unit
D) $345 per unit