75) Wheeler Company can produce a product that incurs the following costs per unit: direct
materials, $10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the
product to Wheeler for $45. If Wheeler buys from the supplier, it will still incur 45% of its
overhead cost. Compute the net incremental cost or savings of buying.
A) $4.00 savings per unit.
B) $4.00 cost per unit.
C) $2.20 cost per unit.
D) $3.80 cost per unit.
E) $2.20 savings per unit.
76) Paxton Company can produce a component of its product that incurs the following costs per
unit: direct materials, $10; direct labor, $14, variable overhead $3 and fixed overhead, $8. An
outside supplier has offered to sell the product to Paxton for $32. Compute the net incremental
cost or savings of buying the component.
A) $5.00 savings per unit.
B) $3.00 cost per unit.
C) $0 cost or savings per unit.
D) $5.00 cost per unit.
E) $3.00 savings per unit.
77) Walters manufactures a specialty food product that can currently be sold for $22 per unit and
has 20,000 units on hand. Alternatively, it can be further processed at a cost of $12,000 and
converted into 12,000 units of Deluxe and 6,000 units of Super. The selling price of Deluxe and
Super are $30 and $20, respectively. The incremental income of processing further would be:
A) $40,000.
B) $28,000.
C) $18,000.
D) $44,000.
E) $12,000.
43
78) Cornish Company had the following results of operations for the past year:
Sales (20,000 units at $22) $ 440,000
Direct materials and direct labor $ 200,000
Overhead (40% variable) 100,000
Selling and administrative expenses (all fixed) 92,000 (392,000 )
Operating income $ 48,000
A foreign company offers to buy 3,000 units at $17.00 per unit. In addition to variable
manufacturing costs, selling these units would increase fixed overhead by $500 and selling and
administrative costs by $1,000. If Cornish accepts the offer, its profits will:
A) Decrease by $4,500.
B) Increase by $4,500.
C) Decrease by $300.
D) Increase by $13,500.
E) Increase by $15,000.
79) Elliot Company can sell all of its products A and Z that it can produce, but it has limited
production capacity. It can produce 8 units of A per hour or 10 units of Z per hour, and it has
20,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z.
What is the most profitable sales mix for Elliot Company?
A) 84,000 units of A and 60,000 units of Z.
B) 48,000 units of A and 80,000 units of Z.
C) 60,000 units of A and 100,000 units of Z.
D) 120,000 units of A and 0 units of Z.
E) 0 units of A and 200,000 units of Z.
80) Soar Incorporated is considering eliminating its mountain bike division, which reported an
operating loss for the recent year of $3,000. The division sales for the year were $1,050,000 and
the variable costs were $860,000. The fixed costs of the division were $193,000. If the mountain
bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated.
The impact on operating income for eliminating this business segment would be:
A) $57,900 decrease
B) $132,100 decrease
C) $54,900 decrease
D) $190,000 increase
E) $190,000 decrease
81) Granfield Company is considering eliminating its backpack division, which reported an
operating loss for the recent year of $42,000. The division sales for the year were $960,000 and
the variable costs were $475,000. The fixed costs of the division were $527,000. If the backpack
division is dropped, 40% of the fixed costs allocated to that division could be eliminated. The
impact on Granfield’s operating income for eliminating this business segment would be:
A) $485,000 decrease
B) $210,800 increase
C) $274,200 decrease
D) $485,000 increase
E) $274,200 increase
82) Granfield Company has a piece of manufacturing equipment with a book value of $40,000
and a remaining useful life of four years. At the end of the four years the equipment will have a
zero salvage value. The market value of the equipment is currently $22,000. Granfield can
purchase a new machine for $120,000 and receive $22,000 in return for trading in its old
machine. The new machine will reduce variable manufacturing costs by $19,000 per year over
the four-year life of the new machine. The total increase or decrease in net income by replacing
the current machine with the new machine (ignoring the time value of money) is:
A) $22,000 decrease
B) $76,000 increase
C) $18,000 decrease
D) $52,000 increase
E) $22,000 increase
83) Beta Inc. can produce a unit of Zed for the following costs:
Direct material $ 10
Direct labor 20
Overhead 50
Total costs per unit $ 80
An outside supplier offers to provide Beta with all the Zed units it needs at $58 per unit. If Beta
buys from the supplier, it will still incur 40% of its overhead. Beta should:
A) Buy Zed since the relevant cost to make it is $60.
B) Make Zed since the relevant cost to make it is $60.
C) Buy Zed since the relevant cost to make it is $80.
D) Make Zed since the relevant cost to make it is $30.
E) Buy Zed since the relevant cost to make it is $30.
84) To determine a product selling price based on the total cost method, management should
include:
A) Total production and nonproduction costs plus a markup.
B) Total production and nonproduction costs only.
C) Total production costs plus a markup.
D) Total nonproduction costs plus a markup.
E) Only a markup.
85) Assume markup percentage equals desired profit divided by total costs. What is the correct
calculation to determine the dollar amount of the markup per unit?
A) Total cost times markup percentage.
B) Total cost per unit times markup percentage per unit.
C) Total cost per unit divided by markup percentage per unit.
D) Markup percentage per unit divided by total cost per unit.
E) Markup percentage divided by total cost.
86) Wade Company is operating at 75% of its manufacturing capacity of 140,000 product units
per year. A customer has offered to buy an additional 20,000 units at $32 each and sell them
outside the country so as not to compete with Wade. The following data are available:
Costs at 75% capacity: Per Unit Total
Direct materials $ 12.00 $ 1,260,000
Direct labor 9.00 945,000
Overhead (fixed and variable) 15.00 1,575,000
Totals $ 36.00 $ 3,780,000
In producing 20,000 additional units, fixed overhead costs would remain at their current level but
incremental variable overhead costs of $6 per unit would be incurred. What is the effect on
income if Wade accepts this order?
A) Income will decrease by $4 per unit.
B) Income will increase by $4 per unit.
C) Income will increase by $5 per unit.
D) Income will decrease by $5 per unit.
E) Income will increase by $11 per unit.
87) Derby Inc. manufactures a product which contains a small motor. The company has always
purchased this motor from a supplier for $125 each. Derby recently upgraded its own
manufacturing capabilities and now has enough excess capacity (including trained workers) to
begin manufacturing the motor instead of buying it. The company prepared the following per
unit cost projections of making the motor, assuming that overhead is allocated to the part at the
normal predetermined overhead rate of 150% of direct labor cost.
Direct material $ 38
Direct labor 50
Overhead (fixed and variable) 75
Total $ 163
The required volume of output to produce the motors will not require any incremental fixed
overhead. Incremental variable overhead cost is $21 per motor. What is the effect on income if
Derby decides to make the motors?
A) Income will decrease by $16 per unit.
B) Income will increase by $16 per unit.
C) Income will increase by $23 per unit.
D) Income will decrease by $23 per unit.
E) Income will increase by $39 per unit.
88) A company has already incurred a $55,000 cost in partially producing its three products.
Their selling prices when partially and fully processed are shown in the following table with the
additional costs necessary to finish their processing. Based on this information, should any
products be processed further?
Product Unfinished
Selling Price Finished
Selling Price Further
Processing Costs
A $ 72 $ 108 $ 35
B 83 124 42
C 94 141 45
A) All of these products should be processed further.
B) None of these products should be processed further.
C) Products A and B should be processed further.
D) Products B and C should be processed further.
E) Products A and C should be processed further.
89) Bandy Corporation owns a machine that manufactures lawn game sets. Production time for
the croquet set is 10 units per hour and for the volleyball set is 8 units per hour. The machine’s
capacity is 1,500 hours per year. Both products are sold to a single customer who has agreed to
buy all of the company’s output up to a maximum of 4,000 croquet sets and 10,000 volleyball
sets. Selling prices and variable costs per unit are shown below. Based on this information, what
is Bandy Corporation’s most profitable sales mix?
Croquet Set Volleyball Game
Selling price per unit $ 75 $ 62
Variable costs per unit 42 25
A) 15,000 croquet sets.
B) 12,000 volleyball sets.
C) 4,000 croquet sets and 10,000 volleyball sets.
D) 4,000 croquet sets and 8,800 volleyball sets.
E) 2,500 croquet sets and 10,000 volleyball sets.
90) The Mad Hatter Company owns a machine that manufactures two types of chimney caps.
Production time is .20 hours for cap A and .40 hours for cap B. The machine’s capacity is 2,000
hours per year. Both products are sold to a single customer who has agreed to buy all of the
company’s output up to a maximum of 1,000 units of cap A and 6,000 units of cap B. Selling
prices and variable costs per unit are shown below. Based on this information, what is Mad
Hatter’s most profitable sales mix?
Cap A Cap B
Selling price per unit $ 80 $ 60
Variable costs per unit 53 42
A) 10,000 units of cap A.
B) 5,000 units of cap B.
C) 1,000 units of cap A and 5,000 units of cap B.
D) 1,000 units of cap A and 6,000 units of cap B.
E) 1,000 units of cap A and 4,500 units of cap B.
91) What decision rule should be followed when deciding if a business segment should be
eliminated?
A) Segments generating a net loss should always be eliminated.
B) Segments with revenues that are more than avoidable expenses should be considered for
elimination.
C) Segments with revenues that are more than unavoidable expenses should be considered for
elimination.
D) Segments with revenues that are less than avoidable expenses should be considered for
elimination.
E) Segments with revenues that are less than unavoidable expenses should be considered for
elimination.
92) Rocko Inc. has a machine with a book value of $50,000 and a five-year remaining life. A
new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in
the old machine. The new machine will reduce variable manufacturing costs by $14,000 per year
over its five-year life. Should the machine be replaced?
A) Yes, because income will increase by $14,000 per year.
B) Yes, because income will increase by $23,000 in total.
C) No, because the company will be $23,000 worse off in total.
D) No, because the income will decrease by $14,000 per year.
E) Rocko will be not be better or worse off by replacing the machine.
93) Janko Wellspring Inc. has a pump with a book value of $24,000 and a four-year remaining
life. A new, more efficient pump, is available at a cost of $45,000. Janko can also receive $8,000
for trading in the old pump. The new pump will reduce variable costs by $10,000 per year over
its four-year life. Should the pump be replaced?
A) Yes, because income will increase by $3,000 in total.
B) Yes, because income will increase by $3,000 per year.
C) No, because the company will be $3,000 worse off in total.
D) No, because income will decrease by $10,000 per year.
E) No, Janko will record a loss of $16,000 if they replace the pump.
94) Janko Wellspring Inc. has a pump with a book value of $24,000 and a four-year remaining
life. A new, more efficient pump, is available at a cost of $45,000. Janko can also receive $8,000
for trading in the old pump. The new pump will reduce variable costs by $10,000 per year over
its four-year life. The costs not relevant to the decision of whether or not to replace the pump are:
A) $40,000.
B) $8,000.
C) $10,000.
D) $24,000.
E) $16,000.
95) Dragoo Building Inc. has a crane with a book value of $240,000 and a four-year remaining
life. A new crane is available at a cost of $615,000. Dragoo can also receive $48,000 for trading
in the old pump. The new crane will reduce variable costs by $145,000 per year over its four-
year life. The total impact to Dragoo over the crane’s four-year life is:
A) Increase of $13,000.
B) Increase of $23,000.
C) Decrease of $13,000.
D) Decrease of $615,000.
E) Decrease of $48,000.
96) J&H Company has a router platform with a book value of $65,000 and a three-year
remaining life. A new router platform is available at a cost of $125,000, and J&H can also
receive $16,000 for trading in the old router platform. The new router platform will reduce
variable manufacturing costs by $31,000 per year over its three-year life. Should the router
platform be replaced?
A) Yes, as will increase income by $31,000 in total.
B) Yes, as it is always important to have the current technology.
C) No, it will decrease income by $16,000 in total.
D) Yes, as the company will increase income by $16,000 total.
E) J&H will be not be better or worse off by replacing the router platform.
97) iSooky has a spotter truck with a book value of $40,000 and a remaining useful life of five
years. At the end of the five years the spotter truck will have a zero salvage value. The market
value of the spotter truck is currently $32,000. iSooky can purchase a new spotter truck for
$120,000 and receive $31,000 in return for trading in its old spotter truck. The new spotter truck
will reduce variable manufacturing costs by $25,000 per year over the five-year life of the new
spotter truck. The total increase or decrease in income by replacing the current spotter truck with
the new truck (ignoring the time value of money) is:
A) $31,000 decrease
B) $31,000 increase
C) $36,000 decrease
D) $120,000 decrease
E) $36,000 increase
98) Janko Wellspring Inc. has a pump with a book value of $24,000 and a four-year remaining
life. A new, more efficient pump, is available at a cost of $45,000. Janko can also receive $8,000
for trading in the old pump. The new pump will reduce variable costs by $10,000 per year over
its four-year life. The costs not relevant to the decision of whether or not to replace the pump are:
A) $40,000.
B) $8,000.
C) $10,000.
D) $24,000.
E) $16,000.
99) iSooky has a spotter truck with a book value of $40,000 and a remaining useful life of five
years. At the end of the five years the spotter truck will have a zero salvage value. The market
value of the spotter truck is currently $32,000. iSooky can purchase a new spotter truck for
$120,000 and receive $31,000 in return for trading in its old spotter truck. The new spotter truck
will reduce variable manufacturing costs by $25,000 per year over the five-year life of the new
spotter truck. The costs not relevant to the decision of whether or not to replace the spotter truck
are:
A) $31,000.
B) $25,000.
C) $125,000.
D) $120,000.
E) $40,000.
100) Logan Company can sell all of the standard and premier products they can produce, but it
has limited production capacity. It can produce 6 standard units per hour or 4 premier units per
hour, and it has 36,000 production hours available. Contribution margin per unit is $24 for the
standard product and $30 for the premier product. What is the most profitable sales mix for
Logan Company?
A) 0 standard units and 144,000 premier units.
B) 180,000 standard units and 24,000 premier units.
C) 216,000 standard units and 0 premier units.
D) 36,000 standard units and 120,000 premier units.
E) 120,000 standard units and 64,000 premier units.