21
53) Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A
salvage company will purchase the defective units as they are for $5 each. Chang’s production
manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their
regular market price of $21. Chang should:
A) Sell the units to the salvage company for $5 per unit.
B) Scrap the units.
C) Sell the units as they are because repairing them will cause their total cost to exceed their
selling price.
D) Correct the defects and sell the units at the regular price.
E) Sell 1,000 units to the salvage company and repair the remainder.
54) Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A
salvage company will purchase the defective units as they are for $5 each. Chang’s production
manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their
regular market price of $21. The incremental income or loss on reworking the units is:
A) $12,000 loss.
B) $20,000 loss.
C) $32,000 income.
D) $20,000 income.
E) $30,000 income.
55) Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine
hours per unit, and the company’s productive capacity is limited to 240,000 machine hours. Product
A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and
has variable costs of $5 per unit. Assuming the company can sell as many units of either product as
it produces, the company should:
A) Produce only Product A.
B) Produce A and B in the ratio of 40% A and 60% B.
C) Produce A and B in the ratio of 62.5% A to 37.5% B.
D) Produce only Product B.
E) Produce equal amounts of A and B.
Direct material
Direct labor
Overhead saved (60% * $40)
Direct material
Direct labor
Overhead saved (60% * $40)
56) Epsilon Co. can produce a unit of product for the following costs:
Direct material
$ 8
Direct labor
24
Overhead
40
Total costs per unit
$ 72
An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon
buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to:
A) Buy since the relevant cost to make it is $56.
B) Make since the relevant cost to make it is $48.
C) Buy since the relevant cost to make it is $48.
D) Make since the relevant cost to make it is $56.
E) Buy since the relevant cost to make it is $72.
27
Direct material
Direct labor
Direct material
Direct labor
Direct material
Direct labor
57) Factor Co. can produce a unit of product for the following costs:
Direct material
$ 8
Direct labor
24
Overhead
40
Total costs per unit
$ 72
An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor buys
from the supplier, the company will still incur 60% of its overhead. Factor should choose to:
A) Buy since the relevant cost to make it is $48.
B) Buy since the relevant cost to make it is $32.
C) Buy since the relevant cost to make it is $56.
D) Make since the relevant cost to make it is $48.
E) Make since the relevant cost to make it is $32.
Premier
0
$ 900
0
Deluxe
450
225
630
Super
900
450 1,80
0
Basic
90
45 180
58) Listmann Corp. processes four different products that can either be sold as is or processed further.
Listed below are sales and additional cost data:
Product
Sales Value
with no further
Processing
$ 1,35
Additional
Processing
Costs
Sales Value
after
further
processing
$ 2,70
Which product(s) should not be processed further?
A) Super.
B) Premier.
C) Premier and Basic.
D) Basic.
E) Deluxe.
59) Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000
bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs
are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into
Premium Green and Green Deluxe at an additional cost. The additional processing will yield
10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6
per bag, respectively. Assuming Maxim further processes Green Health further into Premium
Green and Green Deluxe, revenue from the two products would be:
A) $ 2,000. B) $96,000. C) $98,000. D) $ 6,000. E) $ 8,000.
60) Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000
bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs
are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into
Premium Green and Green Deluxe at an additional cost. The additional processing will yield
10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6
per bag, respectively. The incremental revenue of processing Green Health further into Premium
Green and Green Deluxe would be:
A) $96,000. B) $ 8,000. C) $ 6,000. D) $ 2,000. E) $98,000.
61) Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000
bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs
are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into
Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will
yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8
and $6 per bag, respectively. The net advantage (incremental income) of processing Green Health
further into Premium Green and Green Deluxe would be:
A) $98,000. B) $2,000. C) $96,000. D) $8,000. E) $6,000.
62) Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of
Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are
$10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Premium
Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000
bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag,
respectively. If Green Health is processed further into Premium Green and Green Deluxe, the total
gross profit would be:
A) $78,000. B) $100,000. C) $68,000. D) $96,000. E) $98,000.
63) Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit.
Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its
capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and
$1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of
$1,000 with a zero salvage value. Management expects no other changes in costs as a result of the
additional production. Should the company accept the special order?
A) Yes, because incremental revenue exceeds incremental costs.
B) Yes, because incremental costs exceed incremental revenues.
C) No, because the incremental revenue is too low.
D) No, because incremental costs exceed incremental revenue.
E) No, because additional production would exceed capacity.
64) Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit.
Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its
capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and
$1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of
$1,000 with a zero salvage value. Management expects no other changes in costs as a result of the
additional production. Should the company accept the special order?
A) Yes, because net income would increase by $2,000.
B) No, because net income would decrease by $1,500.
C) No, because net income would decrease by $2,000.
D) Yes, because net income would increase by $7,500.
E) No, because net income would decrease by $5,500.
65) Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird
currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity.
These bird feeders would be marketed under the wholesaler’s name and would not affect Bluebird’s
sales through its normal channels. Production costs for these units are $3.50 per unit, which
includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the
incremental revenue will be:
A) $33,750. B) $38,750. C) $45,000. D) $11,250. E) $7,500.