Chapter 7 The Use of Cost Information in Management Decision Making
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136. Starwood Aviation produces an executive jet for which it currently manufactures an
airflow lever. The cost of each lever is indicated below:
Variable costs
Direct material $300
Direct labor 200
Variable overhead 150
Total variable costs $650
Fixed costs
Depreciation of equipment 120
Depreciation of building 80
Supervisory salaries 140
Total fixed costs 340
Total cost $990
The company has an offer from Lans Levers to produce the part for $700 per unit who is
able to supply the 600 levers needed in the coming year. If the company accepts this
offer and shuts down production of levers, supervisors will be reassigned to other areas
needing their services. The equipment cannot be used elsewhere in the company, and it
has no market value. However, the space occupied by the production of the lever can be
used by another production group that is currently leasing space for $21,000 per year.
Prepare a single column incremental analysis in good form to determine if the company
should make or buy the lever.
137. Deason Distributors has decided to discontinue manufacturing its Venus model blender.
Currently, the company has 4,600 partially completed blenders on hand. The
government has taken the blades off the market that the company uses in the blender,
so each base must be reworked to accommodate a new style of blades. The company
has spent $110 per unit to manufacture these blenders to their current state. Reworking
each blender will cost $20 for material and $20 for direct labor. In addition, $7 of variable
overhead and $32 of allocated fixed overhead (relating primarily to depreciation of plant
and equipment) will be allocated per unit. If Deason completes the blenders, it can sell
them for $160 per unit. On the other hand, another manufacturer is interested in
purchasing the partially completed blenders for $104 each and converting them into
choppers. In good form, prepare an incremental analysis per unit to determine if Deason
should complete the blenders or sell them in their current state.
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
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138. Football Fanatics sells logo sports merchandise and does custom embroidery. The
company is contemplating whether or not to continue the embroidery service. All of the
company’s direct fixed costs can be avoided if a segment is dropped. The following
information is available for the segments.
Embroidery Apparel
Sales $60,000 $250,000
Variable costs 30,000 110,000
Contribution margin 30,000 140,000
Direct fixed costs 22,000 40,000
Allocated common fixed costs 12,000 50,000
Net income ($ 4,000) $ 50,000
a. What will be the impact on net income if the embroidery segment is dropped?
b. Assume that if the embroidery segment is dropped, apparel sales will increase
10%. What is the impact on contribution margin and net income solely for the
apparel ?
c. Identify one cost that is not relevant in this analysis.
Answer
139. Sausalita’s Cantina has been approached by Luck & Dewey that wants to hold an
employee recognition dinner next month. The restaurant manager agreed to a charge of
$50 per person for food, wine, and dessert for 90 people. The manager estimates that
the cost of the food will be $17 per person and beverages will be $15 per person.
To be able to accommodate the group, the restaurant must be closed for dinner
that night. Typically, 100 people with an average bill of $44 per person would be served
each evening, with the cost of food estimated at $14 per person and beverages at $11
per person. No additional staff will need to be hired to accommodate the group from
Luck & Dewey.
a. In good form, prepare an incremental analysis to determine the effect on net
income associated with accepting the Luck & Dewey group.
b. What is the opportunity cost of accepting the Luck & Dewey group?
Answer
Chapter 7 The Use of Cost Information in Management Decision Making
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140. Acer Computing manufactures tablets. The manufacturing process uses a processor that
Acer currently manufacturers. The resource officer of Acer has been asked to determine
if it is advisable to purchase the processors rather than make them internally (the current
practice). Identify which of the following items are relevant to the resource officer’s
decision by circling the number preceding each relevant item.
1. The original cost of equipment currently used to manufacture the processors
2. The market value of equipment currently used to manufacture the tablets
3. The cost of buying processors from suppliers
4. Rent revenue for the space freed up if the processors are not manufactured
internally
5. The salary of the president of Acer Computing
6. The quality of the processors made internally
7. The quality of the processors purchased from suppliers
8. Depreciation on equipment used to manufacture the processors
9. The labor contract with production workers
10. The selling prices of tablets
Answer
141. Rocking Express manufactures rocking chairs. Recently, the company began
manufacturing and marketing a chair with an automatic rocker. Demand for this rocker is
very strong and the CEO of Rocking Express is considering dropping production of the
company’s original rocker. This will give the company increased capacity to devote to
the new model. Identify which of the following items are relevant to the CEO’s decision
by circling the number preceding each relevant item.
1. The original cost of equipment used to manufacture the old rocker
2. Depreciation of the equipment used to manufacture the old rocker (ignore taxes)
3. The rent on the warehouse used to store the completed inventory and materials
4. The time it takes to manufacture each rocker
5. The factory janitor’s salary
6. The selling price of the new rocker
7. The variable cost of producing the new rocker
8. The cost of retraining personnel to make the newer rocker
9. Depreciation of the factory building allocated to the old rocker
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-38
142. Sandford Electronics sells desktops and notebook computers. Currently, the desktop
product line takes up approximately 50 percent of the company’s retail floor space. The
president of the company is trying to decide whether the company should continue
offering desktops or just concentrate on notebooks. If the desktop product line is
dropped, salaries and other direct fixed costs can be avoided. In addition, sales of
notebooks will increase by 10 percent. Allocated fixed costs are assigned based on labor
hours.
Notebooks Desktops Total
Sales $1,200,000 $800,000 $2,000,000
Less cost of goods sold 700,000 500,000 1,200,000
Contribution margin 500,000 300,000 800,000
Less direct fixed costs:
Salaries 175,000 175,000 350,000
Other 60,000 60,000 120,000
Less allocated fixed costs:
Rent 14,118 9,882 24,000
Insurance 3,529 2,471 6,000
Cleaning 4,117 2,883 7,000
President’s salary 76,470 53,530 130,000
Other 7,058 4,942 12,000
Total costs 340,292 308,708 649,000
Net income $ 159,708 ($ 8,708) $ 151,000
Prepare an incremental analysis in good form to determine the incremental effect on net
income of discontinuing the desktop computer line.
Chapter 7 The Use of Cost Information in Management Decision Making
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143. Dairy Fresh makes a variety of dairy products. During June, 45,000 gallons of raw milk
were processed at a joint cost of $36,000. This produced 36,000 gallons of skim milk
and 4,000 gallons of cream. The cream could be processed further into butter and the
skim milk could be processed further into farmer’s cheese. Information on these items
follows:
Sales Value Estimated Further Sales Value After
At Split-off Point Processing Cost Processing
Skim Milk $94,500 $10,000 $115,000
Cream 40,500 40,000 70,000
a. Assume that the joint cost is allocated to the products based on the physical
quantity of output of each product. How much joint cost should be assigned to
each product?
b. How much joint cost should be assigned to each product if the relative sales
value allocation method is used?
c. Which products should be processed further?
144. Sanders Products produces two joint products, A and B. Prior to the split-off point, the
company incurred costs of $12,000. Product A weighs 10 pounds and product B weighs
30 pounds. Product A sells for $50 per pound and product B sells for $25 per pound.
Based on a physical measure of output, allocate joint costs to products A and B.
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-40
145. Mexo Products produces two joint products, A and B. Prior to the split-off point, the
company incurred costs of $12,000. Product A weighs 100 pounds and product B
weighs 300 pounds. Product A sells for $50 per pound and product B sells for $25 per
pound. Mexo uses a physical measure of output to allocate joint costs to products A and
B.
Comment on the profitability and recommend if the products should be sold at the
indicated prices or not.
Answer
146. Mexo Products produces two joint products, A and B. Prior to the split-off point, the
company incurred costs of $12,000. Product A weighs 100 pounds and product B
weighs 300 pounds. Product A sells for $50 per pound and product B sells for $25 per
pound.
a. Based on relative sales values at the split-off point, allocate joint costs to the two
products.
b. Under what condition will the cost allocated using relative sales values be greater
than the selling price of a joint product?
Answer
Chapter 7 The Use of Cost Information in Management Decision Making
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147. For each of the following situations, indicate a qualitative factor that should be
considered prior to making the decision:
a. A company that produces and sells bottled water is considering outsourcing its
bottling operation. The company will still sell the water and deliver it to
wholesalers.
b. A wine producer is considering dropping its premium brand wine and
concentrating exclusively on less costly wines.
c. A software company currently has a large facility for producing videos used in
games and advertisements. The company is considering shutting down the
facility and using resources provided by other companies.
*148. Sport Luck makes baseballs and soccer balls in a three-step process. The sewing
machine has been identified as the bottleneck in the process. Each soccer ball has a
contribution margin of $6.00 and each baseball has a contribution margin of $2.00. The
sewing machine can make 10 soccer balls or 25 baseballs in one hour.
a. If demand for both products is unlimited and the sewing machine capacity cannot
be expanded, which product should be produced?
b. If demand for each ball is limited to 6,000 balls and there are 3,000 hours
available on the machine, how many of each product should be produced?
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-42
149. At Express Production, the engraving department is a bottleneck. The company is
considering hiring an extra worker whose salary will be $51,000 per year, to mitigate the
problem. With the extra worker, the company will be able to produce and sell 6,000 more
units per year. The selling price per unit is $15. The cost per unit currently is $7.85 as
follows:
Direct material $3.50
Direct labor 1.10
Variable overhead 0.45
Fixed overhead (primarily depreciation of equipment) 2.80
Total $7.85
Calculate the annual financial impact of hiring the extra worker.
Answer
Chapter 7 The Use of Cost Information in Management Decision Making
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CHALLENGE EXERCISES
150. Seats Galore sells 3 models of deck chairs: Blue Magoo, Red Ahead, and Green Seen.
Operating results for June are below:
Blue Magoo
Red
Ahead
Green
Seen
Total
Units sold
4,000
4,500
3,500
12,000
Revenue
$36,000
$22,500
$35,000
$93,500
Variable departmental
costs
14,000
13,500
17,500
45,000
Direct fixed costs
6,000
4,000
5,000
15,000
Allocated fixed costs
8,000
9,000
7,000
24,000
Net income
$ 8,000
($ 4,000)
$ 5,500
$ 9,500
a. If Red Ahead is discontinued, management estimates that sales of Blue Magoo
will increase by 20%. In good form, prepare an incremental analysis to determine
if Red Ahead should be discontinued.
b. What qualitative factors should Seats Galore’s managers consider?
c. Should Red Ahead be discontinued based solely on quantitative aspects? Briefly
justify your response.
d. Without creating new income statements, and using your results from your
analysis in part A, determine the amount of the company’s new net income if Red
Ahead is discontinued. Show your calculations.
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-44
151. Lance, Inc. produces a line of products, which includes umbrellas. During 2017, there
are 4,400 umbrellas budgeted for production. Total material costs for the umbrellas are
budgeted at $7,700 and direct labor is $5,500. Overhead costs are $2.15 per unit of
which $0.95 is variable. Forty-five percent of the fixed overhead is allocated and
unavoidable. Supplier, Inc. has contacted Lance, Inc. with an offer to sell the umbrellas
to Lance, Inc. for $4.50 each.
a. Prepare an incremental analysis to assess the decision.
b. Explain the nature of the ‘allocated’ fixed overhead. Why is this amount
considered to be ‘unavoidable’?
Answer
Chapter 7 The Use of Cost Information in Management Decision Making
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152. For each situation listed as items 1 through 3, identify the type of decision situation that
is presented, and recommend the appropriate action assuming only the financial impact
is considered. Justify your choice.
Scenario
Type of Decision
Appropriate Action
1. Blockbuster has 3 product lines.
Compact Discs (CDs) have a loss
of $4,000 for last year, while the
other lines are profitable. If the CD
product line is dropped, allocated
costs are unavoidable. The
allocated costs exceed the
operating loss of the CD product
line.
2. The incremental cost to make
widgets for June is $3,380. The
incremental cost to buy from a
supplier is $3,200.
Type of Decision
Appropriate Action
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-46
153. PaperPro produces staplers, which it regularly sells for $11.25 each. The following unit
cost data are based on a normal production of 7,800 staplers produced each year:
Direct materials
$2.60
Direct labor
1.32
Factory overhead (70% variable)
4.40
PaperPro has received an order from a new customer who wants to buy 1,200 staplers.
The customer is willing to pay $10.00 per stapler, but also wants its logo imprinted on
each stapler. The logo imprint will cost $0.40 per stapler.
a. How much is the minimum price that PaperPro should charge for the entire order
if its factory has the capacity to produce 10,500 staplers annually?
b. How much is the minimum price that PaperPro should charge for the entire order
if its factory has the capacity to produce 8,500 staplers annually?
c. Why does the answer to part b differ from part c?
Answer
Chapter 7 The Use of Cost Information in Management Decision Making
7-47
SHORT-ANSWER ESSAYS
154. What are the components of incremental analysis that are used to calculate incremental
profit or incremental loss?
Answer
155. What are avoidable costs? Which costs are usually avoidable in a make-or-buy
decision?
156. What is the cause of the cost allocation death spiral?
Answer
157. What is the role of opportunity costs in a make–or-buy decision?
Answer
158. What are joint costs and how are these costs allocated?
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-48
159. List three disadvantages of using an outside supplier.
Answer
*160. List the steps in the theory of constraints process.
Answer
*161. Explain what is meant by “subordinate everything else to the binding constraint.” Give an
example of what this means.