CHAPTER 7
The Use of Cost Information in Management Decision-Making
Summary of Questions by Objectives and Bloom’s Taxonomy
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True-False Statements
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Multiple Choice Questions
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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-2
TRUE-FALSE STATEMENTS
1. Incremental profit is the additional revenue received as a result of selecting one decision
alternative over another.
2. Sunk costs are incremental costs because they increase or decrease with the choice of
one alternative over another.
3. Differential costs are relevant in decision-making.
4. In deciding whether to sell or process further, the costs that have been incurred to
process the product to the split-off point are incremental costs.
5. In a make-or–buy decision, direct materials and direct labor are usually incremental
costs.
6. In a make-or-buy decision, the original purchase price of equipment that is currently
used in the manufacturing process is usually a relevant cost because the equipment can
be sold for its salvage value.
7. Avoidable fixed costs are incremental in a make-or-buy decision.
8. Avoidable costs are always relevant.
9. Decision alternatives that provide the largest incremental profit are always the best
option.
10. The proper way to analyze the decision to drop a product line is to compare sunk costs
to incremental costs.
11. Common costs are not directly traceable to an individual product line.
12. If a company decides to eliminate a product, fixed costs allocated to that product line will
be avoided.
13. When deciding whether to eliminate a segment, the segment should be dropped if its
contribution margin less the avoidable fixed costs is positive.
14. Opportunity costs represent the benefits foregone by selecting one alternative over
another.
15. Avoidable costs are always incremental to business decisions.
16. Fixed costs are always sunk costs.
17. Two or more products which result from common inputs are called cut-off products.
18. The best way to allocate the cost of common inputs to joint products is based on the
physical quantities of the outputs.
Chapter 7 The Use of Cost Information in Management Decision Making
7-3
19. Allocating joint costs to products based on physical quantities will make all of the
products have the same gross margin ratio if they are sold at the split-off point.
20. The stage of production at which individual products are identifiable is referred to as the
spin-off point.
21. One advantage of using an outside supplier is the possibility that the outside supplier is
particularly efficient at manufacturing the needed part or component.
22. The qualitative aspects of a decision must receive the same careful attention as the
quantitative aspects.
23. A primary disadvantage of using an outside supplier is that the supplier may not be able
to deliver the needed parts or components on a timely basis.
*24. When applying the theory of constraints, management attempts to improve throughput in
factory bottlenecks.
*25. A manufacturing company will have a binding constraint unless the capacity in all its
departments exceeds the demand of its products.
*26. According to the theory of constraints, everything else should be subordinate to the
binding constraint.
*27. Throughput is the amount of inventory produced in a period.
Material from the appendix to the chapter is marked with an asterisk (*).
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-4
MULTIPLE CHOICE
28. Which of the following is quite often not incremental?
A. Direct labor
B. Direct material
C. Variable manufacturing overhead
D. Fixed manufacturing overhead
29. Which of the following is never considered in incremental analysis?
A. Incremental revenue
B. Sunk costs
C. Incremental profit
D. Differential costs
30. Which of the following is a cost that does not differ between decisions?
A. Controllable costs
B. Opportunity costs
C. Unavoidable costs
D. Incremental costs
31. Which one of the following is the preferred alternative when deciding between two
alternatives?
A. No opportunity or sunk costs exist.
B. Revenues are greater than under the other alternatives.
C. Expenses are less than under the other alternatives.
D. Incremental profit is greater than under the other alternatives.
32. Which of the following is a cost that was incurred in the past that will never be
incremental?
A. Sunk costs
B. Opportunity costs
C. Avoidable costs
D. Relevant costs
33. A company is trying to decide whether to sell partially completed goods in their current
state or incur additional costs to finish the goods and sell them as complete units. Which
of the following is not relevant to the decision?
A. The selling price of the completed units
B. The costs incurred to process the units to this point
C. The selling price of the partially completed units
D. The costs that will be incurred to finish the units
34. A company is trying to decide whether to keep or drop the organic foods department in
its grocery store. If organic foods are dropped, the manager will be laid off. What is the
manager’s salary in relation to the decision to keep or drop the department?
A. An opportunity cost and therefore relevant
B. Avoidable and therefore incremental
C. Sunk and therefore not relevant
D. The same for all alternatives and therefore not relevant
Chapter 7 The Use of Cost Information in Management Decision Making
7-5
35. Which of the following is most likely relevant in a make–or-buy decision?
A. Unavoidable costs
B. Sunk costs
C. Incremental revenues
D. Opportunity costs
36. Wilson is currently producing a component for one of its products. Wilson has received
an offer to buy the component from an outside supplier. A machine is currently being
rented to manufacture the component. If the company buys the component, the rental
will be cancelled. What is the rent on the machine, in relation to the decision to make or
buy the component?
A. Sunk and therefore not relevant
B. Avoidable and therefore not relevant
C. Avoidable and therefore relevant
D. Unavoidable and therefore relevant
37. Costs that will be eliminated if a particular course of action is undertaken are called
A. sunk costs.
B. opportunity costs.
C. accounting costs.
D. avoidable costs.
38. The value of benefits foregone by selecting one decision alternative over another is a(n)
A. unavoidable cost.
B. incremental benefit.
C. differential revenue.
D. opportunity cost.
39. A product line should be dropped when
A. it has a positive contribution margin.
B. it has unavoidable fixed costs.
C. there will be a positive change in income if the product line is dropped.
D. All of these answer choices are correct.
40. Which of the following statements is(are) true concerning common costs?
I. They are costs that are directly traceable to an individual product line.
II. They are normally avoidable.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
41. Which of the following is a direct cost of a specific department in a retail store?
A. Supplies used in cleaning the store
B. Rent of the store
C. Utilities used by the store, such as electricity
D. Cost of the department manager’s salary
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-6
42. When a department or product line is dropped, the common fixed costs that had been
allocated to that department
A. are eliminated.
B. become variable costs.
C. are allocated to the remaining departments or product lines.
D. become sunk costs.
43. Harrison Enterprises currently produces 8,000 units of part B13. Current unit costs for
part B13 are as follows:
Direct materials $12
Direct labor 9
Factory rent 7
Administrative costs 10
General factory overhead (allocated) 7
Total $45
If Harrison decides to buy part B13, 50% of the administrative costs would be avoided.
All of the company’s items, including part B13, are manufactured in the same rented
production facility. The company has an offer from a wholesaler that wishes to sell the
part to Harrison for $31 per unit. What will occur if the company accepts the offer?
A. The cost for this part will increase by $5 per unit.
B. The cost for this part will be the same.
C. The cost for this part will decrease by $14 per unit.
D. The cost for this part will decrease by $10 per unit.
44. You have tickets to go to Jamaica over spring break. Just this week your best friend
informs you that he (she) is getting married over spring break. Your friend would like you
to stay back in the city and be the wedding attendant. The tickets to Jamaica are
nonrefundable.
Which of the following is a sunk cost relating to your decision of attending the wedding or
going on the trip to Jamaica?
A. The cost of the airline tickets to Jamaica
B. The cost of wedding gift
C. The cost of the clothing you will have to buy/rent to be in the wedding
D. The cost of the rent on your apartment for the month
45. Which of the following statements regarding opportunity costs is true?
A. Opportunity costs are recorded as an expense since they are a cost of accepting
another option.
B. Opportunity costs are always incremental.
C. Opportunity costs are unavoidable.
D. The same decision will be reached whether or not opportunity costs are
considered in an incremental analysis.
Chapter 7 The Use of Cost Information in Management Decision Making
7-7
46. Samson Designers produces a lady’s handbag that normally sells for $120. The
company produces 800 units annually but has the capacity to produce 1,100 units. An
order from a customer has been received for 200 handbags at $85 each that would not
disrupt current operations. Current costs for the handbag are as follows:
Direct materials $23.00
Direct labor 45.00
Variable overhead 7.00
Fixed overhead 12.00
Total $87.00
In addition, the customer would like to add a monogram to each bag which would require
an additional $4 per bag in additional labor costs. Samson would also have to purchase
a piece of equipment to create the monogram which would cost $800. This equipment
would not have any other uses. Which statement is true with regard to this situation?
A. Incremental revenues will exceed incremental costs by $400.
B. Incremental revenues will exceed incremental costs by $1,200.
C. Incremental costs will exceed incremental revenues by $1,200.
D. Incremental costs will exceed incremental revenues by $2,000.
47. Speedo produces signature goggles which it sells for $35. The company produces
15,000 pairs of these goggles annually but has the capacity to produce 20,000. An order
for manufacturing and selling 1,000 pairs at $25 has been received from the U.S.
Olympic swim team that would not disrupt current operations. Current costs for the
signature goggles are as follows:
Direct materials $ 6.00
Direct labor 10.00
Variable overhead 3.00
Fixed overhead 8.00
Total $27.00
In addition, the Olympic coach would like to add the U.S. Olympic logo to each pair
which would require an additional $2 per pair of goggles in additional labor costs. The
company would also have to rent a logo stamper to stamp the logo which would cost
$600. Which statement is true with regard to this order?
A. Incremental profit will be $4,000.
B. Incremental costs will be $27,000.
C. Incremental costs will be $21,600.
D. Incremental costs will exceed incremental revenues by $4,600.
48. Denray Deli has two locations, downtown and in the town mall. During March, the
company reported total net income of $144,000 with sales of $1,200,000. The
contribution margin in the downtown store was 30%. The contribution margin in the town
mall store is $80,000. Total fixed costs are allocated as $110,000 in the downtown store
and $90,000 in the town mall location. How much are sales at the downtown location?
A. $880,000
B. $1,146,667
C. $254,000
D. None of these answer choices are correct.
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-8
49. Mel’s Diner owns a single restaurant, which has a cantina primarily used to seat patrons
while they wait on their tables. The company is considering eliminating the cantina.
Segmented contribution income statements are as follows and fixed costs applicable to
both segments are allocated on the basis of square footage.
Restaurant Cantina Total
Sales $800,000 $200,000 $1,000,000
Variable costs 475,000 160,000 635,000
Direct fixed costs 50,000 15,000 65,000
Allocated fixed costs 212,500 37,500 250,000
Net income $ 62,500 ($ 12,500) $ 50,000
What effect will occur if Mel’s Diner eliminates the cantina if there is no effect on
restaurant sales?
A. Net income will increase by $12,500.
B. Net income will decrease to $37,500.
C. Net income will decline by $25,000.
D. Net income will be $62,500.
50. The Book Rack has two locations, downtown and on campus. During March, the
company reported net income of $164,000 and sales of $1.2 million. The contribution
margin in the downtown store was $320,000 (32% of sales). The contribution margin in
the campus store is $110,000. Direct fixed costs are $90,000 in the downtown store and
$93,000 in the campus location. How much are total variable costs?
A. $953,000
B. $770,000
C. $680,000
D. $430,000
51. Abacus has 800 obsolete calculators that are carried in inventory at a cost of $1,920. If
these calculators are upgraded at a cost of $3,100, they could be sold for $4,500.
Alternatively, the calculators could be sold “as is” for $1,600. What is the net advantage
or disadvantage of reworking the calculators?
A. $1,400 advantage
B. $2,900 advantage
C. $5,440 disadvantage
D. $200 disadvantage
52. Swell Computers has 12 obsolete computers that are carried in its inventory at a cost of
$13,200. If these computers are upgraded at a cost of $7,500, they could be sold for
$15,300. Alternatively, the computers could be sold “as is” for $9,000. What is the net
advantage or disadvantage of upgrading the computers?
A. $6,300 advantage
B. $1,200 disadvantage
C. $5,400 disadvantage
D. $3,000 advantage
Chapter 7 The Use of Cost Information in Management Decision Making
7-9
53. The following are production and cost data for two products, buckets and pails, produced
in batches of 600 each.
Buckets Pails
Contribution margin per batch $360 $250
Machine set-ups needed per batch 14 9
The company can only perform 9,450 set-ups each period, yet there is unlimited demand
for each product. What is the maximum contribution margin for the year?
A. $366,000
B. $243,000
C. $1,050
D. $262,500
54. The following are production and cost data for two products, A and B, produced in
batches of 100 units.
Product A Product B
Contribution margin per batch $450 $340
Machine set-ups needed per batch 25 20
The company can only perform 12,000 set-ups each period yet there is unlimited
demand for each product. What is the incremental profit from producing Product A
instead of Product B for the year?
A. $216,000
B. $204,000
C. $12,000
D. $54,000
55. Marshal Costumes owns two stores and management is considering eliminating the
Mandarin store due to declining sales. Common fixed costs are allocated on the basis of
sales. Contribution income statements are as follows:
Arlington Mandarin Total
Sales $300,000 $200,000 $500,000
Variable costs 160,000 130,000 290,000
Direct fixed costs 40,000 20,000 60,000
Allocated fixed costs 80,000 65,000 145,000
Net Income $ 20,000 $ (15,000) $ 5,000
Marshal’s management feels that if they eliminate the Mandarin store, that sales in the
Arlington store will increase by 10%. If the Mandarin store is closed, what is the
incremental effect on profit for Marshal Costumes?
A. Increase by $17,000
B. Decrease by $36,000
C. Increase by $22,000
D. Decrease by $20,000
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-10
56. Publix has 2,700 pounds of bananas with a total cost of $864. Because the bananas
have become too ripe, Publix is contemplating whether it should use the bananas to
bake banana bread or sell the bananas ‘as is’ to the homeless center for $1,485. In
addition to the cost of the bananas, it would cost $2,565 to convert the bananas into
bread, which could then be sold for a total of $4,480. However, a special oven to bake
the bread will have to be rented for an additional $300. What is the incremental effect on
income if Publix converts the bananas to banana bread?
A. Increase of $130
B. Increase of $430
C. Decrease of $734
D. Increase of $1,615
57. Fanatic Footwear has two store locations, midtown and at the beach. During October,
the company reported net income of $80,000 on sales of $450,000. Sales in the midtown
store were $170,000 and variable costs in the beach store were 40% of sales. The
contribution margin in the midtown store was $85,000. If total direct fixed costs are
$40,000, how much are total fixed costs for Fanatic Footwear?
A. $93,000
B. $150,000
C. $370,000
D. None of these answer choices are correct.
58. Watson Wheels currently makes 6,000 wheels annually that are used in other products it
manufactures. Current unit costs for the wheels are as follows:
Direct materials $22.00
Direct labor 16.00
Variable manufacturing overhead 12.00
Fixed manufacturing overhead 15.00
Total $65.00
The company has an offer from a manufacturer to produce the wheels for $60 per wheel.
If the company decides to buy the wheels, the empty warehouse space could be rented
for $22,000 annually. In addition, half of the fixed manufacturing overhead costs would
be avoided if the company decides to buy the wheels. If the company decides to accept
the offer, what is the incremental effect on the company’s net income?
A. A savings of $7,000
B. A savings of $37,000
C. A decrease in net income of $15,000
D. An increase in net income of $52,000
59. Trebecker Construction plans to discontinue its roofing segment which last year
generated a contribution margin of $65,000 and incurred $70,000 in fixed costs. If the
segment is discontinued, half of the fixed costs will be avoided. What effect is expected
to occur to the company’s overall profit?
A. A decrease of $5,000
B. A decrease of $30,000
C. A decrease of $5,000
D. An increase of $30,000
Chapter 7 The Use of Cost Information in Management Decision Making
7-11
60. Tannimen Square has 800 obsolete calculators in its inventory which have a cost of $16
each. If the calculators are reworked they could be sold for $23 each. If sold ‘as–is’, the
revenue would be only $12 each. If Tannimen decides to rework the calculators, how
much should the company be willing to invest to ensure that no additional loss occurs on
the sale of the calculators?
A. $5,600
B. $8,800
C. $0
D. $3,200
61. Blue Chip Company sells gears for $9 per unit. The unit cost of each gear follows:
Direct materials $1.50
Direct labor 2.20
Manufacturing overhead 2.10
Total $5.80
An order to purchase 4,000 gears was recently received from a new customer. There is
enough capacity to fill the order and filling this order would not disrupt current
operations. Blue Chip Company would incur an additional $1.80 per gear for shipping
costs. Half of the manufacturing overhead costs are fixed and would be incurred no
matter how many units are produced. In negotiating a price, how much is the minimum
acceptable selling price?
A. $7.60
B. $5.80
C. $4.75
D. $6.55
62. Conviser Tools manufactures a number of products from the same raw material. Joint
processing costs total $10,000. Product A could be sold at the cut-off point for $18,000
or it can be further processed at a cost of $9,000 and then sold for $35,000. Conviser
should:
A. Further process product A because its incremental revenues will exceed
incremental costs by $8,000.
B. Further process product A because its incremental revenues will exceed
incremental costs by $26,000.
C. Sell as-is because the incremental loss is $2,000 if processed further.
D. Further process product A because its incremental revenues will exceed
incremental costs by $16,000.
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-12
63. Barnett Brass sells economy door knobs for $15 each. Unit product costs are as follows:
Direct materials $3
Direct labor 2
Manufacturing overhead 4
Total $9
An order to purchase 4,000 units was recently received from a new customer. There is
enough capacity to fill the order and filling this order would not disrupt current
operations. Barnett Brass would incur an additional $1.50 per unit for shipping costs.
Thirty percent of the manufacturing overhead costs are fixed and would be incurred no
matter how many units are produced. In negotiating a price, how much is the minimum
acceptable selling price?
A. $10.50
B. $7.80
C. $9.30
D. $7.70
64. Meehan Gifts manufactures a number of products from the same raw material. Joint
processing costs total $4,000. Product Z could be sold at the cut-off point for $6,000 or it
can be further processed at a cost of $9,000 and then sold for $14,000. Meehan
Company should
A. sell product Z at the split-off point because its incremental costs will exceed
incremental revenues by $5,000 than if processed further.
B. further process product Z because its incremental revenues will exceed
incremental costs by $1,000 with this option.
C. sell product Z at the split-off point because its incremental costs will exceed
incremental revenues by $1,000 than if processed further.
D. sell product Z at the split-off point because its incremental costs will exceed
incremental revenues by $5,000 than if processed further.
65. B&B Flooring produced 8,000 yards of its economy-grade carpet. In the coloring
process, there was a pigment defect and the resulting color faded. The carpet normally
sells for $18 per yard, with $6 of variable cost per yard and $3 of fixed cost per yard
assigned to the carpet. The company realizes that it cannot sell the faded carpet for $18
per yard through its normal channels, unless the coloring process is repeated. The
incremental cost of the coloring process is $4 per yard. Ace Apartments is willing to buy
the carpet in its current faded condition for $13 per yard. Should B&B repeat the coloring
process or sell the carpet to Ace Apartments?
A. Repeat coloring for $8,000 benefit
B. Sell ‘as is’ to Ace for $32,000 benefit
C. Repeat coloring for $56,000 benefit
D. Sell ‘as is’ to Ace for $56,000 benefit
Chapter 7 The Use of Cost Information in Management Decision Making
7-13
66. Foot Print has three product lines in its retail stores: shoes, boots, and sandals. The
allocated fixed costs are based on units sold and are unavoidable. Results of June
follow:
Socks
Boots
Sandals
Total
Units sold
800
1,200
2,400
4,400
Revenue
$24,800
$30,400
$36,600
$91,800
Variable costs
13,600
13,200
16,800
43,600
Direct fixed costs
5,000
7,000
6,500
18,500
Allocated fixed costs
8,000
9,000
8,000
25,000
Net income (loss)
$(1,800)
$ 1,200
$ 5,300
$ 4,700
Demand of individual products is not affected by changes in other product lines. How
much is the incremental effect on income of dropping socks?
A. Decrease of $11,200
B. Decrease of $6,200
C. Increase of $1,800
D. Decrease of $1,500
67. Deep South Dairy gathered the following data about the two products that it produces:
Current Sales Estimated Added Sales Value if
Product Value Processing Costs Processed Further
Milk $8,000 $2,000 $11,000
Yogurt 12,000 7,000 18,000
Which of the products should be processed further?
A. Milk, because profits increase by $1,000, whereas Yogurt results in decrease of
profit
B. Yogurt, because profits increase by $1,000, which exceeds the profits increased
by Milk
C. Both products, because revenue will increase by $9,000 for Milk, and by $6,000
for Yogurt
D. Both products, because profits for Milk will be $1,000, and profit for Yogurt will be
$1,000
68. Way Living sells unfinished oak shelves for $35 each. Budgeted sales for the year are
expected to be 4,000 shelves. Each shelf requires 4 linear feet of wood to produce. The
cost of wood is $4.80 per linear foot. Direct labor is $6.00 per shelf. Variable overhead
and fixed overhead costs per unfinished shelf are $1.00 and $0.50 respectively. Way
Living is considering whether it should stain the shelves so it can sell them for $48.00
each. It estimates it will sell 60% of the budgeted shelves ‘stained’ with the others
unfinished. The direct costs of staining each shelf are $9.00. How much is the
incremental effect on profit if the company stains the shelves?
A. $16,000
B. $67,200
C. $52,000
D. None of these answer choices are correct.
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-14
69. Two or more products that result from common inputs are called
A. split products.
B. joint products.
C. split-off products.
D. common products.
70. Joint costs
A. are the cost of the common inputs for joint products.
B. are the costs incurred after the split–off point for joint products.
C. are expensed because they have no future benefit for a company.
D. only exist when there are no opportunity costs involved in the decision.
71. Which of the following is a common input resulting in joint products?
A. Logwood that is made into shelves of different lengths
B. Uncooked pasta, which is made into cooked meals at a restaurant
C. Flour that is made into bread, cookies, and other baked goods
D. A hog that is made into ham, bacon, and other meat products
72. What is the stage of production at which the individual joint products are identified?
A. Split-off point
B. Joint processing point
C. Joint identification point
D. Relative sales point
73. Which of the following is not a joint product?
A. Milk converted into cream and butter
B. Logs converted into paper and cardboard
C. Crude oil converted into gasoline and jet fuel
D. 4’ x 8’ plywood converted into chairs and tables
74. At the split-off point,
A. the production process stops and profitable products can be sold.
B. inventory becomes obsolete.
C. the company recognizes profit by selling the product.
D. the cost incurred can be separated into individual joint products.
75. The allocation of joint costs to joint products influences
A. the dollar amount of profit of each joint product.
B. the overall profitability of the company.
C. the decision to sell or process further the joint products.
D. the timing of when the split–off point will occur.
76. Production of all the joint products should cease if
A. any of the individual joint products sells for less than its allocated cost.
B. the total joint cost is less than the total revenue generated when all of the joint
products are sold.
C. any of the joint products have a negative gross margin after the joint costs have
been allocated.
D. total revenue from the sale of all the joint products is less than the joint cost.
Chapter 7 The Use of Cost Information in Management Decision Making
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77. Which method of allocating joint costs is based on the proportional sales values at the
split-off point?
A. Proportional method
B. Physical quantities method
C. Relative sales value method
D. Joint allocation method
78. Which statement is true of the relative sales value method if all joints products are sold
at the split-off point?
I. The products will have the same gross margin ratio.
II. The products will have the same gross margin per unit.
A. Both I and II
B. Neither I nor II
C. Only I
D. Only II
79. When making a decision to sell a joint product at the split-off point or process it further,
which of the following is not relevant?
A. The amount of joint costs assigned
B. The sales value at the split–off point
C. The cost of further processing
D. The sales value after further processing
80. LanaTech produces three products, X, Y, and Z, from recycled paper. Budgeted data for
next month follows:
X Y Z
Units produced 800 2,400 1,600
Sales value at split-off per unit $6 $15 $12
Additional processing costs per unit $1 $4 $5
Joint production costs per unit $2 $6 $4
Sales value if processed further per unit $9 $20 $16
The joint cost of the recycled paper is $110,000. Which of the products should be
produced beyond the split–off point?
X Y Z
A. No Yes Yes
B. Yes Yes No
C. No No No
D. No Yes No
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-16
81. Ralston Tile produces three types of ceramic tiles, models 33, 41, and 56 from clay,
which is mined in the Arizona desert. Budgeted data for next month follows:
33 41 56
Units produced 3,000 4,500 6,000
Sales value at split-off per unit $15 $18 $24
Additional processing costs per unit $4 $6 $7
Joint production costs per unit $2 $5 $5
Sales value if processed further per unit $20 $23 $32
The joint cost of mining the clay is $80,000. Which of the products should be produced
beyond the split-off point?
33 41 56
A. Yes Yes Yes
B. Yes Yes No
C. No Yes Yes
D. Yes No Yes
82. One advantage of using an outside supplier is that
A. the adverse effect of a downturn in the business will be less severe.
B. it will enhance the manager’s control over the production process.
C. the component produced will always be of a better quality.
D. it will boost employee morale.
83. Which of the following is a disadvantage of using an outside supplier?
A. Employees may have to be laid off if production is outsourced.
B. The supplier assumes the risk of obsolete inventory.
C. The supplier may provide a cost savings due to increased efficiencies.
D. The supplier may have better quality control.
84. Which of the following costs are always incremental and relevant in decision analysis?
A. Opportunity costs and sunk costs
B. Sunk costs and avoidable costs
C. Unavoidable costs and opportunity costs
D. Relevant costs and opportunity costs
Chapter 7 The Use of Cost Information in Management Decision Making
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85. State University is considering hiring an outside company for its grounds maintenance.
In this regard, State University has received a bid from Mackin Services. Mackin states
that its bid of $410,000 will cover all services and planting materials required to “keep
State University’s grounds in a condition comparable to prior years.” State University’s
cost for grounds maintenance in the preceding year was $412,000 as follows:
Salary of three full-time gardeners $295,000
Plant materials 80,000
Fertilizer 9,000
Fuel 8,000
Depreciation of other equipment 5,000
Depreciation of tractor and mowers 15,000
Total $412,000
If State University hires Mackin, it will be able to sell its other equipment for $30,000, and
the three gardeners will be laid off. What is the first year financial impact of hiring the
outside company for its grounds maintenance?
A. $13,000 additional cost
B. $2,000 savings
C. $17,000 savings
D. $30,000 savings
86. State University is considering hiring an outside company for its grounds maintenance.
In this regard, State University has received a bid from Mackin Services. Mackin states
that its bid of $410,000 will cover all services and planting materials required to “keep
State University’s grounds in a condition comparable to prior years.” State University’s
cost for grounds maintenance in the preceding year was $412,000 as follows:
Salary of three full-time gardeners $295,000
Plant materials 80,000
Fertilizer 9,000
Fuel 8,000
Depreciation of other equipment 5,000
Depreciation of tractor and mowers 15,000
Total $412,000
If State University hires Mackin, it will be able to sell its other equipment for $30,000, and
the three gardeners will be laid off. What will savings be in the second year?
A. $13,000 additional costs
B. $2,000 savings
C. $7,000 savings
D. $30,000 savings
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-18
87. Sanders Toys is beginning to manufacture Bungey Wagons. The product will be sold to
toy store chains for $30 each. Management allocates $120,000 of fixed manufacturing
overhead costs to Bungey Wagons. The manufacturing cost for each wagon at the
expected production of 10,000 wagons is as follows:
Direct material $ 13.00
Direct labor 4.00
Overhead ($1.20 fixed and $2.00 variable) 3.20
Total $20.20
The company has contacted a number of suppliers to determine whether it is better to
buy or manufacture the wheels. The lowest quote for a set of 4 wheels needed for each
wagon is $3.15. It is estimated that purchasing the wheels from a supplier will save 10
percent of direct materials, 20 percent of direct labor, and 15 percent of variable
overhead. Sanders Toys’ manufacturing space is highly constrained. By purchasing the
wheels, the company will not have to lease additional manufacturing space that currently
cost $8,000 per year. What is the incremental cost or benefit of buying the wheels as
opposed to making them?
A. $500 net benefit
B. $7,500 net cost
C. $14,500 net cost
D. None of these answer choices are correct.
88. Hanson Sports has three product lines: footballs, basketballs, and bats. Common costs
are allocated based on relative sales. A product line income statement for the year
ended December 31, 2017 follows:
Footballs
Basketballs
Bats
Total
Sales
$600,000
$800,000
$400,000
$1,800,000
Cost of goods sold
260,000
400,000
230,000
890,000
Gross margin
340,000
400,000
170,000
910,000
Less other variable costs
85,000
120,000
80,000
285,000
Contribution margin
255,000
280,000
90,000
625,000
Less direct salaries
50,000
60,000
45,000
155,000
Less common fixed costs
85,000
100,000
55,000
240,000
Net income
$120,000
$120,000
($10,000)
$ 230,000
Since the profit for bats is relatively low, the company is considering dropping this
product line. What is the incremental effect of dropping bats?
A. $185,000
B. ($45,000)
C. $240,000
D. $280,000
*89. The theory of constraints seeks to
A. improve throughput in all departments.
B. improve throughput in the department with the binding constraint.
C. create more constraints.
D. sell at the split-off point.
Chapter 7 The Use of Cost Information in Management Decision Making
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*90. As it pertains to the theory of constraints, inspections should be conducted
A. after the process with the binding constraint.
B. during the process with the binding constraint.
C. before the work is transferred to a constrained department.
D. without regard to the binding constraint.
*91. In theory of constraints, what does “break the binding constraint” mean?
A. Improve the process that was the binding constraint.
B. Improve all processes simultaneously.
C. Make sure that the items made in the constrained process yield the highest
contribution margin.
D. Make across-the-board cuts to all processes that are binding.
*92. When operating in a constrained environment, which products should be produced?
A. Those with the highest contribution margin per unit
B. Those with the highest contribution margin per unit of the constrained process
C. Those with the highest selling price
D. Those with the lowest allocated joint cost
93. Zanatech’s market for its remote control has changed significantly, and Zanatech has
had to drop the selling price per unit from $45 to $38. There are some units in the work
in process inventory that have costs of $30 per unit associated with them. Zanatech can
sell these units in their current state for $22 each. It will cost Zanatech $11 per unit to
rework these units so that they can be sold for $38 each. Which of the following is not a
relevant value in this problem?
A. $22
B. $30
C. $38
D. $8
94. Zanatech’s market for its remote control has changed significantly, and Zanatech has
had to drop the selling price per unit from $45 to $38. There are some units in the work
in process inventory that have costs of $30 per unit associated with them. Zanatech can
sell these units in their current state for $22 each. It will cost Zanatech $11 per unit to
rework these units so that they can be sold for $38 each. How much is the financial
impact if the units are processed furthur?
A. $5 per unit profit
B. $16 per unit profit
C. $3 per unit loss
D. $12 per unit loss
95. Zanatech’s market for its remote control has changed significantly, and Zanatech has
had to drop the selling price per unit from $45 to $38. There are some units in the work
in process inventory that have costs of $30 per unit associated with them. Zanatech can
sell these units in their current state for $22 each. It will cost Zanatech $11 per unit to
rework these units so that they can be sold for $38 each. Which of the following is the
amount of sunk costs in this problem?
A. $30 per unit
B. $11 per unit
C. $38 per unit
D. $15 per unit
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
7-20
96. Zanatech’s market for its remote control has changed significantly, and Zanatech has
had to drop the selling price per unit from $45 to $38. There are some units in the work
in process inventory that have costs of $30 per unit associated with them. Zanatech can
sell these units in their current state for $22 each. It will cost Zanatech $11 per unit to
rework these units so that they can be sold for $38 each. A new employee looks at the
analysis and exclaims, “We’ll lose money with either of these alternatives! Let’s just
throw these units in the trash!” What effect will this option have on net income?
A. Profit will decrease by $45 per unit for each unit discarded.
B. Profit will decrease by $30 per unit for each unit discarded.
C. Profit will increase by $11 per unit since the completion costs will not have to be
incurred.
D. Profit will decrease by $5 per unit for each unit discarded.
97. Reason Food Store has 4,000 pounds of raw pork approaching its expiration date. Each
pound has a cost of $4.50. The pork could be sold ‘as is’ for $3.00 per pound to the dog
food processing plant, or roasted and sold in the deli. The cost of roasting the pork will
be $2.80 per pound and each pound could be sold for $6.50. What should be done with
the pork and why?
A. The pork should be thrown away since there will be a loss with each of the other
alternatives.
B. The pork should be processed further since the sales price increases by $3.50
per pound and the cost only increases by $2.80 per pound.
C. The pork should be sold ‘as is’ since there is no reason to put more cost into a
product that is already selling below its $4.50 cost.
D. It does not matter which option is undertaken since all alternatives result in a
loss.
98. Winton Corporation currently makes rolls for deli sandwiches it produces. It uses 30,000
rolls annually in the production of deli sandwiches. The costs to make the rolls are given
below:
Materials $0.24 per roll
Labor $0.40 per roll
Variable overhead $0.16 per roll
Fixed overhead $0.20 per roll
A potential supplier has offered to sell Winton the rolls for $0.90 each. If the rolls are
purchased, 30% of the fixed overhead could be avoided. If Winton accepts the offer,
what will the effect on profit be?
A. $1,200 decline in profit
B. $1,200 increase in profit
C. $3,000 decline in profit
D. $3,000 increase in profit