Chapter 9 – Measuring relevant costs and revenues for decision-making
MULTIPLE CHOICE
1. Tactical decision-making relies
a.
only on relevant cost information.
b.
on qualitative factors.
c.
on relevant costs as well as other qualitative factors.
d.
on neither relevant costs or qualitative decisions.
2. An important qualitative factor to consider regarding a special order is the
a.
variable costs associated with the special order.
b.
avoidable fixed costs associated with the special order.
c.
effect the sale of special-order units will have on the sale of regularly priced units.
d.
incremental revenue from the special order.
3. Qualitative factors that should be considered when evaluating a make-or-buy decision are
a.
the quality of the outside supplier’s product.
b.
whether the outside supplier can provide the needed quantities.
c.
whether the outside supplier can provide the product when it is needed.
d.
all of the above.
4. Future costs that differ across alternatives describe
a.
relevant costs.
b.
target cost.
c.
full costs.
d.
activity-based costs.
5. Relevant costs are
a.
past costs.
b.
future costs.
c.
full costs.
d.
cost drivers.
6. Sunk costs are
a.
future costs that have no benefit.
b.
relevant costs that have only short-run benefits.
c.
target costs.
d.
cannot be avoided.
7. Which item is not an example of a sunk cost?
a.
materials needed for production
b.
purchase cost of machinery
c.
depreciation
d.
All are sunk costs.
8. The Titanic hit an iceberg and sank. In deciding whether or not to salvage the ship, its book value is
a(n)
a.
relevant cost.
b.
sunk cost.
c.
opportunity cost.
d.
discretionary cost.
9. A purchasing agent has two potential firms from which to buy materials for production. If both firms
charge the same price, the material cost is a(n)
a.
irrelevant cost.
b.
relevant cost.
c.
sunk cost.
d.
opportunity cost.
10. Which of the following BEST describes relevant costs?
a.
present costs with similar decision alternatives
b.
future costs that differ between competing decision alternatives
c.
past costs that correspond solely on competing decision alternatives
d.
present costs that differ between competing decision alternatives
11. If a cost is identical under each alternative under consideration within a given decision context, the
cost is considered:
a.
an alternative cost.
b.
a discounted cost.
c.
an irrelevant cost.
d.
a procedural cost.
12. Which of the following statements is true when making a decision between two alternatives?
a.
Variable costs may not be relevant when the decision alternatives have the same activity
levels.
b.
Variable costs are not relevant when the decision alternatives have different activity levels.
c.
Sunk costs are always relevant.
d.
Fixed costs are never relevant.
13. Which of the following costs is NOT relevant to a special-order decision?
a.
the direct labour costs to manufacture the special-order units
b.
the variable manufacturing overhead incurred to manufacture the special-order units
c.
the portion of the cost of leasing the factory that is allocated to the special order
d.
All of the above costs are relevant.
14. Which of the following costs is NOT relevant to a make-or-buy decision?
a.
£10,000 of direct labour used to manufacture the parts
b.
£30,000 of depreciation on the plant used to manufacture the parts
c.
the supervisor’s salary of £25,000 that will be avoided if the part is purchased from an
outside supplier
d.
£15,000 in rent from leasing the production space to another company if the part is
purchased from an outside supplier
15. ____ are future costs that differ across alternatives.
a.
Relevant costs
b.
Irrelevant costs
c.
Sunk costs
d.
Past costs
16. Which of the following costs is NOT relevant for special decisions?
a.
incremental costs
b.
sunk costs
c.
avoidable costs
d.
All of the above costs are relevant for special decisions.
17. Which of the following costs is relevant to a make-or-buy decision?
a.
original cost of the production equipment
b.
annual depreciation of the equipment
c.
the amount that would be received if the production equipment were sold
d.
the cost of direct materials purchased last month and used to manufacture the component
18. A decision to make a component internally versus through a supplier is a
a.
special-order decision.
b.
keep-or-drop a product-line decision.
c.
make-or-buy decision.
d.
Both a and c are correct.
19. Refer to Figure 9-1. What is the effect on income if Foster Industries purchases the component from
the outside supplier?
a.
£30,000 decrease
b.
£30,000 increase
c.
£90,000 decrease
d.
£90,000 increase
Figure 9-1
Foster Industries manufactures 20,000 components per year. The manufacturing cost of the
components was determined as follows:
Direct materials
£150,000
Direct labour
240,000
Variable manufacturing overhead
90,000
Fixed manufacturing overhead
_120,000
Total
£600,000
An outside supplier has offered to sell the component for £25.50.
20. Refer to Figure 9-1. What is the effect on income if Foster purchases the component from the outside
supplier?
a.
£45,000 increase
b.
£15,000 increase
c.
£75,000 decrease
d.
£105,000 increase
Make:
Direct materials
Direct labour
Variable overhead
Total
Buy:
Purchase price (20,000 £25.50)
Rental income
Total
Figure 9-2
Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct labour
Variable overhead
Total
Buy:
Purchase price (20,000 £25.50)
21. Refer to Figure 9-2. What is the effect on income if Vest Industries purchases the component from the
outside supplier?
a.
£270,000 decrease
b.
£270,000 increase
c.
£30,000 decrease
d.
£30,000 increase
22. Refer to Figure 9-2. What is the effect on income if Vest purchases the component from the outside
supplier?
a.
£225,000 increase
b.
£195,000 increase
c.
£165,000 decrease
d.
£135,000 increase
Figure 9-3
Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for
£30. Manufacturing and other costs are as follows:
Variable costs per unit:
Fixed costs per month:
Direct materials
£ 9.00
Factory overhead
£120,000
Direct labour
4.50
Selling and admin.
__60,000
Factory overhead
3.00
Total
£180,000
Distribution
__1.50
Total
£18.00
The variable distribution costs are for transportation to the retail stores. The current production and
sales volume is 20,000 per year. Capacity is 25,000 units per year.
23. Refer to Figure 9-3. A Tennessee manufacturing firm has offered a one-year contract to supply speaker
parts at a cost of £6.00 per unit. If Miller Company accepts the offer, it will be able to reduce variable
costs by 30 per cent and rent unused space to an outside firm for £18,000 per year. All other
information remains the same as the original data. What is the effect on profits if Miller Company
buys from the Tennessee firm?
a.
decrease of £19,000
b.
increase of £19,000
c.
increase of £13,000
d.
decrease of £6,000
Cost to buy (£6 20,000)
Cost to make:
Variable costs [(£18.00 0.30) 20,000]
Opportunity costs
_126,000
Profit will decrease by
24. Refer to Figure 9-3. A San Diego wholesaler has proposed to place a special one-time order of 10,000
units at a reduced price of £24 per unit. The wholesaler would pay all distribution costs, but there
would be additional fixed selling and administrative costs of £3,000. All other information remains the
same as the original data. What is the effect on profits if the special order is accepted?
a.
increase of £75,000
b.
increase of £57,000
c.
decrease of £168,000
d.
increase of £12,000
Additional revenues (10,000 £24)
Additional costs:
Variable (10,000 £16.50)
25. Refer to Figure 9-3. An Atlanta wholesaler has proposed to place a special one-time order for 7,000
units at a special price of £25.20 per unit. The wholesaler would pay all distribution costs, but there
would be additional fixed selling and administrative costs of £6,000. In addition, assume that overtime
production is not possible and that all other information remains the same as the original data. What is
the effect on profits if the special order is accepted?
a.
increase of £54,900
b.
increase of £30,900
c.
increase of £36,900
d.
increase of £176,400
Additional revenues (7,000 £25.20)
Additional costs:
Variable (7,000 £16.50)
Fixed
6,000
Opportunity cost (2,000 £12)
Profits increase by
26. Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part
AA1 at this volume is as follows:
Direct materials
£10.00
Direct labour
14.00
Variable overhead
6.00
Fixed overhead
__4.00
Total
£34.00
An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost
of £31.00. If Harris Company accepts this offer, it can eliminate 50 per cent of the fixed costs assigned
to part AA1. Furthermore, the space devoted to the manufacture of part AA1 would be rented to
another company for £24,000 per year. If Harris Company accepts the offer of the outside supplier,
annual profits will
a.
increase by £29,000.
b.
increase by £14,500.
c.
increase by £22,000.
d.
increase by £2,500.
Cost to buy (5,000 £31) + (£2.00 5,000)
Cost to make (5,000 £34) + £24,000
Opportunity cost (5,000 £12)
Profits increase by
27. Houston Ltd. manufacturers a part for its production cycle. The costs per unit for 5,000 units of this
part are as follows:
Direct materials
£ 32
Direct labour
40
Variable overhead
16
Fixed overhead
__32
Total
£120
Johnson Company has offered to sell Houston Ltd. 5,000 units of the part for £112 per unit. If Houston
Ltd. accepts Johnson Company’s offer, total fixed costs will be reduced to £60,000. What alternative is
more desirable and by what amount is it more desirable?
Alternative Amount
a.
Make £20,000
b.
Make £120,000
c.
Buy £40,000
d.
Buy £100,000
e.
Buy £140,000
28. The operations of Smits Ltd. are divided into the Childs Division and the Jackson Division. Projections
for the next year are as follows:
Childs
Jackson
Division
Division
Total
Sales
£250,000
£180,000
£430,000
Variable costs
__90,000
_100,000
_190,000
Contribution margin
£160,000
£ 80,000
£240,000
Direct fixed costs
__75,000
__62,500
_137,500
Segment margin
£ 85,000
£_17,500
£102,500
Allocated common costs
__35,000
__27,500
__62,500
Operating income (loss)
£ 50,000
£(10,000)
£ 40,000
Operating income for Smits Ltd. as a whole if the Jackson Division were dropped would be
a.
£22,500.
b.
£40,000.
c.
£50,000.
d.
£60,000.
Make (£120 5,000)
Buy [(£112 5,000) + £60,000]
Make increases profits by
29. The operations of Knickers Ltd. are divided into the Pacers Division and the Bulls Division.
Projections for the next year are as follows:
Pacers
Bulls
Division
Division
Total
Sales
£420,000
£252,000
£672,000
Variable costs
_147,000
_115,500
_262,500
Contribution margin
£273,000
£136,500
£409,500
Direct fixed costs
_126,000
_105,000
_231,000
Segment margin
£147,000
£ 31,500
£178,500
Allocated common costs
__63,000
__47,250
_110,250
Operating income (loss)
£ 84,000
£(15,750)
£ 68,250
Operating income for Knickers Ltd. as a whole if the Bulls Division were dropped would be
a.
£99,750.
b.
£84,000.
c.
£68,250.
d.
£36,750.
Figure 9-4
The following information pertains to Ewing Company’s three products:
D
E
F
Unit sales per month
900
1,400
800
Selling price per unit
£6.00
£11.25
£ 7.50
Variable costs per unit
_3.00
__9.00
__7.80
Unit contribution margin
£3.00
£ 2.25
£(0.30)
30. Refer to Figure 9-4. Assume that product F is discontinued and the space used to produce product F is
rented for £600 per month. Monthly profits will
a.
increase by £360.
b.
decrease by £5,400.
c.
increase by £600.
d.
increase by £840.
31. Refer to Figure 9-4. Assume that product F is discontinued and the space is used to produce E. Product
E’s production is increased to 2,200 units per month, but E’s selling price of all units of E is reduced to
£10.20. Monthly profits will
a.
decrease by £2,070.
b.
increase by £1,200.
c.
decrease by £270.
d.
increase by £2,640.
32. The following information pertains to Dodge Company’s three products:
A
B
C
Unit sales per year
250
400
250
Selling price per unit
£9.00
£12.00
£ 9.00
Variable costs per unit
_3.60
__9.00
__9.90
Unit contribution margin
£5.40
£ 3.00
£(0.90)
Contribution margin ratio
60%
25%
(10)%
Assume that product C is discontinued and the extra space is rented for £300 per month. All other
information remains the same as the original data. Annual profits will
a.
increase by £75.
b.
decrease by £75.
c.
increase by £525.
d.
remain the same.
33. Firms may be asked to accept a special order of their product for a reduced price if
a.
it can be concealed from the government.
b.
excess capacity exists.
c.
the order is small.
d.
the plant is producing at maximum capacity.
34. A decision that focuses on whether a specially priced order should be accepted or rejected is a
a.
special-order decision.
b.
keep-or-drop a product-line decision.
c.
make-or-buy decision.
d.
Both a and c are correct.
Figure 9-5
Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units:
Direct materials
£2,400
Direct labour
960
Factory overhead (30% variable)
1,800
Selling expenses (50% variable)
900
Administrative expenses (10% variable)
____840
Total per unit
£6,900
Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the
models are sold to dealers for £7,800. Reggie Ltd.’s capacity is sufficient to produce the extra 100
units. No additional selling expenses would be incurred on the special order.
35. Refer to Figure 9-5. What is the profit earned by Reggie Ltd. on the original 1,000 units?
a.
£6,900,000
b.
£8,400,000
c.
£900,000
d.
£2,640,000
36. Refer to Figure 9-5. How much will income change if the special order is accepted?
a.
increase by £398,400
b.
decrease by £180,000
c.
increase by £111,600
d.
no change
37. Refer to Figure 9-5. If Reggie Ltd. wants to increase its profit by £18,000 on the special order, what is
the minimum price it should charge per unit?
a.
£4,014
b.
£4,164
c.
£5,100
d.
£6,900
Figure 9-6
The following information relates to a product produced by Creamer Company:
Direct materials
£24
Direct labour
15
Variable overhead
30
Fixed overhead
_18
Unit cost
£87
Fixed selling costs are £500,000 per year, and variable selling costs are £12 per unit sold. Although
production capacity is 600,000 units per year, the company expects to produce only 400,000 units next
year. The product normally sells for £120 each. A customer has offered to buy 60,000 units for £90
each.
38. Refer to Figure 9-6. The incremental cost per unit associated with the special order is
a.
£84.
b.
£81.
c.
£69.
d.
£64.
39. Refer to Figure 9-6. If the firm produces the special order, the effect on income would be a
a.
£360,000 increase.
b.
£360,000 decrease.
c.
£540,000 increase.
d.
£540,000 decrease.
Figure 9-7
Meco Company produces a product that has a regular selling price of £360 per unit. At a typical
monthly production volume of 2,000 units, the product’s average unit cost of goods sold amounts to
£270. Included in this average is £120,000 of fixed manufacturing costs. All selling and administrative
costs are fixed and amount to £30,000 per month.
Meco Company has just received a special order for 1,000 units at £240 per unit. The buyer will pay
transportation, and the regular selling price will not be affected if Meco accepts the order.
40. Refer to Figure 9-7. Assuming Meco Company has excess capacity, the effect on profits of accepting
the order would be
a.
a £60,000 increase.
b.
a £60,000 decrease.
c.
a £30,000 increase.
d.
a £30,000 decrease.
e.
no change in profits.
41. Refer to Figure 9-7. Assuming Meco Company is operating at capacity and accepting the order would
require an offsetting reduction in regular sales, the effect on profits of accepting the order would be a
a.
£240,000 decrease.
b.
£30,000 increase.
c.
£120,000 decrease.
d.
£150,000 decrease.
42. If there is excess capacity, the minimum acceptable price for a special order must cover
a.
variable costs associated with the special order.
b.
variable and fixed manufacturing costs associated with the special order.
c.
variable and incremental fixed costs associated with the special order.
d.
variable costs and incremental fixed costs associated with the special order plus the
contribution margin usually earned on regular units.
43. If a firm is at full capacity, the minimum special order price must cover
a.
variable costs associated with the special order.
b.
variable and fixed manufacturing costs associated with the special order.
c.
variable and incremental fixed costs associated with the special order.
d.
variable costs and incremental fixed costs associated with the special order plus foregone
contribution margin on regular units not produced.
44. Gundy Company manufactures a product with the following costs per unit at the expected production
of 30,000 units:
Direct materials
£ 4
Direct labour
12
Variable manufacturing overhead
6
Fixed manufacturing overhead
8
The company has the capacity to produce 40,000 units. The product regularly sells for £40. A
wholesaler has offered to pay £32 a unit for 2,000 units.
If the firm is at capacity and the special order is accepted, the effect on operating income would be
a.
a £20,000 increase.
b.
a £16,000 decrease.
c.
a £4,000 increase.
d.
£-0-.
Figure 9-8
Walton Company manufactures a product with the following costs per unit at the expected production
level of 84,000 units:
Direct materials
£12
Direct labour
36
Variable manufacturing overhead
18
Fixed manufacturing overhead
24
The company has the capacity to produce 90,000 units. The product regularly sells for £120.
45. Refer to Figure 9-8. A wholesaler has offered to pay £110 a unit for 7,500 units.
If the special order is accepted, the effect on operating income would be a
a.
£75,000 decrease.
b.
£429,000 increase.
c.
£495,000 increase.
d.
£249,000 increase.
Lost revenue from regular sales (1,500 £120)
Incremental costs:
Direct materials (6,000 £12)
Direct labour (6,000 £36)
Variable overhead (6,000 £18)
Incremental profit
46. Refer to Figure 9-8. If a wholesaler offered to buy 4,500 units for £100 each, the effect of the special
order on income would be a
a.
£153,000 increase.
b.
£45,000 increase.
c.
£450,000 increase.
d.
£90,000 decrease.
Incremental revenue (4,500 £100)
Incremental costs:
Direct materials (4,500 £12)
Direct labour (4,500 £36)
47. Rose Manufacturing Company had the following unit costs:
Direct materials
£24
Direct labour
8
Variable factory overhead
10
Fixed factory overhead (allocated)
18
A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Assuming that
sufficient unused production capacity exists to produce the order and no regular customers will be
affected by the order, how much additional profit (loss) will be generated by accepting the special
order?
a.
£12,000 profit
b.
£96,000 profit
c.
£84,000 loss
d.
£24,000 loss
Figure 9-9
Boone Products had the following unit costs:
Direct materials
£24
Direct labour
10
Variable factory overhead
8
Fixed factory overhead (allocated)
18
48. Refer to Figure 9-9. A one-time customer has offered to buy 1,000 units at a special price of £48 per
unit. Assuming that sufficient unused production capacity exists to produce the order and no regular
customers will be affected by the order, how much additional profit (loss) will be generated from the
special order?
a.
£12,000 loss
b.
£14,000 profit
c.
£48,000 profit
d.
£6,000 profit
Variable overhead (4,500 £18)
Incremental profit
49. Refer to Figure 9-9. A one-time customer has offered to buy 2,000 units at a special price of £48 per
unit. Because of capacity constraints, 1,000 units will need to be produced during overtime. Overtime
premium is £8 per unit. How much additional profit (loss) will be generated by accepting the special
order?
a.
£30,000 loss
b.
£4,000 loss
c.
£24,000 loss
d.
£4,000 profit
50. Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units:
Direct materials
£2,400
Direct labour
960
Factory overhead (30% variable)
1,800
Selling expenses (50% variable)
900
Administrative expenses (10% variable)
___840
Total per unit
£6,900
Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the
models are sold to dealers for £7,800.
Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales
by 40 units in order to contract the special order. There are selling expenses on only the sales to the
regular customers. What is the net income if the special order of 100 units is accepted?
a.
£831,960
b.
£876,960
c.
£1,011,600
d.
£900,000
(960 £7,800)
(100 £5,100)
Variable costs-Regular (960 £4,434*)
Variable costs-Special (100 £3,984**)
Fixed costs [1,000 (£1,260 + £450 + £756]
Net income
*£2,400 + [£960 + (£1,800 0.30) + (£900 0.50) + (£840 0.10)] = £4,434
1,000 (£48 – £42) =
1,000 (£48 – £50) =
£4,000
51. For a cost or revenue to be relevant to a particular decision, the cost or revenue must
a.
differ between the alternatives being considered.
b.
be a past cost.
c.
be a future cost.
d.
Both a and c above are correct.
52. Which of the following costs is NOT relevant to a make-or-buy decision?
a.
£10,000 of direct labour used to manufacture the parts
b.
£30,000 of depreciation on the equipment used to manufacture the parts
c.
the supervisor’s salary of £25,000, which would be avoided if the part is purchased from
an outside supplier
d.
£15,000 in rent from leasing the production space to another company if the part is
purchased from an outside supplier
53. Which of the following is a qualitative factor that should be considered when evaluating a
make-or-buy decision?
a.
the quality of the outside supplier’s product
b.
whether the outside supplier can provide the needed quantities
c.
whether the outside supplier can provide the product WHEN it is needed
d.
all of the above
54. If there is excess capacity, the minimum acceptable price for a special order must cover
a.
only variable costs associated with the special order.
b.
variable and fixed manufacturing costs associated with the special order.
c.
variable and incremental fixed costs associated with the special order.
d.
variable costs and incremental fixed costs associated with the special order, plus the
contribution margin usually earned on regular units.
55. If the firm is at full capacity, the minimum special-order price must cover
a.
variable costs associated with the special order.
b.
variable and fixed manufacturing costs associated with the special order.
c.
variable and incremental fixed costs associated with the special order.
d.
variable costs and incremental fixed costs associated with the special order, plus foregone
contribution margin on regular units not produced.
56. When there is one scarce resource, the product that should be produced first is the product with the
highest
a.
contribution margin per unit of the scarce resource.
b.
sales price per unit of the scarce resource.
c.
demand.
d.
contribution margin per unit.
57. Zandy Beverage Company plans to eliminate a branch that has a contribution margin of £50,000 and
fixed costs of £75,000. Of the fixed costs, £55,000 cannot be eliminated. The effect of eliminating this
branch on net income would be a(n)
a.
decrease of £25,000.
b.
increase of £25,000.
c.
decrease of £30,000.
d.
increase of £30,000.
58. Salish Industries manufactures a product with the following costs per unit at the expected production
of 60,000 units:
Direct materials
£ 8
Direct labour
15
Variable manufacturing overhead
10
Fixed manufacturing overhead
12
The company has the capacity to produce 70,000 units. The product regularly sells for £60. A
wholesaler has offered to pay £55 each for 5,000 units.
If the special order is accepted, the effect on operating income would be a
a.
£42,000 decrease.
b.
£67,000 increase.
c.
£110,000 increase.
d.
£182,000 decrease.
Incremental revenue (5,000 units £55)
Incremental costs:
Direct materials (5,000 units £8)
Direct labour (5,000 units £15)
Variable overhead (5,000 units £10)
Incremental profit
59. Bridge Industries manufactures a product with the following costs per unit at the expected production
of 78,000 units:
Direct materials
£15
Direct labour
22
Variable manufacturing overhead
12
Fixed manufacturing overhead
19
Contribution Margin
Avoidable fixed costs (£75,000 – £55,000)
Segment margin