Chapter 11—Short-Run Decision Making: Relevant Costing and
Inventory Management Key
1. The first step in making a short-run decision is to define the problem.
2. In making a short-run decision, all alternatives need not be considered. Only feasible alternatives are
considered.
3. In short-run decision making, the alternative with the lowest overall cost is always chosen.
4. Irrelevant costs are costs that vary across alternatives.
5. The benefit sacrificed when one alternative is chosen over another is called opportunity cost.
6. Short-run decision making only involves short-run decisions that have nothing to do with the firm’s overall
strategy.
7. A sunk cost is never relevant.
8. Future costs that differ across alternatives are relevant costs.
9. Fixed costs are never relevant.
10. Resources that are acquired in advance of usage are flexible resources.
11. Flexible resources may have unused capacity.
12. A choice between internal and external production is a make-or-buy decision.
13. Typically in a special-order decision, a customer wants to pay less than the usual price.
14. In keep-or–drop decisions, both the segment’s contribution margin and its segment margin are useful in
evaluating the performance of the segment.
15. A segment margin is always greater than or equal to zero.
16. At split-off, the joint costs of production for joint products are not relevant to the sell-or-process-further
decision.
17. In deciding the optimal mix of products that use a constrained resource, it is important to determine the
contribution margin per unit of scarce resource.
18. Linear programming is a special technique that can be used to determine the optimal product mix when
there are multiple constraints.
19. A situation in which management tells divisions that they must reduce costs by 10% is called target costing.
20. Bellair Company produces a product that has manufacturing cost of $30 per unit. Bellair’s policy is to
charge a price equal to cost plus 30%. The 30% is pure profit to Bellair.
21. In determining the target price of a good, the company must first determine the target cost and the desired
profit.
22. The costs of not having a product available when demanded by a customer are called setup costs.
23. Total inventory-related cost consists of ordering cost and carrying cost.
24. JIT relies on a pull system to control finished good inventory.
25. A major drawback to the JIT inventory approach is that increases carrying costs.
26. Demand and supply are on one side of the pricing equation.
27. The markup includes desired profit and any costs not included in the base cost.
28. Many companies start with cost to determine price since revenue must cover cost for the firm to make a
profit.
29. A major disadvantage of markup pricing is that standard markups are not easy to apply.
30. Target costing is a method of determining the price of a product or service based on the cost that the
business has to pay.
31. Target costing involves much more up-front work than cost-based pricing.
32. Target costing can be used most effectively in the design and development stage of the product life cycle.
33. Pasha Company produced 50 defective units last month at a unit manufacturing cost of $30. The defective
units were discovered before leaving the plant. Pasha can sell them “as is” for $20 or can rework them at a cost
of $15 and sell them at the regular price of $50. Which of the following is not relevant to the sell-or-rework
decision?
34. Which of the following is not a step in the decision-making model?
35. The act of choosing among alternatives with an immediate or limited end in view is termed
36. Future costs that differ across alternatives are
37. Depreciation of equipment is an example of a(n)
38. Resources that can be purchased in the amount needed and at the time of use are
39. A company is considering a special order for 1,000 units to be priced at $8.90 (the normal price would be
$11.50). The order would require specialized materials costing $4.00 per unit. Direct labor and variable factory
overhead would cost $2.15 per unit. Fixed factory overhead is $1.20 per unit. However, the company has excess
capacity and acceptance of the order would not raise total fixed factory overhead. The warehouse, however,
would have to add capacity costing $1,300. Which of the following is relevant to the special order?
40. A decision involving a choice between internal and external production is what kind of decision?
41. A decision that focuses on whether a specially priced order should be accepted or rejected is what kind of
decision?
42. A decision in which a manager needs to determine whether a product line (or segment) should continue or
be eliminated is what kind of decision?
43. A decision that involves potential further processing of joint products is which kind of decision?
44. When managers are considering the optimal product mix, they are most concerned with
45. Limited resources and limited demand for a product are generally referred to as
46. The solution of the product mix problem in the presence of multiple constraints requires the use of
47. Raffles Company routinely bids on construction jobs. Raffles first determines the budgeted product cost of
the job and then applies a markup of 50%. If a bid of $15,000 is submitted for a new job, which of the following
is true?
48. The method of determining the cost of a product or service based on the price that customers are willing to
pay is called
49. The two major costs associated with inventory are
50. The inventory cost that can include insurance, inventory taxes, and obsolescence is called
51. The inventory cost that can include processing costs, cost of insurance for shipping, and unloading is called
52. The inventory cost that can include lost sales, cost of expediting, and cost of interrupted production is
called
53. Which of the following is not a traditional reason for carrying inventory?
54. Under a JIT system,
55. JIT responds to the problems traditionally solved by carrying inventories by
56. Walloon Company produced 150 defective units last month at a unit manufacturing cost of $30. The
defective units were discovered before leaving the plant. Walloon can sell them as is for $20 or can rework
them at a cost of $15 and sell them at the regular price of $50. The total relevant cost of reworking the defective
units is:
57. Figure 11-1.
Stein Company makes carpets. A customer wants to place a special order for 1,000 carpets in navy blue with the
company logo woven in the middle, to be priced at $30 each. Normally, Stein would charge $60 per carpet for
this type of order. Stein figures that yarn and backing will cost $12 per carpet, variable overhead (machining,
electricity) is $5 per carpet, direct labor is $10 per carpet, and one setup will be required at $800 per setup. The
set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the carpets are
working at Stein. Their wages will be paid whether or not the special order is accepted. Stein’s policy is to
avoid layoffs to the extent possible.
Refer to Figure 11-1. Which costs of the special order relate to flexible resources?
58. Figure 11-1.
Stein Company makes carpets. A customer wants to place a special order for 1,000 carpets in navy blue with the
company logo woven in the middle, to be priced at $30 each. Normally, Stein would charge $60 per carpet for
this type of order. Stein figures that yarn and backing will cost $12 per carpet, variable overhead (machining,
electricity) is $5 per carpet, direct labor is $10 per carpet, and one setup will be required at $800 per setup. The
set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the carpets are
working at Stein. Their wages will be paid whether or not the special order is accepted. Stein’s policy is to
avoid layoffs to the extent possible.
Refer to Figure 11-1. Which of the following is a qualitative factor that Stein would consider in making the
decision to accept or reject the special order?
59. Figure 11-1.
Stein Company makes carpets. A customer wants to place a special order for 1,000 carpets in navy blue with the
company logo woven in the middle, to be priced at $30 each. Normally, Stein would charge $60 per carpet for
this type of order. Stein figures that yarn and backing will cost $12 per carpet, variable overhead (machining,
electricity) is $5 per carpet, direct labor is $10 per carpet, and one setup will be required at $800 per setup. The
set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the carpets are
working at Stein. Their wages will be paid whether or not the special order is accepted. Stein’s policy is to
avoid layoffs to the extent possible.
Refer to Figure 11-1. Which of the following is irrelevant to the special order decision?
60. Figure 11-1.
Stein Company makes carpets. A customer wants to place a special order for 1,000 carpets in navy blue with the
company logo woven in the middle, to be priced at $30 each. Normally, Stein would charge $60 per carpet for
this type of order. Stein figures that yarn and backing will cost $12 per carpet, variable overhead (machining,
electricity) is $5 per carpet, direct labor is $10 per carpet, and one setup will be required at $800 per setup. The
set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the carpets are
working at Stein. Their wages will be paid whether or not the special order is accepted. Stein’s policy is to
avoid layoffs to the extent possible.
Refer to Figure 11-1. If Stein accepts the special order, by how much will operating income increase or
decrease?
61. Figure 11-2.
ColorPro uses part 87A in the production of color printers. Unit manufacturing costs of part 87A are:
Direct materials
$8
Direct labor
2
Variable overhead
1
Fixed overhead
4
ColorPro uses 100,000 units of 87A per year. Filbert Company has offered to sell ColorPro 100,000 units of 87A per year for $12. Fixed overhead is
unavoidable.
Refer to Figure 11-2. Should ColorPro make or buy the part?
62. Figure 11-2.
ColorPro uses part 87A in the production of color printers. Unit manufacturing costs of part 87A are:
Direct materials
$8
Direct labor
2
Variable overhead
1
Fixed overhead
4
ColorPro uses 100,000 units of 87A per year. Filbert Company has offered to sell ColorPro 100,000 units of 87A per year for $12. Fixed overhead is
unavoidable.
Refer to Figure 11-2. Now suppose that ColorPro discovers that other costs will increase by $7,000 per year if the component is purchased rather
than made internally. Should ColorPro make or buy the part?
63. Figure 11-2.
ColorPro uses part 87A in the production of color printers. Unit manufacturing costs of part 87A are:
Direct materials
$8
Direct labor
2
Variable overhead
1
Fixed overhead
4
ColorPro uses 100,000 units of 87A per year. Filbert Company has offered to sell ColorPro 100,000 units of 87A per year for $12. Fixed overhead is
unavoidable.
Refer to Figure 11-2. Which of the following is a qualitative factor that might affect ColorPro’s decision?
64. Figure 11-3.
Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed a line of
sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and have variable costs
of $80. The tubs sell for $600 and have variable cost of $450. The glass and ceramic sinks and tubs require the
use of specialized molding equipment. The specialized molding equipment has 4,050 hours of capacity per year.
A sink uses an average of 2 hours of specialized molding equipment time; a tub uses an average of 5 hours of
specialized molding equipment time.
Refer to Figure 11-3. What is the contribution margin per hour of specialized molding equipment time for
sinks?
65. Figure 11-3.
Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed a line of
sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and have variable costs
of $80. The tubs sell for $600 and have variable cost of $450. The glass and ceramic sinks and tubs require the
use of specialized molding equipment. The specialized molding equipment has 4,050 hours of capacity per year.
A sink uses an average of 2 hours of specialized molding equipment time; a tub uses an average of 5 hours of
specialized molding equipment time.
Refer to Figure 11-3. Assume that EBP can sell as many as 1,000 sinks and 500 tubs per year. How many tubs
should EBP produce?
66. Figure 11-3.
Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed a line of
sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and have variable costs
of $80. The tubs sell for $600 and have variable cost of $450. The glass and ceramic sinks and tubs require the
use of specialized molding equipment. The specialized molding equipment has 4,050 hours of capacity per year.
A sink uses an average of 2 hours of specialized molding equipment time; a tub uses an average of 5 hours of
specialized molding equipment time.
Refer to Figure 11-3. What is the contribution margin per hour of specialized molding time for tubs?
67. Figure 11-3.
Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed a line of
sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and have variable costs
of $80. The tubs sell for $600 and have variable cost of $450. The glass and ceramic sinks and tubs require the
use of specialized molding equipment. The specialized molding equipment has 4,050 hours of capacity per year.
A sink uses an average of 2 hours of specialized molding equipment time; a tub uses an average of 5 hours of
specialized molding equipment time.
Refer to Figure 11-3. Assuming that specialized molding equipment time is the only constrained resource, and
that EBP can sell as many tubs and sinks as it can produce, how many sinks should be sold?
68. Corrigan Company charges cost plus 25%. What is the price of an item with cost equal to $50?
69. McDougall Company charges cost plus 25%. If the price of an item is $80, what is the item’s cost?
70. Figure 11-4.
Delson Company produces two types of piano legs, plain and fancy, with unit contribution margins of $8 and
$12, respectively. Each piano leg must spend time on a special machine. The firm owns four machines that
together provide 10,000 hours of machine time per year. The plain leg requires 0.25 hours of machine time, the
fancy leg requires 0.5 hours of machine time.
Refer to Figure 11-4. What is the contribution margin per hour of machine time for a plain leg?
71. Figure 11-4.
Delson Company produces two types of piano legs, plain and fancy, with unit contribution margins of $8 and
$12, respectively. Each piano leg must spend time on a special machine. The firm owns four machines that
together provide 10,000 hours of machine time per year. The plain leg requires 0.25 hours of machine time, the
fancy leg requires 0.5 hours of machine time.
Refer to Figure 11-4. What is the contribution margin per hour of machine time for a fancy leg?
72. Figure 11-4.
Delson Company produces two types of piano legs, plain and fancy, with unit contribution margins of $8 and
$12, respectively. Each piano leg must spend time on a special machine. The firm owns four machines that
together provide 10,000 hours of machine time per year. The plain leg requires 0.25 hours of machine time, the
fancy leg requires 0.5 hours of machine time.
Refer to Figure 11-4. How many of each type of leg must be sold to optimize total contribution margin?
73. Figure 11-4.
Delson Company produces two types of piano legs, plain and fancy, with unit contribution margins of $8 and
$12, respectively. Each piano leg must spend time on a special machine. The firm owns four machines that
together provide 10,000 hours of machine time per year. The plain leg requires 0.25 hours of machine time, the
fancy leg requires 0.5 hours of machine time.
Refer to Figure 11-4. What is the total contribution margin of the optimal mix of plain and fancy legs?
74. Figure 11-5.
Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit contribution
margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14, respectively. Each model must
spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine
time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time.
Refer to Figure 11-5. What is the amount of machine time for model K-3 in terms of percent of a machine
hour?
75. Figure 11-5.
Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit contribution
margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14, respectively. Each model must
spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine
time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time.
Refer to Figure 11-5. What is the contribution margin per unit of scarce resource (machine time) for Model K-
3?
76. Figure 11-5.
Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit contribution
margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14, respectively. Each model must
spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine
time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time.
Refer to Figure 11-5. What is the contribution margin per unit of scarce resource (machine time) for Model P-
4?
77. Figure 11-5.
Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit contribution
margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14, respectively. Each model must
spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine
time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time.
Refer to Figure 11-5. Now suppose that Santorino Company can sell only 5,500 units of each model. How
many units of Model K-3 should be produced?
78. Figure 11-5.
Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit contribution
margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14, respectively. Each model must
spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine
time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time.
Refer to Figure 11-5. Now suppose that Santorino Company can sell only 5,500 units of each model. How
many units of Model P-4 should be produced?
79. Figure 11-5.
Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit contribution
margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14, respectively. Each model must
spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine
time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time.
Refer to Figure 11-5. What is the amount of machine time for model P-4 in terms of percent of a machine
hour?
80. Lassiter Construction charges each customer a price equal to the cost of direct materials and direct labor
plus 30%. Job #17-50 included the following costs:
Direct materials
$50,000
Direct labor
$36,000
What is price charged for Job 17-50?
81. Handy Hardware Store sets prices at cost plus 80% of cost. The cost of a cordless drill kit is $34. What price
is charged by Handy Hardware for the cordless drill kit?
82. Parron Company sets price equal to cost plus 60%. Recently, Parron charged a customer a price of $42 for
an item. What was the cost of the item to Parron?
83. Wilson Custom Cabinetry makes cabinets to order and prices the completed jobs at product cost plus 40%.
Recently, Wilson finished a job and billed the customer $560. If direct materials for the job cost $130, and
direct labor cost $180, what was the applied overhead for the job?
84. Falkner Company is designing a portable DVD player aimed at families traveling with young children. The
company believes that the product can be sold for $140; and it requires a 20% profit on new products. What is
85. Shear-it, Inc., produces paper shredders. Shear-it is considering a new shredder design for home offices. The
marketing vice president believes that a basic unit in a variety of attractive colors could be sold for $70. Shear-it
requires that all new products yield 30% profit. What is the target cost of the new shredder?
86. Brorsen, Inc., has just designed a new product with a target cost of $64. Brorsen requires new product to
have a profit of 20%. What is the target price for the new product?
87. Teller Company has designed a caller ID machine with a large screen that can be seen easily from across the
room. The Sales Department believes that this product can be sold for $30 each. Teller requires that all new
products yield 15% profit. What is the target cost of the new product?
88. Fester Company was making a product for $60 and selling it for $80. A competitor began selling the same
product for $68. If Fester is to meet the competition’s price, and maintain the same amount of profit per unit,
what is target cost?
89. Figure 11-6.
Autry Company manufactures veterinary products. One joint process involves refining a chemical (dactylyte)
into two chemicals – dac and tyl. One batch of 5,000 gallons of dactylyte can be converted to 2,000 gallons of
dac and 3,000 gallons of tyl at a total joint processing cost of $12,000. At the split off point, dac can be sold for
$3 per gallon and tyl can be sold for $4 per gallon. Autry has just learned of a new process to convert dac into
prodac. The new process costs $4,000 and yields 1,700 gallons of prodac for every 2,000 gallons of dac. Prodac
sells for $5 per gallon.
Refer to Figure 11-6. What is Autry’s profit from refining one batch of dactylyte if both dac and tyl are sold at
the split-off point?
90. Figure 11-6.
Autry Company manufactures veterinary products. One joint process involves refining a chemical (dactylyte)
into two chemicals – dac and tyl. One batch of 5,000 gallons of dactylyte can be converted to 2,000 gallons of
dac and 3,000 gallons of tyl at a total joint processing cost of $12,000. At the split off point, dac can be sold for
$3 per gallon and tyl can be sold for $4 per gallon. Autry has just learned of a new process to convert dac into
prodac. The new process costs $4,000 and yields 1,700 gallons of prodac for every 2,000 gallons of dac. Prodac
sells for $5 per gallon.
Refer to Figure 11-6. Should Autry process dac further?