91. Piersall Company makes a variety of paper products. One product is 20 lb copier paper, packaged 5,000
sheets to a box. One box normally sells for $18. A large bank offered to purchase 3,000 boxes at $14 per box.
Costs per box are as follows:
Direct materials
$8
Direct labor
3
Variable overhead
1
Fixed overhead
5
No variable marketing costs would be incurred on the order. The company is operating significantly below the maximum productive capacity. No
fixed costs are avoidable.
Should Piersall accepts the order?
92. Aerotoy Company makes toy airplanes. One plane is an excellent replica of a 737; it sells for $5. Vacation
Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying unaccompanied. Costs per
plane are as follows:
Direct materials
$1.00
Direct labor
0.50
Variable overhead
0.10
Fixed overhead
0.90
No variable marketing costs would be incurred. The company is operating significantly below the maximum productive capacity. No fixed costs are
avoidable. However, Vacation Airlines wants its own logo and colors on the planes. The cost of the decals is $0.01 per plane and a special machine
costing $1,500 would be required to affix the decals. After the order is complete, the machine would be scrapped. Should the special order be
accepted?
93. Figure 11-7.
Bell Company makes fax machines. Currently, Bell makes all components of the fax machines in house. An
outside company has offered to supply one component, part number B48, for $8 each. Bell uses 15,000 of these
components per year. Costs of B48 are as follows:
Direct materials
$4.00
Direct labor
2.00
Variable overhead
1.50
Fixed overhead
3.00
Refer to Figure 11-7. Suppose that 40% of the fixed overhead is avoidable if part B48 is not made by Bell. Should Bell purchase the part from the
outside supplier?
94. Figure 11-7.
Bell Company makes fax machines. Currently, Bell makes all components of the fax machines in house. An
outside company has offered to supply one component, part number B48, for $8 each. Bell uses 15,000 of these
components per year. Costs of B48 are as follows:
Direct materials
$4.00
Direct labor
2.00
Variable overhead
1.50
Fixed overhead
3.00
Refer to Figure 11-7. Assume that all of the fixed overhead is allocated and cannot be avoided. Should Bell purchase the part from the outside
supplier?
95. Figure 11-8.
Bonner Milling Company purchases logs and mills them into various grades of lumber. During the sawing and
planing process, a considerable amount of sawdust is generated. Currently, Bonner sells the sawdust to a
particle board manufacturer for $50 per truckload. Bonner is considering processing the sawdust into particle
board itself. One truckload of sawdust can be made into 20 sheets of particle board selling for $8 per sheet.
Further processing costs are $7 per board.
Refer to Figure 11-8. Should Bonner process the sawdust into particle board?
96. Figure 11-8.
Bonner Milling Company purchases logs and mills them into various grades of lumber. During the sawing and
planing process, a considerable amount of sawdust is generated. Currently, Bonner sells the sawdust to a
particle board manufacturer for $50 per truckload. Bonner is considering processing the sawdust into particle
board itself. One truckload of sawdust can be made into 20 sheets of particle board selling for $8 per sheet.
Further processing costs are $7 per board.
Refer to Figure 11-8. Assume that the cost of logs falls by half. Should Bonner sell the sawdust at split-off or
process it further?
97. Figure 11-9.
Medlabs is a private laboratory that performs over 100 different tests and analyses. Four tests require the use of
a radiological counting machine that can supply 6,000 hours per year. Information on the four lab tests are as
follows:
Test A
Test B
Test D
Charging rate
$50
$20
$70
Variable cost
10
10
30
Machine hours
2
1
0.25
Refer to Figure 11-9. What is the contribution margin per hour of machine time for Test A?
98. Figure 11-9.
Medlabs is a private laboratory that performs over 100 different tests and analyses. Four tests require the use of
a radiological counting machine that can supply 6,000 hours per year. Information on the four lab tests are as
follows:
Test A
Test B
Test D
Charging rate
$50
$20
$70
Variable cost
10
10
30
Machine hours
2
1
0.25
Refer to Figure 11-9. What is the contribution margin per hour of machine time for Test B?
99. Figure 11-9.
Medlabs is a private laboratory that performs over 100 different tests and analyses. Four tests require the use of
a radiological counting machine that can supply 6,000 hours per year. Information on the four lab tests are as
follows:
Test A
Test B
Test D
Charging rate
$50
$20
$70
Variable cost
10
10
30
Machine hours
2
1
0.25
Refer to Figure 11-9. What is the contribution margin per hour of machine time for Test C?
100. Figure 11-9.
Medlabs is a private laboratory that performs over 100 different tests and analyses. Four tests require the use of
a radiological counting machine that can supply 6,000 hours per year. Information on the four lab tests are as
follows:
Test A
Test B
Test D
Charging rate
$50
$20
$70
Variable cost
10
10
30
Machine hours
2
1
0.25
Refer to Figure 11-9. What is the contribution margin per unit of machine time for Test D?
101. Victor’s Detailing customers would be willing to pay $57 per detail. The company requires a 80% markup
on each job. The average job would cost $30.
Victor’s Detailing uses markup to set price on each job. What is the price he should quote a new customer?
102. Figure 11-10
Victor’s Detailing customers would be willing to pay $57 per detail. The company requires a 40% profit on each
job. The average job would cost $30.
Victor’s Detailing uses target-costing to set price on each job. What is the price they should quote a new
customer?
103. Figure 11-10
Victor’s Detailing customers would be willing to pay $57 per detail. The company requires a 40% profit on each
job. The average job would cost $30.
Victor’s uses target costing. Victor’s Detailing should:
104. Match each statement with the correct item below.
limited resources and limited demand for each
a specific set of procedures that produces a
the difference in total cost between the
method of determining the cost of a product
products that have common processes and costs
approach that maintains goods should be pulled
determine whether or not a segment should be
decisions involving a choice between internal
a percentage applied to the base cost to cover
13. Sell-or-process-further
determine whether it is more profitable to
determine whether a specially priced order
the point that products that have common
processes and costs of production become
the costs of not having a product available when
past costs that cannot be affected by future
105. Sherrell Washington owns a successful hole-in-the-wall bagel shop called Big Apple Bagels. Sherrell
wants to expand the shop by leasing the space next door for $500 per month, and adding tables and chairs so
that customers can dine in. She figures that the tables and chairs will cost $4,000 and that the bagel machine,
that cost $3,500 five years ago, would have to be scrapped in favor of a larger machine costing $6,400. She
thinks sales would increase by $4,000 per month. Variable costs are 50% of sales.
A. What are the relevant costs and benefits of expanding into the new space?
B. What are the irrelevant costs and benefits of expanding into the new space?
106. Veblen Company manufactures a variety of athletic shoes: basketball, running, and tennis. Sales of the
tennis shoes have fallen off. Veblen is considering several options: 1) drop the tennis shoe line; 2) replace the
tennis shoe line with golf shoes; 3) retool the tennis shoe line to make “Airtennies.” Price and cost data are as
follows:
Basketball
Running
Tennis
Golf
Airtennies
Price
$90
$65
$40
$60
$70
Variable cost/unit
$45
$40
$35
$43
$50
Fixed costs
$200,000
$210,000
$50,000
$50,000
$90,000
Number of units
10,000
15,000
2,500
25,000
6,000
If the tennis shoe line is dropped, the $50,000 fixed cost is totally avoidable.
A. Calculate the impact on operating income, using relevant amounts only, for keeping the tennis shoe line.
B. Calculate the impact on operating income, using relevant amounts only, for option 1.
C. Calculate the impact on operating income, using relevant amounts only, for option 2.
D. Calculate the impact on operating income, using relevant amounts only, for option 3.
E. Which option is best?
A. Keep Tennis
B. Option 1
C. Option 2
D. Option 3
Sales
$100,000
-$100,000
$1,400,000
$320,000
COGS & Net FC
137,500
137,500
987,500
252,500
Net Change
$(37,500)
$37,500
$412,500
$67,500
As is.
Increase Income
Increase Income
Increase Income
107. Goldwin Company makes lawn and garden equipment. Lawns R Us put in a special order for 20,000 weed
eaters for $15 each. Normally, Goldwin sells the weed eaters for $20 each. In addition, Lawns R Us wants their
own logo on the weed eaters. Cost information is as follows:
Direct materials
$8.00
Direct labor
3.00
Variable overhead
2.00
Fixed overhead
3.50
To affix the Lawns R Us logo, Goldwin will have to lease a special machine for three months (the time it will take to make the order) at a cost of
$2,000 per month.
If Goldwin accepts the special order, what will be the impact on operating income?
Accept
Reject
Revenue
$300,000
Direct materials
(160,000)
0
Direct labor
(60,000)
0
Variable overhead
(40,000)
0
Rent on machine
(6,000)
0
Gross profit
$34,000
108. Island Princess Pineapples purchases pineapples from area farmers and processes them into rings, juice,
and skins. The cost of the pineapples is a joint cost, as is the initial processing in which the fruits are skinned,
cored, and sliced into rings. At the split off point, Island Princess sells the skins (for fertilizer). Juice and rings
are processed further (further processing costs occurs for cooking and canning). Data for the three products
follows:
Sales
Rings
$2,000
Juice
$1,500
Fertilizer
$400
Further processing costs:
Rings
500
Juice
300
Joint costs
$1,600
A. Prepare a segmented income statement for Island Princess, showing results for rings, juice, fertilizer, and in total. Do not allocate joint costs
individually.
B. Now suppose that Island Princess is considering the option of processing the skins further into pet food which would sell for $1,000. Additional
costs would be $450. Should this be done?
Rings
Juice
Fertilizer
Total
Sales
$2,000
$1,500
$400
$3,900
Further processing costs
500
300
0
800
Product margin
$1,500
$1,200
$400
$3,100
Joint costs
1,600
Operating income
$1,500
109. Gordon Company produces two types of gears, Gear Q and Gear S, with unit contribution margins of $2
and $5, respectively. Each gear must spend time on a special machine. The firm owns ten machines that
together provide 25,000 hours of machine time per year. Gear Q requires 0.10 hours of machine time; Gear S
requires 0.4 hours of machine time.
A. What is the contribution margin per hour of machine time for Gear Q? Gear S?
B. If Gordon faces only the production constraint (25,000 hours of machine time), how many units of Gear Q
should be produced? Gear S? What is the total contribution margin from this product mix?
C. Now suppose that Gordon cannot sell more than 200,000 units of each type of gear. How many units of Gear
Q should be produced? Gear S? What is the total contribution margin from this product mix?
110. David Company produces two types of gears, Gear A and Gear B, with unit contribution margins of $6 and
$8, respectively. Each gear must spend time on a special machine. The firm owns five machines that together
provide 12,000 hours of machine time per year. Gear A requires 12 minutes of machine time; Gear B requires
24 minutes of machine time.
A. What is the contribution margin per hour of machine time for Gear A? Gear B?
B. If David faces only the production constraint (12,000 hours of machine time), how many units of Gear A
should be produced? Gear B? What is the total contribution margin from this product mix?
C. Now suppose that David cannot sell more than 45,000 units of each type of gear. How many units of Gear A
should be produced? Gear B? What is the total contribution margin from this product mix?
111. Boger Company makes 30,000 lawnmowers each year. To date, all components have been made in house.
All fixed costs are unavoidable. Recently, Exeter Extruding offered to supply Boger with the metal handles for
the lawnmowers for $5 each. Boger analyzed the cost of the handles and came up with the following per unit
information:
Direct materials
$1.60
Direct labor
0.50
Variable overhead
1.75
Fixed overhead
1.30
A. If Boger accepts Exeter’s offer, operating income will be
$ ___________________
Higher or Lower?
B. What is the highest price that Boger would pay an outside company for the handles?
112. Salley Company makes pagers. Currently, Salley purchases 10,000 plastic housings a year from an outside
company for $1 each. One of Salley’s engineers suggested that the company make its plastic housings in house.
Estimated unit costs are as follows:
Direct materials
$0.30
Direct labor
0.20
Variable overhead
0.15
Fixed overhead*
0.40
* Fixed overhead is $2,400 per year in equipment costs specifically traceable to the plastic housing line and $1,600 per year in general overhead costs
to be allocated to this line
A. If Salley makes the housing in-house, net income will be $__________________ Higher or Lower?
B. What is the highest price per unit that Salley would pay an outside company for the housings?
C. Now assume that all of the fixed overhead is allocated fixed overhead and will not be affected by making the product in-house or purchasing it. If
Salley makes the housing in-house, net income will be $__________________ Higher Lower (circle one)
113. Figure 11-11.
Goutam Company prints a variety of publications and colored inserts for newspapers. Currently, Goutam
produces its own ink, including a special metallic color. India Inks has offered to supply Goutam with the
25,000 ounces of metallic ink that it needs each year for $1.24 per ounce. Goutam is interested because this is a
particularly difficult ink to make. Purchasing must make special efforts to locate suppliers, the metallic
component requires special handling, and, since the metallic ink uses machinery that is also used to make other
colors of ink, the machinery must be cleaned very well before every batch of metallic. The accounting
department supplied the following unit costs:
Direct materials
$0.40
Direct labor
0.15
Variable overhead
0.06
Fixed overhead*
0.50
*Fixed overhead is applied on the basis of a plantwide rate based on direct labor hours.
Refer to Figure 11-11.
A. Based on the cost figures, if Goutam purchases metallic ink from the outside supplier, operating income will be $__________________ Higher or
Lower?
B. What is the highest price per ounce that Goutam would pay an outside supplier for the ink?
114. Figure 11-11.
Goutam Company prints a variety of publications and colored inserts for newspapers. Currently, Goutam
produces its own ink, including a special metallic color. India Inks has offered to supply Goutam with the
25,000 ounces of metallic ink that it needs each year for $1.24 per ounce. Goutam is interested because this is a
particularly difficult ink to make. Purchasing must make special efforts to locate suppliers, the metallic
component requires special handling, and, since the metallic ink uses machinery that is also used to make other
colors of ink, the machinery must be cleaned very well before every batch of metallic. The accounting
department supplied the following unit costs:
Direct materials
$0.40
Direct labor
0.15
Variable overhead
0.06
Fixed overhead*
0.50
*Fixed overhead is applied on the basis of a plantwide rate based on direct labor hours.
Refer to Figure 11-11. Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier, Jim
Webb, the production supervisor said “That’s nuts! This ink is a real pain to make and $1.24 per ounce sounds like a bargain to me!” Based on Jim’s
feelings, Anna Ruiz (a new CMA in the accounting office) did an ABC analysis of ink production. She came up with the same direct materials, direct
labor and variable overhead, as well as the following information on activities required by metallic ink production.
Setups
$ 60,000
600 setups per year
Purchasing
$270,000
9,000 purchase orders per year
The metallic ink requires 300 purchase orders per year and 80 setups.
A. If Goutam purchases the ink from the outside supplier, operating income would be $__________________ Higher Lower (circle one)
B. What is the highest price per ounce that Goutam would pay an outside company for the ink?
115. Sherpa Company manufactures tents and sleeping bags. Tents are priced at $80, have variable cost of $55,
and direct fixed costs of $120,000. Sleeping bags are priced at $60, have variable cost of $35, and direct fixed
costs of $66,000. Common fixed costs equal $200,000. Last year, the division sold 5,000 tents and 10,000
sleeping bags.
A. What was the segment margin for tents last year?
B. What was the segment margin for sleeping bags last year?
C. What was Sherpa’s operating income last year?
D. If Sherpa stopped making tents, what would operating income be?
116. Auden makes three types of vitamin supplements, all of which require the use of encapsulating machines
that have capacity of 10,000 hours. Information on the three types (per case) is as follows:
Basic
Vita-Stress
Antioxidant+
Selling price
$100
$125
$160
Variable cost
50
70
90
Machine hours
0.4
0.50
0.8
A. What is the contribution margin per case for each type?
B. What is the contribution margin per hour of machine time for each type?
C. Based on your analysis in requirement B, if the company can sell all that it can make of all of the products, how many of each type should be sold
to maximize total contribution margin?
117. List three problems that inventory was meant to solve. How does the JIT producer handle these problems?
Basic
Vita-Stress
Antioxidant+
Price
$100
$125
$160
– Variable cost
Contribution margin
118. “The accounting decision making model is not useful in real life because it only looks at the numbers.”
Critique this statement and give an example for which it does not hold true.
119. Why does a special order decision frequently ignore fixed factory overhead?