Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
20) For Welch Manufacturing, what is the minimum acceptable price of this special order?
A) $110
B) $140
C) $170
D) $240
E) $255
21) What is the change in operating profits if the one-time-only special order for 1,000 units is accepted
for $180 a unit by Welch?
A) $70,000 increase in operating profits
B) $10,000 increase in operating profits
C) $10,000 decrease in operating profits
D) $75,000 decrease in operating profits
E) $40,000 increase in operating profits
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
Answer the following question(s) using the information below.
Grant’s Kitchens is approached by Ms. Tammy Wang, a new customer, to fulfill a large one-time-only
special order for a product similar to one offered to regular customers. The following per unit data apply
for sales to regular customers:
Direct materials
$455
Direct labour
300
Variable manufacturing support
45
Fixed manufacturing support
100
Total manufacturing costs
$900
Markup (60%)
540
Targeted selling price
$1440
Grant’s Kitchens has excess capacity. Ms. Wang wants the cabinets in cherry rather than oak, so direct
material costs will increase by $30 per unit.
22) For Grant’s Kitchens, what is the minimum acceptable price of this one-time-only special order?
A) $830
B) $900
C) $930
D) $1,440
E) $800
23) Other than price, what other item should Grant’s Kitchens consider before accepting this one-time-
only special order?
A) reaction of shareholders
B) management stock options
C) demand for cherry cabinets
D) price is the only consideration
E) reaction of existing customers to the lower price offered to Ms. Wang
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
24) For make-or-buy decisions, a supplier’s ability to deliver the item on a timely basis is considered a(n)
A) qualitative factor.
B) relevant cost.
C) differential factor.
D) opportunity cost.
E) quantitative factor.
Answer the following question(s) using the information below.
Konrade’s Engine Company manufactures part TE456 used in several of its engine models. Monthly
production costs for 1,000 units are as follows:
Direct materials
$40,000
Direct labour
10,000
Variable overhead costs
30,000
Fixed overhead costs
20,000
Total costs
$100,000
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the
company purchases TE456 from the outside supplier. Konrade’s Engine Company has the option of
purchasing the part from an outside supplier at $85 per unit.
25) If Konrade’s Engine Company accepts the offer from the outside supplier, the monthly avoidable
costs (costs that will no longer be incurred) total
A) $80,000.
B) $98,000.
C) $50,000.
D) $100,000.
E) $82,000.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
26) If Konrade’s Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then
its monthly operating income will
A) increase by $13,000.
B) increase by $15,000.
C) decrease by $5,000.
D) decrease by $3,000.
E) decrease by $35,000.
27) The maximum price that Konrade’s Engine Company should be willing to pay the outside supplier is
A) $80 per TE456 part.
B) $82 per TE456 part.
C) $98 per TE456 part.
D) $100 per TE456 part.
E) $50 per TE456 part.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
Answer the following question(s) using the information below.
Schmidt Corporation produces a part that is used in the manufacture of one of its products. The costs
associated with the production of 10,000 units of this part are as follows:
Direct materials
$45,000
Direct labour
65,000
Variable factory overhead
30,000
Fixed factory overhead
70,000
Total costs
$210,000
Of the fixed factory overhead costs, $30,000 is avoidable.
28) Phil Company has offered to sell 10,000 units of the same part to Schmidt Corporation for $18 per
unit. Assuming there is no other use for the facilities, Schmidt should
A) make the part, as this would save $3 per unit.
B) buy the part, as this would save $3 per unit.
C) make the part, as this would save $4 per unit.
D) make the part, as this would save $1 per unit.
E) buy the part, as this would save $4 per unit.
29) Assuming no other use of their facilities, the highest price that Schmidt should be willing to pay for
10,000 units of the part is
A) $210,000.
B) $170,000.
C) $110,000.
D) $180,000.
E) $140,000.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
30) Assuming accepting the offer creates excess facility capacity that can be used to produce 2,000 units of
another product that has a unit selling price of $24, variable costs of $12, and fixed cost allocation of $3.
What is the highest price that Schmidt should be willing to pay Phil Company for 10,000 units of the part?
A) $146,000
B) $164,000
C) $116,000
D) $134,000
E) $186,000
31) Lynn Valley Corporation currently manufactures a subassembly for its main product. The costs per
unit are as follows:
Direct materials
$2.00
Direct labour
20.00
Variable overhead
10.00
Fixed overhead
16.00
Reliance Corp has contacted Lynn Valley with an offer to sell them 5,000 of the subassemblies for $44.00
each. Lynn Valley will eliminate $50,000 of fixed overhead if it accepts the proposal.
Should Omark make or buy the subassemblies? What is the difference between the two alternatives?
A) buy; savings = $20,000
B) buy; savings = $50,000
C) make; savings = $60,000
D) make; savings = $10,000
E) buy; savings = $10,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
Answer the following question(s) using the information below.
Day Star collected the following information:
Cost to buy one unit
$48
Production costs per unit:
Direct materials
$22
Direct labour
$16
Variable overhead
$2
Total fixed overhead
$360,000
Day Star can sell 25,000 units per year, at $80 each. The company also has an offer from a subsidiary to
rent its plant facilities for $2,000,000. The fixed overhead will be incurred in each alternative, but there
will be a savings of $150,000 in the fixed costs under the renting alternative.
32) Based on the above information only, should Day Star make or buy the product or rent its facilities
out?
A) buy
B) make
C) either make or buy – indifferent
D) rent the facilities to the subsidiary
E) either make or rent – indifferent
33) What production level is required for Day Star to be indifferent between making or buying the part if
$260,000 of fixed costs can be eliminated by buying?
A) 32,500 units
B) 26,500 units
C) 12,500 units
D) 1,000 units
E) 0 units
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
34) Audio Labs collected the following information on the cost of producing 20,000 speaker units:
Direct materials
Direct labour
Variable overhead
Fixed overhead
Cartunes has offered to sell Audio 10,000 speakers for $56.00 each.
Should Audio Labs make or buy the parts if the facilities remain idle when speakers are purchased?
A) buy, save $16.00 per unit
B) buy, save $4.00 per unit
C) make, save $2.00 per unit
D) make, save $4.00 per unit
E) make, save $6.00 per unit
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
35) Clearwater Company operates a wine outlet in a tourist area. One litre bottles sell for $12. Daily fixed
costs are $3,000, and variable costs are $6 per litre. An average of 750 litres are sold each day. Clearwater
has a capacity of 800 litres per day.
Required:
a. Determine the average cost per bottle.
b. A bus loaded with 40 senior citizens stops by at closing time and the tour director offers Clearwater
$300 for 40 litres. Clearwater refuses, saying they would lose $2.50 on each litre. Is Clearwater correct
about the $2.50? Why or why not?
c. A fund-raising organization has offered Clearwater a one-year contract to buy 300 litres a day for
$7.50 each. Should they accept the offer? Why or why not?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
36) Axle and Wheel Manufacturing is approached by a European customer to fill a one-time-only special
order for a product similar to one offered to domestic customers. The following per unit data apply for
sales to regular customers:
Direct materials $33
Direct labour 15
Variable manufacturing support 24
Fixed manufacturing support 52
Total manufacturing costs $124
Markup (50%) 62
Targeted selling price $186
Axle and Wheel Manufacturing has excess capacity.
Required:
a. What is the full cost of the product per unit?
b. What is the contribution margin per unit?
c. Which costs are relevant for making the decision regarding this one-time-only special order? Why?
d. For Axle and Wheel Manufacturing, what is the minimum acceptable price of this one-time-only
special order?
e. For this one-time-only special order, should Axle and Wheel Manufacturing consider a price of $100
per unit? Why or why not?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
37) Silver Lake Cabinets is approached by Ms. Jenny Zhang, a new customer, to fulfill a large one–time-
only special order for a product similar to one offered to regular customers. The following per unit data
apply for sales to regular customers:
Direct materials $100
Direct labour 125
Variable manufacturing support 60
Fixed manufacturing support 75
Total manufacturing costs $360
Markup (60%) 216
Targeted selling price $576
Silver Lake Cabinets has excess capacity. Ms. Zhang wants the cabinets in cherry rather than oak, so
direct material costs will increase by $30 per unit.
Required:
a. For Silver Lake Cabinets, what is the minimum acceptable price of this one-time-only special order?
b. Other than price, what other items should Silver Lake Cabinets consider before accepting this one–
time-only special order?
c. How would the analysis differ if there was limited capacity?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
38) Kirkland Company manufactures a part for use in its production of hats. When 10,000 items are
produced, the costs per unit are:
Direct materials $0.60
Direct manufacturing labour 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Total $6.40
Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The
plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the
offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be
eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Kirkland Company? By how much?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
39) Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000
items are produced, the costs per unit are:
Direct materials $12
Direct manufacturing labour 60
Variable manufacturing overhead 24
Fixed manufacturing overhead 32
Total $128
Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The
plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts
the supplier’s offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would
be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Lewis Auto Company? By how much?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
40) A cafe specializes in short order meals and morning and afternoon snack breaks. It is open from 9:00
am until 4:00 pm. An office manager in a nearby high rise office building offers the owner a contract to
provide her 50 employees with afternoon snack breaks for$2.00 each. Each employee would receive a
drink and a snack item. The shop has an hourly capacity of 50 customers. The owner estimates that the
variable costs of the afternoon breaks would be $1.20 each. Currently the afternoon service, starting at
2:00, is running at only 50 percent capacity, although the morning and noon activities are near capacity.
At the present level of operations each meal/snack served is allocated a fixed cost of $0.25.
Required:
a. What nonfinancial factors should be considered by the owner?
b. Given your concerns listed in part a., should the offer be accepted? Why or why not?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
41) Collier Bicycles has been manufacturing its own wheels for its bikes. The company is currently
operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of
30% of direct labour cost. The direct materials and direct labour cost per unit to make the wheels are $1.50
and $1.80, respectively. Normal production is 200,000 wheels per year.
A supplier offers to make the wheels at a price of $4 each. If the bicycle company accepts this offer, all
variable manufacturing costs will be eliminated, but the $42,000 of fixed manufacturing overhead
currently being charged to the wheels will have to be absorbed by other products.
Required:
a. Prepare an incremental analysis for the decision to make or buy the wheels.
b. Should Collier Bicycles buy the wheels from the outside supplier? Justify your answer.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
42) Southwestern Company needs 1,000 motors in its manufacture of automobiles. It can buy the motors
from Jinx Motors for $1,250 each. Southwestern’s plant can manufacture the motors for the following
costs per unit:
Direct materials $500
Direct manufacturing labour 250
Variable manufacturing overhead 200
Fixed manufacturing overhead 350
Total $1,300
If Southwestern buys the motors from Jinx, 30% of the fixed manufacturing overhead applied will be
avoided.
Required:
a. Should the company make or buy the motors?
b. What additional factors should Southwestern consider in deciding whether or not to make or buy the
motors?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
43) Quiett Truck manufactures part WB23 used in several of its truck models. 10,000 units are produced
each year with production costs as follows:
Direct materials $45,000
Direct manufacturing labour 15,000
Variable support costs 35,000
Fixed support costs 25,000
Total costs $120,000
Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If WB23
is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.
Required:
a. Describe avoidable costs. What amount of the WB23 production costs is avoidable?
b. Should Quiett Truck outsource WB23? Why or why not?
c. What other items should Quiett Truck consider before outsourcing any of the parts it currently
manufactures?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
44) Nall Custom Pool Inc. needs 10,000 units of a certain part for its manufacturing process. It can buy the
part from Wholesale Pool Supplies and Equipment for $53. Nall’s plant can manufacture the part for the
following costs per unit:
Direct materials $6
Direct manufacturing labour 24
Variable manufacturing overhead 12
Fixed manufacturing overhead 15
Total $57
If Nall buys the part from Wholesale, 60 percent of the fixed manufacturing overhead applied will
continue to be incurred.
Required:
What is the relevant dollar difference between making and buying the part?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
45) A florist produces table settings for weddings. Based on an annual volume of 10,000 units it incurs
$100,000 in fixed manufacturing costs. Variable costs per unit are $16 for direct materials, $3 for direct
manufacturing labour, and $14 for variable factory overhead.
Another company has offered to supply empty baskets for the settings for $8, with a minimum annual
order of 5,000 units. If the florist accepts the offer, it will be able to reduce variable labour and overhead
costs by 50 percent. The materials for the empty baskets will cost $4 if the florist assembles them.
Required:
a. Determine if they should make or assemble the empty baskets.
b. Should they make or assemble the empty baskets if they could rent the space that the basket
assembly requires for $16,000 per year to another company?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 11 – Decision Making and Relevant Information
46) Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens
Manufacturing announced the availability of a new convection oven that cooks more quickly with lower
operating expenses. Pat is considering the purchase of this faster, lower-operating cost convection oven to
replace the existing one they recently purchased. Selected information about the two ovens is given
below:
Existing New Turbo Oven
Original cost $60,000 $50,000
Accumulated depreciation $5,000 –
Current salvage value $40,000 –
Remaining life 5 years 5 years
Annual operating expenses $10,000 $7,500
Disposal value in 5 years $0 $0
Required:
a. What costs are sunk?
b. What costs are relevant?
c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new
convection oven?
d. What other items should Pat, as manager of the Pizzeria, consider when making this decision?