49. You purchased baseball tickets last month when your team was doing well. You paid $75 for the
non-refundable tickets. The team is doing poorly and a friend offered you $30 for the ticket. The opportunity
cost of going to the game is
50. Which of the following costs are relevant to decision making?
51. Abrams Corporation sells a product for $75 per unit. Its market share is 20 percent. The market share can be
increased to 30 percent with a reduction in price to $63. The product is currently earning a profit of $12 per unit.
The president of Abrams feels that the $12 profit per unit must be maintained.
What is the target price per unit?
52. _____ involves temporarily setting a price below cost to broaden demand for a product and injure
competition.
53. What act prohibits price discrimination?
Use the following to answer questions 54-56:
Richardson Motors uses ten units of part Number T305 each month in the production of large Diesel engines.
The cost to manufacture one unit of T305 is presented below:
Material handling, which is not included in manufacturing overhead, represents the direct variable costs of the
receiving department that are applied to direct materials and purchased components on the basis of their costs.
Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds fixed) Simpson
Castings, one of Richardson’s reliable vendors, has offered to supply T305 at a unit price of $30,000.
Hilton – Chapter 13
54. If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used to
manufacture these parts would be idle. Should Richardson decide to purchase the parts from Simpson, the
out–of-pocket cost per unit of T305 would:
55. Assume Richardson Motors is able to rent all idle capacity for $50,000 per month. If Richardson decides to
purchase the ten units from Simpson Castings, Richardson’s monthly
Cost for T305 would:
56. Assume the rental opportunity does not exist and Richardson Motors could use the idle Capacity to
manufacture another product that would contribute $104,000 per month. If Richardson chooses to manufacture
the ten T305 units in order to maintain quality control, Richardson’s opportunity cost is:
57. Faulk Industries (FI) produces low cost digital cameras that sell for $100. FI requires a 25% return on sales.
Currently feasible costs are $5,160,000 and a cost reduction of $660,000 is required to meet their target. FI
assumes they will sell ____ cameras.
Use the following to answer questions 58-59:
Juarez Healthcare Center receives reimbursement from C.H.E.A.T.E.M. insurance company. Juarez receives
$20 per physical therapy session. Each session lasts 15 minutes. Because of a shortage of physical therapists,
Juarez often finds it necessary to use a temporary service to provide therapists. Assume collections and other
variable cost amount to $5 per visit and all other facility costs are fixed.
Hilton – Chapter 13
58. What is the most Juarez should pay for physical therapists?
59. What other qualitative factors should Juarez consider before using a temporary service?
60. Titan Snow Shovel Company (TSSC) has a pricing policy of cost plus 40% to cover all costs. They base
their costing on the expectation that they will sell 50,000 shovels at $98 each. Unit level costs are $40 per unit.
Product and batch level costs together equal $500,000. Facility level costs are
Use the following to answer questions 61-63:
McCoy Industries (MI) produces ice cream supplies including bowls, scoops and shake makers. MI is
considering outsourcing their shake makers. Juan Hernandez, the controller complied the following information.
Mr. Hernandez assumes 100,000 shake makers will be sold. If the shake maker is outsourced, product level
costs will increase by $35,000 to cover the increased cost of maintaining the relationship with the supplier.
Other product level and facility level costs will not change.
Hilton – Chapter 13
61. What is the most MI should pay for the shake makers from an independent supplier?
62. Given the facts above, assume that MI can use the space now devoted to shake makers as storage. Because
they will no longer need to rent a warehouse, they can save $120,000 in rental. What is the most MI should pay
for the shake makers from an independent supplier?
63. What other factors should Mr. Hernandez consider in outsourcing the shake makers?
64. The Sheila Cabot Construction Company (SCCC) is building a local stadium. They need an office at the
stadium site. SCCC can build the office themselves with material costing $50,000 and labor costs of $13,000.
When the company takes apart the building at the end of the project, 20% of the material would be reusable.
Alternatively, SCCC can rent a pre-fabricated building at a cost of $1000 per month with no set–up or
dismantling costs. It will benefit SCCC to build the office if it expects the stadium project to exceed
65. Chisel Inc currently produces 30,000 hammers per year with variable costs of $90,000 and fixed costs of
$40,000 per year. The hammers sell for $5 per unit. Currently, the company has no excess capacity as it is able
to sell all of the hammers it produces. Jacob Maccabi, head salesman received a special order for an additional
5,000 units at the same price. Producing the extra units will require the company to rent an additional machine
for increased capacity. The cost of the increased machine is $12,500. Should the company accept the special
order – explain your answer.
66. Travis Corporation sells a product for $100 per unit. Its market share is 32 percent. The market share can be
increased to 40 percent with a reduction in price to $87. The product is currently earning a profit of $23 per unit.
The president of Travis Corporation feels that the company needs to maintain the same profit level per unit. The
total market consists of $1,000,000 (10,000 units).
Compute the following items:
(1) How many units does Travis Corporation currently sell of the product? __________
(2) What is the target price per unit? __________
(3) What is the original cost per unit? __________
(4) What is the target cost per unit? _____
67. Sanders Company needs 10,000 units of a certain part to use in its production cycle. If Sanders buys the part
from Rodman Company instead of making it, Sanders cannot use the excess capacity for another manufacturing
activity. Forty percent of the overhead will continue regardless of what decision is made.
Cost to Sanders to make the part (per unit)
Cost to buy the part from Rodman – $65 (per unit)
Required:
(1) In deciding whether to make or buy the part, what are Sanders’ total relevant costs to make the part?
__________
(2) What decision should Sanders make, and what is the total cost advantage that would result?
__________
(3) What is the total dollar value of costs that are not relevant to this decision? _____
68. Jones Corp. currently sells 50,000 units to its normal customers, but it has a capacity to produce 60,000
units. Its product sells for $60 per unit and the variable costs incurred in manufacturing and selling the product
are as follows on a per unit basis: Direct materials – $12; Direct labor – $20; Sales commission – $4. A customer
has proposed a special order to purchase 10,000 units at a special price of $45 per unit. If Jones accepts the
order, the company would not have to pay its sales people their normal commission, but the company would
incur a shipping cost of $7 per unit.
Required:
(1) If Jones accepts the special order, how would operating income is affected? __________
(2) What is the minimum price per unit below which Jones should reject the order? __________
(3) Assume that Jones is operating at full capacity. What is the minimum price per unit below which Jones
should reject the order? _____
69. (CMA adapted) Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit
that includes $8 of fixed overhead.
Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33
per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead applied will be eliminated,
and the company may be able to rent the facility previously used for manufacturing the plugs.
Required:
(1) If Regis purchases the plugs but does not rent the unused facility, how much would the company save or
lose per unit? __________
(2) If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in savings
annually. To achieve this goal, what must the minimum annual rent on the facility be? ______
70. Brewer Corp. is considering dropping its talking dog product line due to continuing losses.
Revenue and cost data for the talking dog line for the past year follow:
If the talking dog is discontinued, then Brewer could avoid $110,000 per year in fixed costs.
Required:
(1) What is the change in annual operating income from discontinuing the talking dog product line?
___________
(2) Assuming all other conditions stay the same, at what level of annual sales of the talking dog (in units)
should Brewer be indifferent at to discontinuing or continuing the product line?
___________
(3) Suppose that if the talking dog is dropped, the production and sale of other products would increase so as to
generate a $15,000 increase in the contribution margin received from the other products. If all other conditions
are the same, what is the change in annual operating income from dropping the talking dog? _____
71. What are characteristics of information used in decision making?
72. Conwell Candies (CC) makes three types of chocolate candy bars. The head of marketing, Grant Wistrom
found the chart below and believes CC should drop the Almond line. He asks controller Vivian King to review
the situation and determine the fate of the Almond Line.
Required:
1) Review the information below and determine the fate of the Almond Line. Prepare your answer in good form.
Note-facility and product level costs are fixed and will not change; they are allocated based upon sales.
2) Prepare a memo defending your position on this important issue.
73. Ellis Enterprises produces high quality blankets sold to hotels and resorts. Blankets must be well made
because of frequent washings. Currently, Holt sells 10,000 blankets at $60 each with the capacity to produce
12,000 blankets. Ellis is considering a special order from a hotel chain in Kenya for 1,000 blankets at a price of
$45. Currently, Ellis has the following costs:
If Ellis accepts the special order, they will incur an additional $2 per blanket in foreign currency transaction
costs. No other product or facility costs will change.
Required:
1) Determine the impact of the special order on Ellis. Prepare your analysis in good form.
2) What other factors should Ellis consider in taking the special order?