Chapter 13 – Short-Run Decision Making: Relevant Costing
1. The first step in making a short-run decision is to identify alternatives as possible solutions to the problem.
a.
True
b.
False
False
The first step in making a short-run decision is to define the problem.
2. In making a short-run decision, all alternatives need to be considered.
a.
True
b.
False
False
3. In short-run decision making, the alternative with the lowest overall cost is always chosen.
a.
True
b.
False
False
4. Irrelevant costs are costs that are the same for more than one alternative.
a.
True
b.
False
True
5. The benefit sacrificed when one alternative is chosen over another is called sunk cost.
a.
True
b.
False
False
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.
a.
True
b.
False
False
7. A sunk cost is always relevant.
a.
True
b.
False
False
A sunk cost is never relevant.
8. Future costs that differ across alternatives are relevant costs.
a.
True
b.
False
9. Fixed costs are never relevant.
Chapter 13 – Short-Run Decision Making: Relevant Costing
a.
True
b.
False
False
10. Resources that are acquired in advance of usage are flexible resources.
a.
True
b.
False
False
11. Flexible resources may have unused capacity.
a.
True
b.
False
False
12. A choice between internal and external production is a keep-or-drop decision.
a.
True
b.
False
False
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 more than the usual price.
a.
True
b.
False
False
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.
a.
True
b.
False
True
15. A segment margin is always greater than or equal to zero.
a.
True
b.
False
False
16. At split-off, the joint costs of production for joint products are not relevant to the sell-or-process-further decision.
a.
True
b.
False
True
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.
a.
True
b.
False
Chapter 13 – Short-Run Decision Making: Relevant Costing
True
18. Linear programming is a special technique that can be used to determine the optimal product mix when there are
multiple constraints.
a.
True
b.
False
True
19. A situation in which management tells divisions that they must reduce costs by 10% is called target costing.
a.
True
b.
False
False
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.
a.
True
b.
False
False
21. In determining the target price of a good, the company must first determine the target cost and the desired profit.
a.
True
b.
False
False
22. Demand is one side of the pricing equation; supply is the other side.
a.
True
b.
False
True
23. The markup includes desired profit and any costs not included in the base cost.
a.
True
b.
False
True
24. Many companies start with cost to determine price since revenue must cover cost for the firm to make a profit.
a.
True
b.
False
True
25. A major advantage of markup pricing is that standard markups are easy to apply.
a.
True
b.
False
True
Chapter 13 – Short-Run Decision Making: Relevant Costing
26. Target costing is a method of determining the cost of a product or service based on the price (target price) that
customers are willing to pay.
a.
True
b.
False
True
27. Target costing involves much more up-front work than cost-based pricing.
a.
True
b.
False
True
28. Target costing can be used most effectively in the design and development stage of the product life cycle.
a.
True
b.
False
True
29. ____________________ consists of choosing among alternatives with an immediate or limited end in view.
30. A _________________ can be used to structure the decision maker’s thinking and to organize the information to make
a good decision.
31. The difference between the summed costs of two alternatives in a decision is known as the __________________.
32. _____________________ are simply those factors that are hard to put a number on, including things like political
pressure and product safety.
33. Most short-run decisions require extensive consideration of ___________.
34. If a future cost is the same for more than one alternative, and it has no effect on the decision is known as a(n)
_____________ cost.
irrelevant
35. In order to be classified as a _________________, a cost must possess these two characteristics: 1) they are future
costs and 2) they differ across alternatives.
36. The benefit sacrificed or foregone when one alternative is chosen over another is known as the
____________________.
37. A cost that cannot be affected by any future action is called a(n) _______________.
Chapter 13 – Short-Run Decision Making: Relevant Costing
38. A manager will make a __________________ when determining if a specially priced order should be accepted or
rejected.
special-order decision
39. Segmented reports are helpful for managers to make _______________ decisions.
40. The decision on whether to produce a product internally or purchase it from a supplier is an example of a
_______________.
41. __________________ have common processes and costs of production up to a split-off point.
Joint products
42. ______________ is the point at which products become distinguishable after passing through a common process.
Split-off point
43. _______________________ focus on whether a product should be processed beyond the split-off point.
44. Limited resources or a limited demand for a product are examples of ______________.
45. In the presence of multiple constraints the solution is considerably more complex than for one constraint and requires
a technique known as ____________________.
linear programming.
46. ________________ refers to the relative amount of each product manufactured by a company.
Product mix
47. The percentage that is applied to the base cost is known as the _____________.
48. A method of determining the cost of a product or service based on the price that customers are willing to pay is called
________________.
target costing.
49. 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?
a.
$15 for rework
b.
$20 selling price of defective units
c.
$30 manufacturing cost
d.
$50 regular selling price
e.
All of these are relevant.
50. Which of the following is not a step in the decision-making model?
a.
define the problem
Chapter 13 – Short-Run Decision Making: Relevant Costing
b.
identify alternatives
c.
consider qualitative factors
d.
total relevant costs and benefits for each alternative
e.
determine costs and benefits for both feasible and unfeasible alternatives
51. The act of choosing among alternatives with an immediate or limited end in view is termed
a.
assessing feasible alternative.
b.
strategic decision making.
c.
constructing a decision model.
d.
short-run decision making.
e.
None of these.
52. Future costs that differ across alternatives are
a.
opportunity costs.
b.
sunk costs.
c.
relevant costs.
d.
variable costs.
e.
product costs.
53. Depreciation of equipment is an example of a(n)
a.
relevant cost.
b.
opportunity cost.
c.
sunk cost.
d.
variable cost.
e.
None of these.
54. Resources that can be purchased in the amount needed and at the time of use are
a.
lumpy resources.
b.
flexible resources.
c.
committed resources.
d.
product resources.
e.
implicit resources.
55. 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?
a.
$11.50 normal selling price
b.
$1.20 fixed factory overhead per unit
Chapter 13 – Short-Run Decision Making: Relevant Costing
c.
$7.35 spent on donuts and coffee
d.
$8.90 selling price per unit of special order
e.
None of these.
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
a.
$4,500.
b.
$6,750.
c.
$7,500.
d.
$3,000.
e.
$2,250.
Cost of reworking the defective units = 150 × $15 = $2,250
57. 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.
c
58. 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 these.
59. Abbott Company is considering purchasing a new machine to replace a machine purchased one year ago that is not
achieving the expected results. The following information is available:
Expected maintenance costs of new machine
$12,000 per year
Purchase price of existing machine
$150,000
Expected cost savings of new machine
$20,000 per year
Expected maintenance costs of existing machine
$8,000 per year
Resale value of existing machine
$35,000
Which of these items is irrelevant?
a.
Expected maintenance costs of new machine
b.
Purchase cost of existing machine
c.
Expected maintenance costs of existing machine
d.
Expected resale value of existing machine
Figure 13–1.
Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company logo
Chapter 13 – Short-Run Decision Making: Relevant Costing
painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order. Fuller
figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct
labor is $12 per frame, and one setup will be required at $1,000 per setup. The set–up charge costs are 100% labor.
Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether
or not the special order is accepted. Fuller’s policy is to avoid layoffs to the extent possible.
60. Refer to Figure 13–1. Which costs of the special order relate to flexible resources?
a.
wood and glass
b.
wood, glass, and variable overhead
c.
depreciation on machinery
d.
wood, glass, and direct labor
e.
wood, glass, direct labor, and setup labor
61. Refer to Figure 13–1. Which of the following is a qualitative factor that Fuller would consider in making the decision
to accept or reject the special order?
a.
cost of yarn and backing
b.
cost of setup labor
c.
the no-layoff policy
d.
the use of machinery
e.
the machining and electricity
62. Refer to Figure 13–1. Which of the following is irrelevant to the special order decision?
a.
cost of wood and glass
b.
direct labor cost
c.
machining and electricity cost
d.
$40 price
e.
All of these are relevant.
63. Refer to Figure 13–1. If Fuller accepts the special order, by how much will operating income increase or decrease?
a.
$14,400 increase
b.
$12,000 decrease
c.
$12,000 increase
d.
$21,600 increase
e.
There will be no effect on operating income.
Sales ($40 × 600)
Less: wood and glass ($16 × 600)
Variable overhead ($4 × 600)
Increase in operating income
64. Which of the following costs is not relevant to a decision to sell a product at split-off or process the product further
and then sell the product?
a.
joint costs allocated to the product
b.
the selling price of the product at split-off
Chapter 13 – Short-Run Decision Making: Relevant Costing
c.
the additional processing costs after split-off
d.
the selling price of the product after further processing
a
65. A decision involving a choice between internal and external production is what kind of decision?
a.
relevant
b.
keep-or-drop
c.
sell-or-process-further
d.
special-order
e.
make-or–buy
e
66. A decision that focuses on whether a specially priced order should be accepted or rejected is what kind of decision?
a.
relevant
b.
make-or–buy
c.
sell-or-process-further
d.
special-order
e.
keep-or-drop
67. 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?
a.
relevant
b.
make-or–buy
c.
sell-or-process-further
d.
special-order
e.
keep-or-drop
e
68. 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 accept the order?
a.
Yes, income will increase by $6,000.
b.
Yes, income will increase by $9,000.
c.
No, income will decrease by $3,000.
d.
No, income will decrease by $6,000.
e.
It doesn’t matter; there will be no impact on income.
Chapter 13 – Short-Run Decision Making: Relevant Costing
69. 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?
a.
Yes, income will increase by $300.
b.
No, income will decrease by $180.
c.
No, income will decrease by $1,500.
d.
Yes, income will increase by $180.
e.
It doesn’t matter; there will be no change in income.
Contribution margin [($1.75 − 1.61) ×12,000]
$1,680
Less: cost of special machine
1,500
Increased income
70. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was
determined as follows:
Direct materials
$150,000
Direct labor
240,000
Inspecting products
60,000
Providing power
30,000
Providing supervision
40,000
Setting up equipment
60,000
Moving materials
20,000
Total
$600,000
If the component is not produced by Foster, inspection of products and provision of power costs will only be 10% of the
current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs;
and supervision costs will amount to only 40% of the production amount. An outside supplier has offered to sell the
component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?
a.
$25,000 increase
b.
$45,000 increase
c.
$90,000 decrease
d.
$90,000 increase
Make:
Direct materials
Direct labor
Chapter 13 – Short-Run Decision Making: Relevant Costing
71. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined
as follows:
Direct materials
$ 75,000
Direct labor
120,000
Variable overhead
45,000
Fixed overhead
60,000
Total
$300,000
An outside supplier has offered to sell the component for $12.75. Fixed costs will remain the same if the component is
purchased from an outside supplier.
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
Make:
Direct materials
Direct labor
Variable overhead
Total
Buy:
Purchase price (40,000 × $12.75)
72. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined
as follows:
Inspecting products (avoid 90%)
Providing power (avoid 90%)
Providing supervision (avoid 60%)
Setting up equipment (avoid 50%)
Moving materials (avoid 50%)
Total
Buy:
Purchase price (20,000 × $25.50)
Chapter 13 – Short-Run Decision Making: Relevant Costing
Direct materials
$ 75,000
Direct labor
120,000
Variable overhead
45,000
Fixed overhead
60,000
Total
$300,000
An outside supplier has offered to sell the component for $12.75. Fixed cost will remain the same if the component is
purchased from an outside supplier.
Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside
supplier.
What is the effect on income if Vest purchases the component from the outside supplier?
a.
$225,000 decrease
b.
$195,000 increase
c.
$165,000 decrease
d.
$135,000 increase
Make:
Direct materials
Direct labor
Variable overhead
Total
Buy:
Purchase price (40,000 × $12.75)
Rental income
45,000
Total
73. 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 labor
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.
A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00 per unit. If Miller
Company accepts the offer, it will be able to 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 $8,000
b.
increase of $9,000
c.
increase of $8,000
d.
decrease of $6,000
Chapter 13 – Short-Run Decision Making: Relevant Costing
Cost to buy ($17 × 20,000)
$340,000
Cost to make:
Variable costs ($16.50 × 20,000)
$330,000
Profit will increase by
74. Houston Corporation manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as
follows:
Direct materials
$ 32
Direct labor
40
Variable overhead
16
Fixed overhead
32
Total
$120
Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If Houston
Corporation 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
Make ($120 × 5,000)
$600,000
Buy [($112 × 5,000) + $60,000]
620,000
Make increases profits by
$ 20,000
75. The operations of Smits Corporation are divided into the Child Division and the Jackson Division. Projections for the
next year are as follows:
Child
Jackson
Division
Division
Total
Sales revenue
$250,000
$180,000
$430,000
Variable expenses
90,000
100,000
190,000
Contribution margin
$160,000
$ 80,000
$240,000
Direct fixed expenses
75,000
62,500
137,500
Segment margin
$ 85,000
$ 17,500
$102,500
Allocated common costs
35,000
27,500
62,500
Total relevant benefit (loss)
$ 50,000
$(10,000)
$ 40,000
Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be
a.
$22,500.
b.
$40,000.
c.
$50,000.
d.
$60,000.
SUPPORTING CALCULATIONS:
Chapter 13 – Short-Run Decision Making: Relevant Costing
$85,000 − $62,500 = $22,500
76. The operations of Knickers Corporation are divided into the Pacers Division and the Bulls Division. Projections for
the next year are as follows:
Pacers
Bulls
Division
Division
Total
Sales revenue
$420,000
$252,000
$672,000
Variable expenses
147,000
115,500
262,500
Contribution margin
$273,000
$136,500
$409,500
Direct fixed expenses
126,000
105,000
231,000
Segment margin
$147,000
$ 31,500
$178,500
Allocated common costs
63,000
47,250
110,250
Total relevant benefit (loss)
$ 84,000
$(15,750)
$ 68,250
Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be
a.
$99,750.
b.
$84,000.
c.
$68,250.
d.
$36,750.
77. 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.
78. The following information relates to a product produced by Creamer Company:
Direct materials
$24
Direct labor
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
Chapter 13 – Short-Run Decision Making: Relevant Costing
each. A customer has offered to buy 60,000 units for $90 each.
The incremental cost per unit associated with the special order is
a.
$84.
b.
$81.
c.
$69.
d.
$64.
Direct materials
$24
Direct labor
15
Variable overhead
30
Variable selling
12
$81
79. 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.
Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be
a.
$60,000 increase.
b.
$60,000 decrease.
c.
$30,000 increase.
d.
$30,000 decrease.
80. The following information relates to a product produced by Creamer Company:
Direct materials
$24
Direct labor
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.
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.
SUPPORTING CALCULATIONS:
Chapter 13 – Short-Run Decision Making: Relevant Costing
81. Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units:
Direct materials
$ 4
Direct labor
12
Variable overhead
6
Fixed overhead
8
The company has the capacity to produce 30,000 units. The product regularly sells for $40. A wholesaler has offered to
pay $32 per unit for 2,000 units.
If the firm chooses to accept the special order and reject some regular sales, the effect on operating income would be
a.
a $20,000 increase.
b.
a $16,000 decrease.
c.
a $4,000 increase.
d.
$-0-.
82. Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000
units:
Direct materials
$12
Direct labor
36
Variable overhead
18
Fixed overhead
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered to
pay $110 per 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.
Incremental revenue (7,500 × $110)
Lost revenue from regular sales (1,500 × $120)
Incremental costs:
Direct materials (6,000 × $12)
Direct labor (6,000 × $36)
Variable overhead (6,000 × $18)
Incremental profit
83. Rose Manufacturing Company had the following unit costs:
Direct materials
$24
Direct labor
8
Incremental revenue (60,000 × $90)
Less: Incremental costs (60,000 × $81)
Incremental profit
Chapter 13 – Short-Run Decision Making: Relevant Costing
Variable overhead
10
Fixed 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 or 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
84. Reggie Corporation manufactures a single product with the following unit costs for 1,000 units:
Direct materials
$2,400
Direct labor
960
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 Corporation about buying 100 units for $5,100 each. Currently, the models are
sold to dealers for $7,800. Reggie Corporation’s capacity is sufficient to produce the extra 100 units. No additional selling
expenses would be incurred on the special order.
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
85. Boone Products had the following unit costs:
Direct materials
$24
Direct labor
10
Variable overhead
8
Fixed factory (allocated)
18
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 or
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
SUPPORTING CALCULATIONS:
Chapter 13 – Short-Run Decision Making: Relevant Costing
86. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint process. The joint costs amount
to $200,000.
If Processed Further
Units
Sales Value
Additional
Sales
Product
Produced
at Split-Off
Costs
Value
A1
3,000
$10,000
$2,500
$15,000
B2
5,000
30,000
3,000
35,000
C3
4,000
20,000
4,000
25,000
D4
6,000
40,000
6,000
45,000
If Product B2 is processed further, profits will
a.
increase by $30,000.
b.
decrease by $3,000.
c.
increase by $32,000.
d.
increase by $2,000.
87. Manning Company uses a joint process to produce products W, X, Y, and Z. Each product may be sold at its split-off
point or processed further. Additional processing costs of specific products are entirely variable. Joint processing costs for
a single batch of joint products are $120,000. Other relevant data are as follows:
Additional
Product
Sales Value
at Split-Off
Processing
Costs
Sales Value of
Final Product
W
$ 40,000
$ 60,000
$ 80,000
X
$ 12,000
$ 4,000
$ 20,000
Y
$ 20,000
$ 32,000
$120,000
Z
$ 28,000
$ 20,000
$ 32,000
$100,000
$116,000
$252,000
Which products should Manning process further?
a.
All.
b.
All except Z.
c.
Y and X.
d.
None.
Additional
Additional
Product
Costs
Decision
$ 40,000
$60,000
Sell now
$ 8,000
$ 4,000
$ 4,000
Process on
$100,000
$32,000
$68,000
Process on
*Difference between sales value at split off vs. sales value of final product
1,000 × ($48 − $42) =
$6,000
1,000 × ($48 − $50) =
$4,000
Chapter 13 – Short-Run Decision Making: Relevant Costing
88. Information about three joint products follows:
A
B
C
Anticipated production
5,000 lbs.
1,000 lbs.
2,000 lbs.
Selling price/lb. at split-off
$10
$30
$16
Additional processing costs/lb. after split-off
(all variable)
$6
$12
$24
Selling price/lb. after further processing
$20
$40
$50
The cost of the joint process is $60,000. Which of the joint products should be sold at split-off?
a.
A.
b.
B.
c.
C.
d.
Both A and B.
Split-Off
Process Further
$10
$20 − $6 = $14
$30
$40 − $12 = $28
*Sell now
$16
$50 − $24 = $26
89. Information about three joint products follows:
X
Y
Z
Anticipated production
12,000 lbs.
8,000 lbs.
7,000 lbs.
Selling price/lb. at split-off
$16
$26
$48
Additional processing costs/lb. after split-off
(all variable)
$8
$20
$20
Selling price/lb. after further processing
$20
$40
$70
The cost of the joint process is $140,000. Which of the joint products should be processed further?
a.
X.
b.
Y.
c.
Z.
d.
Both X and Y.
Split-Off
Process Further
$16
$20 − $8 = $12
$26
$40 − $20 = $20
$48
$70 − $20 = $50
*Process on
Figure 13–2.
ColorPro uses part 87A in the production of color printers. Unit manufacturing costs for 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.
90. Refer to Figure 13–2. Should ColorPro make or buy the part?
Chapter 13 – Short-Run Decision Making: Relevant Costing
a.
Make the part because it will save $100,000 over buying it.
b.
Buy the part because it will save $100,000 over making it.
c.
Make the part because it will save $1,100,000 over buying it.
d.
Buy the part because it will save 1,100,000 over making it.
e.
Buy the part because it will save $300,000 over making it.
Direct materials
Direct labor
Variable overhead
Purchase price
Total relevant costs
91. Refer to Figure 13–2. 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?
a.
Make the part because it will save $100,000 over buying it.
b.
Buy the part because it will save $100,000 over making it.
c.
Make the part because it will save $107,000 over buying it.
d.
Buy the part because it will save $107,000 over making it.
e.
Make the part because it will save $10,000 over buying it.
Direct materials
Direct labor
Variable overhead
Purchase price
Materials handling cost
Total costs
92. Refer to Figure 13–2. Which of the following is a qualitative factor that might affect ColorPro’s decision?
a.
Filbert has an outstanding reputation for quality.
b.
Ordering from Filbert would give ColorPro a chance to see how well Filbert could meet JIT standards for
ColorPro’s other products.
c.
Filbert is known for the reliability of its products.
d.
Making the part in-house would help ColorPro avoid layoffs of direct and indirect labor.
e.
All of these.
Figure 13–6.
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.
93. Refer to Figure 13–6. What is Autry’s profit from refining one batch of dactylyte if both dac and tyl are sold at the