Chapter 13 – Short-Run Decision Making: Relevant Costing
split-off point?
a.
$6,000
b.
$12,000
c.
$7,000
d.
$18,000
e.
$15,000
Revenue [(2,000 × $3) + (3,000 × $4)]
Less: Joint processing cost
Gross profit
94. Refer to Figure 13–6. Should Autry process dac further?
a.
No, income will be $1,500 lower.
b.
No, income will be $5,000 lower.
c.
Yes, income will be $1,500 higher.
d.
Yes, income will be $5,000 higher.
e.
It doesn’t matter; income will be the same.
Revenue
Less: further processing of dac
Less: Joint processing cost
Gross profit
Figure 13–7.
Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house. An outside company
has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year.
Costs of X76 are as follows:
Direct materials
$3.00
Direct labor
$1.50
Variable overhead
$2.75
Fixed overhead
$5.00
95. Refer to Figure 13–7. Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should
Ring purchase the part from the outside supplier?
a.
No, income will decrease by $71,500.
b.
No, income will decrease by $15,000.
c.
Yes, income will increase by $74,500.
d.
No, income will decrease by $10,500.
e.
Yes, income will increase by $10,500.
Chapter 13 – Short-Run Decision Making: Relevant Costing
Relevant cost per unit= $3.00 + $1.50 + $2.75 + $1.50* =
*Fixed overhead = $5.00 – ($5.00 × 70%) = $1.50
96. Refer to Figure 13–7. Assume that all of the fixed overhead is allocated and cannot be avoided. Should Ring purchase
the part from the outside supplier?
a.
Yes, income will increase by $104,500.
b.
No, income will decrease by $104,500.
c.
Yes, income will increase by $78,500.
d.
Yes, income will increase by $95,500.
e.
Yes, income will increase by $137,500.
Relevant cost per unit = $3.00 + $1.50 + $2.75 = $7.25
Decrease in income if purchased = ($7.25 – $12.00) ×
Figure 13–8.
Kerrigan Lumber Yard receives 12,000 large trees each year that they process into rough logs. Currently, Kerrigan sells
the rough logs for $75 each. Kerrigan is considering processing the logs further into refined lumber. Each log can be
processed into 200 feet of refined lumber at an additional cost of $0.40 per foot. The refined lumber can be sold for $0.95
per foot.
97. Refer to Figure 13-8. Should Kerrigan process the rough logs into refined lumber?
a.
Yes, income will increase by $35 per log.
b.
Yes, income will increase by $110 per log.
c.
Yes, income will increase by $75 per log.
d.
No, income will decrease by $35 per log.
e.
No, income will decrease by $110 per log.
Revenue
Less: Processing cost
Income
*$0.95 × 200
98. Refer to Figure 13–8. Assume that the cost of getting the 12,000 large trees falls by half. Should Kerrigan sell the
rough logs at split-off or process it further?
a.
Process further, the reduction in the cost of trees makes that option more profitable than it was before.
b.
Sell at split-off because the decrease in the cost of the trees makes that option more profitable than it was
before.
c.
Sell at split-off, the reduction in the cost of the trees is irrelevant.
Chapter 13 – Short-Run Decision Making: Relevant Costing
d.
Process further, the reduction in the cost of the trees will lower further processing costs.
e.
Process further because the reduction in the cost of the trees is irrelevant.
e
99. A decision that involves potential further processing of joint products is which kind of decision?
a.
relevant
b.
make-or–buy
c.
sell-or-process-further
d.
special-order
e.
keep-or-drop
c
100. When managers are considering the optimal product mix, they are most concerned with
a.
maximizing revenue.
b.
minimizing cost.
c.
maximizing profit.
d.
minimizing selling and administrative expense.
e.
balancing productive capacity.
c
101. Limited resources and limited demand for a product are generally referred to as
a.
resources.
b.
problems.
c.
constraints.
d.
optima.
e.
contribution factors.
c
102. The solution of the product mix problem in the presence of multiple constraints requires the use of
a.
linear programming.
b.
relevant costing.
c.
differential costing.
d.
excel programming.
e.
contribution margin per unit of scarce resource.
a
Figure 13–3.
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 costs 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.
103. Refer to Figure 13–3. What is the contribution margin per hour of specialized molding equipment time for sinks?
a.
$35
b.
$33.33
Chapter 13 – Short-Run Decision Making: Relevant Costing
c.
$70
d.
$200
e.
$68.33
104. Refer to Figure 13–3. Assume that EBP can sell as many as 1,000 sinks and 500 tubs per year. How many tubs should
EBP produce?
a.
1,000
b.
500
c.
410
d.
675
e.
0
105. Refer to Figure 13–3. What is the contribution margin per hour of specialized molding time for tubs?
a.
$35
b.
$68.33
c.
$70
d.
$200
e.
$30
106. Refer to Figure 13–3. 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?
a.
2,050
b.
2,025
c.
0
d.
4,050
e.
810
Chapter 13 – Short-Run Decision Making: Relevant Costing
107. Refer to Figure 13–4. What is the contribution margin per hour of machine time for a classic lamp?
a.
$26
b.
$104
c.
$16
d.
$65
e.
$13
Contribution margin per unit
Hours of machine time
Contribution margin per hour of machine time
108. Refer to Figure 13–4. What is the contribution margin per hour of machine time for a fancy lamp?
a.
$21
b.
$42
c.
$13
d.
$8
e.
$6
Contribution margin per unit
Hours of machine time
Contribution margin per hour of machine time
109. Refer to Figure 13–4. How many of each type of lamp must be sold to optimize total contribution margin?
a.
18,000 classic lamps; 0 fancy lamps
b.
0 classic lamps; 30,000 fancy lamps
c.
10,000 classic lamps; 10,000 fancy lamps
d.
0 classic lamps; 9,000 fancy lamps
e.
90,000 classic lamps; 0 fancy lamps
Contribution margin per unit
Hours of machine time
Contribution margin per hour of machine time
110. Refer to Figure 13–4. What is the total contribution margin of the optimal mix of classic and fancy lamps?
a.
$1,280,000
of machine time.
Chapter 13 – Short-Run Decision Making: Relevant Costing
b.
$950,000
c.
$1,000,000
d.
$1,170,000
e.
$90,000
The optimal mix is 90,000 classic lamps and zero fancy lamps.
Figure 13–5.
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. 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.
111. Refer to Figure 13–5. What is the amount of machine time for model K-3 in terms of percent of a machine hour?
a.
10%
b.
20%
c.
25%
d.
40%
e.
50%
112. Refer to Figure 13–5. What is the contribution margin per unit of scarce resource (machine time) for Model K-3?
a.
$24
b.
$12
c.
$6
d.
$14
e.
$28
113. Refer to Figure 13–5. What is the amount of machine time for model P-4 in terms of percent of a machine hour?
a.
10%
b.
20%
c.
25%
d.
30%
Chapter 13 – Short-Run Decision Making: Relevant Costing
e.
50%
114. Refer to Figure 13–5. What is the contribution margin per unit of scarce resource (machine time) for Model P-4?
a.
$6
b.
$12
c.
$24
d.
$14
e.
$28
115. Refer to Figure 13–5. Now suppose that Santorino Company can sell only 5,500 units of each model. How many
units of Model K-3 should be produced?
a.
5,500
b.
312
c.
1,250
d.
2,750
e.
5,000
116. Refer to Figure 13–5. Now suppose that Santorino Company can sell only 5,500 units of each model. How many
units of Model P-4 should be produced?
a.
5,500
b.
5,000
c.
1,250
d.
2,750
e.
1,375
Chapter 13 – Short-Run Decision Making: Relevant Costing
Figure 13–9.
Sabor Inc. is a medical testing laboratory that performs several tests and analyses for hospitals in the area. Four of the tests
that they perform require the use of a specialized machine that can supply 14,000 hours per year. Information on the four
lab tests follows:
Test A
Test B
Test C
Test D
Charging rate
$65
$51
$48
$32
Variable cost
$25
$18
$13
$8
Machine hours
3
2
1
0.5
117. Refer to Figure 13–9. What is the contribution margin per hour of machine time for Test A?
a.
$40
b.
$65
c.
$25.50
d.
$13.33
e.
$15.67
$40 CM per unit / 3 machine hours = $13.33
118. Refer to Figure 13–9. What is the contribution margin per hour of machine time for Test B?
a.
$20.50
b.
$33
c.
$16.25
d.
$16.50
e.
$18
0.5 completed in 1 hour × $33 CM = $16.50 OR $33 / 2
119. Refer to Figure 13–9. What is the contribution margin per hour of machine time for Test C?
a.
$48
b.
$35
c.
$13
d.
$16
e.
$24
1 completed in 1 hour × $35 CM = $35 OR $35 / 1
120. Refer to Figure 13–9. What is the contribution margin per unit of machine time for Test D?
Contribution margin per unit
Hours of machine time
Contribution margin per hour of machine time
remaining machine time can be used to produce Model K-3.)
Chapter 13 – Short-Run Decision Making: Relevant Costing
a.
$20
b.
$32
c.
$8
d.
$48
e.
$24
2 completed in 1 hour × $24 CM = $48 OR $24 / 0.50
121. 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?
a.
Budgeted product cost is $15,000.
b.
$5,000 is pure profit.
c.
All costs pertaining to the job total $15,000.
d.
$5,000 includes fixed overhead, selling and administrative expense, and profit.
e.
$5,000 includes selling and administrative expense, and profit.
e
122. The method of determining the cost of a product or service based on the price that customers are willing to pay is
called
a.
relevant costing.
b.
differential costing.
c.
target costing.
d.
product costing.
e.
overall costing.
c
123. Moss Company charges cost plus 35%. What is the price of an item with cost equal to $65?
a.
$73.25
b.
$95.80
c.
$87.75
d.
$65.50
e.
$22.75
Price = $65 + ($65 × 35%) = $87.75
124. Stadium Company charges cost plus 60%. If the price of an item is $260, what is the item’s cost?
a.
$180
b.
$162.50
c.
$100
d.
$125.50
e.
$150.75
= $260 / (1 + .60)
= $260 / 1.60
Chapter 13 – Short-Run Decision Making: Relevant Costing
125. Mattson Construction charges each customer a price equal to the cost of direct materials, direct labor, and overhead
plus 40%. Job #1845 included the following costs:
Direct materials
Direct labor
Overhead
What is price charged for Job 1845?
a.
$86,000
b.
$42,400
c.
$106,000
d.
$184,800
e.
$166,154
Price = ($39,000 + $67,000 + $26,000) × 1.40 = $184,800
126. Super Pet Supplies sets prices at cost plus 70% of cost. The cost of an aquarium start-up kit is $110. What price does
Super Pet Supplies charge for the aquarium start-up kit?
a.
$195
b.
$200
c.
$187
d.
$77
e.
$180
Price = $110 × 1.70 = $187
127. Curtis Company sets price equal to cost plus 50%. Recently, Curtis charged a customer a price of $150 for an item.
What was the cost of the item to Curtis?
a.
$50
b.
$75
c.
$100
d.
$40
e.
$80
Cost = $150 / 1.50 = $100
128. 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?
a.
$250
b.
$179
c.
$350
d.
$400
e.
$90
= $162.50
Chapter 13 – Short-Run Decision Making: Relevant Costing
129. Welker Company is designing an all-in–one grill and cooler aimed at sports fans. The company believes that the
product can be sold for $180; and it requires a 30% profit on new products. What is the target cost of the all-in–one grill
and cooler?
a.
$140
b.
$54
c.
$175
d.
$126
e.
$168
130. 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?
a.
$21
b.
$91
c.
$49
d.
$100
e.
$63.70
131. 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?
a.
$64
b.
$12.80
c.
$320
d.
$80
e.
$53
132. 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?
a.
$26
b.
$4.50
c.
$30
Chapter 13 – Short-Run Decision Making: Relevant Costing
d.
$25.50
e.
$28.50
133. 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?
a.
$40
b.
$60
c.
$48
d.
$17
e.
$63
134. Victor’s Detailing customers would be willing to pay $57 per detail. The company requires an 80% markup on each
job. The average job would cost $30.
Victor’s Detailing uses markup pricing to set the price on each job. What is the price Victor should quote a new customer?
a.
$30
b.
$24
c.
$54
d.
$84
e.
$240
135. 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. What is the price they should quote a new customer?
a.
$30
b.
$24
c.
$57
d.
$54
e.
$84
the lowest acceptable price.
136. 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.
Chapter 13 – Short-Run Decision Making: Relevant Costing
Victor’s uses target costing. Victor’s Detailing should:
a.
sell their business.
b.
ask their customers to pay more.
c.
sell their services at the price customers are willing to pay.
d.
find a way to reduce costs.
e.
reduce their required percentage to stay in business.
c
137. 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?
138. Kara Ring owns a successful flower shop called Always Blooming. Kara wants to expand the shop by leasing the
space next door for $1,200 per month, and adding refrigerators to keep the flowers fresh and two checkout counters so the
customers do not have to wait in long lines. She currently pays $1,000 per month for her current store space and has two
refrigerators that cost her $6,000 each two years ago. She figures that the new refrigerators and counters will cost $25,000.
She also has determined that the current cash register that initially cost her $1,000 two years ago and has been depreciated
$250 each year would have to be replaced with two new cash registers costing $1,500 each. She thinks sales would
increase by $10,000 per month. Variable costs are 40% of sales.
Required:
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?