25. Anderson Co. makes and uses 5,000 components each year in its manufacturing operations. An outside
supplier has offered to supply the components to Anderson at $66 per unit. Anderson’s production
costs are as follows:
Direct materials
$ 8
Direct labor
32
Variable overhead
12
Fixed overhead (based on normal capacity)
34
If Anderson accepts the order, $8 of fixed overhead per unit will be eliminated.
What is the relevant cost to produce one unit?
a.
$86
b.
$52
c.
$78
d.
$60
26. Anderson Co. makes and uses 5,000 components each year in its manufacturing operations. An outside
supplier has offered to supply the components to Anderson at $66 per unit. Anderson’s production
costs are as follows:
Direct materials
$ 8
Direct labor
32
Variable overhead
12
Fixed overhead (based on normal capacity)
34
If Anderson accepts the order, $8 of fixed overhead per unit will be eliminated.
If the offer is accepted, operating income will
a.
increase by $100,000.
b.
decrease by $70,000.
c.
decrease by $30,000.
d.
increase by $60,000.
27. The point at which products are separated in a joint production process is the
a.
split-off point.
b.
joint product point.
c.
separation point.
d.
breakeven point.
28. The costs incurred beyond the split-off point are called
a.
split-off point costs.
b.
incremental costs.
c.
joint product costs.
d.
by-product costs.
29. Relevant costs in a sell or process-further decision include
a.
costs of additional processing.
b.
both additional revenues and additional costs.
c.
revenues after additional processing.
d.
joint product costs.
30. All of the following are relevant in a sell or process-further decision except
a.
sales value at the split-off point.
b.
sales value after further processing.
c.
additional processing costs.
d.
joint costs.
31. California Chemical Co. produces several chemical compounds. Each compound can be sold at the
split-off point or processed further. The following results apply to May:
Compound
Sales Value at
Split-off Point
Costs of Additional
Processing
Chem I
$59,600
$7,300
Chem II
70,700
17,500
Chem III
46,700
6,200
After determining which products should be sold at the split-off point and which should be processed
further, the total revenue provided by these three products would be
a.
$172,500.
b.
$199,000.
c.
$200,600.
d.
$212,500.
32. An old machine that originally cost $9,500 thus far has accumulated depreciation of $1,900. The
remaining useful life is four years, with no salvage value at the end of its useful life. A new machine is
now available that costs $8,500, with a useful life of five years and no residual value. The old machine
could be sold now for $5,900. The annual cash operating costs for the old machine are $5,000, but for
the new machine they would be only $2,500. Gross revenue from the products would be $12,000
annually for either machine. The company should
a.
keep the old machine to avoid a $5,900 loss on its disposal.
b.
keep the old machine to avoid a $1,700 loss on its disposal.
c.
replace the old machine.
d.
keep the old machine to avoid an $8,500 decrease in cash.
SHORT ANSWER
1. Discuss the qualitative factors that should be considered in short-run decision making.
2. “Variable costs are relevant and fixed costs are irrelevant.” Explain why you agree or disagree with
this statement.
3. What two criteria must be met for information to be considered relevant to decision making?
4. Why is the book value of equipment irrelevant when considering the replacement of equipment?
5. What are the two steps in the analysis for a sales mix decision?
6. Courtney Sinclaire is trying to rent a new bicycle. She has narrowed her choices to two lease
arrangements, each with unique characteristics. Bike Superior would rent for $220 per year, and Bike
Deluxe’s annual rent would be $250. Bike Superior would need a new seat costing $35 and new racing
tires costing $95. The old seat and tires could be sold for $30. Bike Deluxe is fully equipped but would
need to be painted at a cost of $110. Maintenance and upkeep on both bikes would average $60 per
year.
a. Identify the relevant data in this problem.
b. Prepare an incremental analysis for Courtney to aid her in this decision.
c. What decision should Courtney make?
7. Lispell Co. manufactures in-line skates that sell for $128 a pair. The company is currently operating at
capacity, 2,000 pairs. A special order from a foreign distributor for 400 pairs of skates at $120 a pair
has just been received. In order to accept this order, Lispell Co. would have to give up 400 pairs of its
regular sales. However, there would be no sales commission incurred on the order. Shown below are
the current costs of operation:
Direct materials
$48
Direct labor
12
Variable overhead
4
Fixed overhead
5 ($10,000 2,000 pairs)
Variable selling and administrative
8 (sales commissions)
Fixed selling and administrative
4 ($8,000 2,000 pairs)
a. What costs are relevant to this decision?
b. Provide an incremental analysis to be used in determining whether or not the order should be
accepted.
c. Are there any qualitative considerations that need to be addressed? Explain.
8. Sand Canyon Enterprises is analyzing its sales mix to find out if it is maximizing its profits. The
company produces three similar items: X, Y, and Z. All three of these products are made with the same
equipment, and maximum productive capacity measured in machine hours is now being used. Product
line statistics are as follows:
X
Y
Z
Current production and sales (units)
105,000
158,000
95,000
Machine hours per unit
10
5
13
Selling price per unit
$63
$48
$84
Unit variable cost
$33
$26
$49
(2,000 $128)
(1,600 $128)
(400 $120)
Total sales
(2,000 $72)
(1,600 $72)
(400 $64)
Total variable costs
Contribution margin
Fixed costs
Operating income
Unit variable selling cost
$17
$13
$16
Determine whether the existing sales mix is the most profitable one possible. If your answer is no,
offer your suggestion to improve the sales mix. Round answers to two decimal places.
9. Red Rock Enterprises is analyzing its sales mix to find out if it is maximizing its profits. The company
produces three similar items: Alpha, Beta, and Gamma. All three of these products are made with the
same equipment, and maximum productive capacity measured in machine hours is now being used.
Product line statistics are as follows:
Alpha
Beta
Gamma
Current production and sales (units)
105,000
158,000
95,000
Machine hours per unit
10
5
13
Selling price per unit
$63.00
$48.00
$84.00
Unit variable cost
$33.00
$26.00
$49.00
Unit variable selling cost
$20.00
$16.00
$19.00
Determine whether the existing sales mix is the most profitable one possible. If your answer is no,
offer your suggestion to improve the sales mix. Round answers to two decimal places.
Total variable costs
10. On November 25, 20xx, Marquez Golf Co. received a special order for 5,000 three-wood golf club
sets. These golf clubs will be marketed in Japan. Ito Imports, Inc., the purchasing company, wants the
clubs bulk packaged and is willing to pay $55 per set for the clubs. The president of Marquez Golf Co.
has gathered the following product costing information about the set of woods being discussed: direct
materials (wood), $600 per 100 sets; direct materials (metal shafts), $1,000 per 100 sets; and direct
materials (grips), $150 per 100 sets. Direct labor is $20 per set. Variable manufacturing costs are $12
per set, and fixed manufacturing costs are 20 percent of direct labor dollars. Variable selling expenses
are $10 per set, and variable shipping costs are $7 per set. Fixed general and administrative costs are
figured at 30 percent of direct labor dollars. Bulk shipping costs will total $11,000, thus eliminating
both variable selling and variable shipping costs from consideration. The company did not expect this
order and will reach planned production capacity for the year. However, there is enough plant capacity
for the special order. Round answers to two decimal places.
a. Prepare an analysis for the president to use in deciding whether to accept or reject the offer by Ito
Imports, Inc. What decision should be made?
b. What is the lowest possible price Marquez Golf Co. could charge per set of woods and still make a
$9,000 profit on this order?
11. On November 15, 20xx, The Cooper Co. received a special order for 6,000 three-wood golf club sets.
These golf clubs will be marketed in Asia. Seto Imports, Inc., the purchasing company, wants the clubs
bulk packaged and is willing to pay $72 per set for the clubs. The president of The Cooper Co. has
gathered the following product costing information about the set of woods being discussed: direct
materials (wood), $900 per 100 sets; direct materials (metal shafts), $1,200 per 100 sets; and direct
materials (grips), $200 per 100 sets. Direct labor is $27 per set. Variable manufacturing costs are $19
per set, and fixed manufacturing costs are 20 percent of direct labor dollars. Variable selling expenses
are $14 per set, and variable shipping costs are $9 per set. Fixed general and administrative costs are
figured at 30 percent of direct labor dollars. Bulk shipping costs will total $10,000, thus eliminating
both variable selling and variable shipping costs from consideration. The company did not expect this
order and will reach planned production capacity for the year. However, there is enough plant capacity
for the special order. Round answers to two decimal places.
a. Prepare an analysis for the president to use in deciding whether to accept or reject the offer by Seto
Imports, Inc. What decision should be made?
b. What is the lowest possible price The Cooper Co. could charge per set of woods and still make a
$12,000 profit on this order?
12. Identify each of the following as quantitative or qualitative factors in the decision making of a tax
preparation firm:
a. Timeliness ____________________
b. Number of clients _____________________
c. Competition from other firms ____________________
d. Cost of computer time _____________________
e. Service quality _____________________
13. The Dropinsky Company’s management wants to determine if Division Y should be eliminated. The
following data are available (in thousands).
Segmented Income Statement
Division X
Division Y
Division Z
Total
Sales
$200
$300
$400
$900
Less variable costs
80
150
160
390
Contribution margin
$120
$150
$240
$510
Less direct fixed costs
70
170
120
360
Segment margin
$ 50
($ 20)
$120
$150
Less common fixed costs
90
Operating income
$ 60
a. Assuming all direct fixed costs of Division Y are avoidable, what would be the change in operating
income if Division Y were eliminated?
b. Assuming one-half of the direct fixed costs of Division Y are avoidable, what would be the change
in operating income if Division Y were eliminated?
14. The Big Bear Lumber Company is trying to decide whether to sell or process further rough-sawn
lumber. The joint cost of producing the rough-sawn lumber is $10,500. The following data are
available:
Lumber
Type
Number of Boards
Selling Price per Board
Incremental
Cost to Process
Further
At Split-Off
After
Additional
Processing
A
2,000
$ 8
$12
$7,000
B
1,000
16
20
6,000
C
500
25
30
1,000
a. What is the incremental effect, increase or (decrease), on operating income of processing the lumber
further?
b. Which type of lumber should be processed further?