Chapter 9—Relevant Costs and Product Planning Decisions Key
1. Which of the following statements is true regarding special order decisions?
2. Which of the following would not be a factor in the consideration of whether or not a special order should be
accepted?
3. Which of the following would not be a factor in the consideration of whether or not a special order is
accepted or not?
4. Which of the following types of costs should always be considered in special order decisions?
5. Which of the following will never be considered in special order decisions?
6. A local science museum normally sells tickets to its museum for $6 each. The daily maximum capacity of the
museum is 500 visitors. At the maximum capacity, fixed costs are $3 per visitor and variable costs are $.50 per
visitor. A local school group has approached the museum wishing to purchase 25 special passes at a cost of
$2.00 each. Assuming the museum has excess capacity, if the special order were accepted, net income would:
7. A local vendor at the county fair sells snow cones for $3 each. When 250 snow cones are sold, each snow
cone is estimated to have $.10 in variable costs and $.15 in fixed costs. A local school group plans on attending
the fair next week and wishes to purchase 50 snow cones for $.25 each. The vendor can sell as many as 400
snow cones per day. If the special order were accepted, net income would:
8. A local vendor at the county fair sells snow cones for $3 each. When 250 snow cones are sold, each snow
cone is estimated to have $.10 in variable costs and $.15 in fixed costs. A local school group plans on attending
the fair next week and wishes to purchase 50 snowcones for $.25 each. The vendor can sell as many as 400
snowcones per day.
What is the minimum price the vendor should charge for the snowcones?
9. Preston Wade
Preston Wade, a local craftsman, normally sells his handcrafted wooden birdhouses for $88 each. Preston has
the capacity to produce as many as 50 birdhouses a week. In a normal week, Preston makes 20 birdhouses with
the following costs per unit:
Direct materials
$ 5.00
Direct labor
$20.00
Variable overhead
$ 4.00
Fixed overhead
$ 2.00
Refer to the Preston Wade information above. Preston has received a special order from a local plant nursery to purchase 25 birdhouses for a price
of $90 each. The nursery wishes to have the birdhouses engraved with their own logo, therefore, the order would require the rental of a special
engraving tool at a cost of $200.
If Preston accepts the special order, net income will increase by:
10. Preston Wade
Preston Wade, a local craftsman, normally sells his handcrafted wooden birdhouses for $88 each. Preston has
the capacity to produce as many as 50 birdhouses a week. In a normal week, Preston makes 20 birdhouses with
the following costs per unit:
Direct materials
$ 5.00
Direct labor
$20.00
Variable overhead
$ 4.00
Fixed overhead
$ 2.00
Refer to the Preston Wade information above. Preston has received a special order from a local plant nursery for 25 birdhouses. The nursery wishes
to have the birdhouses engraved with their own logo, therefore, the order would require the rental of a special engraving tool at a cost of $200.
Preston requires a minimum $2,000 profit on any special order.
The minimum price per birdhouse that Preston should charge the nursery is:
11. JNR Products produces and sells plastic soda cups with specialized logos on the front. They sell the cups in
batches of 500 for $125 per batch. The company has the capacity to produce 100 batches per month but
averages much less. When 75 batches are sold a month, each batch has $40 worth of variable costs and $5 worth
of fixed overhead costs allocated to it. The company has been approached by a local fireman’s association who
wishes to purchase three batches of cups for $50 per batch. If the special order were accepted, net income
would:
12. Collegiate Products produces and sells padded stadium seats emblazoned with a university logo. The
company has the capacity to produce as many as 6,000 seats per month but consistently averages much less.
When 4,500 seats are produced, each seat has $5 of variable costs and $2 of fixed overhead costs allocated to it.
The seats typically sell for $25 each. The company has been approached by a small college who wishes to
purchase 500 seats for special alumni at a price of $5 per seat. If the special order were accepted, net income
would:
13. Which of the following costs is least likely to be relevant in deciding whether to accept a special order?
14. Vertical integration:
15. When are fixed costs relevant in a make or buy decision?
16. Which of the following is not a consideration associated with outsourcing?
17. Which of the following statements is true when a company is considering whether or not to make or buy
(outsource) a component of a product that it currently manufactures?
18. Speed Quest Inc. manufactures speed boats. Currently, the company manufactures its own engine for the
boats at the following unit costs:
Direct materials
$25.00
Direct labor
$40.00
Variable overhead
$15.00
Fixed overhead
$20.00
Another manufacturer has offered to supply Speed Quest with the engine at a cost of $85 each. Speed Quest currently makes 1,000 boats annually. If
Speed Quest accepts the offer, what will be the short-term impact on net income?
19. Quinton Products manufactures digital cameras. Currently, the company manufactures its own carrying case
for the cameras at the following unit costs:
Direct materials
$2.00
Direct labor
$2.00
Variable overhead
$1.00
Fixed overhead
$1.00
Another manufacturer has offered to supply Quinton with the case at a cost of $6 each. Quinton currently makes 9,000 cases annually. If Quinton
accepts the offer, what will be the short-term impact on net income?
20. Averette & Averette
Averette & Averette, a local dental practice, currently makes its own dentures for customers. The dental
practice has one part-time employee who comes in weekly to make dentures. The employee is paid $150 per
denture set. The direct materials and variable overhead cost per set of dentures is $75 and $25, respectively. In
addition, the practice allocates $10,000 of fixed overhead to the denture-making department. The practice
makes 1,000 sets of dentures per year. An outside company who specializes in the making of dentures has
offered to make each set of dentures for Averette & Averette for $255 per set.
Refer to the Averette & Averette information above. What are Averette & Averette‘s total relevant costs to
make the dentures themselves?
21. Averette & Averette
Averette & Averette, a local dental practice, currently makes its own dentures for customers. The dental
practice has one part-time employee who comes in weekly to make dentures. The employee is paid $150 per
denture set. The direct materials and variable overhead cost per set of dentures is $75 and $25, respectively. In
addition, the practice allocates $10,000 of fixed overhead to the denture-making department. The practice
makes 1,000 sets of dentures per year. An outside company who specializes in the making of dentures has
offered to make each set of dentures for Averette & Averette for $255 per set.
Refer to the Averette & Averette information above. If Averette & Averette outsources the making of dentures,
net income will:
22. Henderson Manufacturing Inc.
Henderson Manufacturing Inc. manufactures electric scooters. The company currently makes all of the
electronic components for the scooter itself. When 6,000 motors are manufactured each year, the motor costs
per unit are as follows:
Direct materials
$3
Direct labor
4
Variable overhead
5
Fixed overhead
8
Plymouth Inc. has offered to sell Henderson 6,000 motors for $15 per unit. If Henderson accepts the offer, 60% of the fixed overhead currently
allocated to the motors could be avoided.
Refer to the Henderson Manufacturing Inc. information above. What are the relevant costs per unit of Henderson manufacturing the motors
themselves?
23. Henderson Manufacturing Inc.
Henderson Manufacturing Inc. manufactures electric scooters. The company currently makes all of the
electronic components for the scooter itself. When 6,000 motors are manufactured each year, the motor costs
per unit are as follows:
Direct materials
$3
Direct labor
4
Variable overhead
5
Fixed overhead
8
Plymouth Inc. has offered to sell Henderson 6,000 motors for $15 per unit. If Henderson accepts the offer, 60% of the fixed overhead currently
allocated to the motors could be avoided.
Refer to the Henderson Manufacturing Inc. information above. If Henderson accepts the offer to purchase 6,000 motors from Plymouth, net income
will:
24. Compton Products Inc.
Compton Products Inc. manufactures humidifiers. The company currently makes all of the electronic
components for the humidifier itself. When 10,000 units are manufactured each year, the motor costs per unit
are as follows:
Direct materials
$6
Direct labor
8
Variable overhead
7
Fixed overhead
9
McClintock Inc. has offered to sell Compton 10,000 motors for $25 per unit. If Compton accepts the offer, 75% of the fixed overhead currently
allocated to the motors could be avoided.
Refer to the Compton Products Inc. information above. What are the relevant costs per unit of Compton making the motors themselves?
25. Compton Products Inc.
Compton Products Inc. manufactures humidifiers. The company currently makes all of the electronic
components for the humidifier itself. When 10,000 units are manufactured each year, the motor costs per unit
are as follows:
Direct materials
$6
Direct labor
8
Variable overhead
7
Fixed overhead
9
McClintock Inc. has offered to sell Compton 10,000 motors for $25 per unit. If Compton accepts the offer, 75% of the fixed overhead currently
allocated to the motors could be avoided.
Refer to the Compton Products Inc. information above. If Compton accepts the offer to purchase 10,000 motors from McClintock, net income will:
26. In the decision on whether or not to drop an unprofitable product line, the product line will most likely be
dropped if:
27. A particular product line is most likely to be dropped when:
28. Laurel Inc. has three product lines: A, B, and C.
A
B
C
Total
Sales
$20,000
$35,000
$22,000
$77,000
Variable costs
8,000
10,000
14,000
32,000
Contribution margin
12,000
25,000
8,000
45,000
Fixed costs
4,000
11,000
9,000
24,000
Net income
$ 8,000
$14,000
$ (1,000)
$21,000
Management is considering dropping product line C. If it is discontinued, one-half of its fixed costs can be avoided. The discontinuation of product
line C would:
29. Tremaine Inc. has three product lines: A, B, and C.
A
B
C
Total
Sales
$50,000
$85,000
$90,000
$225,000
Variable costs
30,000
30,000
44,000
104,000
Contribution margin
20,000
55,000
46,000
121,000
Fixed costs
23,000
25,000
18,000
66,000
Net income
$ (3,000)
$30,000
$28,000
$ 55,000
Management is considering dropping product line A. If it is discontinued, $18,000 of its fixed costs can be avoided. The discontinuation of product
line A would:
30. Carlton Products has three product lines: A, B, and C.
A
B
C
Total
Sales
$500,000
$550,000
$700,000
$1,750,000
Variable costs
280,000
420,000
300,000
1,000,000
Contribution margin
220,000
130,000
400,000
750,000
Fixed costs
100,000
140,000
150,000
390,000
Net income
$120,000
$ (10,000)
$250,000
$ 360,000
Management is considering dropping product line B. If it is discontinued, all of its fixed costs can be avoided. The discontinuation of product line B
would:
31. Paxton Products has three product lines: A, B, and C.
A
B
C
Total
Sales
$90,000
$150,000
$200,000
$440,000
Variable costs
50,000
120,000
100,000
270,000
Contribution margin
40,000
30,000
100,000
170,000
Fixed costs
15,000
40,000
50,000
105,000
Net income
$25,000
$ (10,000)
$ 50,000
$ 65,000
Management is considering dropping product line B. In order for the dropping of product line B to not cause an overall decrease in profits, product
line B’s avoidable fixed costs should be at least:
32. Which of the following statements regarding resource utilization is not true?
33. Which of the following is the least likely to be a consideration in a resource utilization decision?
34. In resource utilization decisions, managers should:
35. Decker Products
Decker Products manufactures standard and deluxe wooden swing sets. Selected data related to each product is
as follows:
Standard
Deluxe
Sales price per unit
$900
$2,000
Direct materials per unit
100
500
Direct labor per unit
300
700
Variable overhead per unit
50
100
Machine hours per unit
4
8
Most of the manufacturing process for the sets is done on machines. There is a maximum of 10,000 machine hours available each year.
Refer to the Decker Products information above. What is the contribution margin per unit of limited resource for each type of set?
36. Decker Products
Decker Products manufactures standard and deluxe wooden swing sets. Selected data related to each product is
as follows:
Standard
Deluxe
Sales price per unit
$900
$2,000
Direct materials per unit
100
500
Direct labor per unit
300
700
Variable overhead per unit
50
100
Machine hours per unit
4
8
Most of the manufacturing process for the sets is done on machines. There is a maximum of 10,000 machine hours available each year.
Refer to the Decker Products information above. If demand were strong for both sets and the company could sell an unlimited number of either
style, how many of which kind(s) of wooden swing set(s) should be produced in order to maximize profits?
37. Decker Products
Decker Products manufactures standard and deluxe wooden swing sets. Selected data related to each product is
as follows:
Standard
Deluxe
Sales price per unit
$900
$2,000
Direct materials per unit
100
500
Direct labor per unit
300
700
Variable overhead per unit
50
100
Machine hours per unit
4
8
Most of the manufacturing process for the sets is done on machines. There is a maximum of 10,000 machine hours available each year.
Refer to the Decker Products information above. If demand were strong for both sets and the company could sell an unlimited number of either
style, what is the maximum total contribution margin the company could have?
38. Kellerman Detailing Service
Kellerman Detailing Service provides two types of car detailing packages: the standard and the deluxe. Selected
data related to each package is as follows:
Standard
Deluxe
Sales price
$85
$200
Direct materials
5
10
Direct labor
15
40
Variable overhead
5
15
Direct labor hours
2
3
Most of the car detailing is done by hand.
Refer to the Kellerman Detailing Service information above. There is a maximum of 4,050 direct labor hours available each year. If demand were
equally strong for both packages and the company could sell an unlimited number of either package, how many of which kind(s) of package(s)
should be sold in order to maximize profits?
39. Kellerman Detailing Service
Kellerman Detailing Service provides two types of car detailing packages: the standard and the deluxe. Selected
data related to each package is as follows:
Standard
Deluxe
Sales price
$85
$200
Direct materials
5
10
Direct labor
15
40
Variable overhead
5
15
Direct labor hours
2
3
Most of the car detailing is done by hand.
Refer to the Kellerman Detailing Service information above. For the upcoming year, there is a maximum of 4,050 direct labor hours available.
Management believes that the demand for both the standard and deluxe detailing is limited to 900 each per year. How many standard and deluxe
detailing jobs should be sold in the upcoming year in order to maximize profits?
40. Kellerman Detailing Service
Kellerman Detailing Service provides two types of car detailing packages: the standard and the deluxe. Selected
data related to each package is as follows:
Standard
Deluxe
Sales price
$85
$200
Direct materials
5
10
Direct labor
15
40
Variable overhead
5
15
Direct labor hours
2
3
Most of the car detailing is done by hand.
Refer to the Kellerman Detailing Service information above. For the upcoming year, there is a maximum of 4,050 direct labor hours available.
Management believes that the demand for both the standard and deluxe detailing is limited to 900 each per year. If the company maximizes profits,
what is the maximum contribution margin the company could have in the upcoming year?
41. Mountaineer Products
Mountaineer Products manufactures two types of tents: single-wall and double-wall. Selected data related to
each type of tent is as follows:
Single-wall
Double-wall
Sales price
$250
$375
Direct materials
25
50
Direct labor
20
40
Variable overhead
10
15
Machine hours
2
3
Total fixed overhead is $150,000. Most of the manufacturing process is done on specialized machines. For the upcoming year, there is a maximum of
9,000 machine hours available. Management believes there is sufficient demand for 3,000 single-wall and 4,000 double-wall tents each year.
Refer to the Mountaineer Products information above. In order to maximize profits, how many of each type of tent should be produced?
42. Mountaineer Products
Mountaineer Products manufactures two types of tents: single-wall and double-wall. Selected data related to
each type of tent is as follows:
Single-wall
Double-wall
Sales price
$250
$375
Direct materials
25
50
Direct labor
20
40
Variable overhead
10
15
Machine hours
2
3
Total fixed overhead is $150,000. Most of the manufacturing process is done on specialized machines. For the upcoming year, there is a maximum of
9,000 machine hours available. Management believes there is sufficient demand for 3,000 single-wall and 4,000 double-wall tents each year.
Refer to the Mountaineer Products information above. If the company maximizes profits, what is the maximum contribution margin for the
upcoming year?
43. Tilton Food Warehouse Club sells food and other items in bulk to its members. Tilton is very selective in
the products it sells because of limited shelf space. It has been asked by a canned vegetables manufacturer to
consider adding three of its canned food items. The following information is available regarding each of the
possible canned food items:
Item #1
Item #2
Item #3
Sales price per unit
$3.50
$4.50
$7.00
Cost to purchase
1.25
2.00
3.00
Units per foot of shelf space
3
2
1
Assuming that there is unlimited demand for all items, if Tilton has 15 feet of shelf space available, which of the following statements is true if they
wish to maximize profits?
44. If a company is faced with a limited resource, which of the following is not a feasible option for alleviating
the constraint?
45. The theory of constraints:
46. Which of the following is most likely to represent a bottleneck?
47. In the production process, bottlenecks: