Finance Chapter 10 the tires can be sold without further processing

Achievement Test 10: Chapter 20 Name __________________________

Accounting, 5e Instructor _______________________

Section # _______ Date _________

Part

I

II

III

Total

Points

20

60

100

Score

PART I — MULTIPLE CHOICE (20 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. What is a relevant cost?

a. It is a sunk cost.

b. It is a past cost.

c. It is a cost that differ across alternatives.

d. It is an opportunity cost.

____ 2. Which one of the following is a qualitative factor as it relates to make-or-buy decisions?

a. The cost to buy the part or product

b. Loss of customers due to eliminating a product line

c. Customer perceptions due to a change in pricing

d. Quality of products from the supplier

PART II — TRUE/FALSE (10 points)

Instructions: Designate whether each of the following statements is true or false by circling the T

or F.

T F 1. A sunk cost is the potential benefit that may be obtained by following an alternative

course of action.

T F 2. A company should process further as long as the incremental costs of further

production exceed the incremental revenue of further production.

T F 3. Joint costs are all costs incurred prior to the point at which two products are

separately identified.

T F 4. Sunk costs are relevant costs that differ across alternatives.

Test Bank for Accounting, Fifth Edition

AT10- 2

PART III — INCREMENTAL ANALYSIS (26 points)

This problem consists of two independent mini-problems.

A. Zane Wheels produces lawn mower tires in batches of 1,200 at a cost of $2.40 each. The

tires can be sold without further processing for $5.00 per tire, or can be processed further by

injecting solid foam which insures the tires will never become flat. The solid foam tires can be

sold for $11.00 each. The additional processing costs total $6,600 per batch.

Instructions

Compute the incremental income from further production of one batch of solid foam tires.

B. Lansing Manufacturers produces can openers. For the first six months of 2014, the company

reported the following operating results for 16,000 units, while operating at 80% of plant

capacity.

Sales $2,000,000

Cost of goods sold 1,200,000

Gross profit 800,000

Operating expenses 420,000

Net income $ 380,000

Cost of goods sold was 75% variable and 25% fixed. Operating expenses were 60% variable

and 40% fixed. In July of 2014, Lansing receives a special order for 2,000 can openers at

$85 each from a foreign company. The can openers normally sell for $112.00. Acceptance

of the special order would result in $1,000 of shipping costs but no increase in fixed

operating expenses.

Instructions

Prepare an incremental analysis for the special order.

Achievement Test 10

AT10- 3

Solutions — Achievement Test 4: Chapters 20

PART I — MULTIPLE CHOICE (20 points)

PART II — TRUE/FALSE (20 points)

PART III — INCREMENTAL ANALYSIS (60 points)