Chapter 7—Relevant Costs and Product Planning Decisions
MULTIPLE CHOICE
1. Which of the following statements is true regarding special order decisions?
a.
Special order decisions are long-run decisions.
b.
Whether or not the company has excess capacity is seldom a consideration for special
order decisions.
c.
Both quantitative and qualitative impacts should be considered.
d.
The sales price of a special order should never be below the price offered to regular
customers.
2. Which of the following would not be a factor in the consideration of whether or not a special order
should be accepted?
a.
Excess capacity
b.
Variable costs
c.
Sunk costs
d.
Qualitative factors
3. Which of the following would not be a factor in the consideration of whether or not a special order is
accepted or not?
a.
Variable costs
b.
Avoidable fixed costs
c.
Sales price of the special order
d.
Unavoidable fixed costs
4. Which of the following types of costs should always be considered in special order decisions?
a.
Unavoidable costs
b.
Relevant costs
c.
Sunk costs
d.
Fixed costs
5. Which of the following will always be considered in special order decisions?
a.
Unavoidable costs
b.
Fixed costs
c.
Sunk costs
d.
Excess capacity
6. A local science museum normally sells tickets to its museum for $5 each. The daily maximum capacity
of the museum is 1,000 visitors. At the maximum capacity, fixed costs are $2 per visitor and variable
costs are $1.50 per visitor. A local school group has approached the museum wishing to purchase 50
special passes at a cost of $2.50 each. Assuming the museum has excess capacity, if the special order
were accepted, net income would:
a.
increase by $50.00.
b.
decrease by $125.00.
c.
increase by $125.00.
d.
decrease by $50.00.
7. A local vendor at the county fair sells snow cones for $.50 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:
a.
not change.
b.
decrease by $25.00.
c.
increase by $12.50.
d.
increase by $7.50.
8. A local vendor at the county fair sells snow cones for $.50 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?
a.
$ .50
b.
$ .25
c.
$ .10
d.
$ .75
Preston Wade
Preston Wade, a local craftsman, normally sells his handcrafted wooden birdhouses for $145 each.
Preston has the capacity to produce as many as 60 birdhouses a week. In a normal week, Preston
makes 20 birdhouses with the following costs per unit:
Direct materials
$12.00
Direct labor
$15.00
Variable overhead
$ 3.00
Fixed overhead
$ 5.00
9. Refer to the Preston Wade information above. Preston has received a special order from a local plant
nursery to purchase 40 birdhouses for a price of $80 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 $250. If Preston accepts the special order, net income will increase by:
a.
$1,050
b.
$1,750
c.
$2,000
d.
$3,200
10. Refer to the Preston Wade information above. Preston has received a special order from a local plant
nursery for 40 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 $250. Preston
requires a minimum $2,500 profit on any special order. The minimum price per birdhouse that Preston
should charge the nursery is:
a.
$65.00.
b.
$98.75.
c.
$95.00.
d.
$145.00.
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:
a.
increase by $10.
b.
decrease by $225.
c.
increase by $15.
d.
increase by $30.
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 $12 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:
a.
decrease by $1,000.
b.
increase by $2,500.
c.
decrease by $12,500.
d.
not change.
13. Which of the following costs is least likely to be relevant in deciding whether to accept a special
order?
a.
Variable direct labor costs
b.
Variable selling costs
c.
Fixed manufacturing overhead
d.
Variable packaging and shipping costs
14. Vertical integration:
a.
is achieved when a company acquires many of its competitors.
b.
is accomplished when a company is involved in multiple steps in the value chain.
c.
is rarely attempted due to the risks involved.
d.
ensures that the highest quality products are produced at the lowest possible price.
15. When are fixed costs relevant in a make or buy decision?
a.
Fixed costs are never relevant to the decision.
b.
Fixed costs are relevant when they differ among alternatives.
c.
Fixed costs are always relevant to the decision.
d.
Fixed costs are relevant when they exceed variable costs.
16. Which of the following is not a consideration associated with outsourcing?
a.
The effect on employees.
b.
The effect on vertical integration.
c.
The effect on unavoidable fixed costs.
d.
The effect on variable costs.
17. Which of the following statements is true when a company is considering whether to make or buy a
component of a product that it currently manufactures?
a.
If none of the current fixed overhead is avoidable when outsourcing, the product should be
made internally.
b.
If the current fixed overhead is avoidable when outsourcing, the product should be
outsourced.
c.
If the relevant costs to make internally are greater than the relevant costs of outsourcing,
the product should be outsourced.
d.
If the cost of outsourcing is greater than the direct materials cost of making internally, the
product should continue to be made internally.
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?
a.
Decrease of $5,000.
b.
Increase of $15,000.
c.
Decrease of $85,000.
d.
Increase of $20,000.
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?
a.
No impact on net income.
b.
Decrease by $9,000.
c.
Increase by $9,000.
d.
Decrease by $18,000.
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.
20. Refer to the Averette & Averette information above. What are Averette & Averette’s total relevant
costs to make the dentures themselves?
a.
$300
b.
$400
c.
$415
d.
$350
21. Refer to the Averette & Averette information above. If Averette & Averette outsources the making of
dentures, the net income will:
a.
decrease by $15,000.
b.
increase by $5,000.
c.
increase by $15,000.
d.
decrease by $5,000.
Henderson Manufacturing Inc.
Henderson Manufacturing Inc. manufactures electric scooters. The company currently makes all of the
electronic components for the scooter itself. When 10,000 motors are manufactured each year, the
motor costs per unit are as follows:
Direct materials
$5
Direct labor
5
Variable overhead
2
Fixed overhead
7
Plymouth Inc. has offered to sell Henderson 10,000 motors for $14 per unit. If Henderson accepts the
offer, 50% of the fixed overhead currently allocated to the motors could be avoided.
22. Refer to the Henderson Manufacturing Inc. information above. What are the relevant costs per unit of
Henderson manufacturing the motors themselves?
a.
$15.50
b.
$15.20
c.
$19.00
d.
$14.00
23. Refer to the Henderson Manufacturing Inc. information above. If Henderson accepts the offer to
purchase 6,000 motors from Plymouth, the net income will:
a.
decrease by $9,000.
b.
increase by $10,000.
c.
decrease by $10,000.
d.
increase by $9,000.
24. Refer to the Compton Products Inc. information above. What are the relevant costs per unit of
Compton making the motors themselves?
a.
$21.00
b.
$23.25
c.
$27.75
d.
$30.00
25. Refer to the Compton Products Inc. information above. If Compton accepts the offer to purchase
10,000 motors from McClintock, the net income will:
a.
increase by $27,500.
b.
decrease by $17,500.
c.
increase by $50,000.
d.
decrease by $40,000.
26. In the decision on whether or not to drop an unprofitable product line, the product line will most likely
be dropped if:
a.
all of the product line’s fixed costs are unavoidable.
b.
the product line’s total fixed costs are less than the contribution margin lost from dropping
the product line.
c.
the contribution margin lost from dropping the product line is less than the fixed costs
avoided from dropping the product line.
d.
the contribution margin lost from dropping the product line is more than the fixed costs
avoided from dropping the product line.
27. A particular product line should not be dropped if:
a.
its total fixed costs are more than its contribution margin.
b.
its avoidable fixed costs are less than its contribution margin.
c.
its unavoidable fixed costs are more than its contribution margin.
d.
its variable costs are more than its fixed costs.
28. Laurel Inc. has three product lines: A, B, and C.
A
C
Total
Sales
$20,000
$22,000
$77,000
Variable costs
8,000
14,000
32,000
Contribution margin
12,000
8,000
45,000
Fixed costs
4,000
9,000
24,000
Net income
$ 8,000
$ (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:
a.
decrease net income by $3,500.
b.
increase net income by $1,000.
c.
decrease net income by $12,500.
d.
increase net income by $4,500.
29. Tremaine Inc. has three product lines: A, B, and C.
A
C
Total
Sales
$55,000
$95,000
$240,000
Variable costs
37,000
45,000
122,000
Contribution margin
18,000
50,000
118,000
Fixed costs
23,000
30,000
73,000
Net income
$(5,000)
$20,000
$ 45,000
Management is considering dropping product line A. If it is discontinued, $14,000 of its fixed costs
can be avoided. The discontinuation of product line A would:
a.
decrease net income by $15,000.
b.
increase net income by $21,000.
c.
decrease net income by $4,000.
d.
increase net income by $4,000.
30. Carlton Products has three product lines: A, B, and C.
A
C
Total
Sales
$500,000
$700,000
$1,750,000
Variable costs
280,000
300,000
1,000,000
Contribution margin
220,000
400,000
750,000
Fixed costs
100,000
150,000
390,000
Net income
$120,000
$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:
a.
decrease net income $10,000.
b.
increase net income $140,000.
c.
decrease net income $130,000.
d.
increase net income $10,000.
31. Paxton Products has three product lines: A, B, and C.
A
C
Total
Sales
$90,000
$200,000
$440,000
Variable costs
50,000
100,000
270,000
Contribution margin
40,000
100,000
170,000
Fixed costs
15,000
50,000
105,000
Net income
$25,000
$ 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:
a.
$40,000.
b.
$30,000.
c.
$10,000.
d.
$70,000.
32. Which of the following statements regarding resource utilization is not true?
a.
Resource utilization decisions are usually short-term in nature.
b.
Resource utilization decisions require the identification of a constraint.
c.
Resource utilization decisions relates to an analysis of which fixed costs are unavoidable.
d.
Resource utilization decisions require managers to compute a product’s contribution
margin.
33. Which of the following is the least likely to be a consideration in a resource utilization decision?
a.
Shelf space
b.
Direct labor hours
c.
Machine time
d.
Fixed costs
34. In resource utilization decisions, managers should:
a.
minimize the contribution margin per unit.
b.
minimize the use of the scarce resource.
c.
maximize the contribution margin per unit of scarce resource.
d.
maximize the contribution margin per unit.
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 cost per unit
100
500
Direct labor cost per unit
300
700
Variable overhead cost per unit
50
100
Machine hours per unit
4 hours
8 hours
Most of the manufacturing process for the sets is done on machines. There is a maximum of 10,000
machine hours available each year.
35. Refer to the Decker Products information above. What is the contribution margin per unit of limited
resource for each type of set?
a.
Standard: $125.00 Deluxe: $100.00
b.
Standard: $225.00 Deluxe: $250.00
c.
Standard: $450.00 Deluxe: $700.00
d.
Standard: $112.50 Deluxe: $ 87.50
36. 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?
a.
2,500 standard sets
b.
1,250 deluxe sets
c.
833 standard sets and 833 deluxe sets
d.
1,500 standard sets and 1,250 deluxe sets
37. 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?
a.
$ 875,000
b.
$ 281,250
c.
$1,125,000
d.
$1,750,000
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
$90
$195
Direct materials cost
20
40
Direct labor cost
5
40
Variable overhead cost
5
15
Direct labor hours cost
3 hours
4 hours
Most of the car detailing is done by hand.
38. 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?
a.
1,400 standard
b.
1,075 deluxe
c.
1,400 standard and 1,075 deluxe
d.
810 standard and 810 deluxe
39. Refer to the Kellerman Detailing Service information above. For the upcoming year, there is a
maximum of 4,300 direct labor hours available. Management believes that the demand for both the
standard and deluxe detailing is limited to 1,000 each per year. How many standard and deluxe
detailing jobs should be sold in the upcoming year in order to maximize profits?
a.
Standard: 900 Deluxe: 750
b.
Standard: 100 Deluxe: 1,000
c.
Standard: 1,400 Deluxe: 1,000
d.
Standard: 450 Deluxe: 900
40. Refer to the Kellerman Detailing Service information above. For the upcoming year, there is a
maximum of 4,300 direct labor hours available. Management believes that the demand for both the
standard and deluxe detailing is limited to 1,000 each per year. If the company maximizes profits, what
is the maximum contribution margin the company could have in the upcoming year?
a.
$ 67,500
b.
$ 60,000
c.
$106,000
d.
$ 60,750
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.
41. Refer to the Mountaineer Products information above. In order to maximize profits, how many of each
type of tent should be produced?
a.
Single-wall: 3,000 Double-wall: 1,000
b.
Single-wall: 0 Double-wall: 3,000
c.
Single-wall: 1,800 Double-wall: 1,800
d.
Single-wall: 1,500 Double-wall: 4,000
42. Refer to the Mountaineer Products information above. If the company produces in order to maximize
its profits, what would be the contribution margin for the upcoming year?
a.
$232,500
b.
$382,500
c.
$705,000
d.
$855,000
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?
a.
Tilton should sell only item #1.
b.
Tilton should sell only item #2.
c.
Tilton should sell only item #3.
d.
Tilton should sell an equal amount of each item.
44. If a company is faced with a limited resource, which of the following is not a feasible option for
alleviating the constraint?
a.
Focusing on products that require less use of the resource.
b.
Increasing the capacity of the limited resource.
c.
Reducing the use of the resource in production.
d.
Increasing the capacity of an underutilized resource.
45. The theory of constraints:
a.
is a management tool used to determine whether or not a company should accept a special
order.
b.
helps in identifying the bottlenecks in a production process.
c.
helps in estimating the fixed overhead costs in a production process.
d.
is a management tool used for deciding whether a product should be sold “as is” or
processed further.
46. Which of the following is most likely to represent a bottleneck?
a.
A production machine that is underutilized.
b.
A workstation that requires significant supervision.
c.
A production machine that has limited capacity.
d.
An employee who has one hour of idle time each day.
47. In the production process, bottlenecks:
a.
maximize profits.
b.
maximize the use of scarce resources.
c.
limit throughput.
d.
minimize the total cost of a product.
48. In deciding whether to sell a product or to process it further, which of the following pieces of
information would not be relevant to the decision?
a.
Costs of further processing.
b.
Costs incurred up to the decision point.
c.
Sales price if processed further.
d.
Customer demand with further processing.
49. In deciding whether to sell a product or to process it further, which of the following costs are relevant
to the decision?
a.
Material costs incurred up to the decision point.
b.
Costs incurred to process further.
c.
Overhead costs incurred up to the decision point.
d.
Direct materials and direct labor costs only.
50. In a sell or process further decision, if the incremental revenue of additional processing is greater than
the incremental cost of additional processing, then:
a.
it is less profitable to process further.
b.
it is more profitable to process further.
c.
total fixed costs have increased.
d.
total product costs have decreased.
51. Carolina Potato Inc. currently sells cut sweet potatoes for $.85 per can. The cost of producing the
sweet potatoes is $.18 per can. Carolina Potato is considering starting a line of mashed sweet potatoes.
The additional processing costs would be $.06 per can and each can would sell for $.95. Which of the
following pieces of information is not relevant to the decision to sell or process further?
a.
$.06 additional processing cost
b.
$.18 production cost
c.
$.95 sales price
d.
demand for pureed sweet potatoes
52. Hannah’s Homemade Cookies produces and sells delicious shortbread cookies. The cost of producing a
bag of cookies is $.65 and the bag sells for $3.75. Hannah is considering processing all the cookies
further by dipping them in chocolate. The additional processing costs would be $.50 per bag and the
sales price of the chocolate-dipped cookies would be $4.20 per bag. If Hannah can sell 5,000 bags of
either type of cookie per year, which of the following statements is true if she chooses to process the
cookies further?
a.
Net income would increase by $2,250 per year.
b.
Net income would decrease by $2,500 per year.
c.
Net income would decrease by $250 per year.
d.
Net income would increase by $15,250 per year.
Wright Manufacturing
Wright Manufacturing makes picnic tables in three sizes: small, medium, and large. The picnic tables
can be sold with or without a finishing stain. The following information is available for each table: