Matching
A.
Bottleneck
G.
Price discrimination
B.
Differential analysis
H.
Product life cycle
C.
Full cost
I.
Special order
D.
Dumping
Sunk cost
Make-or-buy decision
K.
Target price
Peak-load pricing
Throughput contribution
_____ 1. Occurs when a company exports its product to consumers in another country at an
export price below its domestic price.
_____ 2. Sales dollars minus direct materials costs and other variable costs such as energy and
piecework labor.
_____ 3. Involves any decision concerning whether to make the needed goods internally or
purchase them from outside sources.
_____ 4. Refers to the process of estimating revenues and costs of alternative actions available
to decision makers and of comparing these estimates to the status quo.
_____ 5. Represents an order that will not affect other sales and is usually a short-run
occurrence.
_____ 6. The sum of the fixed and variable costs of manufacturing and selling a unit.
_____ 7. Covers the time from initial research and development to the time at which support to
the customer ends.
Matching Answers
1. D
3. E
5. I
7. H
9. F
11. K
Multiple Choice
1. Which of the following statements is correct?
a. Life-cycle costing tracks costs from start to finish.
b. Product life cycle ends when the product is delivered to customers.
c. Product price must be set to cover the costs of manufacturing activities only.
d. “Take–back” requirement for product recycle and disposal is customers’ responsibility.
2. A division has the following data: Sales $320,000, Variable costs $200,000, and Fixed costs
$140,000. If the division were eliminated, the fixed costs would be allocated to other
divisions. What is the net impact on the company’s overall profit if the division is eliminated?
3. Two alternative projects are under consideration:
Project A
Project B
Revenues
$360,000
280,000
Variable costs
210,000
180,000
Fixed costs
90,000
90,000
Which of the following is (are) relevant in choosing between the projects?
4. Which of the following statements is correct?
5. For differential analysis:
a. differential costs are relevant costs.
b. no fixed costs are differential.
c. most variable costs are differential.
d. Both a and c.
6. Full cost is:
a. the sum of variable and fixed cost per unit.
b. always relevant for short-run decisions.
c. useful for long-run pricing decisions.
d. Both a and c.
7. In a competitive market where firms are price takers:
a. each firm can set its own prices.
b. target pricing is appropriate.
8. At what volume will Company B become indifferent to the make-or-buy choice?
a. 8,000 units
b. 12,000 units
c. 20,000 units
d. 31,000 units
9. If Company B needs 8,000 units of Part#375, and outsourcing saves only 25% of the fixed
overhead, then Company B’s make-or-buy decision and cost advantage are:
10. The theory of constraints (TOC):
a. applies to long-run cost management.
b. is concerned with improving bottleneck operations.
c. tries to minimize throughput contribution.
d. considers most salaries and wages, rent, utilities and depreciation to be variable costs.
11. A company currently manufactures a subassembly for its main product. The unit costs for the
subassembly are:
$25
$10
$8
The fixed overhead is an allocated amount shared by other operations. What is the relevant
cost of the subassembly?
12. Differential analysis is suitable for the following situations except:
a. make-or-buy decisions.
b. whether to close a business unit.
c. cost behavior analysis.
d. product mix decisions.
Multiple Choice Answers
1. a (LO3)
3. d (LO1)
5. d (LO1)
7. b (LO3)
8. b (LO4)
Assume the unknown volume to be X.
($2.00 + $1.20 + $1.50) × X + $18,000 = $6.20 × X
X = 12,000 units.
9. a (LO4)
Make: ($2.00 + $1.20 + $1.50) × 8,000 + $18,000 = $55,600.
Buy: $6.20 × 8,000 + $18,000 × (1 – 25%) = $63,100.
$63,100 – $55,600 = $7,500 cost savings.
11. b (LO4)
Only the variable costs ($25 + $10) are relevant in this case.
Demonstration Problem 1
During a particular month, U-Develop Inc., receives a special order from an out-of-town
merchant who is willing to pay $4,000 for 10,000 photo prints developed, or $0.40 per print. An
analysis of U-Develop’s cost structure shows that it incurs variable cost of $0.36 per print and
$1,500 monthly fixed cost. U-Develop can handle the special order without affecting its regular
business.
The full cost of the special order is calculated by an employee as follows:
Demonstration Problem 1 – Solution
By unitizing the fixed cost, the full cost calculation gives the impression that the special order is
not a profitable one as the unit cost of $0.51 per print is higher than the unit price offered of
$0.40. However, the “full–cost fallacy” must be avoided. Since the monthly fixed cost of $1,500
Demonstration Problem 2
Nationwide Windows can produce 10,000 windows per year. Its normal year of operations
involves the following:
Sales (8,000 units @ $220)
$1,760,000
Manufacturing cost
Variable per unit
150
Fixed
Selling and administrative cost
Variable (commission) per unit on sales
Fixed
Required:
1. Should Nationwide Windows accept or reject the special order for 1,500 windows at $165
each? Why?
2. Assume, instead, that the contractor needs a total of 2,500 windows; all other information
remains the same. Should Nationwide accept or reject the special order for 2,500 windows at
$165? Why?
Demonstration Problem 2 – Solution
Part 1
The special order for 1,500 windows at $165 each should be accepted because it generates the
additional profit of $10,500.
Status Quo:
Reject
Special Order
Alternative:
Accept
Special Order
Difference
Sales
$ 1,760,000
$ 2,007,500
a
$ 247,500
Variable costs
(1,296,000)
(1,521,000)
b
(225,000)
Contribution margin
Fixed costs
(320,000)
c
(12,000)
Operating profit
$ 144,000
$ 154,500
Part 2
Nationwide Windows can produce 10,000 windows per year. It is currently selling 8,000
windows per year. It only has the capacity to make an additional 2,000 windows per year. As
such, if the special order of 2,500 windows at $165 each is accepted, Nationwide would only be
able to sell 7,500 windows (instead of 8,000 windows) at its regular price of $220 each.
The special order of 2,500 windows at $165 each should be rejected because it generates a net
loss of $3,500.
Status Quo:
Reject
Special Order
Alternative:
Accept
Special Order
Difference
Sales
a
Variable costs
(1,296,000)
b
(294,000)
Fixed costs
c
(12,000)
Operating profit
$ (3,500)
Demonstration Problem 3
Cube Manufacturing usually produces its own parts for assembly. The following monthly data
are available for one of the parts, Part A31:
Manufacturing costs
Variable per unit
$ 6
Fixed costs
15,000
Nonmanufacturing costs
Variable per unit
1
Fixed costs
9,000
Demonstration Problem 3 – Solution
Part 1
Cube Manufacturing should reject the offer and continue to make the part itself, because the total
costs will be higher.
Status Quo:
Make Part
Alternative:
Buy Part
Difference
Variable costs
$14,000
$ 0
$14,000 lower
Fixed costs
24,000
16,500
7,500 lower
Purchase price
23,000
23,000 higher
Total costs
$38,000
$39,500
$ 1,500 higher
Part 2
In this scenario, Cube should accept the offer. The $3,000 monthly rental income represents an
opportunity cost for producing Part A31 internally, making outsourcing more attractive.
Status Quo:
Make Part
Alternative:
Buy Part
Difference
Variable costs
$14,000
$ 0
$14,000 lower
Fixed costs
24,000
16,500
7,500 lower
Purchase price
23,000
23,000 higher
Opportunity cost
3,000
3,000 lower
Total costs
$41,000
$39,500
$ 1,500 lower
The $3,000 monthly rental income may be treated as cost savings as a result of outsourcing. The
conclusion remains the same.
Status Quo:
Make Part
Buy Part
Difference
Variable costs
$14,000
$ 0
Fixed costs
24,000
16,500
7,500 lower
Purchase price
23,000
23,000 higher
Opportunity cost
Alternative:
Demonstration Problem 4
Cube Manufacturing produces three different products: Platinum, Gold, and Silver. The financial
statement from last quarter is shown below.
Platinum
Gold
Silver
Total
Sales
$ 500,000
$ 400,000
$ 200,000
$1,100,000
Variable costs
(350,000)
(300,000)
(160,000)
(810,000)
Contribution margin
150,000
100,000
40,000
290,000
Fixed costs
(80,000)
(60,000)
(50,000)
(190,000)
Operating profit (loss)
$ 70,000
$ 40,000
$(10,000)
$ 100,000
Demonstration Problem 4 – Solution
The general manager should keep the Silver product line.
If Silver is dropped, the total fixed costs of $190,000 remain the same while the contribution
margin from Silver will be lost, resulting a net loss of $40,000 for the company as a whole.
Status Quo:
Keep Silver
Alternative:
Drop Silver
Difference
Sales
$1,100,000
$ 900,000
$200,000 decrease
Variable costs
Contribution margin
Fixed costs
Operating profit (loss)
$ 100,000
$ 60,000
$ 40,000 decrease