Deck 4: Fundamentals of Cost Analysis for Decision Making

Question 1

Only variable costs can be differential costs.

Answer 1

False

Question 2

With constrained resources, the important measure of profitability is the contribution margin per unit of scarce resource.

Answer 2

True

Question 3

Dumping occurs when a company exports its product to consumers in another country at an export price that is below the domestic price.

Answer 3

True

Question 4

Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of revenues and costs (i.e., the time value of money).

Question 5

A decision must involve at least two alternative courses of action.

Question 6

Peak-load pricing is the practice of setting prices lowest when the quantity demanded for the product approaches the physical capacity to produce it.

Question 7

The full-cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost.

Question 8

The reason opportunity costs are not included in the accounting system is because they involve estimates.

Question 9

Fixed costs are always classified as sunk costs in differential cost analysis.

Question 10

Financial statements prepared in accordance with generally accepted accounting principles (GAAP) provide differential cost information.

Question 11

The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective.

Question 12

The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally or (b) purchase needed items externally.

Question 13

In the short-run, plant capacity is fixed and product choices have to be made that optimize the use of available capacity.

Question 14

Price discrimination is the practice of selling identical goods or services to different customers at different prices.

Question 15

Differential analysis involves the comparison of one or more alternative courses of action with the status quo.

Question 16

Target costs equal the difference between the target selling price and the desired profit margin.

Question 17

Short-run decisions often have long-run implications.

Question 18

If there is only one alternative course of action and the status quo is unacceptable, then there really is no decision to make.

Question 19

The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis.

Question 20

When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.

Question 21

Which of the following statements regarding special orders is (are) true?
(A) The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order.
(B) The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis.

A) Only A.
B) Only B.
C) Neither A nor B is true.
D) Both A and B are true.

Question 22

The Minton Company has gathered the following information for a unit of its most popular product:
$$\begin{array} { l r } \text { Direct materials } & \$ 6 \\\text { Direct labor } & 3 \\\text { Overhead (40\% variable) } & 5 \\ \text { Cost to manufacture } & 14 \\\text { Desired markup (50\%) } & 7 \\ \text { Target selling price } & \$ 21 \\\end{array}$$
The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000 units at a price of $16 per unit. This special order would not disturb regular sales. Variable shipping and other selling expenses would be an additional $1 per unit for the special order. If the special order is accepted, Minton's operating profits will increase by:

A) $1,000.
B) $1,600.
C) $2,000.
D) $4,000.

Question 23

Which of the following costs are irrelevant for a special order that will allow an organization to utilize some of its present idle capacity?

A) Direct materials.
B) Indirect materials.
C) Variable overhead.
D) Unavoidable fixed overhead.

Question 24

If there is excess capacity, the minimum acceptable price for a special order must cover:

A) only variable costs associated with the special order.
B) variable and fixed manufacturing costs associated with the special order.
C) variable and incremental fixed costs associated with the special order.
D) variable costs and incremental fixed costs associated with the special order, plus the contribution margin usually earned on regular units.

Question 25

The following information relates to a product produced by Faulkland Company:
$$\begin{array} { l r } \text { Direct materials } & \$ 10 \\\text { Direct labor } & 7 \\\text { Variable overhead } & 6 \\\text { Fixed overhead } &\underline{ 8} \\\text { Unit cost } & \underline{\$ 31} \\\end{array}$$
Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to cover the transportation cost. Although production capacity is 500,000 units per year, Faulkland expects to produce only 400,000 units next year. The product normally sells for $40 each. A customer has offered to buy 60,000 units for $30 each. The customer will pay the transportation company directly for the transportation charges on the units purchased. If Faulkland accepts the special order, the effect on operating profits would be a:

A) $60,000 increase.
B) $180,000 increase.
C) $420,000 increase.
D) $600,000 decrease.

Question 26

The period of time over which capacity will be unchanged is:

A) long run.
B) sunk cost.
C) short run.
D) product life cycle.

Question 27

In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? (CMA adapted)

A) Labor.
B) Overhead.
C) Straight-line Depreciation.
D) Selling.

Question 28

Tori Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 'as is', but if reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it 'as is' as scrap? (CIMA adapted)

A) $(69,100)
B) $(700)
C) $29,400
D) $(39,000)

Question 29

The following information relates to the Magna Company for the upcoming year, based on 400,000 units.
$\begin{array}{lrr}&\text { Amount}&\text { Per Unit}\\\text { Sales } & \$ 4,000,000 & \$ 10.00\\\text { Cost of goods sold } & \underline{3,200,000} & \underline{8.00 }\\\text { Gross margin } & 800,000& 2.00 \\\text { Operating expenses } &\underline{ 300,000 }&\underline{ 0.75} \\\text { Operating profits } & \underline{ \$ 500,000} &\underline{ \$ 1.25}\end{array}$

The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per unit has been made to Magna. Fortunately, there will be no additional operating expenses associated with the order and Magna has sufficient capacity to handle the order. How much will operate profits be increased if Magna accepts the special order?

A) $25,000.
B) $62,500.
C) $100,000.
D) $125,000.

Question 30

The Arthur Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 20,000 utensils at $0.75 each. Arthur sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits?

A) $400.
B) $800.
C) $1,600.
D) $2,000.

Question 31

Which of the following costs are not considered in a differential analysis for a make-or-buy decision?

A) Indirect materials and indirect labor if the item is manufactured internally.
B) Direct materials and direct labor if the item is purchased.
C) Variable overhead if the item is manufactured internally.
D) Fixed overhead that will continue if the item is purchased.

Question 32

The relevance of a particular cost to a decision is determined by the: (CMA adapted)

A) riskiness of the decision.
B) number of decision variables.
C) amount of the cost.
D) potential effect on the decision.

Question 33

The Crispy Baking Company is considering the expansion of its business into door-to-door delivery service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding into the home delivery market?

A) $12,500
B) $17,500
C) $19,750
D) $20,425

Question 34

Which of the following statements regarding differential costs is (are) false?
(A) The full-cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.

A) Only A.
B) Only B.
C) Neither A nor B is false.
D) Both A and B are false.

Question 35

Starla Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 4,200 units of component JOLT. Each unit of JOLT requires 6 units of material OX8 and 9 units of material POW6. Data concerning these two materials follow:
$$\begin{array} { l c c c c } & \text { Units in } & \text { Original Cost } & \text { Current Market Price Per } & \begin{array} { c } \text { Disposal } \\\text { Value Per }\end{array} \\\text { Material } & \text { Stock } & \text { Per Unit } & \text { Unit } & \text { Unit } \\\text { OX8 } & 18,600 & \mathbf { \$ 3 . 6 0 } & \mathbf { \$ 3 . 7 0 } & \mathbf { \$ 3 . 3 5 } \\\text { PoW6 } & \mathbf { 3 8 , 2 8 0 } & \mathbf { \$ 3 . 2 0 } & \mathbf { \$ 2 . 8 0 } & \mathbf { \$ } 1.65\end{array}$$
Material OX8 is in use in many of the company's products and is routinely replenished. Material POW6 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product JOLT? (CIMA adapted)

A) $146,790.
B) $199,080.
C) $155,610.
D) $212,340.

Question 36

Park Corporation is preparing a bid for a special order that would require 720 liters of material SUN100. The company already has 560 liters of this raw material in stock that originally cost $6.30 per liter. Material SUN100 is used in the company's main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $5.80 per liter. New stocks of the material can be readily purchased for $6.65 per liter. What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order? (CIMA adapted)

A) $4,592.
B) $4,788.
C) $4,456.
D) $4,176.

Question 37

Alpha Inc. regularly uses material FLAV4 and currently has in stock 460 liters of the material for which it paid $2,622 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.25 per liter. New stocks of the material can be purchased on the open market for $5.85 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer. The relevant cost of the 800 liters of material FLAV4 is: (CIMA adapted)

A) $5,850.
B) $4,200.
C) $4,404.
D) $4,680.

Question 38

Lafferty Corporation is a specialty component manufacturer with idle capacity. Management would like to use its unused capacity to generate additional profits. A potential customer has offered to buy 6,200 units of component Rocket. Each unit of Rocket requires 8 units of material CES4 and 6 units of material XES7. Data concerning these two materials follow:
$$\begin{array} { l c c c c } & \text { Units in } & \text { Original Cost } & \text { Current Market Price Per } & \begin{array} { c } \text { Disposal } \\\text { Value Per }\end{array} \\\text { Material } & \text { Stock } & \text { Per Unit } & \text { Unit } & \text { Unit } \\\text { CES4 } &3 2 , 4 2 0 & \$ 3 . 8 0& \$ 3 . 3 5 & \$ 3 . 1 0 \\\text { XES7 } & 3 1 , 0 6 0 & \$ 2 . 3 0 & \$ 9.60 & \$ 3 . 3 5 \end{array}$$
Material CES4 is in use in many of the company's products and is routinely replenished. Material XES7 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product Rocket? (CIMA adapted)

A) $528,551
B) $523,280
C) $476,350
D) $484,455

Question 39

Differential costs are: (CMA adapted)

A) the difference in total costs that result from selecting one choice instead of another.
B) the profit foregone by selecting one choice instead of another.
C) a cost that continues to be incurred in the absence of activity.
D) a cost common to all choices in questions and not clearly allocable to any of them.

Question 40

Tara Inc. is considering using stocks of an old raw material in a special project. The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company $1,136 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.50 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $75.00 for all 160 kilograms. What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project? (CIMA adapted)

A) $1,040
B) $965
C) $1,136
D) $1,160

Question 41

Exporting a product to another country at a price below the domestic price is:

A) dumping.
B) target pricing.
C) peak-load pricing.
D) price fixing.

Question 42

Brevard Industries produces two products. Information about the products is as follows:
$\begin{array}{lrr}&\text { Product } 1&\text { Product } 2\\ \text { Units produced and sold } &4,000&10,000\\ \text {Selling price per unit } &\$15&\$13\\ \text { Variable costs per unit } &9&8\\\end{array}$

The company's fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1 and $40,000 can be directly traced to Product 2. The effect on the firm's profits if Product 2 is dropped would be a:

A) $10,000 increase.
B) $35,000 increase.
C) $35,000 decrease.
D) $10,000 decrease.

Question 43

A target cost is computed as:

A) cost to manufacture plus a desired markup.
B) cost to manufacture plus designated selling expenses.
C) market willingness to pay - cost to manufacture.
D) market willingness to pay - desired profit.

Question 44

The practice of setting prices highest when the quantity demanded for the product approaches capacity is:

A) predatory pricing.
B) target pricing.
C) peak-load pricing.
D) price fixing.

Question 45

Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows:
$$\begin{array} { l r } \text { Direct materials } & \$ 150,000 \\\text { Direct labor } & 240,000 \\\text { Variable maruffacturing overhead } & 90,000 \\\text { Fixed marnufacturing overhead } &\underline{ 120,000 }\\\text { Total } &\underline{ \$ 600,000 }\\\end{array}$$

-
Assume Ortega Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the component from an outside supplier. An outside supplier has offered to sell the component for $34. If Ortega purchases the component from the supplier instead of manufacturing it, the effect on income would be a:

A) $60,000 increase.
B) $10,000 increase.
C) $100,000 decrease.
D) $140,000 increase.

Question 46

Agreement among business competitors to set prices at a particular level is:

A) predatory pricing.
B) target pricing.
C) peak-load pricing.
D) price fixing.

Question 47

The price based on customers' perceived value for the product and the price that competitors charge is the:

A) predatory price.
B) target price.
C) target cost.
D) dumping price.

Question 48

The operations of Ranger Corporation are divided into the Stargate Division and the Cosmos Division. Projections for the next year are as follows:
$\begin{array}{lrr}&\text { Stargate }&\text { Cosmos}\\&\text { Division }& \text { Division }& \text { Total }\\ \text {Sales } &\$500,000&\$360,000&\$860,000\\ \text {Less: Variable costs } &\underline{180,000}&\underline{200,000}&\underline{380,000}\\ \text { Contribution margin} &\$320,000&\$160,000&\$480,000\\ \text { Less: Direct fixed costs} &\underline{150,000}&\underline{125,000}&\underline{275,000}\\ \text {Segment margin } &\$170,000&\$35,000&\$205,000\\ \text {Less :Allocated common costs } &\underline{70,000}&\underline{55,000}&\underline{125,000}\\ \text { Operating income (loss)} &\underline{\$100,000}&\underline{\$(20,000)}&\underline{\$80,000}\end{array}$

Operating income for Ranger Corporation, as a whole, if the Cosmos Division were dropped would be

A) $45,000.
B) $80,000.
C) $100,000.
D) $120,000.

Question 49

The operations of Bridgeton Corporation are divided into the Adams Division and the Carter Division. Projections for the next year are as follows:
$\begin{array}{lrr}&\text { Adams }\\&\text { Division }& \text { CarterDivision }& \text { Total }\\ \text {Sales } &\$560,000&\$336,000&\$896,000\\ \text { Variable costs } &\underline{196,000}&\underline{154,000}&\underline{350,000}\\ \text { Contribution margin} &\$364,000&\$182,000&\$546,000\\ \text { Direct fixed costs} &\underline{168,000}&\underline{140,000}&\underline{308,000}\\ \text {Segment margin } &\$196,000&\$42,000&\$238,000\\ \text {Allocated common costs } &\underline{84,000}&\underline{63,000}&\underline{147,000}\\ \text { Operating income (loss)} &\underline{\$112,000}&\underline{\$(21,000)}&\underline{\$91,000}\end{array}$

Operating income for Bridgeton Corporation as a whole if the Carter Division were dropped would be:

A) $133,000.
B) $112,000.
C) $91,000.
D) $49,000.

Question 50

Carter Industries has two divisions: the West Division and the East Division. Information relating to the divisions for the year just ended is as follows:
$\begin{array}{lrr}&\text { West}& \text { East }\\ \text {Units produced and sold } &30,000&40,000\\ \text {Selling price per unit } &\$8&\$15\\ \text { Variable costs per unit } &3&15\\ \text { Direct fixed cost } &48,000&110,000\\ \text { Common fixed cost } &40,000&40,000\\\end{array}$

Common fixed expenses have been allocated equally to each of the two divisions. Carter's segment margin for the West Division is:

A) $150,000.
B) $102,000.
C) $30,000.
D) $110,000.

Question 51

Which of the following statements about the theory of constraints is (are) true?
(A) The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective.
(B) The theory of constraints focuses on the rate of throughput contribution and minimizing investment and other operating costs.

A) Only A
B) Only B
C) Neither of these is true.
D) Both of these are true.

Question 52

Which of the following costs would continue to be incurred even if a segment is eliminated?

A) Direct fixed expenses
B) Variable cost of goods sold
C) Common fixed costs
D) Variable selling and administrative expenses

Question 53

Damon Industries manufactures 20,000 components per year. The manufacturing costs of the components was determined as follows:
$\begin{array}{lr}\text { Direct materials } & \$ 100,000 \\\text { Direct labor } & 160,000 \\\text { Variable manufacturing overhead } & 60,000 \\\text { Fixed manufacturing overhead } & 80,000\end{array}$
An outside supplier has offered to sell the component for $17. If Damon purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $10,000. If Damon purchases the component from the supplier instead of manufacturing it, the effect on operating profits would be a:

A) $70,000 increase.
B) $50,000 decrease.
C) $10,000 decrease.
D) $30,000 increase.

Question 54

AirStep Shoe Company has two retail stores, one in Gainesville and the other in Orlando. The Gainesville store had sales of $100,000, a contribution margin of 35 percent, and a segment margin of $14,000. The company's two stores have total sales of $250,000, contribution margin of 32 percent, and a total segment margin of $31,000. The contribution margin for the Orlando store must have been:

A) $65,000.
B) $170,000.
C) $105,000.
D) $45,000.

Question 55

The practice of setting the selling price below cost with the intent to drive competitors out of business is:

A) predatory pricing.
B) target pricing.
C) target costing.
D) peak-load pricing.

Question 56

Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows:
$$\begin{array} { l r } \text { Direct materials } & \$ 150,000 \\\text { Direct labor } & 240,000 \\\text { Variable maruffacturing overhead } & 90,000 \\\text { Fixed marnufacturing overhead } & \underline{120,000} \\\text { Total } & \underline{\$ 600,000} \\\end{array}$$

-
Assume that the fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Ortega for $34. If Ortega Industries purchases the component from the outside supplier, the effect on operating profits would be a:

A) $30,000 decrease.
B) $30,000 increase.
C) $90,000 decrease.
D) $90,000 increase.

Question 57

The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000.
$$\begin{array} { l r } \text { Direct materials } & \$ 20,000 \\\text { Direct labor } & 55,000 \\\text { Variable overhead } & 45,000 \\\text { Fixed overhead } & \underline{ 70,000} \\ \text { Total } &\underline{ \$ 190,000}\\\end{array}$$
The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $15,000 per year.

-At what price would Camel be indifferent to Yukon's offer?

A) $17.00.
B) $17.50.
C) $18.50.
D) $19.50.

Question 58

The time from initial research and development to the time that support to the customer ends is the:

A) product life cycle.
B) short run.
C) target time.
D) predatory price.

Question 59

The Hammer Division of Excel Company produces hardened sledge hammers. One-third of Hammer's output is sold to the Government Products Division of Excel; the remainder is sold to outside customers. Hammer's estimated operating profit for the year is: $\begin{array}{lrr}&\text { Government }\\&\text { Products } & \text { Outside } \\&\text { Division } & \text { Customers }\\ \text { Sales } &\$15,000&\$40,000\\ \text {Variable costs } &(10,000)&(20,000)\\ \text { Fixed costs } &\underline{(3,000)}&\underline{(6,000)}\\ \text { Operating profits } &\underline{\underline{\$2,000}}&\underline{\underline{\$14,000}}\\ \text { Unit sales} &10,000&20,000\\\end{array}$
The Government Products Division has an opportunity to purchase 10,000 hammers of the same quality from an outside supplier on a continuing basis. The Hammer Division cannot sell any additional products to outside customers. Should the Excel Company allow its Government Products Division to purchase the hammers from the outside supplier at $1.25 per unit?

A) No; making the hammers will save Excel $1,500.
B) Yes; buying the hammers will save Excel $1,500.
C) No; making the hammers will save Excel $2,500.
D) Yes; buying the hammers will save Excel $2,500.

Question 60

The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000.
$$\begin{array} { l r } \text { Direct materials } & \$ 20,000 \\\text { Direct labor } & 55,000 \\\text { Variable overhead } & 45,000 \\\text { Fixed overhead } &\underline{ 70,000} \\ \text { Total } &\underline{ \$ 190,000}\\\end{array}$$
The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $15,000 per year.

- What are the relevant costs for the "make" alternative?

A) $160,000.
B) $165,000.
C) $175,000.
D) $185,000.

Question 61

The Lamar Company manufactures wiring tools. The company is currently producing well below its full capacity. The Boston Company has approached Lamar with an offer to buy 10,000 tools at $1.75 each. Lamar sells its tools wholesale for $1.85 each; the average cost per unit is $1.83, of which $0.27 is fixed costs. If Lamar were to accept Boston's offer, what would be the increase in Lamar's operating profits?

A) $800
B) $1,000
C) $1,900
D) $2,900

Question 62

The Tire Division of Traker Company produces tires for off-road sport vehicles. One-third of Tire's output is sold to an internal division of Traker; the remainder is sold to outside customers. Tire's estimated operating profit for the year is:
$\begin{array}{lrr}&\text {Internal}&\text { Outside}\\ \text {Sales } &\$150,000&\$40,000\\ \text { Variable costs } &100,000&200,000\\ \text { Fixed costs} &\underline{30,000}&\underline{60,000}\\ \text { Operating profits} &\underline{\$20,000}&\underline{\$140,000}\\ \text {Unit sales } &10,000&20,000\\\end{array}$


-
The internal division has an opportunity to purchase 10,000 tires of the same quality from an outside supplier on a continuing basis. The Tire Division cannot sell any additional products to outside customers. Should Traker Company allow its internal division to purchase the tires from the outside supplier at $13.00 per unit?

A) No; making the tires will save Traker $15,000.
B) Yes; buying the tires will save Traker $15,000.
C) No; making the tires will save Traker $30,000.
D) Yes; buying the tires will save Traker $30,000.

Question 63

The following information relates to the Jasmine Company for the upcoming year, based on 400,000 units:
$\begin{array}{lrr}&\text { Amount}&\text { Per Unit}\\\text { Sales } & \$ 8,000,000 & \$ 20.00\\\text { Cost of goods sold } & \underline{6,400,000} & \underline{16.00 }\\\text { Gross margin } &1,600,000& 4.00 \\\text { Operating expenses } &\underline{ 600,000 }&\underline{ 1.50} \\\text { Operating profits } & \underline{ \$ 1,000,000} &\underline{ \$2.50}\end{array}$

The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00 per unit has been made to Jasmine.

- Fortunately, there will be no additional operating expenses associated with the order and Jasmine has sufficient capacity to handle the order. How much will operating profits increase if Jasmine accepts the special order?

A) $50,000
B) $125,000
C) $200,000
D) $250,000

Question 64

The Tire Division of Traker Company produces tires for off-road sport vehicles. One-third of Tire's output is sold to an internal division of Traker; the remainder is sold to outside customers. Tire's estimated operating profit for the year is:
$\begin{array}{lrr}&\text {Internal}&\text { Outside}\\ \text {Sales } &\$150,000&\$40,000\\ \text { Variable costs } &100,000&200,000\\ \text { Fixed costs} &\underline{30,000}&\underline{60,000}\\ \text { Operating profits} &\underline{\$20,000}&\underline{\$140,000}\\ \text {Unit sales } &10,000&20,000\\\end{array}$



-
The internal division has an opportunity to purchase 10,000 tires of the same quality from an outside supplier on a continuing basis. The Tire Division cannot sell any additional products to outside customers. What is the minimum selling price that Tire should accept from the internal division?

A) $10.00.
B) $13.00.
C) $15.00.
D) $50.00.

Question 65

The Rapid Delivery Service is considering the expansion of its business into afternoon retail delivery service. This would require an additional $25,000 in labor costs per month. Company-owned vehicles now used to make morning deliveries to local manufacturers could be used in the afternoons to make retail deliveries. However, it is estimated that an additional $10,000 would be required per month for gas, oil, and maintenance. It is further estimated that the retail delivery use of the trucks would be allocated 45% of the existing $13,000 fixed vehicle costs. What is the differential delivery cost per month for expanding into the retail delivery market?

A) $25,000.
B) $35,000.
C) $39,500.
D) $40,850.

Question 66

The Garrison Company manufactures two products: Oxy Cleaner and Sonic Cleaner. The costs and revenues are as follows:
$$\begin{array} { l r r } & \text { Oxy } & \text { Sonic } \\& \text { Clearner } & \text { Clearner } \\\text { Sales Price } & \$ 75 & \$ 44 \\\text { Variable cost per unit } & 40 & 21\end{array}$$
Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine hours is a scarce resource. During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while Sonic requires 2.5 machine hours per unit.

-
How many units of Oxy and Sonic should Garrison produce?
$\begin{array} { l r r } & \text { Oxy Clearier } & { \text { Sonic Clearner } } \\\end{array}$
A. $\begin{array} { l r r } && 10,000 &&&&& 0 \\\end{array}$
B. $\begin{array} { l r r } &&& 0 &&&&&& 6,000 \\\end{array}$
C. $\begin{array} { l r r } && 8,750 &&&&& 6,000 \\\end{array}$
D. $\begin{array} { l r r } && 10,000 &&&&& 6,000 \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 67

The Bogart Company produces 5,000 units of item SLM 46 annually at a total cost of $200,000.
$$\begin{array} { l r } \text { Direct materials } & \$ 20,000 \\\text { Direct labor } & 55,000 \\\text { Variable overhead } & 45,000 \\\text { Fixed overhead } &\underline{ 80,000 }\\\text { Total } & \underline{ \$ 200,000} \\\end{array}$$
The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If Bogart accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's leased facilities could be vacated, reducing lease payments by $30,000 per year.

-At what price would Bogart be indifferent to Conner's offer?

A) $40.
B) $38.
C) $35.
D) $24.

Question 68

The Young Company has gathered the following information for a unit of its most popular product:
$$\begin{array} { l r } \text { Direct materials } & \$ 12 \\\text { Direct labor } & 6 \\\text { Overhead (40\% variable) } &\underline{ 10} \\ \text { Cost to marnufacture } & 28 \\\text { Desired markup (50\%) } &\underline{ 14} \\ \text { Target selling price } &\underline{ \$ 42 }\\\end{array}$$
The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit.

- The distributor claims this special order would not disturb regular sales at $42. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. How many units of regular sales could be lost before this contract is not profitable?

A) 0 units
B) 950 units
C) 1,000 units
D) 2,000 units

Question 69

Zantaq Inc. has 5,400 machine hours available each month. The following information on the company's three products is available:
$$\begin{array} { l c r r } & & & \text { Side } \\& \text { Bookcases } & \text { Chairs } & \text { Tables }\\\text { Contribution margin per unit } &\$ 15.00 & \$ 18.00 & \$ 7.50 \\\text { Machine hours per unit } & 3&2&1\end{array}$$

The market demand is limited to 2,000 units of each of the three products.

- What is the maximum possible contribution margin that Zantaq could make in any month?

A) $81,000.
B) $46,500.
C) $43,000.
D) $51,000.

Question 70

Zantaq Inc. has 5,400 machine hours available each month. The following information on the company's three products is available:
$$\begin{array} { l c r r } & & & \text { Side } \\& \text { Bookcases } & \text { Chairs } & \text { Tables }\\\text { Contribution margin per unit } &\$ 15.00 & \$ 18.00 & \$ 7.50 \\\text { Machine hours per unit } & 3&2&1\end{array}$$
The market demand is limited to 2,000 units of each of the three products.

-How many units of each should Zantaq produce and sell?
$\begin{array} { l r r r } & { \text { Bookcases } } & { \text { Chairs } } & { \text { Side Tables } } \\\end{array}$
A. $\begin{array} { l r r r } & 2,000 &&& 2,000 && 2,000 \\\end{array}$
B. $\begin{array} { l r r r } && 0 &&&& 2,000 & &2,000 \\\end{array}$
C. $\begin{array} { l r r r } && 0 &&&& 2,000 && 1,400 \\\end{array}$
D. $\begin{array} { l r r r } & 1,800 &&&& 0 &&&& 0 \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 71

Morgan Inc. has 5,400 machine hours available each month. The following information on the company's three products is available:
$$\begin{array} { l r r r } & \text { Product 1 } & \text { Product 2 } & \text { Product 3 } \\\text { Contribution margin per unit } & \$ 15.00 & \$ 1 8 . 00 & \$ 7 . 5 0\\\text { Machine hours per unit } & 3 & 2 & 1\end{array}$$
If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

A) Product 1 first, product 2 second, and product 3 third.
B) Product 2 first, product 3 second, and product 1 third.
C) Product 3 first, product 2 second, and product 1 third.
D) Product 3 first, product 1 second, and product 2 third.

Question 72

The Bogart Company produces 5,000 units of item SLM 46 annually at a total cost of $200,000.
$$\begin{array} { l r } \text { Direct materials } & \$ 20,000 \\\text { Direct labor } & 55,000 \\\text { Variable overhead } & 45,000 \\\text { Fixed overhead } &\underline{ 80,000} \\\text { Total } & \underline{ \$ 200,000} \\\end{array}$$
The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If Bogart accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's leased facilities could be vacated, reducing lease payments by $30,000 per year.

-What are the relevant costs for the "make" alternative?

A) $120,000.
B) $175,000.
C) $190,000.
D) $200,000.

Question 73

The Garrison Company manufactures two products: Oxy Cleaner and Sonic Cleaner. The costs and revenues are as follows:
$$\begin{array} { l r r } & \text { Oxy } & \text { Sonic } \\& \text { Clearner } & \text { Clearner } \\\text { Sales Price } & \$ 75 & \$ 44 \\\text { Variable cost per unit } & 40 & 21\end{array}$$
Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine time is a scarce resource. During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while Sonic requires 2.5 machine hours per unit.

-
What is the maximum contribution margin Garrison can achieve during a year?

A) $444,250.
B) $1,014,000.
C) $488,000.
D) $855,500.

Question 74

The theory of constraints focuses on minimizing all of the following except:

A) selling expenses per unit sold.
B) production bottlenecks.
C) investment in buildings.
D) investment in inventories.

Question 75

Xenos Inc. has 6,600 machine hours available each month. The following information on the company's three products is available:
$$\begin{array} { l r r r } & \text { Product X } & \text { Product Y } & \text { Product Z } \\\text { Contribution margin per unit } & \$ 20.00 & \$ 2 1 . 0 0 & \$ 1 7 . 50\\\text { Machine hours per urit } & 2 & 3 & 2\end{array}$$
If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

A) Product X first, product Z second, and product Y third.
B) Product Y first, product Z second, and product X third.
C) Product Y first, product X second, and product Z third.
D) Product Z first, product X second, and product Y third.

Question 76

Warrior Inc. has 12,000 machine hours available each month. The following information on the company's four products is available:
$\begin{array}{lrrrrrr}&\text { Product W }&\text { Product X }&\text { Product Y }&\text { ProductZ}&\\\text { Selling price per unit } & \$ 20.00 & \$ 21.00 & \$ 17.50 & \$ 15.00 \\\text { Variable cost per unit } & \$ 10.00& \$ 9.00 & \$ 7.50 & \$ 10.00 \\\text { Machine hours per unit } & 2 & 3 &4 &1.5 \\\end{array}$

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

A) Product W first, product X second, product Z third, and product Y last.
B) Product Z first, product W second, product X third, and product Y last.
C) Product X first, product W second, product Y third, and product Z last.
D) Product X first, product Z second, product Y third, and product W last.

Question 77

The Widner Company manufactures two products: Stainless Serving Spoons and Stainless Serving Forks. The costs and revenues are as follows:
$$\begin{array} { l c c } & \text { Spoons } & \text { Forks } \\\text { Sales price } & \$ 150 & \$ 88 \\\text { Variable cost per urit } & 80 & 42\end{array}$$
Total demand for Spoons is 14,000 units and for Forks is 9,000 units. Machine time is a scarce resource. During the year, 54,000 machine hours are available. Spoons require 5 machine hours per unit, while Forks require 3 machine hours per unit.
How many units of Spoons and Forks should Widner produce?
$\begin{array} { l r r } &{ \text { Spoons } } & { \text { Forks } } \\\end{array}$
A. $\begin{array} { l r r } & 14,000 &0 \\\end{array}$
B. $\begin{array} { l r r } & 8,307 & 4,154 \\\end{array}$
C. $\begin{array} { l r r } & 10,800 &0\\\end{array}$
D. $\begin{array} { l r r } & 5,400 & 9,000 \\\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 78

The following information relates to a product produced by Orca Company:
$$\begin{array} { l r } \text { Direct materials } & \$ 20 \\\text { Direct labor } & 14 \\\text { Variable overhead } & 12 \\\text { Fixed overhead } &\underline{ 16} \\ \text { Unit cost } &\underline{ \$ 62 }\\\end{array}$$
Fixed selling costs are $1,000,000 per year. Although production capacity is 500,000 units per year, Orca expects to produce only 400,000 units next year. The product normally sells for $80 each. A customer has offered to buy 60,000 units for $60 each. The customer will pay the transportation charge on the units purchased. If Orca accepts the special order, the effect on operating profits would be a:

A) $120,000 increase.
B) $360,000 increase.
C) $840,000 increase.
D) $1,200,000 decrease.

Question 79

The following information relates to the Jasmine Company for the upcoming year:Sales
$\begin{array}{lrr}&\text { Amount}&\text { Per Unit}\\\text { Sales } & \$ 8,000,000 & \$ 20.00\\\text { Cost of goods sold } & \underline{6,400,000} & \underline{16.00 }\\\text { Gross margin } &1,600,000& 4.00 \\\text { Operating expenses } &\underline{ 600,000 }&\underline{ 1.50} \\\text { Operating profits } & \underline{ \$ 1,000,000} &\underline{ \$2.50}\end{array}$


The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00 per unit has been made to Jasmine.

-Fortunately, there will be no additional operating expenses associated with the order; however, Jasmine is operating at full capacity. How much will operating profits increase if Jasmine accepts the special order?

A) $50,000.
B) $125,000.
C) $200,000.
D) Operating profits will not increase as a result of accepting the special order.

Question 80

The Young Company has gathered the following information for a unit of its most popular product:
$$\begin{array} { l r } \text { Direct materials } & \$ 12 \\\text { Direct labor } & 6 \\\text { Overhead (40\% variable) } & \underline{ 10 }\\ \text { Cost to marnufacture } & 28 \\\text { Desired markup (50\%) } &\underline{ 14 }\\ \text { Target selling price } &\underline{ \$ 42 }\\\end{array}$$
The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit.

- This special order would not disturb regular sales. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. If the special order is accepted, Young's operating profits will increase by:

A) $4,000.
B) $6,400.
C) $8,000.
D) $19,000.