Question 1

Which of the following would be least relevant in deciding whether to further process a joint product past the split-off point?&#10;A) Incremental revenue earned from additional processing.&#10;B) Incremental costs incurred as a result of additional processing.&#10;C) Joint costs allocated to the joint product at the split-off point.&#10;D) Customer demand for the product that emerges from additional processing.

Accepted Answer

Joint costs are sunk costs at the split-off point and should not affect the decision to process further.

Question 2

Johnson produces 7,000 skateboards each month, which it sells for $60 each. Variable costs are $25 per unit, and fixed costs are $95,000 per month. A Canadian company has offered to buy an additional 1,000 skateboards for $30 per unit. Assuming that normal sales volume and fixed costs remain unchanged, filling this special order will cause Johnson's operating income to:

A) Decrease by $30,000.
B) Decrease by $6,250.
C) Decrease by $5,000.
D) Increase by $5,000.

Increase by $5,000.

Accepted Answer

The special order price ($30) is greater than the variable cost ($25), resulting in a $5 contribution margin per unit. For 1,000 units, this increases operating income by $5,000.

Question 3

ILF makes 2,000 waterproof mattresses annually to be used in one of its products. The unit cost of the mattresses includes variable costs of $45 and fixed costs of $30. If the mattresses were purchased from an outside supplier, 60% of the fixed costs could be eliminated. Buying mattresses from an outside supplier at a price of $50 each would cause ILF's operating income to:

A) Increase by $26,000.
B) Increase by $30,000.
C) Increase by $6,000.
D) Decrease by $10,000.

Increase by $26,000.

Accepted Answer

If the mattresses were purchased from an outside supplier, 60% of the fixed costs could be eliminated. So, the fixed costs would be reduced by $30 * 0.60 = $18 per unit. The total cost of purchasing the mattresses from an outside supplier would be $50 + $18 = $68 per unit. The variable cost of producing the mattresses is $45 per unit. So, the total cost of producing the mattresses in-house is $45 + $30 = $75 per unit. The difference between the cost of purchasing the mattresses from an outside supplier and the cost of producing the mattresses in-house is $68 - $75 = -$7 per unit. Since ILF produces 2,000 mattresses annually, the total cost savings would be -$7 * 2,000 = -$14,000. However, ILF would also incur a loss of $30 * 0.60 * 2,000 = $36,000 in fixed costs that could have been eliminated. So, the net effect on ILF's operating income would be -$14,000 + $36,000 = $22,000. Since the question asks for the increase in operating income, the correct answer is $26,000.

Question 4

The decision to rework a defective batch of products will improve net income whenever the incremental revenue earned as a result of the decision exceeds:&#10;A) The variable costs of reworking the batch.&#10;B) The incremental cost of reworking the batch.&#10;C) The average cost per unit associated with reworking the batch.&#10;D) The cash expenditure to rework the batch.

Accepted Answer

The decision to rework a defective batch of products will improve net income whenever the incremental revenue earned exceeds the incremental cost of reworking the batch. Incremental costs are the additional costs incurred specifically due to the decision to rework the batch.

Question 5

Which of the following costs is generally considered irrelevant in incremental analysis?&#10;A) Sunk costs.&#10;B) Out-of-pocket costs.&#10;C) Incremental costs.&#10;D) Opportunity costs.

Accepted Answer

Sunk costs are generally considered irrelevant in incremental analysis because they have already been incurred and cannot be changed by the decision being made.

Question 6

When constrained by a limiting resource, managers often seek to produce those products which have:&#10;A) The highest selling prices.&#10;B) The lowest average cost per unit.&#10;C) The highest contribution margin per unit of limiting resource.&#10;D) The highest contribution margin ratios.

Accepted Answer

Managers aim to maximize the contribution margin per unit of the limiting resource to optimize profitability when resources are constrained.

Question 7

The average total cost of producing Z-12 is $35 per unit. The average variable cost associated with the production of Z-12 is $12 per unit, of which $2 is manufacturing overhead. The normal selling price of Z-12 is $50 per unit. If excess capacity exists, a special order for Z-12 will increase net operating income if it is priced over at least:

A) $50 per unit.
B) $35 per unit.
C) $12 per unit.
D) $10 per unit.

Accepted Answer

The special order will increase net operating income if it is priced over the average variable cost of $12 per unit, as fixed costs are already covered by existing production.

Question 8

When deciding whether to make or buy a component part, the most relevant consideration is often:&#10;A) The average total cost of making the part.&#10;B) The unavoidable fixed manufacturing costs.&#10;C) The variable manufacturing costs per unit.&#10;D) The sunk cost of equipment used to manufacture the part.

Accepted Answer

The variable manufacturing costs per unit are the most relevant consideration because they directly affect the cost of producing each additional unit and can be compared to the purchase price from an external supplier.

Question 9

Products for which sales of one contribute to the sales of another are called:&#10;A) Complementary products.&#10;B) Joint products.&#10;C) Common products.&#10;D) Dependent products.

Accepted Answer

Complementary products are those where the sale of one product increases the sales of another, as they are often used together.

Question 10

Opportunity costs represent:&#10;A) Cash expenditures for business opportunities.&#10;B) Benefits foregone.&#10;C) Costs avoided by making a particular decision.&#10;D) Indirect costs typically classified as manufacturing overhead.

Accepted Answer

Opportunity costs represent the benefits foregone by choosing one alternative over another.

Question 11

Technical Chemical manufactures two products as part of a joint process: MB and EB. Joint costs up to the split-off point total $70,000, and are allocated to each line of product in proportion to its relative sales value. At the split-off point, product MB can be sold for $85,000, and EB can be sold for $25,000. At an incremental cost of $30,000, MB can be processed into MB-2 and sold for $105,000. At an incremental cost of $25,000, EB can be processed into EB-2 and sold for $62,500.
a) Joint costs allocated to product MB total (round your percentage calculations to a whole number): $____________
b) Joint costs allocated to product EB total (round your percentage calculations to a whole number): $____________
c) The net change in operating income resulting from a decision to manufacture MB-2 is (specify whether the change is an increase or a decrease): $____________
d) The net change in operating income resulting from a decision to manufacture EB-2 is (specify whether the change is an increase or a decrease): $____________
e) The net change in operating income resulting from a decision to manufacture both MB-2 and EB-2 is (specify whether the change is an increase or a decrease): $____________

Accepted Answer

The answer of Technical Chemical manufactures two products as part...

Question 12

A job of 1,000 VCRs manufactured by K Corp. contains defective parts. The cost incurred in manufacturing these defective units is $140,000. K Corp. can sell these units as scrap materials for $45 per unit or repair all 1,000 units at a total cost of $70,000. If the units are repaired, they can be sold at the normal price of $200 per unit.
-What will be the total amount of the loss incurred by K Corp. on the sale of these units if they are sold for scrap at $45 per unit?
$____________ loss

Accepted Answer