Deck 6: Relevant Information for Decision Making With a Focus on Operational Decisions

Question 1

Mary is considering leaving her current position to open an ice cream shop.Mary's current annual salary is $77,000.Annual ice cream shop revenue and costs are estimated at $260,000 and $210,000,respectively.What is Mary's annual opportunity cost of starting the ice cream shop?

A) $50,000
B) $77,000
C) $210,000
D) $260,000

Answer 1

B

Question 2

Marianne Company has an idle machine that originally cost $200,000.The book value of the machine is $100,000.The company is considering three alternative uses of the idle machine:
Alternative 1: Disposal of machine.Disposal value of machine is $50,000.
Alternative 2: Use the idle machine to increase production of Product A.Contribution margin from additional sales of Product A is estimated to be $60,000.
Alternative 3: Use the idle machine to increase production of Product B.Contribution margin from additional sales of Product B is estimated to be $70,000.
When considering Alternative 2,what is the opportunity cost of the idle machine?

A) $50,000
B) $60,000
C) $70,000
D) $110,000

Answer 2

C

Question 3

Johnston Company wants to double production of Product X from 1,000 units to 2,000 units.The variable manufacturing cost per unit is $10.The variable nonmanufacturing cost per unit is $20.There are no fixed costs.The selling price per unit is $50.What is the incremental cost of the proposed change?

A) $10,000
B) $20,000
C) $30,000
D) $60,000

Answer 3

C

Question 4

The salary foregone by a person who quits a job to start a business is an example of a(n)________.

A) sunk cost
B) opportunity cost
C) depreciable cost
D) outlay cost

Question 5

Nestle Company paid $130,000 for a machine used to mill oats.The annual contribution margin from oat sales is $60,000.The machine could be sold for $80,000.The opportunity cost of producing the oats is ________.

A) $20,000
B) $60,000
C) $80,000
D) $130,000

Question 6

The key to determining the financial difference between two alternative courses of action is to identify the ________.

A) opportunity cost of each alternative
B) marginal cost
C) differential costs and revenues
D) joint cost of both alternatives

Question 7

When evaluating alternative uses of a capital asset,equivalent decisions are reached using the opportunity cost approach and ________.

A) cost-volume-profit analysis
B) contribution margin approach
C) absorption costing approach
D) incremental analysis

Question 8

Marjorie Company has an idle machine that originally cost $200,000.The book value of the machine is $100,000.The company is considering three alternative uses of the idle machine:
Alternative 1: Disposal of machine.Disposal value of machine is $50,000.
Alternative 2: Use the idle machine to increase production of Product A.Contribution margin from additional sales of Product A is estimated to be $60,000.
Alternative 3: Use the idle machine to increase production of Product B.Contribution margin from additional sales of Product B is estimated to be $70,000.
When considering Alternative 3,what is the opportunity cost of the idle machine?

A) $50,000
B) $60,000
C) $70,000
D) $110,000

Question 9

Differential cost is the difference in ________ between two alternatives.

A) average cost
B) marginal cost
C) median cost
D) total cost

Question 10

Determining the opportunity cost of a project depends on the alternatives available.

Question 11

Nancy Company has an idle machine that originally cost $200,000.The book value of the machine is $100,000.The company is considering three alternative uses of the idle machine:
Alternative 1: Disposal of machine.Disposal value of machine is $50,000.
Alternative 2: Use the idle machine to increase production of Product A.Contribution margin from additional sales of Product A is estimated to be $60,000.
Alternative 3: Use the idle machine to increase production of Product B.Contribution margin from additional sales of Product B is estimated to be $70,000.
When considering the opportunity cost of the idle machine,what is the net financial benefit from Alternative 3?

A) $10,000
B) $20,000
C) $50,000
D) $70,000

Question 12

An opportunity cost is ________.

A) the additional costs generated by a proposed alternative
B) the difference in total cost between two alternatives
C) a cash disbursement in the future
D) the maximum available benefit foregone by using a resource for a particular purpose instead of the best alternative use

Question 13

Opportunity costs and outlay costs are widely used synonyms.

Question 14

Incremental benefits are the ________ generated by a proposed alternative.

A) reduced revenues
B) additional costs
C) additional profits
D) additional revenues or reduced costs

Question 15

Differential revenue is the difference in ________ between two alternatives.

A) average revenue
B) marginal revenue
C) median revenue
D) total revenue

Question 16

A proposed project will require the use of ten machines in a company.Each machine has five alternative uses.What is the simplest way to evaluate the desirability of the project?

A) incremental analysis
B) cost-volume-profit analysis
C) opportunity cost approach
D) scarce resource approach

Question 17

The term opportunity cost applies to a resource that a company ________.

A) is thinking about purchasing
B) already owns only
C) has committed to purchase only
D) already owns or has committed to purchase

Question 18

Jeffrey Company wants to double production of Product X from 1,000 units to 2,000 units.The variable manufacturing cost per unit is $10.The variable nonmanufacturing cost per unit is $20.There are no fixed costs.The selling price per unit is $50.What is the incremental revenue of the proposed change?

A) $10,000
B) $20,000
C) $30,000
D) $50,000

Question 19

Incremental costs are the ________ generated by a proposed alternative.

A) additional revenues
B) additional revenues or reduced costs
C) reduced costs
D) additional costs or reduced revenues

Question 20

Sue is considering leaving her current position to open a coffee shop.Sue's current annual salary is $83,000.Annual coffee shop revenue and costs are estimated at $260,000 and $210,000,respectively.What is Sue's opportunity cost of staying at her current work position?

A) $50,000
B) $83,000
C) $210,000
D) $343,000

Question 21

Blue Company is a small company with limited expertise with customer service.Blue Company has a contract with New Company to handle all of Blue Company's customer service needs.For Blue Company,this is an example of ________.

A) technology transfer
B) technology osmosis
C) outsourcing
D) none of the above

Question 22

Benton Company manufactures a part for its production cycle.The costs per unit for 38,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\\\text { Direct materials } & \$ 3.00 \\\text { Direct labor } & 5.00 \\\text { Variable factory overhead } & 3.00 \\\text { Fixed factory overhead } & \underline{4.00} \\\text { Total costs } & \$ 15.00\end{array}$
The fixed factory overhead costs are unavoidable.Assume no other use for the facilities.What is the highest price Benton Company should pay for the part from an outside supplier?

A) $8
B) $11
C) $12
D) $15

Question 23

Thompson Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.Annual variable costs are $300,000.Of the annual fixed costs,$140,000 relate specifically to this part.The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $48 per unit.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $60,000 annually.Alternatively,the facilities could be rented out at $70,000 annually.If Thompson Company makes the part,what is the annual opportunity cost of the facilities?

A) $13,000
B) $28,000
C) $60,000
D) $70,000

Question 24

Potter Company manufactures a part for its production cycle.The annual costs per unit for 10,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\\\text { Direct materials } & \$ 20.00 \\\text { Direct labor } & 15.00 \\\text { Variable factory overhead } & 16.00 \\\text { Fixed factory overhead } & \underline{10.00} \\\text { Total costs }&\$61.00\end{array}$
The fixed factory overhead costs are unavoidable.Paulson Company has offered to sell 10,000 units of the same part to Potter Company for $60 per unit.The facilities currently used to make the part could be rented out to another manufacturer for $100,000 per year.Potter Company should ________.

A) make the part to save $10,000
B) make the part to save $25,000
C) buy the part and rent the facilities to save $10,000
D) buy the part and rent the facilities to save $25,000

Question 25

Kaiman Company currently produces a key part at a total cost of $210,000.Annual variable costs are $170,000.Of the annual fixed costs,$10,000 relate specifically to this part.The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part annually for $200,000.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000 per year.Alternatively,the facilities could be rented out at $60,000 per year.Given all of these alternatives,what is Kaiman Company's lowest net relevant cost for the parts?

A) $130,000
B) $140,000
C) $170,000
D) $180,000

Question 26

Bonneville Company is producing a subassembly used in the production of a product.The costs incurred for the subassembly follow:
$\begin{array}{ll}&\text { Per Unit }\\\text { Direct materials } & \$ 6.00 \\\text { Direct labor } & 4.00 \\\text { Variable factory overhead } & 1.00 \\\text { Fixed supervisor salary } & 3.00 \\\text { Depreciation expense on factory equipment } & 2.00 \\\text { General fixed factory overhead allocated } & \underline{5.00} \\\text { Total costs } & \$ 21.00\end{array}$
The above per unit costs are based on 8,000 units.An outside supplier will provide 8,000 subassemblies for $19 per unit.The supervisor will be terminated if the subassemblies are not produced in house.The idle factory will be used to manufacture another product with a contribution margin of $60,000.What should Bonneville do?

A) make the subassemblies and save $20,000
B) make the subassemblies and save $40,000
C) buy the subassemblies and save $20,000
D) buy the subassemblies and save $40,000

Question 27

Laskowski Company manufactures a part for its production cycle.The annual costs per unit for 5,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\\\text { Direct materials } & \$ 3.00 \\\text { Direct labor } & 5.00 \\\text { Variable factory overhead } & 4.00 \\\text { Fixed factory overhead } & \underline{2.00} \\\text { Total costs } & \$ 14.00\end{array}$
The fixed factory overhead costs are unavoidable.Hendricks Company has offered to sell 5,000 units of the same part to Laskowski Company for $14 per unit.The facilities currently used for the part could be used to make 5,000 units annually of a new product that would contribute $5 a unit to fixed expenses.No additional fixed costs would be incurred with the new product.Laskowski Company should ________.

A) make the part to save $5,000
B) make the part to save $15,000
C) make the new product and buy the part to save $5,000
D) make the new product and buy the part to save $15,000

Question 28

Fixed overhead costs that will continue regardless of a make-or-buy decision are ________ to the make-or-buy decision.

A) relevant
B) irrelevant
C) opportunity costs
D) incremental costs

Question 29

Buddy Company manufactures a part for its production cycle.The costs per unit for 5,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\\\text { Direct materials } & \$ 3.00 \\\text { Direct labor } & 5.00 \\\text { Variable factory overhead } & 4.00 \\\text { Fixed factory overhead } & \underline{4.00} \\\text { Total costs } & \$ 16.00\end{array}$
The fixed factory overhead costs are avoidable.Spalding Company has offered to sell 5,000 units of the same part to Buddy Company for $15 per unit.Assuming no other use for the facilities,Buddy Company should ________.

A) make the part to save $5,000
B) make the part to save $15,000
C) buy the part from Spalding Company to save $5,000
D) buy the part from Spalding Company to save $15,000

Question 30

Corrao Company manufactures a part for its production cycle.The costs per unit for 10,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\\\text { Direct materials } & \$ 20.00 \\\text { Direct labor } & 13.00 \\\text { Variable factory overhead } & 15.00 \\\text { Fixed factory overhead } & \underline{14.00} \\\text { Total costs }&\$62.00\end{array}$
The fixed factory overhead costs are unavoidable.Assuming no other use for the facilities,what is the highest price that Corrao Company should be willing to pay for the part?

A) $33
B) $47
C) $48
D) $62

Question 31

Golden Company manufactures a part for its production cycle.The annual costs per unit for 10,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\\\text { Direct materials } & \$ 20.00 \\\text { Direct labor } & 15.00 \\\text { Variable factory overhead } & 6.00 \\\text { Fixed factory overhead } & \underline{10.00}\\\text { Total costs }&\$51.00\end{array}$
The fixed factory overhead costs are unavoidable.Olson Company has offered to sell 10,000 units of the same part to Golden Company for $55 per unit.The facilities currently used to make the part could be used to make 10,000 units per year of a new product that has a contribution margin of $20 per unit.No additional fixed costs would be incurred with the new product.Golden Company should ________.

A) make the part to save $40,000
B) make the part to save $140,000
C) make the new product and buy the part to save $60,000
D) make the new product and buy the part to save $140,000

Question 32

In make-or-buy decisions for a part for a product,relevant costs include ________.

A) some variable costs of making the part
B) all variable costs of making the part
C) fixed costs that can be avoided in the future if the part is purchased
D) B and C

Question 33

In a make-or-buy decision,which of the following is the fundamental question that is asked in making the decision?

A) What is the difference in present costs between the two alternatives?
B) What is the difference in present revenues between the two alternatives?
C) What is the difference in future revenues between the two alternatives?
D) What is the difference in future costs between the two alternatives?

Question 34

When making a make-or-buy decision for a part used in a product,which of the following item is relevant to the decision?

A) variable costs of making the part
B) contribution margin on new products manufactured in idle area not used for making part
C) rental income from idle plant when not making the part
D) all of the above

Question 35

In a make-or-buy decision for a part for a product,which of the following qualitative factors play a role?

A) quality of purchased part
B) credit terms offered by supplier of part
C) timeliness of delivery of purchased part by supplier
D) all of the above

Question 36

What is the most common value-chain function outsourced in most businesses?

A) production process
B) research and development
C) product design
D) corporate support

Question 37

Dolphin Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.Variable costs are $300,000 annually.Of the annual fixed costs,$140,000 relate specifically to this part.The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $48 per unit.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000 per year.Alternatively,the facilities could be rented out at $60,000 per year.Given all of these alternatives,what is Dolphin Company's lowest net relevant cost for the parts?

A) $420,000
B) $440,000
C) $450,000
D) $480,000

Question 38

Opportunity costs apply to resources that a company has committed to purchase.

Question 39

Christian Company manufactures a part for its production cycle.The annual costs per unit for 5,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\\\text { Direct materials } & \$ 3.00 \\\text { Direct labor } & 5.00 \\\text { Variable factory overhead } & 4.00 \\\text { Fixed factory overhead } & \underline{2.00} \\\text { Total costs } & \$ 14.00\end{array}$
The fixed factory overhead costs are unavoidable.Another company has offered to sell 5,000 units of the same part to Christian Company for $15 per unit.The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year.Christian Company should ________.

A) make the part to save $5,000
B) make the part to save $15,000
C) buy the part and rent facilities to save $5,000
D) buy the part and rent facilities to save $15,000

Question 40

Krakowski Company manufactures a part for its production cycle.The costs per unit for 10,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\\\text { Direct materials } & \$ 20.00 \\\text { Direct labor } & 15.00 \\\text { Variable factory overhead } & 16.00 \\\text { Fixed factory overhead } & \underline{10.00} \\\text { Total costs } & \$ 61.00\end{array}$
The fixed factory overhead costs are unavoidable.Winters Company has offered to sell 10,000 units of the same part to Krakowski Company for $55 per unit.Assuming no other use for the facilities,Krakowski Company should ________.

A) make the part to save $40,000
B) make the part to save $60,000
C) buy the part from Winters Company to save $40,000
D) buy the part from Winters Company to save $60,000

Question 41

Qualitative factors do not affect a make-or-buy decision.

Question 42

Gonzalez Company produces a part that is used in the manufacture of one of its products.The annual costs associated with the production of 5,000 units of this part are as follows:
$\begin{array}{ll}\text { Direct materials } & \$ 100,000 \\\text { Direct labor } & 56,000 \\\text { Variable factory overhead } & 72,000 \\\text { Fixed factory overhead } & \underline{168,000} \\\text { Total costs }&\$396,000\end{array}$
Of the fixed factory overhead costs,$72,000 are avoidable.Another company has offered to sell 5,000 units of the same part to Gonzalez for $70.00 per unit.The facilities currently used to make the part can be rented out to another manufacturer for $72,000 per year.What should Gonzalez Company do?

A) Make the part to save $22,000.
B) Make the part to save $50,000.
C) Buy the part and rent the facilities to save $22,000.
D) Buy the part and rent the facilities to save $72,000.

Question 43

In a make-or-buy decision,if plant facilities will remain idle when the decision is made to outsource a part used in a product,then the opportunity cost of the plant facilities is zero.Assume there are no alternative uses of the plant facilities available.

Question 44

If a department in a department store is eliminated,________ costs will not continue.

A) unavoidable
B) common
C) corporate
D) avoidable

Question 45

Jeff Company produces a part that is used in the manufacture of one of its products.The annual costs associated with the production of 11,000 units of this part are as follows:

A supplier is willing to sell 11,000 units of the part to Jeff Company for $12.50 per unit.When examining the fixed indirect production costs,Jeff Company determines $10,000 is avoidable.
Required:

A) If there are no alternative uses for the facilities, should Jeff Company take advantage of the supplier's offer?
B) If Jeff Company decides to buy the part from the supplier, Jeff Company can rent out the idle facilities for $50,000 per year. Should Jeff Company take advantage of the supplier's offer?

Question 46

Andrea Company manufactures a part for its production cycle.The annual costs per unit for 20,000 units of this part are as follows:

Andrea Company has been approached by a supplier who will sell 20,000 units of the same part for $940,000.All the fixed indirect production costs are unavoidable if Andrea Company ceases production of the part.
Required:

A) Assuming there is no alternative use for the facilities, should Andrea Company buy or make the part?
B) Assume the facilities can be rented out for $100,000 per year. Should Andrea Company buy the part? If so, how much money will be saved?

Question 47

Fast Company has just decided to outsource the production of a part for a product.Assume Fast Company leaves the area of the manufacturing plant idle where it was producing the outsourced part.It has no alternative uses of the plant.What is the opportunity cost of the idle area of the manufacturing plant to Fast Company?

A) zero
B) definitely a negative number
C) the disposal value of the entire manufacturing plant
D) none of the above

Question 48

If a department in a department store is under consideration to be eliminated,unavoidable fixed expenses are ________ to the decision.

A) incremental
B) marginal
C) relevant
D) irrelevant

Question 49

Outsourcing is the purchase of products or services by a company from an outside supplier.

Question 50

Bally Company has three product lines: A,B and C.The following annual information is available:
$\begin{array}{llll}&\text { Product A }&\text { Product B }&\text { Product C }\\\text { Sales } & \$ 60,000 & \$ 90,000 & \$ 24,000 \\\text { Variable costs } & \underline{36,000} & \underline{48,000} & 20,000\\\text { Contribution margin } & 24,000 & 42,000 & 4,000 \\\text { Avoidable fixed costs } & 9,000 & 18,000 & 3,000 \\\text { Unavoidable fixed costs } & 6,000 & 9,000 & 2,400\\\text { Operating income(loss) }&\$9,000&\$15,000&\$(1,400)\end{array}$
Assume Bally Company drops Product C.What will happen to operating income?

A) increase by $1,400
B) increase by $3,800
C) decrease by $1,000
D) decrease $1,400

Question 51

Cesar Company has three product lines: A,B and C.The following annual information is available:
$\begin{array}{llll}&\text { Product A }&\text { Product B }&\text { Product C }\\\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 44,000 \\\text { Variable costs } & \underline{76,000} & \underline{48,000} & \underline{35,000}\\\text { Contribution margin } & 24,000 & 42,000 & 9,000 \\\text { Avoidable fixed costs } & 9,000 & 18,000 & 3,000 \\\text { Unavoidable fixed costs } & 6,000 & 9,000 & 7,700\\\text { Operating income(loss) }&\$9,000&\$15,000&\$(1,700)\end{array}$
Assume Cesar Company drops Product C.Cesar Company then doubles the production and sales of Product B without increasing fixed costs.What will happen to operating income?

A) increase by $15,000
B) increase by $24,000
C) increase by $36,000
D) increase by $42,000

Question 52

Davidson Company produces a part that is used in the manufacture of one of its products.The costs associated with the production of 5,000 units of this part are as follows:
$\begin{array}{ll}\text { Direct materials } & \$ 108,000 \\\text { Direct labor } & 156,000 \\\text { Variable factory overhead } & 70,000 \\\text { Fixed factory overhead } & \underline{168,000} \\\text { Total costs }&\$502,000\end{array}$
Of the fixed factory overhead costs,$72,000 are avoidable.Assuming there is no other use for the facilities.What is the highest price Davidson Company should be willing to pay for 5,000 units of the part?

A) $264,000
B) $334,000
C) $406,000
D) $502,000

Question 53

Department A covers one section of a large factory building.Which of the following costs is relevant to the decision to eliminate Department A?

A) Heating expenses of building allocated to Department A
B) General corporate overhead allocated to Department A
C) Depreciation Expense on store building allocated to Department A
D) Salary Expense of Supervisor in Department A; he only works in Department A

Question 54

The most recent income statement for the Venetian Branch of Palm Harbor Bank is presented below:
$\begin{array}{ll}\text { Sales } & \$ 57,000 \\\text { Variable costs } & 31,500\\\text { Contribution margin } & 25,500 \\\text { Avoidable fixed costs } & 13,500 \\\text { Unavoidable fixed costs } & 20,000\\\text { Operating loss }&\$(8,000)\end{array}$
Palm Harbor Bank is thinking about eliminating the Venetian Branch.If the branch is eliminated,Palm Harbor Bank's operating income will ________.

A) increase by $8,000
B) increase by $25,500
C) decrease by $12,000
D) decrease by $31,500

Question 55

Each year,Madsen Company purchases 8,000 units of a part that it needs for production of its product.The supplier notified Madsen Company that a price increase will take effect shortly,which will bring the price of the part to $25 per part.Madsen Company is considering the use of idle facilities to produce the part.The annual production costs to produce the needed 8,000 parts are as follows:

The idle facilities could also be rented out at an annual rent of $99,000.All the fixed indirect production costs are avoidable.
Required:
Determine if Madsen Company should buy the part or produce it internally.

Question 56

The most recent income statement for the South Branch of First Financial Bank is presented below:
$\begin{array}{ll}\text { Sales } & \$ 57,000 \\\text { Variable costs } & 31,500\\\text { Contribution margin } & 25,500 \\\text { Avoidable fixed costs } & 13,500 \\\text { Unavoidable fixed costs } & 18,000\\\text { Operating loss }&\$(6,000)\end{array}$
First Financial Bank is thinking about eliminating the South Branch.If the branch is eliminated,First Financial Bank's operating income will ________.

A) increase by $6,000
B) increase by $25,500
C) decrease by $12,000
D) decrease by $31,500

Question 57

If a department in a grocery store is under consideration to be eliminated,which of the following cost(s)is(are)NOT relevant to the decision?

A) avoidable fixed expenses
B) unavoidable costs
C) common costs
D) B and C

Question 58

Madison Company produces a part that is used in the manufacture of one of its products.The costs associated with the production of 5,000 units of this part are as follows:
$\begin{array}{ll}\text { Direct materials } & \$ 108,000 \\\text { Direct labor } & 156,000 \\\text { Variable factory overhead } & 72,000 \\\text { Fixed factory overhead } & 168,000\\\text { Total costs }&\$504,000\end{array}$
Of the fixed factory overhead costs,$72,000 are avoidable.Middleton Company has offered to sell 5,000 units of the same part to Madison for $87.00 per unit.Assuming there is no other use for the facilities,Madison Company should ________.

A) make the part to save $24,000
B) make the part to save $27,000
C) buy the part to save $24,000
D) buy the part to save $27,000

Question 59

Sahara Industries has three product lines: A,B and C.The following annual information is available:
$\begin{array}{llll}&\text { Product A }&\text { Product B }&\text { Product C }\\\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 88,000 \\\text { Variable costs } & 76,000 & 48,000 & 79,000\\\text { Contribution margin } & 24,000 & 42,000 & 9,000 \\\text { Avoidable fixed costs } & 9,000 & 18,000 & 3,000 \\\text { Unavoidable fixed costs } & 6,000 & 9,000 & 9,400\\\text { Operating income(loss) }&\$9,000&\$15,000&\$(3,400)\end{array}$
Sahara Industries is thinking about dropping Product C because it is reporting a loss.Assume Sahara Industries drops Product C and the space formerly used to produce Product C is rented out for $15,000 per year.What will happen to operating income?

A) increase by $6,600
B) increase by $9,000
C) increase by $14,400
D) increase by $15,000

Question 60

Central Industries has three product lines: A,B and C.The following information is available:
$\begin{array}{llll}&\text { Product A }&\text { Product B }&\text { Product C }\\\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 44,000 \\\text { Variable costs } & 76,000 & 48,000 & 35,000 \\\text { Contribution margin } & 24,000 & 42,000 & 9,000 \\\text { Avoidable fixed costs } & 9,000 & 18,000 & 3,000 \\\text { Unavoidable fixed costs } & \underline{6,000} & \underline{9,000} & \underline{7,700}\\\text { Operating income(loss) }&\$9,000&\$15,000&\$(1,700)\end{array}$
Central Industries is thinking about dropping Product C because it is reporting a loss.Assume Central Industries drops Product C and does not replace it.What will happen to operating income?

A) increase by $600
B) increase by $2,400
C) decrease by $6,000
D) decrease by $9,000

Question 61

When adding or dropping a product line,variable costs are the only relevant costs.

Question 62

When deciding whether to add or delete a department,managers should keep the department as long as ________ from the department exceeds ________.

A) contribution margin; variable costs
B) contribution margin; common costs
C) contribution margin; avoidable fixed costs
D) contribution margin; unavoidable fixed costs

Question 63

Variable expenses are divided into avoidable and unavoidable costs.

Question 64

________ are relevant in deciding whether to add or delete a department from a department store.

A) Avoidable fixed expenses
B) Common costs
C) Unavoidable fixed expenses
D) None of the above

Question 65

Olson Company has three departments.Data for the most recent year is presented below:

Olson Company is considering eliminating Dept.C because it is operating at a loss.
Required:

A) Compute the change in operating income if Olson Company eliminates Dept. C and does not replace it.
B) Compute the change in operating income if Olson Company eliminates Dept. C and doubles the sales of Dept. T without increasing fixed costs.

Question 66

A company has 10,000 hours of capacity and manufactures two products.Product 1 takes 2 hours per unit.Product 2 takes 3 hours per unit.The contribution margin per unit for Product 1 is $5.The contribution margin per unit for Product 2 is $6.The demand for either product exceeds the factory capacity.Which product or products should be manufactured?

A) 3,000 units of Product 1 and 2,000 units of Product 2
B) 2,500 units of Product 1 and 3,333 units of Product 2
C) make 5,000 units of Product 1 and 0 units of Product 2
D) make 3,333 units of Product 2 and 0 units of Product 1

Question 67

A company has 100,000 hours of capacity and manufactures two products,Product X and Product Z.Neither product has enough demand to utilize the entire capacity,but the combined demand of both products exceeds the capacity of the plant.It takes one hour to make one unit of Product X and two hours to make one unit of Product Z.The following information is available:
$\begin{array}{ll}&\text { Product X }&\text { Product Z }\\\text { Units produced from capacity available }&100,000 & 50,000 \\\text { Contribution margin per unit }&\$ 20 & \$ 30\end{array}$
What product or products should be made?

A) only make Product X
B) only make Product Z
C) make Product X to meet customer demand and then make Product Z
D) make Product Z to meet customer demand and then make Product X

Question 68

In deciding whether to add or delete a product,the salary of the plant manager is an ________.Assume the plant manager supervised the production of several products.

A) avoidable fixed cost
B) avoidable variable cost
C) unavoidable fixed cost
D) unavoidable variable cost

Question 69

Bronski Corporation manufactures two products,Simple and Complex.The following information was gathered:
$\begin{array}{lll}&\text { Simple }&\text { Complex }\\\text { Selling price per unit } & \$ 37.00 & \$ 26.00 \\\text { Variable cost per unit } & 32.00 & 22.00\end{array}$
Total fixed costs are $18,000.Assume demand for either product exceeds the factory's capacity.It takes one hour of production time to make Simple and two hours to make Complex.The annual capacity of the plant is 10,000 hours.How many units of Simple and Complex should Bronski Corporation produce and sell to maximize profits?

A) 0 units of Simple and 5,000 units of Complex
B) 6,000 units of Simple and 3,000 units of Complex
C) 10,000 units of Simple and 0 units of Complex
D) 3,000 units of Simple and 6,000 units of Complex

Question 70

Unavoidable costs are never relevant in deciding whether to eliminate a product or department.

Question 71

A company has 10,000 hours of capacity and manufactures two products.Product 1 takes 2 hours per unit.Product 2 takes 3 hours per unit.The contribution margin per unit for Product 1 is $5.The contribution margin per unit for Product 2 is $6.Neither product has enough demand to use all of the plant capacity,but the demand for both products exceeds the plant capacity.Which product or products should be manufactured?

A) 5,000 units of Product 1 and 0 units of Product 2
B) 0 units of Product 1 and 5,000 units of Product 2
C) make Product 1 first until meet customer demand, then make Product 2
D) make Product 2 first until meet customer demand, then make Product 1

Question 72

________ is the item that restricts or constrains the production or sale of a product.

A) A limiting factor
B) A scarce resource
C) Floor space
D) All of the above

Question 73

A company can sell any mix of Product A and Product B at full capacity.The company has 100,000 hours of capacity.The demand for each product exceeds the capacity.It takes one hour to make one unit of Product A and two hours to make one unit of Product B.The following information is available:
$\begin{array}{ll}&\text { Product A }&\text { Product B }\\\text { Units produced from capacity available }&100,000 & 50,000 \\\text { Contribution margin per unit }&\$ 20 & \$ 30\end{array}$
If capacity is the limiting factor,which product should be produced?

A) 0 units of Product A and 50,000 units of Product B
B) 20,000 units of Product A and 30,000 units of Product B
C) 30,000 units of Product A and 20,000 units of Product B
D) 100,000 units of Product A and 0 units of Product B

Question 74

In deciding whether to add or delete a product,the insurance expense associated with the custom-built equipment used to produce the product is an ________ cost.Assume the equipment will be sold if the company discontinues the product.

A) avoidable fixed
B) avoidable variable
C) unavoidable fixed
D) unavoidable variable

Question 75

Heating and air conditioning costs are examples of common costs to the different departments in a retail store.

Question 76

If demand is the limiting factor,and there are no other scarce resources,managers should emphasize the product with ________.

A) the highest selling price per unit
B) the lowest variable costs per unit
C) the highest contribution margin per unit
D) the highest contribution margin per hour

Question 77

When adding or dropping a product line,fixed avoidable costs may be relevant costs.

Question 78

In deciding whether to add or delete a product or service,common costs are probably ________.

A) relevant and avoidable
B) relevant and unavoidable
C) irrelevant and avoidable
D) irrelevant and unavoidable

Question 79

Qualitative information can influence decisions to add or drop a department.

Question 80

Freedom Company has three departments.Data for the most recent year are presented below:

Required:

A) Compute the operating income for Freedom Company.
B) Compute the contribution margin for each department.
C) Compute the operating income for each department.
D) Which department(s) should be eliminated? Why?