Deck 9: Absorption and Variable Costing

Question 1

Which of the following are valid reasons for eliminating a product line?
I) The product line's contribution margin is negative.
II) The product line's traceable fixed costs plus its allocated common corporate costs are less than its contribution margin.

A)Only I
B)Only II
C)Both I and II
D)Neither I nor II

Answer 1

A

Question 2

Power Systems Inc. manufactures jet engines for the United States armed forces on a cost-plus basis. The production cost of a particular jet engine is shown below: $\begin{array}{lrr} \text {Direct materials. } &£200,000\\ \text {Direct labour. } &150,000&\\ \text { Manufacturing overhead: } &\\\ \text { Supervisor's salary.} &20,000\\ \text { Fringe benefits on direct labour} &15,000\\ \text { Depreciation} &12,000\\ \text { Depreciation } &\underline{11,000}\\ \text { Total cost} &\underline{£408,000}\end{array}$


If production of this engine was discontinued, the production capacity would be idle, and the supervisor would be laid off. The depreciation referred to above is for special equipment that would have no resale value and that does not wear out through use. When asked to bid on the next contract for this engine, the minimum unit price that Power Systems should bid is

A)£408,000.
B)£365,000.
C)£397,000.
D)£385,000.

Answer 2

£385,000.

Question 3

Any cost that is avoidable is relevant for decision purposes

Answer 3

True

Question 4

Ahrends Company makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:Direct materials. $\quad$$\quad$ £17.80
Direct labour. $\quad$$\quad$ 19.00
Variable manufacturing overhead. $\quad$$\quad$ 1.00
Fixed manutacturing ov erhead. $\quad$$\quad$ 17.10
Unit product cost. $\quad$$\quad$ £54.90
An outside supplier has offered to sell the company all of these parts it needs for £48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be £273,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, £8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

-What is the net total pound advantage (disadvantage) of purchasing the part rather than making it?

A)£273,000
B)(£126,000)
C)£147,000
D)£448,000

Question 5

The Rewehon department at Greenwich plc manufactures high quality toy cars for customers in the London area. Selected data from the budget for the 12 months ending 31st December is available:
Budget 2000
$\begin{array}{|l|c|}\hline & £ \\\hline \text { Sales (90,000 units) } & 2,700,000 \\\hline \text { Cost of goods sold (see notes 1 and 2) } & 1,800,000 \\\hline \text { Gross profit } & 900,000 \\\hline \text { Selling general \& administrative overheads (see note 3) } & 650,000 \\\hline \text { Profit betore tax } & 250,000 \\\hline\end{array}$
Note 1. Cost of goods sold includes fixed costs of £400,000
Note 2. If production is increased from 90,000 units to 100,000 units per annum it is estimated that fixed costs will increase by £20,000
Note 3. Sales commission on the existing orders is 7.5% of sales and is included in the total cost of £650,000. All other costs are assumed to be fixed.
Capacity
The current capacity at the factory is 100,000 units per year. In the budget for the year the company expect to sell 90,000 units.
New order
After agreeing the budget a company in South Africa contacted Greenwich to discuss two orders. This is an unusual situation, as the Rewehon department has never exported before.
The first order is for 10,000 units but if the selling price is reduced they will place a larger order. Rewehon have to accept only 1 order. Details of the orders are as follows: $\begin{array}{|l|l|}\hline \text { Order 1* } & \\\hline \text { Quantity } & 10,000 \text { units } \\\hline \text { Selling price } & \text { £22 per unit } \\\hline\end{array}$
*The sales commission for this order will increase to 10%. Additional variable shipping costs will be 5% of sales value and additional insurance to export the toy cars will be £3,000. (Also refer to note 2 above) $\begin{array}{|l|l|}\hline \text { Order 2* } & \\\hline \text { Quantity } & 20,000 \text { units } \\\hline \text { Selling price } & \text { £21 per unit } \\\hline\end{array}$

- **The sales commission for this order will be 10%. Additional variable shipping costs will be 5% of sales value and additional insurance costs will be £8,000. (Also refer to note 2 above) Calculate the contribution for order 2

A)-£104,056.
B)-£126,000.
C)-£11,200.
D)£210,000.

Question 6

Sunk costs are sometimes relevant in decision-making.

Question 7

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows:Annual sales. $\quad$$\quad$ 5,000 units
Selling price per unit. $\quad$$\quad$ £180
Variable costs per unit:
Production. $\quad$$\quad$ £120
Selling. $\quad$$\quad$ £15
Avoidable foed costs peryear:
Production. $\quad$$\quad$ £40,000
Selling. $\quad$$\quad$ £80,000
Allocated common fixed costs per year. $\quad$$\quad$ £45,000

-
If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabiet shop will drop by £20,000 per year. What is the lowest selling price per unit that could be charged for the new cabinets and still make it economically desirable to add the new product line

A)£159.
B)£164.
C)£171.
D)£151.

Question 8

The Rewehon department at Greenwich plc manufactures high quality toy cars for customers in the London area. Selected data from the budget for the 12 months ending 31st December is available:
Budget 2000
$\begin{array}{|l|c|}\hline & £ \\\hline \text { Sales (90,000 units) } & 2,700,000 \\\hline \text { Cost of goods sold (see notes 1 and 2) } & 1,800,000 \\\hline \text { Gross profit } & 900,000 \\\hline \text { Selling general \& administrative overheads (see note 3) } & 650,000 \\\hline \text { Profit betore tax } & 250,000 \\\hline\end{array}$
Note 1. Cost of goods sold includes fixed costs of £400,000
Note 2. If production is increased from 90,000 units to 100,000 units per annum it is estimated that fixed costs will increase by £20,000
Note 3. Sales commission on the existing orders is 7.5% of sales and is included in the total cost of £650,000. All other costs are assumed to be fixed.
Capacity
The current capacity at the factory is 100,000 units per year. In the budget for the year the company expect to sell 90,000 units.
New order
After agreeing the budget a company in South Africa contacted Greenwich to discuss two orders. This is an unusual situation, as the Rewehon department has never exported before.
The first order is for 10,000 units but if the selling price is reduced they will place a larger order. Rewehon have to accept only 1 order. Details of the orders are as follows: $\begin{array}{|l|l|}\hline \text { Order 1* } & \\\hline \text { Quantity } & 10,000 \text { units } \\\hline \text { Selling price } & \text { £22 per unit } \\\hline\end{array}$
*The sales commission for this order will increase to 10%. Additional variable shipping costs will be 5% of sales value and additional insurance to export the toy cars will be £3,000. (Also refer to note 2 above) $\begin{array}{|l|l|}\hline \text { Order 2* } & \\\hline \text { Quantity } & 20,000 \text { units } \\\hline \text { Selling price } & \text { £21 per unit } \\\hline\end{array}$

- **The sales commission for this order will be 10%. Additional variable shipping costs will be 5% of sales value and additional insurance costs will be £8,000. (Also refer to note 2 above) Calculate the relevant fixed costs for order 2

A)£20,000.
B)£1,000.
C)£28,000.
D)£18,000.

Question 9

When there is a production constraint, a company should emphasise the products with

A)the highest unit contribution margins.
B)the highest contribution margin ratios.
C)the highest contribution margin per unit of the constrained resource.
D)the highest contribution margins and contribution margin ratios.

Question 10

A general rule in relevant cost analysis is

A)variable costs are always relevant.
B)fixed costs are always irrelevant.
C)differential future costs and revenues are always relevant.
D)depreciation is always irrelevant.

Question 11

The O.T. Company makes 35,000 motors to be used in the production of its sewing machines. The cost per motor at this level of activity is:Direct materials $\quad$$\quad$$£ 4.50$
Direct labour $\quad$$\quad$$£ 4.60$
Variable manufacturing overhead. $\quad$$£ 3.75$
Fixed manufac turing ov erhead. $\quad$$£ 3.45$
An outside supplier has offered to supply all the motors the company needs for £15 each. If O.T. Company decided not to make the motors, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided. If O.T. Company decides to continue making the motor, how much higher or lower would net operating income be than if the motors are purchased from the outside supplier

A)£75,250 higher.
B)£45,500 lower.
C)£311,500 higher.
D)£120,750 higher.

Question 12

The Rewehon department at Greenwich plc manufactures high quality toy cars for customers in the London area. Selected data from the budget for the 12 months ending 31st December is available:
Budget 2000
$\begin{array}{|l|c|}\hline & £ \\\hline \text { Sales (90,000 units) } & 2,700,000 \\\hline \text { Cost of goods sold (see notes 1 and 2) } & 1,800,000 \\\hline \text { Gross profit } & 900,000 \\\hline \text { Selling general \& administrative overheads (see note 3) } & 650,000 \\\hline \text { Profit betore tax } & 250,000 \\\hline\end{array}$

Note 1. Cost of goods sold includes fixed costs of £400,000
Note 2. If production is increased from 90,000 units to 100,000 units per annum it is estimated that fixed costs will increase by £20,000
Note 3. Sales commission on the existing orders is 7.5% of sales and is included in the total cost of £650,000. All other costs are assumed to be fixed.
Capacity
The current capacity at the factory is 100,000 units per year. In the budget for the year the company expect to sell 90,000 units.
New order
After agreeing the budget a company in South Africa contacted Greenwich to discuss two orders. This is an unusual situation, as the Rewehon department has never exported before.
The first order is for 10,000 units but if the selling price is reduced they will place a larger order. Rewehon have to accept only 1 order. Details of the orders are as follows: $\begin{array}{|l|l|}\hline \text { Order 1* } & \\\hline \text { Quantity } & 10,000 \text { units } \\\hline \text { Selling price } & \text { £22 per unit } \\\hline\end{array}$
*The sales commission for this order will increase to 10%. Additional variable shipping costs will be 5% of sales value and additional insurance to export the toy cars will be £3,000. (Also refer to note 2 above) $\begin{array}{|l|l|}\hline \text { Order 2* } & \\\hline \text { Quantity } & 20,000 \text { units } \\\hline \text { Selling price } & \text { £21 per unit } \\\hline\end{array}$
**The sales commission for this order will be 10%. Additional variable shipping costs will be 5% of sales value and additional insurance costs will be £8,000. (Also refer to note 2 above) Calculate the opportunity cost for lost contribution for order 2

A)£121,944.
B)£12,000.
C)£1,200.
D)£211,000.

Question 13

An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of eliminating a sunk cost

Question 14

Joint costs are not relevant to the decision to sell a product at the split-off point or to process the product further

Question 15

The Rewehon department at Greenwich plc manufactures high quality toy cars for customers in the London area. Selected data from the budget for the 12 months ending 31st December is available:
Budget 2000
$\begin{array}{|l|c|}\hline & £ \\\hline \text { Sales (90,000 units) } & 2,700,000 \\\hline \text { Cost of goods sold (see notes 1 and 2) } & 1,800,000 \\\hline \text { Gross profit } & 900,000 \\\hline \text { Selling general \& administrative overheads (see note 3) } & 650,000 \\\hline \text { Profit betore tax } & 250,000 \\\hline\end{array}$
Note 1. Cost of goods sold includes fixed costs of £400,000
Note 2. If production is increased from 90,000 units to 100,000 units per annum it is estimated that fixed costs will increase by £20,000
Note 3. Sales commission on the existing orders is 7.5% of sales and is included in the total cost of £650,000. All other costs are assumed to be fixed.
Capacity
The current capacity at the factory is 100,000 units per year. In the budget for the year the company expect to sell 90,000 units.
New order
After agreeing the budget a company in South Africa contacted Greenwich to discuss two orders. This is an unusual situation, as the Rewehon department has never exported before.
The first order is for 10,000 units but if the selling price is reduced they will place a larger order. Rewehon have to accept only 1 order. Details of the orders are as follows: $\begin{array}{|l|l|}\hline \text { Order 1* } & \\\hline \text { Quantity } & 10,000 \text { units } \\\hline \text { Selling price } & \text { £22 per unit } \\\hline\end{array}$
*The sales commission for this order will increase to 10%. Additional variable shipping costs will be 5% of sales value and additional insurance to export the toy cars will be £3,000. (Also refer to note 2 above) $\begin{array}{|l|l|}\hline \text { Order 2* } & \\\hline \text { Quantity } & 20,000 \text { units } \\\hline \text { Selling price } & \text { £21 per unit } \\\hline\end{array}$

- **The sales commission for this order will be 10%. Additional variable shipping costs will be 5% of sales value and additional insurance costs will be £8,000. (Also refer to note 2 above) Calculate the relevant fixed costs for order 1

A)£28,000.
B)£11,000.
C)£23,000.
D)£1,000.

Question 16

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows:Annual sales. $\quad$$\quad$ 5,000 units
Selling price per unit. $\quad$$\quad$ £180
Variable costs per unit:
Production. $\quad$$\quad$ £120
Selling. $\quad$$\quad$ £15
Avoidable foed costs peryear:
Production. $\quad$$\quad$ £40,000
Selling. $\quad$$\quad$ £80,000
Allocated common fixed costs per year. $\quad$$\quad$ £45,000

-If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by £20,000 per year. If new cabinet product line is added next year, the increase in net operating income resulting from this decision would be

A)£80,000.
B)£225,000.
C)£125,000.
D)£105,000.

Question 17

Ahrends Company makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:Direct materials. $\quad$$\quad$ £17.80
Direct labour. $\quad$$\quad$ 19.00
Variable manufacturing overhead. $\quad$$\quad$ 1.00
Fixed manutacturing ov erhead. $\quad$$\quad$ 17.10
Unit product cost. $\quad$$\quad$ £54.90
An outside supplier has offered to sell the company all of these parts it needs for £48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be £273,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, £8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

-How much of the unit product cost of £54.90 is relevant in the decision of whether to make or buy the part?

A)£37.80
B)£46.70
C)£54.90
D)£19.00

Question 18

Sunk costs are considered to be avoidable costs

Question 19

The Rewehon department at Greenwich plc manufactures high quality toy cars for customers in the London area. Selected data from the budget for the 12 months ending 31st December is available:
Budget 2000
$\begin{array}{|l|c|}\hline & £ \\\hline \text { Sales (90,000 units) } & 2,700,000 \\\hline \text { Cost of goods sold (see notes 1 and 2) } & 1,800,000 \\\hline \text { Gross profit } & 900,000 \\\hline \text { Selling general \& administrative overheads (see note 3) } & 650,000 \\\hline \text { Profit betore tax } & 250,000 \\\hline\end{array}$
Note 1. Cost of goods sold includes fixed costs of £400,000
Note 2. If production is increased from 90,000 units to 100,000 units per annum it is estimated that fixed costs will increase by £20,000
Note 3. Sales commission on the existing orders is 7.5% of sales and is included in the total cost of £650,000. All other costs are assumed to be fixed.
Capacity
The current capacity at the factory is 100,000 units per year. In the budget for the year the company expect to sell 90,000 units.
New order
After agreeing the budget a company in South Africa contacted Greenwich to discuss two orders. This is an unusual situation, as the Rewehon department has never exported before.
The first order is for 10,000 units but if the selling price is reduced they will place a larger order. Rewehon have to accept only 1 order. Details of the orders are as follows: $\begin{array}{|l|l|}\hline \text { Order 1* } & \\\hline \text { Quantity } & 10,000 \text { units } \\\hline \text { Selling price } & \text { £22 per unit } \\\hline\end{array}$
*The sales commission for this order will increase to 10%. Additional variable shipping costs will be 5% of sales value and additional insurance to export the toy cars will be £3,000. (Also refer to note 2 above) $\begin{array}{|l|l|}\hline \text { Order 2* } & \\\hline \text { Quantity } & 20,000 \text { units } \\\hline \text { Selling price } & \text { £21 per unit } \\\hline\end{array}$

- **The sales commission for this order will be 10%. Additional variable shipping costs will be 5% of sales value and additional insurance costs will be £8,000. (Also refer to note 2 above) Calculate the minimum price for order 1

A)£14.
B)£12.
C)£21.
D)£8.

Question 20

Ahrends Company makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:Direct materials. $\quad$$\quad$ £17.80
Direct labour. $\quad$$\quad$ 19.00
Variable manufacturing overhead. $\quad$$\quad$ 1.00
Fixed manutacturing ov erhead. $\quad$$\quad$ 17.10
Unit product cost. $\quad$$\quad$ £54.90
An outside supplier has offered to sell the company all of these parts it needs for £48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be £273,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, £8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

- What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 70,000 units required each year?

A)£50.60
B)£3.90
C)£58.80
D)£54.90

Question 21

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000.
An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year.
The accountant has provided the following information for the factory managers.
Costs incurred last year on special windows now held in stock
PVC material = £5,000
Labour = £3,000
(i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200.
(ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase.
(iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each.
(iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour.
(v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted.
(vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week.
(vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs
(viii) The original design costs for this type of window was £5,000 in 1998.

-Calculate the relevant cost for labour

A)£1,000.
B)£1,200.
C)£1,400.
D)£1,800.

Question 22

Generally, a product line should be dropped when the fixed costs that can be avoided by dropping the product line are less than the contribution margin that will be lost

Question 23

Managers should not authorise working overtime at a workstation that contains a bottleneck

Question 24

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000.
An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year.
The accountant has provided the following information for the factory managers.
Costs incurred last year on special windows now held in stock
PVC material = £5,000
Labour = £3,000
(i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200.
(ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase.
(iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each.
(iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour.
(v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted.
(vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week.
(vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs
(viii) The original design costs for this type of window was £5,000 in 1998.

-Calculate the relevant cost for the design costs

A)£1,000.
B)£0.
C)£5,000.
D)£100.

Question 25

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000.
An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year.
The accountant has provided the following information for the factory managers.
Costs incurred last year on special windows now held in stock
PVC material = £5,000
Labour = £3,000
(i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200.
(ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase.
(iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each.
(iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour.
(v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted.
(vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week.
(vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs
(viii) The original design costs for this type of window was £5,000 in 1998.

-Calculate the relevant cost for the supervisor

A)£1,000.
B)£1,100
C)£100.
D)£900.

Question 26

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of £720,000. If these microcomputers are upgraded at a total cost of £100,000, they can be sold for a total of £160,000. As an alternative, the microcomputers can be sold in their present condition for £50,000.

-Suppose the selling price of the upgraded computers has not been set. At what selling price per unit would the company be as well off upgrading the computers as if it just sold the computers in their present condition?

A)£100.
B)£770.
C)£300.
D)£210.

Question 27

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000.
An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year.
The accountant has provided the following information for the factory managers.
Costs incurred last year on special windows now held in stock
PVC material = £5,000
Labour = £3,000
(i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200.
(ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase.
(iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each.
(iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour.
(v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted.
(vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week.
(vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs
(viii) The original design costs for this type of window was £5,000 in 1998.

-Calculate the relevant cost for the special windows held in stock

A)£200.
B)£2,000
C)£1,800.
D)2,200.

Question 28

Wright Company produces products I, J, and K from a single raw material input. Budgeted data for the next month follows: $\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Product }$
$\begin{array}{ll}&I&J&K\\\text {Units produced. }&1,500&2,000&3,000\\\text {Per unit sales value at split-off. }&£10&£12&£15\\\text { Added processing costs per unit.}&£2&£4&£4\\\text { Per unit sales value if processed further.}&£15&£15&£20\\\end{array}$
If the cost of the raw material input is £78,000, which of the products should be processed beyond the split-off point?
$\quad$ $\quad$ $\quad$$\text { Product }$
$\begin{array}{lrr}&&\\ &\text {I}&&&\text {J}&&\text {K}\end{array}$

A. $\begin{array}{lrr} \text { yes } & \text { yes }& \text {no } \\\end{array}$
B. $\begin{array}{lrr} \text { yes } & \text {no } & \text { yes }\\\end{array}$
C. $\begin{array}{lrr} \text {no } & \text { yes }& \text {no } \\\end{array}$
D. $\begin{array}{lrr} \text {no } & \text { yes }& \text { yes }\\\end{array}$

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

Question 29

Avoidable costs are also called differential costs

Question 30

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000.
An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year.
The accountant has provided the following information for the factory managers.
Costs incurred last year on special windows now held in stock
PVC material = £5,000
Labour = £3,000
(i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200.
(ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase.
(iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each.
(iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour.
(v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted.
(vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week.
(vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs
(viii) The original design costs for this type of window was £5,000 in 1998.

-Calculate the relevant cost for the handles

A)£1,250.
B)£1,000.
C)£1,500.
D)£2,100

Question 31

The Kelsh Company has two divisions--North and South. The divisions have the following revenues and expenses: $\begin{array}{ll}&\text { North } & \text { South } \\\text {Sales. }&£ 900,000 & £ 800,000 \\\text {Variable expenses. }&450,000 & 300,000 \\\text {Traceable fixed expenses. }&260,000 & 210,000 \\\text {Allocated common corporate expenses. }&240,000 & 190,000 \\\text { Net operating income (loss).}&£(50,000) & £ 100,000\end{array}$
Management at Kelsh is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of

A)£100,000.
B)£150,000.
C)£(140,000).
D)£50,000.

Question 32

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of £720,000. If these microcomputers are upgraded at a total cost of £100,000, they can be sold for a total of £160,000. As an alternative, the microcomputers can be sold in their present condition for £50,000.

-What is the net advantage or disadvantage to the company from upgrading the computers rather than selling them in their present condition?

A)£110,000 advantage.
B)£660,000 disadvantage.
C)£ 10,000 advantage.
D)£ 60,000 advantage.

Question 33

In a sell or process further decision, which of the following costs are relevant
I) A variable production cost incurred prior to the split-off point.
II) An avoidable fixed production cost incurred after the split-off point.

A)Only I.
B)Only II.
C)Both I and II.
D)Neither I nor II.

Question 34

Consider the following production and cost data for two products, Q and P: $\begin{array}{lrr}&\text { Product O}&\text {product P}\\ \text { Contribution margin per unit } &£40&£36\\ \text { Machine minutes needed per unit} &8 \text { minutes } &6 \text { minutes } \\ \text { } &\\ \text { } &\\ \text { } &\\\end{array}$

A total of 24,000 machine minutes are available each period and there is virtually unlimited demand for each product. What is the largest possible total contribution margin that can be realised each period

A)£120,000
B)£144,000
C)£456,000
D)£132,000

Question 35

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000.
An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year.
The accountant has provided the following information for the factory managers.
Costs incurred last year on special windows now held in stock
PVC material = £5,000
Labour = £3,000
(i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200.
(ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase.
(iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each.
(iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour.
(v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted.
(vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week.
(vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs
(viii) The original design costs for this type of window was £5,000 in 1998.

-Calculate the relevant cost for the specialist equipment

A)£600.
B)£300.
C)£900.
D)£0.

Question 36

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of £720,000. If these microcomputers are upgraded at a total cost of £100,000, they can be sold for a total of £160,000. As an alternative, the microcomputers can be sold in their present condition for £50,000.

-The sunk cost in this situation is

A)£720,000.
B)£160,000.
C)£ 50,000.
D)£100,000.

Question 37

The Kelso Company has two divisions--Eastern and Western. The divisions have the following revenues and expenses: $\begin{array}{l}&\text { Eastem }&\text { Westem }\\\text {Sales. }&£ 450,000 & £ 400,000 \\\text {Variable expenses }&225,000 & 150,000 \\\text { Traceable fixed expenses.}&130,000 & 105,000 \\\text {Allocated common corporate expenses. }&120,000 & 95,000 \\\text { Net operating income (loss).}&£(25,000)&£ 50,000\end{array}$
Management of Kelso is considering the elimination of the Eastern Division. If the Eastern Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of the Eastern Division would result in an overall company net operating income (loss) of

A)£50,000.
B)(£70,000).
C)£25,000.
D)(£75,000).

Question 38

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000.
An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year.
The accountant has provided the following information for the factory managers.
Costs incurred last year on special windows now held in stock
PVC material = £5,000
Labour = £3,000
(i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200.
(ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase.
(iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each.
(iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour.
(v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted.
(vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week.
(vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs
(viii) The original design costs for this type of window was £5,000 in 1998.

-Calculate the relevant cost for the special locks

A)£80.
B)£400
C)£320
D)£380.

Question 39

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000.
An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year.
The accountant has provided the following information for the factory managers.
Costs incurred last year on special windows now held in stock
PVC material = £5,000
Labour = £3,000
(i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200.
(ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase.
(iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each.
(iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour.
(v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted.
(vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week.
(vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs
(viii) The original design costs for this type of window was £5,000 in 1998.

-Calculate the relevant cost for the administrative costs

A)£1,000.
B)£0.
C)£200.
D)£100.

Question 40

In 1998 a council-owned factory began selling replacement windows to outside customers for the first time. At the time the factory was making losses and the council needed to make severe budget cuts. The new customers have helped to reduce the losses in 1999 and a return to profits is required in 2000.
An order for a special type of window has been received. The factory manufactures this type of window very occasionally and there is some partially completed stock from last year. The stock relates to an order from the council that was cancelled to save costs. The special windows are typically 30% complete and some of the material can be used for the new order. The accountant still has detailed records of the work done last year.
The accountant has provided the following information for the factory managers.
Costs incurred last year on special windows now held in stock
PVC material = £5,000
Labour = £3,000
(i) The factory was planning to sell the stock of special windows to a company in Wales for £2,000. The factory would incur delivery costs of £200.
(ii) Special locks required for the new order are already in stock and were purchased in 1998 at a cost of £500. The locks could be sold for £100. The factory manager believes the locks could be used on another order if they were modified. The modifications would cost £80. The locks after modification would currently cost £400 to purchase.
(iii) 500 handles are required for the order. There are 600 handles in stock and they cost £3 each from supplier X. Supplier X typically supplies over 1000 handles a month. A new supplier has been found who will supply the handles for £2.50 each.
(iv) Three hundred labour hours will be required for the order. The average cost per hour is £5. As the factory is busy it is expected that one hundred of the three hundred hours will be paid at the overtime rate of £8 per hour.
(v) The supervisor's cost will be £1,000. No additional supervisors will be required if the order is accepted. The £1,000 does include £100 of overtime costs that will have to be paid if the order is accepted.
(vi) Specialist equipment will be required for this order. This equipment is rarely used and so it is hired out to a local company. The equipment will be required for 2 weeks. Currently this specialist equipment is hired out at £300 per week.
(vii) Administrative costs have been estimated at £1,000. This is a fixed cost and is included in all estimated costs
(viii) The original design costs for this type of window was £5,000 in 1998.

-Calculate the contribution for the new order

A)£1,000.
B)£1,130.
C)£2,100.
D)£700.

Question 41

Ellis Television makes and sells portable televisions. Each television regularly sells for £210. The following cost data per television is based on a full capacity of 10,000 televisions produced each period: $\begin{array}{lrr} \text { Direct materials } &£80\\ \text { Direct labour } &£60\\ \text { Manufacturing overhead ( \( 70 \% \) variable and \( 30 \% \) unavoidable fixed) } &£40\\\end{array}$

Ellis has received a special order for a sale of 2,000 televisions to an overseas customer. The only selling costs that would be incurred on this order would be £6 per television for shipping. Ellis is now selling 6,000 televisions through regular channels each period. What should be the minimum selling price per television in negotiating a price for this special order

A)£174
B)£168
C)£210
D)£180

Question 42

The book value of a machine, as shown on the balance sheet, is relevant in a decision concerning the replacement of that machine by another machine

Question 43

Vertical integration is the involvement by a company in more than one of the steps from securing basic raw materials to the production and distribution of a finished product

Question 44

Joint products are products that are sold to customers as a set or as part of a group of products

Question 45

Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Peluso's plant manager is considering making the headlights now being purchased from outside supplier for £11.00 each. The Peluso plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires £4.00 of direct materials, £3.00 of direct labour, and £6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Peluso Company to manufacture the headlights should result in a net gain (loss) for each headlight of

A)£(2.00).
B)£1.60.
C)£0.40.
D)£2.80.

Question 46

Balser Company manufactures and sells a product called JYMP. Results of last year for the manufacture and sale of JYMP's are as follows: $\begin{array}{lrr} \text { Sales ( \( 8,000 . J Y M P \) s at \( £ 120 \) each). } &£ 960,000\\ \text { Less costs: } &\\ \text { Variable production costs. } &464,000\\ \text { Sales commissions (15\% of sales). } &144,000\\ \text { Salary of product line manager.} &100,000\\ \text { Fixed product line advertising. } &160,000\\ \text { Fixed manutacturing overhead.} &132,000\\ \text { Total costs. } &1,000,000\\ \text {Net operating loss. } &£(40,000)\\\end{array}$


-Balser anticipates no change in the operating results for JYMP in the foreseeable future. Balser is reexamining all of its product lines and is trying to decide whether or not to discontinue the manufacture and sale of JYMPs. Total fixed manufacturing overhead costs would not be affected by a decision to drop any one product line. Assume that discontinuing the manufacture and sale of JYMPs will have no effect on other product lines. If the company discontinues the JYMP product line, the change in annual operating income due to this decision will be a

A)£40,000 increase.
B)£132,000 decrease.
C)£92,000 decrease.
D)£172,000 decrease.

Question 47

Farnsworth Television makes and sells portable television sets. Each television regularly sells for £200. The following cost data per television are based on a full capacity of 12,000 televisions produced each period: $\begin{array}{lrr} \text { Direct materials } &£75\\ \text { Direct labour } &£55\\ \text {Manufacturing overhead ( \( 75 \% \) variable and \( 25 \% \) unavoidable fixed) } &£48\\\end{array}$


Farnsworth has received a special order for a sale of 2,500 televisions to an overseas customer. The only selling costs that would be incurred on this order would be £10 per television for shipping. Farnsworth is now selling 7,200 televisions through regular distributors each period. What should be the minimum selling price per television in negotiating a price for this special order

A)£200
B)£166
C)£178
D)£176

Question 48

Fixed costs are irrelevant in a decision

Question 49

Balser Company manufactures and sells a product called JYMP. Results of last year for the manufacture and sale of JYMP's are as follows: $\begin{array}{lrr} \text { Sales ( \( 8,000 . J Y M P \) s at \( £ 120 \) each). } &£ 960,000\\ \text { Less costs: } &\\ \text { Variable production costs. } &464,000\\ \text { Sales commissions (15\% of sales). } &144,000\\ \text { Salary of product line manager.} &100,000\\ \text { Fixed product line advertising. } &160,000\\ \text { Fixed manutacturing overhead.} &132,000\\ \text { Total costs. } &1,000,000\\ \text {Net operating loss. } &£(40,000)\\\end{array}$


-Balser anticipates no change in the operating results for JYMP in the foreseeable future. Balser is reexamining all of its product lines and is trying to decide whether or not to discontinue the manufacture and sale of JYMPs. Total fixed manufacturing overhead costs would not be affected by a decision to drop any one product line. Assume that discontinuing the JYMP line would result in a £158,000 increase in the contribution margin of other product lines. How many JYMPs would have to be sold next year for the company to be as well off as if it just dropped the line and enjoyed the increase in contribution margin from other products?

A)8,550 units.
B)8,318 units.
C)9,500 units.
D)12,500 units.

Question 50

Fixed costs that do not differ between alternatives are sunk costs

Question 51

The opportunity cost of making a component part in a factory with no excess capacity is the

A)variable manufacturing cost of the component.
B)fixed manufacturing cost of the component.
C)total manufacturing cost of the component.
D)net benefit foregone from the best alternative use of the capacity requireD.

Question 52

Balser Company manufactures and sells a product called JYMP. Results of last year for the manufacture and sale of JYMP's are as follows: $\begin{array}{lrr} \text { Sales ( \( 8,000 . J Y M P \) s at \( £ 120 \) each). } &£ 960,000\\ \text { Less costs: } &\\ \text { Variable production costs. } &464,000\\ \text { Sales commissions (15\% of sales). } &144,000\\ \text { Salary of product line manager.} &100,000\\ \text { Fixed product line advertising. } &160,000\\ \text { Fixed manutacturing overhead.} &132,000\\ \text { Total costs. } &1,000,000\\ \text {Net operating loss. } &£(40,000)\\\end{array}$


-Balser anticipates no change in the operating results for JYMP in the foreseeable future. Balser is reexamining all of its product lines and is trying to decide whether or not to discontinue the manufacture and sale of JYMPs. Total fixed manufacturing overhead costs would not be affected by a decision to drop any one product line. Assume that discontinuing the JYMP line would result in a £90,000 increase in the contribution margin of other product lines. If Balser chooses to discontinue the JYMP line, then the change in operating income next year due to this action will be a

A)£40,000 decrease.
B)£40,000 increase.
C)£ 2,000 decrease.
D)£50,000 increase.

Question 53

Gary Company produces products X, Y, and Z from a single raw material input. Budgeted data for the next month is as follows: $\begin{array}{lrr}&&\text { product }\\& \text { X} & \text { Y } & \text { Z } \\ \text {Units produced. } &2,500& 3,000 & 4,000\\ \text { Per unit sales value at split-off.} & £ 20.00&£ 22.00&£ 25.00\\ \text {Added processing costs per unit. } &£ 8.00&£ 8.50& £ 8.00 \\ \text {Per unit sales value if processed further. } &£ 30.00 & £ 30.00 &£ 35.00\\\end{array}$

If the cost of raw material input is £150,000, which of the products should be processed beyond the split-off point?
$\quad$ $\quad$ $\quad$$\text { Product }$
$\begin{array}{lrr}&&\\ &\text {X}&&\text {Y}&&\text {Z}\end{array}$

A. $\begin{array}{lrr} \text { no } & \text { yes }& \text {no } \\\end{array}$
B. $\begin{array}{lrr} \text {no} & &\text {yes } & \text { yes }\\\end{array}$
C. $\begin{array}{lrr} \text {yes } & \text { no }& \text {yes } \\\end{array}$
D. $\begin{array}{lrr} \text {yes } & \text { yes }& \text { no }\\\end{array}$

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

Question 54

Consider the following production and cost data for two products, X and Y: $\begin{array}{lrr}& \text {Product X } &\text { Product Y} &\\ \text { Contribution margin per unit } &£24&£18\\ \text { Machine-hours needed per unit} &3 \text { hours } 2& \text { hours }\\\\\end{array}$

The company has 15,000 machine hours available each period, and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period

A)£120,000
B)£125,000
C)£135,000
D)£150,000

Question 55

Consider the following production and cost data for two products, L and C: $\begin{array}{l}&\text { ProductL} &\text {Product C}\\\text { Contribution margin per unit} &£120&£112\\\text { Machine minutes needed per unit }&10 \text { minutes } &8 \text { minutes }\\\end{array}$
A total of 60,000 machine minutes are available each period and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period

A)£720,000
B)£840,000
C)£780,000
D)£1,560,000

Question 56

Manor Company plans to discontinue a department that has a contribution margin of £24,000 and £48,000 in fixed costs. Of the fixed costs, £21,000 cannot be eliminated. The effect of this discontinuance on Manor's net operating income would be a(an)

A)decrease of £3,000.
B)increase of £3,000.
C)decrease of £24,000.
D)increase of £24,000.

Question 57

Talboe Company makes wheels that it uses in the production of children's wagons. Talboe's costs to produce 200,000 wheels annually are as follows: $\begin{array}{lrr} \text {Direct materials } &£40,000\\ \text {Direct labour. } &60,00\\ \text {Variable manufacturing overhead } &30,000\\ \text {Fixed manufacturing overhead } &\underline{70,000}\\ \text {Total } &\underline{£200,000}\\\end{array}$

An outside supplier has offered to sell Talboe similar wheels for £0.80 per wheel. If the wheels are purchased from the outside supplier, £25,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to anther company for £55,000 per year.

- What is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels?

A)£0.95
B)£1.15
C)£1.00
D)£1.05

Question 58

Talboe Company makes wheels that it uses in the production of children's wagons. Talboe's costs to produce 200,000 wheels annually are as follows: $\begin{array}{lrr} \text {Direct materials } &£40,000\\ \text {Direct labour. } &60,00\\ \text {Variable manufacturing overhead } &30,000\\ \text {Fixed manufacturing overhead } &\underline{70,000}\\ \text {Total } &\underline{£200,000}\\\end{array}$

An outside supplier has offered to sell Talboe similar wheels for £0.80 per wheel. If the wheels are purchased from the outside supplier, £25,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to anther company for £55,000 per year.

-If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a

A)£5,000 decrease.
B)£50,000 increase.
C)£70,000 increase.
D)£40,000 increase.

Question 59

In a sell or process further decision, which of the following costs are not relevant
I) A variable production cost incurred after split-off.
II) A fixed production cost incurred prior to split-off.

A)Only I
B)Only II
C)Both I and II
D)Neither I nor II

Question 60

Depreciation expense on existing factory equipment is generally relevant to a decision of whether to accept or reject a special offer for a company's product

Question 61

Problem 2
The cost of making component Q which forms part of product Y is stated as follows:
£
Raw material 4.00
Direct labour 8.00
Variable overhead 6.40
Fixed overhead 9.60
Total absorption cost per unit 28.00
Component Q could be brought from an outside supplier for 20.
b) You are required, assuming that fixed production costs will not change to state whether the company should continue making the component Q or buy it from outside. Explain the costs you use and your reasoning.

Question 62

Opportunity costs are

A)not used for decision making.
B)the same as variable costs.
C)the same as historical costs.
D)relevant to decision making.

Question 63

A cost that is relevant in one decision may not be relevant in another decision

Question 64

Decision problems are faced by a company which produces a range of products and the data is as follows:
Problem 1
The normal selling price of a product is £22 and the full absorption cost per unit is as follows:
£
Raw materials 8.00
Direct Labour 4.00
Variable overhead 3.20
Fixed overhead 4.80
Total absorption cost per unit 20.00
There is the possibility of supplying a special order of 2,000 units of product x at £16 each. If the order were not accepted, the normal budgeted sales would not be affected and the company has the necessary capacity to produce the additional units.
a) You are required, assumed that fixed production costs will not change, to state whether the company should accept the special order above. Explain the costs you use and your reasoning.

Question 65

Barrus Company makes 30,000 motors to be used in the productions of its power lawn mowers. The manufacturing cost per motor at this level of activity is as follows: $\begin{array}{lrr} \text { Direct materials } &£9.50\\ \text { Direct labour. } &£8.60\\ \text { Variable manufacturing overhead } &£3.75\\ \text {Fixed manufacturing overhead. } &£4.35\\\end{array}$

This motor has recently become available from an outside supplier for £25 per motor. If Barrus decides not to make the motors, none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities. If Barrus decides to continue making the motor, how much higher or lower will the company's net operating income be than if the motors are purchased from the outside supplier

A)£36,000 lower.
B)£207,000 higher.
C)£94,500 higher.
D)£130,500 higher.

Question 66

Explain why it is important to distinguish between Relevant and Irrelevant costs in decisions giving examples.

Question 67

Gerond Ltd has developed a new product ‘Q' and is deciding whether to ‘outsource' it (get it made outside) or to make it themselves. It is a key product in their new range.
It has researched the figures and using these and the company's overhead absorption rates has calculated the absorption production cost as follows. It has also obtained a quote for making it from a firm in the same industry sector
Costs of Manufacture Buy in Cost
Direct Mats 4
Direct Labour 6
Variable Overheads 3
Fixed Overheads 7
---
Absorption Cost £20 Price to Buy £15
--- ---
Should it buy or make it on the grounds of:
1 Cost only?
2 Taking other factors into account

Question 68

Freestone Company is considering renting Machine Y to replace Machine X. It is expected that Y will waste less direct materials than does X. If Y is rented, X will be sold on the open market. For this decision, which of the following factors is (are) relevant
I) Cost of direct materials used
II) Resale value of Machine X

A)Only I
B)Only II
C)Both I and II
D)Neither I nor II

Question 69

A company BB Ltd makes a product, selling for 20pence - a can of baked beans. A major supermarket who currently buys their baked beans from a rival baked bean company asks BB Ltd if they will provide them with ‘Own Label' baked beans for 16 pence a can, the costs of manufacture are as follows:
BB Baked Beans: Costs per can
Direct Materials 4
Direct Labour 4
Variable Overheads 3
FO 4
Manufacturing Absorption Cost 15
Advertising 1
Transport costs (variable) 1
Total Cost 17p
Should they supply the Supermarket at this price (16p)?
What reservations would you have?