Deck 8: Short Term Business Decisions

Question 1

1-15 Which of the following is a sunk cost?

A)Operating costs for a new vehicle
B)Trade in value of old vehicle
C)Purchase price of new vehicle
D)Purchase price of vehicle to be traded in

Answer 1

D

Question 2

1-18 The effect of a plant closing on employee morale is an example of which of the following?

A)A quantitative factor
B)A qualitative factor
C)A sunk cost
D)A variable cost

Answer 2

B

Question 3

1-16 Fixed costs that may be avoided in the future are referred to as:

A)replacement costs.
B)opportunity costs.
C)relevant costs.
D)sunk costs.

Answer 3

C

Question 4

1-8 Managers' decisions are based on qualitative as well as quantitative factors.

Question 5

1-2 Management accountants gather and analyze relevant information to compare alternatives.

Question 6

1-6 Costs that differ between alternatives are relevant.

Question 7

1-1 Relevant information is future data that differs among alternatives.

Question 8

1-12 Expected future data that differs among alternative courses of action are referred to as:

A)irrelevant information.
B)historical information.
C)predictable information.
D)relevant information.

Question 9

1-10 Which of the following best describes a "relevant cost"?

A)A factor that restricts production or sales of a product
B)Cost of developing,producing,and delivering a product or service
C)Expected future costs that differs among alternatives
D)Costs that were incurred in the past and can not be changed

Question 10

1-9 Which of the following best describes an "opportunity cost"?

A)Costs that were incurred in the past and cannot be changed
B)Benefits foregone by not choosing an alternative course of action
C)The distribution of all products to be sold
D)Expected future costs that differs among alternatives

Question 11

1-14 Fixed costs that do NOT differ between two alternatives are:

A)relevant to the decision.
B)considered opportunity costs.
C)irrelevant to the decision.
D)important only if they represent a material dollar amount.

Question 12

1-5 Relevant information is expected future data that differs among alternatives.

Question 13

1-4 One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs.

Question 14

1-13 Which of the following is irrelevant when making a decision?

A)The cost of an asset that the company is considering replacing
B)Fixed overhead costs that differ among alternatives
C)The cost of further processing a product that could be sold as is
D)The expected increase in contribution margin of one product line as a result of a decision to drop a separate unprofitable product line

Question 15

Smith Industries is considering replacing a machine that is presently used in its production process.The following information is available: $$\begin{array} { | l | l | l | } \hline & \text { Old Machine } & \text { Replacement Machine } \\\hline \text { Oripinal cost } & \$ 45,000 & \$ 35,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Curent age in years } & 5 & 0 \\\hline \text { Bogk value } & \$ 25,000 & \\\hline \text { Current disposal value in cash } & \$ 8,000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 00 \\\hline \text { Arnual cash operating costs } & \$ 7,000 & \$ 4,000 \\\hline\end{array}$$ Which of the information provided in the table is irrelevant to the replacement decision?

A)The annual operating cost of the old machine
B)The original cost of the old machine
C)The current disposal value of the old machine
D)Both A and C

Question 16

1-11 Which of the following best describes "contribution margin per unit"?

A)Sales price per unit minus fixed cost per unit
B)Sales price per unit minus fixed and variable costs per unit
C)Sales price per unit minus variable cost unit
D)Units sold time contribution margin ratio

Question 17

1-3 One key to analyzing short-term business decisions is to focus on irrelevant revenues,costs and profits.

Question 18

1-7 One cost that is irrelevant in decision making is a sunk cost.

Question 19

1-17 Which of the following describes a sunk cost?

A)One that is relevant to a decision because it changes depending on the alternative course of action selected
B)An outlay expected to be incurred in the future
C)A historical cost that is always irrelevant
D)A historical cost that may be relevant

Question 20

1-19 Which of the following is the format of the income statement most useful in decision-making?

A)Absorption costing format
B)Traditional format
C)Single-step format
D)Contribution margin format

Question 21

Clear Sky Sailmakers manufactures sails for sailboats.The company has the capacity to produce 15,000 sails per year,but is currently producing and selling 10,000 sails per year.The following information relates to current production: $$\begin{array} { | l | c | } \hline \text { Sale price per urit } & \$ 250 \\\hline & \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 165 \\\hline \text { Marketing and adrministrative } & \$ 50 \\\hline & \\\hline \text { Total Eixed costs: } & \\\hline \text { Manufacturing } &\$ 750,000\\\hline \text { Marketing and adrinistrative } & \$ 200,000 \\\hline\end{array}$$

-If a special sales order is accepted for 5,000 sails at a price of $225 per unit,and fixed costs remain unchanged,how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $1,125,000
B)Increase by $50,000
C)Decrease by $50,000
D)Increase by $150,000

Question 22

Woodson Corporation provided the following information regarding its only product: $\begin{array}{|l|r|}\hline\text { Sale price per unit } & \$ 65.00 \\\hline \text { Direct materials used } & \$ 160,000 \\\hline \text { Direct labor incurred } & \$ 185,000 \\\hline \text { Variable manufacturing overhead } & \$ 120,000 \\\hline \begin{array}{l}\text { Variable selling and administrative } \\\text { expenses }\end{array} & \$ 70,000 \\\hline \text { Fixed manufacturing overhead } & \$ 65,000 \\\hline \text { Fixed selling and administrative expenses } & \$ 12,000 \\\hline \text { Units produced and sold } & 10,000 \\\hline & \\\hline \text { Assume no beginning inventory } &\\\hline\end{array}$

- Assuming there is excess capacity,what would be the effect on operating income of accepting a special order for 1,000 units at a sale price of $55 per product? (NOTE: Assume regular sales are not affected by the special order.)

A)Decrease by $1,500
B)Increase by $55,000
C)Increase by $1,500
D)Increase by $108,500

Question 23

1-23 When making any sort of decision,managers should consider:

A)only fixed costs.
B)sunk costs.
C)revenues that differ among alternatives.
D)only variable costs.

Question 24

2-11 When making a short-term special decision,a company should:

A)focus on qualitative factors only.
B)focus on quantitative factors only.
C)use a traditional direct costing approach.
D)separate variable costs from fixed costs.

Question 25

2-10 Which would be a consideration for making special orders?

A)Available capacity to fill the order
B)If price will cover incremental costs of filling the order
C)If the order will affect regular sales in the long run
D)All of the above

Question 26

2-2 In deciding whether to accept a special sales order,any fixed costs that would remain unchanged are considered irrelevant data.

Question 27

Clear Sky Sailmakers manufactures sails for sailboats.The company has the capacity to produce 15,000 sails per year,but is currently producing and selling 10,000 sails per year.The following information relates to current production: $$\begin{array} { | l | c | } \hline \text { Sale price per urit } & \$ 250 \\\hline & \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 165 \\\hline \text { Marketing and adrministrative } & \$ 50 \\\hline & \\\hline \text { Total Eixed costs: } & \\\hline \text { Manufacturing } & \$ 750,000 \\ \hline \text { Marketing and adrinistrative } & \$ 200,000 \\\hline\end{array}$$

- If a special sales order is accepted for 2,500 sails at a price of $205 per unit,fixed costs increase by $14,000,and variable marketing and administrative costs for that order are $25 per unit,how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $23,500
B)Decrease by $23,500
C)Increase by $37,500
D)Increase by $86,000

Question 28

2-5 When deciding whether to accept a special order,managers need not consider whether they have available excess capacity.

Question 29

2-9 A manager should always reject a special order if:

A)there is available excess capacity.
B)the special order price is less than the variable costs of the order.
C)the special order price is less than the regular sales price.
D)the special order will require variable nonmanufacturing expenses.

Question 30

Clear Sky Sailmakers manufactures sails for sailboats.The company has the capacity to produce 15,000 sails per year,but is currently producing and selling 10,000 sails per year.The following information relates to current production: $$\begin{array} { | l | c | } \hline \text { Sale price per urit } & \$ 250 \\\hline & \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 165 \\\hline \text { Marketing and adrministrative } & \$ 50 \\\hline & \\\hline \text { Total Eixed costs: } & \\\hline \text { Manufacturing } & \$ 750,000 \\ \hline \text { Marketing and adrinistrative } & \$ 200,000 \\\hline\end{array}$$

- If a special sales order is accepted for 3,000 sails at a price of $215 per unit,fixed costs remain unchanged,and no variable marketing and administrative costs will be incurred for this order,how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $50,000
B)Increase by $1,125,000
C)Increase by $150,000
D)Decrease by $50,000

Question 31

2-6 If the expected increase in revenues from a special order is less than the expected increase in variable and fixed costs,then the special order should be accepted.

Question 32

Clear Sky Sailmakers manufactures sails for sailboats.The company has the capacity to produce 15,000 sails per year,but is currently producing and selling 10,000 sails per year.The following information relates to current production: $$\begin{array} { | l | c | } \hline \text { Sale price per urit } & \$ 250 \\\hline & \\\hline \text { Variable costs per unit: } & \\\hline \text { Manufacturing } & \$ 165 \\\hline \text { Marketing and adrministrative } & \$ 50 \\\hline & \\\hline \text { Total Eixed costs: } & \\\hline \text { Manufacturing } & \$ 750,000 \\ \hline \text { Marketing and adrinistrative } & \$ 200,000 \\\hline\end{array}$$

- If a special sales order is accepted for 2,000 sails at a price of $220 per unit,and fixed costs increase by $7,000,how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Decrease by $3,000
B)Increase by $103,000
C)Increase by $3,000
D)Increase by $10,000

Question 33

Label each item below as relevant or irrelevant in making a decision.
a)The cost of insurance on a new vehicle when deciding to buy a new vehicle
b)Cost of roof repair made on rental property last year
c)Original cost of old equipment that is being evaluated for replacement
d)Cost of new equipment under evaluation to replace used equipment
e)Accumulated depreciation on old equipment being evaluated for replacement
f)Cost of previous year's insurance policy on old equipment being evaluated for replacement

Question 34

1-25 What is the difference between relevant and irrelevant information for making decisions.Provide examples of each.

Question 35

2-1 Special orders increase income if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order.

Question 36

2-3 Variable costs are relevant to a special decision when those variable costs differ between alternatives.

Question 37

Woodson Corporation provided the following information regarding its only product: $\begin{array}{|l|r|}\hline \text { Sale price per unit } & \$ 65.00 \\\hline \text { Direct materials used } & \$ 160,000 \\\hline \text { Direct labor incurred } & \$ 185,000 \\\hline \text { Variable manufacturing overhead } & \$ 120,000 \\\hline \begin{array}{l}\text { Variable selling and administrative } \\\text { expenses }\end{array} & \$ 70,000 \\\hline \text { Fixed manufacturing overhead } & \$ 65,000 \\\hline \text { Fixed selling and administrative expenses } & \$ 12,000 \\\hline \text { Units produced and sold } & 10,000 \\\hline\\\hline\text { Assume no beginning inventory }\\\hline\end{array}$

-Assuming there is excess capacity,what would be the effect on operating income of accepting a special order for 1,200 units at a sale price of $60 per product assuming additional fixed manufacturing overhead costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $72,000
B)Decrease by $2,800
C)Increase by $7,800
D)Increase by $2,800

Question 38

1-21 All of the following are relevant to the decision to replace equipment EXCEPT the:

A)cost of new equipment.
B)selling price of old equipment.
C)future maintenance costs of old equipment.
D)cost of old equipment.

Question 39

2-8 When deciding whether to accept a special order,managers should consider all of the following EXCEPT:

A)available excess capacity.
B)the variable costs associated with the special order.
C)fixed costs that will not be affected by the order.
D)the affect of the order on regular sales.

Question 40

2-7 In a special sales order decision,incremental fixed costs that will be incurred if the special order is accepted are considered to be:

A)relevant to the decision.
B)irrelevant to the decision.
C)opportunity costs.
D)sunk costs.

Question 41

2-20 Swisser Vase Company manufactures and sells vases.Great Products Company has offered Swisser Vase $16 per vase for 5,000 vases.Swisser Vase's normal selling price is $28 per vase.The total manufacturing cost per vase is $18 and consists of variable costs of $14 per vase and fixed overhead costs of $4 per vase.(NOTE: Assume excess capacity and no effect on regular sales.) Should Swisser Vase accept or reject the special sales order?

A)Accept,because operating income would increase $150,000.
B)Reject,because operating income would decrease $70,000.
C)Reject,because operating income would decrease $10,000.
D)Accept,because operating income would increase $10,000.

Question 42

The Shoop Corporation produces and sells a part used in the production of tractors.The unit costs associated with this part are as follows:
$\begin{array} { l r } \text { Direct materials } & \$ .16 \\\text { Direct labor } & .32 \\\text { Variable manufacturing overhead } & .25 \\\text { Fixed manufacturing overhead } & .10 \\ \text { Total cost } & \underline { \underline { \$ .83 } }\end{array}$

Jupiter Company has approached Shoop Corporation with an offer to purchase 20,000 units of this part at a price of $.72.Accepting this special sales order will put idle manufacturing capacity to use and will not affect regular sales.Total fixed costs will not change.
Determine whether or not the special order should be accepted.Justify your conclusion.

Question 43

Forge Company produces cast-iron skillets.A local campground recently made a special order offer; the campground would like to purchase 1,000 skillets branded with their logo.Forge Company is currently producing and selling 20,000 skillets; the company has the excess capacity to handle this special order.The campground has offered to pay $30 for each skillet.An accountant at Forge Company provides an estimate of the unit product cost as follows: $\begin{array}{|l|lr|}\hline \text { Direct materials } & \$ & 6.00 \\\hline \text { Direct labor (variable) } & \$ & 3.50 \\\hline \text { Variable manufacturing overhead } & \$ & 1.00 \\\hline \text { Fixed manufacturing overhead } & \$ & 4.00 \\\hline \text { Total unit cost } & \$ & 14.50 \\\hline\end{array}$ This special order would require an investment of $5,000 for the molds required for the custom logo brand.These molds would have no other purpose and would have no salvage value.The special order skillets would also have an additional variable cost of $2.00 per unit associated with the custom logos.This special order would not have any effect on the company's other sales.If the special order is accepted,the company's operating income would increase (decrease)by:

A)$ 19,500.
B)$ 15,500.
C)$ 10,500.
D)$ 12,500.

Question 44

2-30 Indicate whether each item below is a characteristic of a price-taker or a price-setter.Use PT for price-taker and PS for price-setter. a)Less competition
B)Cost-plus pricing
C)Product lacks uniqueness
D)Target pricing
E)Heavy competition

Question 45

X Factor Sports received a special order for 1,000 units of its extreme snowboards at a selling price of $60 per snowboard.X Factor Sports has enough extra capacity to accept the order.No additional selling costs will be incurred.
Unit costs to make and sell this product are as follows: Direct materials,$34; direct labor,$8; variable manufacturing overhead,$14; fixed manufacturing overhead,$10,and variable selling costs,$2.

A)List the relevant costs.
B)What will be the change in operating income if X Factor Sports accepts the special order?
C)Should X Factor Sports accept the special order?

Question 46

The following information relates to current production of bench seats for boats at Aquamarine Manufacturing: $$\begin{array} { | l | c c | } \hline \text { Variable manufacturing costs per unit } & \$ & 102.00 \\\hline \text { Tatal fixed manufacturing costs } & \$ & 525,000 \\\hline \text { Variable marketing and administrative costs per unit } & \$ & 30.00 \\\hline \text { Total fixed marketing and adrinistrative costs } & \$ &250,000 \\\hline\end{array}$$

-The regular selling price per bench seat is $200.00.The company is analyzing the opportunity to accept a special sales order for 2,000 bench seats at a price of $150.00 per unit.Fixed costs would remain unchanged.The variable marketing and administrative costs of $30.00 per unit would NOT be incurred on this special order.The company has the capacity to produce 15,000 bench seats per year,but is currently producing and selling 10,000 bench seats per year.Regular sales will not be affected by the special order.If the company were to accept this special order,how would operating income be affected?

A)Decrease by $96,000
B)Decrease by $36,000
C)Increase by $96,000
D)Increase by $36,000

Question 47

Venus Corporation provided the following information regarding its single product: $\begin{array}{|l|c|}\hline \text { Direct materials used } & \$ 240,000 \\\hline \text { Direct labor incurred } & \$ 420,000 \\\hline \text { Variable manufacturing overhead } & \$ 160,000 \\\hline \text { Fixed manufacturing overhead } & \$ 100,000 \\\hline \text { Variable selling and administrative expenses } & \$ 60,000 \\\hline \text { Fixed selling and administrative expenses } & \$ 20,000 \\\hline\end{array}$
The regular selling price for the product is $75.The annual quantity of units produced and sold is 20,000 units (the costs above relate to the 20,000 units production level).The company has excess capacity and regular sales will not be affected by this special order.There was no beginning inventory.

-
What would be the effect on operating income of accepting a special order for 1,500 units at a sale price of $40 per product? The special order units would not require any variable selling and administrative expenses.

A)Decrease by $1,500
B)Decrease by $6,000
C)Increase by $1,500
D)Increase by $6,000

Question 48

Snow Sports Company received a special order for 1,000 units of its extreme snowboards at a selling price of $40 per snowboard.Snow Sports has enough capacity to accept the order.No additional selling costs will be incurred.Unit costs to make and sell this product are as follows: Direct Materials $12; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5.
List the relevant costs (and amount)to Snow Sports Company for this special order.

Question 49

Roadrunner Manufacturing produces Item Q with variable manufacturing costs of $16/unit.The selling price of Item Q is $20/unit.The fixed manufacturing overhead cost is $75,000.A normal production run includes 150,000 units.Roadrunner Manufacturing has discovered an additional process to change Item Q into Item QR.Additional costs are estimated at $3/unit.Item QR would sell for $24/unit.Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced.There would be no change in the number of units produced.
What would be the operating income for Item Q?

Question 50

The following information relates to current production of bench seats for boats at Aquamarine Manufacturing: $$\begin{array} { | l | c c | } \hline \text { Variable manufacturing costs per unit } & \$ & 102.00 \\\hline \text { Tatal fixed manufacturing costs } & \$ & 525,000 \\\hline \text { Variable marketing and administrative costs per unit } & \$ & 30.00 \\\hline \text { Total fixed marketing and adrinistrative costs } & \$& 250,000 \\\hline\end{array}$$

- The regular selling price per bench seat is $200.00.The company is analyzing the opportunity to accept a special sales order for 3,000 bench seats at a price of $175.00 per unit.Fixed costs would remain unchanged.The company has the capacity to produce 15,000 bench seats per year,but is currently producing and selling 10,000 bench seats per year.Regular sales will not be affected by the special order.If the company were to accept this special order,how would operating income be affected?

A)Increase by $129,000
B)Increase by $525,000
C)Decrease by $129,000
D)Decrease by $525,000

Question 51

Green Valley golf course is planning for the coming season.Investors would like to earn a 14% return on the company's $45 million of assets.The company primarily incurs fixed costs to groom the greens and fairways.Fixed costs are projected to be $18,000,000 for the golfing season.About 400,000 golfers are expected each year.Variable costs are about $8 per golfer.The Green Valley golf course has a favorable reputation in the area and therefore,has some control over the price of a round of golf.Using a cost-plus approach,what price should Green Valley charge for a round of golf?

Question 52

Woodson Corporation provided the following information regarding its only product: $\begin{array}{|l|r|}\hline \text { Sale price per unit } & \$ 65.00 \\\hline \text { Direct materials used } & \$ 160,000 \\\hline \text { Direct labor incurred } & \$ 185,000 \\\hline \text { Variable manufacturing overhead } & \$ 120,000 \\\hline \begin{array}{l}\text { Variable selling and administrative } \\\text { expenses }\end{array} & \$ 70,000 \\\hline \text { Fixed manufacturing overhead } & \$ 65,000 \\\hline \text { Fixed selling and administrative expenses } & \$ 12,000 \\\hline \text { Units produced and sold } & 10,000 \\\hline\\\hline\text { Assume no beginning inventory }\\\hline\end{array}$

-Assuming there is excess capacity,what would be the effect on operating income of accepting a special order for 800 units at a sale price of $52 per product? The 800 units would not require any variable selling and administrative expenses.(NOTE: Assume regular sales are not affected by the special order.)

A)Decrease by $4,400
B)Decrease by $1,200
C)Increase by $4,400
D)Increase by $78,800

Question 53

The following information relates to current production of bench seats for boats at Aquamarine Manufacturing: $$\begin{array} { | l | c c | } \hline \text { Variable manufacturing costs per unit } & \$ & 102.00 \\\hline \text { Tatal fixed manufacturing costs } & \$ & 525,000 \\\hline \text { Variable marketing and administrative costs per unit } & \$ & 30.00 \\\hline \text { Total fixed marketing and adrinistrative costs } & \$& 250,000 \\\hline\end{array}$$

-The regular selling price per bench seat is $200.00.The company is analyzing the opportunity to accept a special sales order for 3,000 bench seats at a price of $140.00 per unit.Variable marketing and administrative costs would be $15 per unit lower than on regular sales.Fixed costs would increase by $10,000.The company has the capacity to produce 15,000 bench seats per year,but is currently producing and selling 10,000 bench seats per year.Regular sales will not be affected by the special order.If the company were to accept this special order,how would operating income be affected?

A)Decrease by $69,000
B)Decrease by $59,000
C)Increase by $69,000
D)Increase by $59,000

Question 54

Venus Corporation provided the following information regarding its single product: $\begin{array}{|l|c|}\hline \text { Direct materials used } & \$ 240,000 \\\hline \text { Direct labor incurred } & \$ 420,000 \\\hline \text { Variable manufacturing overhead } & \$ 160,000 \\\hline \text { Fixed manufacturing overhead } & \$ 100,000 \\\hline \text { Variable selling and administrative expenses } & \$ 60,000 \\\hline \text { Fixed selling and administrative expenses } & \$ 20,000 \\\hline\end{array}$
The regular selling price for the product is $75.The annual quantity of units produced and sold is 20,000 units (the costs above relate to the 20,000 units production level).The company has excess capacity and regular sales will not be affected by this special order.There was no beginning inventory.

-
What would be the effect on operating income of accepting a special order for 2,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead costs of $7,000 are incurred?

A)Decrease by $5,000
B)Decrease by $2,000
C)Increase by $5,000
D)Increase by $2,000

Question 55

The following information relates to current production of bench seats for boats at Aquamarine Manufacturing: $$\begin{array} { | l | c c | } \hline \text { Variable manufacturing costs per unit } & \$ & 102.00 \\\hline \text { Tatal fixed manufacturing costs } & \$ & 525,000 \\\hline \text { Variable marketing and administrative costs per unit } & \$ & 30.00 \\\hline \text { Total fixed marketing and adrinistrative costs } & \$&250,000 \\\hline\end{array}$$

- The regular selling price per bench seat is $200.00.The company is analyzing the opportunity to accept a special sales order for 2,500 bench seats at a price of $155.00 per unit.Fixed costs would increase by $10,000.The company has the capacity to produce 15,000 bench seats per year,but is currently producing and selling 10,000 bench seats per year.Regular sales will not be affected by the special order.If the company were to accept this special order,how would operating income be affected?

A)Decrease by $57,500
B)Increase by $57,500
C)Decrease by $47,500
D)Increase by $47,500

Question 56

Sarah's Talking Dolls manufactures a computer chip used in the production of dolls for children.When 5,000 dolls are produced,the costs per part are:
$$\begin{array} { | l | c | } \hline \text { Direct materials } & \$ 2.00 \\\hline \text { Direct labor } & 1.50 \\\hline \text { Variable manufacturing overhead } & 1.75 \\\hline \text { Fixed manufacturing overhead } & \underline { 2.25 } \\\hline \text { Total } & \$ 7.50 \\\hline\end{array}$$ Sam's Associates has offered to sell Sarah's Talking Dolls 5,000 parts for $5.75 each.If Sarah accepts the offer,$1.00 of the fixed manufacturing overhead costs can be eliminated.
A.What is the relevant per unit cost to manufacture the part?
B.Which alternative is best for Sarah's Talking Dolls and by how much?

Question 57

Snow Sports Company received a special order for 1,000 units of its extreme snowboards at a selling price of $40 per snowboard.Snow Sports has enough capacity to accept the order.No additional selling costs will be incurred.Unit costs to make and sell this product are as follows: Direct Materials $12; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5.
What will be Snow Sports Company's change in operating income if they accept the special order? Should Snow Sports Company accept the order? Explain why or why not.

Question 58

2-19 Swisser Vase Company manufactures and sells vases.Great Products Company has offered Swisser Vase $16 per vase for 5,000 vases.Swisser Vase's normal selling price is $28 per vase.The total manufacturing cost per vase is $18 and consists of variable costs of $14 per vase and fixed overhead costs of $4 per vase.(NOTE: Assume excess capacity and no effect on regular sales.) How much are the expected increase (decrease)in revenues and expenses from the special sales order?

A)Expected increase (decrease)in revenues $80,000; expected increase (decrease)in expenses $90,000
B)Expected increase (decrease)in revenues $80,000; expected increase (decrease)in expenses $70,000
C)Expected increase (decrease)in revenues $80,000; expected increase (decrease)in expenses $20,000
D)Expected increase (decrease)in revenues $140,000; expected increase (decrease)in expenses $70,000

Question 59

Venus Corporation provided the following information regarding its single product: $\begin{array}{|l|c|}\hline \text { Direct materials used } & \$ 240,000 \\\hline \text { Direct labor incurred } & \$ 420,000 \\\hline \text { Variable manufacturing overhead } & \$ 160,000 \\\hline \text { Fixed manufacturing overhead } & \$ 100,000 \\\hline \text { Variable selling and administrative expenses } & \$ 60,000 \\\hline \text { Fixed selling and administrative expenses } & \$ 20,000 \\\hline\end{array}$
The regular selling price for the product is $75.The annual quantity of units produced and sold is 20,000 units (the costs above relate to the 20,000 units production level).The company has excess capacity and regular sales will not be affected by this special order.There was no beginning inventory.

-
What would be the effect on operating income of accepting a special order for 3,000 units at a sale price of $65 per product?

A)Increase by $327,000
B)Increase by $63,000
C)Decrease by $327,000
D)Decrease by $63,000

Question 60

Glow Sticks Corporation manufactures and sells glow-in-the-dark necklaces for $10 each.The company has the capacity to produce 25,000 necklaces in a year,but is currently producing and selling 20,000 necklaces per year.The company currently is incurring the following costs at its current production level of 20,000 necklaces: $$\begin{array} { | l | l c | } \hline \text { Variable manufacturing costs } & \$ & 60,000 \\\hline \text { Fixed manufacturing costs } & \$ & 90,000 \\\hline \text { Variable selling and adrinistrative costs } & \$ & 75,000 \\\hline \text { Fixed selling and administrative costs } & \$ & 50,000 \\\hline\end{array}$$ An amusement park is interested in purchasing the excess capacity of 5,000 necklaces if it can receive a special price.This special order would not affect Glow Sticks Corporation's regular sales or its cost structure.Glow Sticks Corporation's profits would increase from this special order if the special order price per necklace is greater than:

A)$ 5.40.
B)$ 6.75.
C)$ 7.50.
D)$ 13.75.

Question 61

3-11 Managers only need to consider variable costs when setting prices.

Question 62

3-12 Cost-plus pricing is essentially the opposite of target-costing.

Question 63

3-9 Product differentiation allows companies to become more of a price-taker,and less of a price- setter.

Question 64

3-8 Companies often try to gain more control over pricing by attempting to differentiate their products.

Question 65

3-17 Which of the describes the target total cost?

A)Revenue at market price minus desired profit
B)Revenue at market price plus desired profit
C)Total cost plus desired profit
D)Total cost minus actual cost

Question 66

3-13 Which of the following best describes "total cost of product or service"?

A)Benefits foregone by not choosing an alternative course of action
B)A factor that restricts production or sales of a product
C)All costs incurred along the value chain in connection with the product or service.
D)Costs that were incurred in the past and can not be changed

Question 67

3-19 Which of the following pairs are characteristics of price-takers?

A)Less competition and target pricing
B)Target costing and heavy competition
C)Cost-plus pricing and less competition
D)Cost-plus pricing and lack of product uniqueness

Question 68

3-5 When making a pricing decision,it is necessary to separate costs into fixed and variable.

Question 69

3-1 When setting prices,a company must consider whether it is a price-taker or a price-setter for each product that it sells.

Question 70

3-6 Cost-plus price minus desired profit equals total cost.

Question 71

3-10 Managers only need to consider inventoriable product costs when setting prices.

Question 72

3-20 Which of the following pairs are characteristics of price-setters?

A)Less competition and target costing
B)Lack of product uniqueness and heavy competition
C)Cost-plus pricing and less competition
D)Less competition and lack of product uniqueness

Question 73

3-7 When using a target costing approach,the company starts with revenue at market price,and then subtracts its desired profit,to yield the target total cost.

Question 74

2-39 Roadrunner Manufacturing produces Item Q with variable manufacturing costs of $16/unit.The selling price of Item Q is $20/unit.The fixed manufacturing overhead cost is $75,000.A normal production run includes 150,000 units.Roadrunner Manufacturing has discovered an additional process to change Item Q into Item QR.Additional costs are estimated at $3/unit.Item QR would sell for $24/unit.Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced.There would be no change in the number of units produced.
What would be the operating income for Item QR?

Question 75

3-2 A price-setter company emphasizes a target costing approach to pricing.

Question 76

3-3 For a product,revenue at market price plus desired operating profit equals target total cost.

Question 77

3-16 Which of the describes the cost-plus price?

A)Total cost plus desired profit
B)Target total cost plus desired profit
C)Revenue at market price plus desired profit
D)Variable cost plus desired profit

Question 78

3-4 When a company is a price-setter,it emphasizes a cost-plus approach to pricing.

Question 79

Roadrunner Manufacturing produces Item Q with variable manufacturing costs of $16/unit.The selling price of Item Q is $20/unit.The fixed manufacturing overhead cost is $75,000.A normal production run includes 150,000 units.Roadrunner Manufacturing has discovered an additional process to change Item Q into Item QR.Additional costs are estimated at $3/unit.Item QR would sell for $24/unit.Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced.There would be no change in the number of units produced.
By what percent would Roadrunner Manufacturing's operating income improve if the change is made?

Question 80

3-15 Which of the following affects stockholders' expectations of company profits?

A)Industry risk
B)General economic conditions
C)Historical company earnings
D)All of the above