Question 1

Fanatic Footwear has two store locations, midtown and at the beach. During October, the company reported net income of $80,000 on sales of $450,000. Sales in the midtown store were $170,000 and variable costs in the beach store were 40% of sales. The contribution margin in the midtown store was $85,000. If total direct fixed costs are $40,000, how much are total fixed costs for Fanatic Footwear?

Accepted Answer

Total fixed costs include both direct fixed costs and any indirect fixed costs. Given the information, we can calculate the total fixed costs by first determining the total contribution margin and then subtracting it from the sales to find total fixed costs. The total contribution margin is the sum of the contribution margin from the midtown store ($85,000) and the contribution margin from the beach store (calculated as sales minus variable costs, which are 40% of beach sales, or 60% of $280,000 = $168,000). Thus, the total contribution margin is $85,000 (midtown) + $168,000 (beach) = $253,000. The net income is given as $80,000, which is the result after subtracting total fixed costs from the total contribution margin. Therefore, total fixed costs = total sales - total contribution margin + net income = $450,000 - $253,000 + $80,000 = $277,000, which is not an option provided.

Question 2

Samson Designers produces a lady's handbag that normally sells for $120. The company produces 800 units annually but has the capacity to produce 1,100 units. An order from a customer has been received for 200 handbags at $85 each that would not disrupt current operations. Current costs for the handbag are as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 23.00 \
\text { Direct labor } & 45.00 \
\text { Variable overhead } & 7.00 \
\text { Fixed overhead } & - 12.00 \
\text { Total } & \underline { \$ 87.00 }
\end{array}$$ In addition, the customer would like to add a monogram to each bag which would require an additional $4 per bag in additional labor costs. Samson would also have to purchase a piece of equipment to create the monogram which would cost $800. This equipment would not have any other uses. Which statement is true with regard to this situation?

Accepted Answer

Incremental revenue from the order is $17,000 (200 bags x $85). Incremental costs include direct materials, direct labor, variable overhead, additional labor for monogramming, and the equipment cost, totaling $16,600. Therefore, incremental revenues exceed incremental costs by $400.

Question 3

Abacus has 800 obsolete calculators that are carried in inventory at a cost of $1,920. If these calculators are upgraded at a cost of $3,100, they could be sold for $4,500. Alternatively, the calculators could be sold "as is" for $1,600. What is the net advantage or disadvantage of reworking the calculators?

Accepted Answer

The answer of Abacus has 800 obsolete calculators that are...

Question 4

Swell Computers has 12 obsolete computers that are carried in its inventory at a cost of $13,200. If these computers are upgraded at a cost of $7,500, they could be sold for $15,300. Alternatively, the computers could be sold "as is" for $9,000. What is the net advantage or disadvantage of upgrading the computers?

Accepted Answer

The answer of Swell Computers has 12 obsolete computers that...

Question 5

You have tickets to go to Jamaica over spring break. Just this week your best friend informs you that he (she) is getting married over spring break. Your friend would like you to stay back in the city and be the wedding attendant. The tickets to Jamaica are nonrefundable.
Which of the following is a sunk cost relating to your decision of attending the wedding or going on the trip to Jamaica?

Accepted Answer

The answer of You have tickets to go to Jamaica...

Question 6

Denray Deli has two locations, downtown and in the town mall. During March, the company reported total net income of $144,000 with sales of $1,200,000. The contribution margin in the downtown store was 30%. The contribution margin in the town mall store is $80,000. Total fixed costs are allocated as $110,000 in the downtown store and $90,000 in the town mall location. How much are sales at the downtown location?

Accepted Answer

We can use the formula:
Net Income = Sales - Variable Costs - Fixed Costs
Let's first find the total contribution margin:
Total contribution margin = $144,000 + $110,000 + $90,000 - $80,000 = $264,000
We are given that the contribution margin in the downtown store is 30%, so we can write:
Contribution margin from downtown store = 0.3(total contribution margin)
Contribution margin from downtown store = 0.3($264,000)
Contribution margin from downtown store = $79,200
Now we can use the formula to find the sales at the downtown location:
Net Income from downtown store = Sales from downtown store - Variable Costs from downtown store - Fixed Costs allocated to downtown store
$79,200 = Sales from downtown store - 0.7(Sales from downtown store) - $110,000
$79,200 + $110,000 = 0.3(Sales from downtown store)
$189,200 = 0.3(Sales from downtown store)
Sales from downtown store = $630,667
Therefore, total sales = sales from downtown store + sales from town mall store = $630,667 + $569,333 = $1,200,000
Thus, the answer is A) $880,000.

Question 7

When a department or product line is dropped, the common fixed costs that had been allocated to that department

Accepted Answer

When a department or product line is dropped, the common fixed costs that had been allocated to that department are not eliminated or become variable costs. Instead, they are reallocated to the remaining departments or product lines. This is because common fixed costs are incurred for the benefit of multiple departments or product lines, so they cannot simply be eliminated. They also do not become sunk costs, as they are still ongoing costs that will be allocated elsewhere in the organization.

Question 8

The Book Rack has two locations, downtown and on campus. During March, the company reported net income of $164,000 and sales of $1.2 million. The contribution margin in the downtown store was $320,000 (32% of sales). The contribution margin in the campus store is $110,000. Direct fixed costs are $90,000 in the downtown store and $93,000 in the campus location. How much are total variable costs?

Accepted Answer

To find the total variable costs, we need to use the contribution margin formula:

Contribution Margin = Sales - Variable Costs

For the downtown store: 
320,000 = 0.32(Sales) - Variable Costs
Variable Costs = 0.32(Sales) - 320,000
Variable Costs = 0.32(1.2 million) - 320,000
Variable Costs = $256,000

For the campus store: 
110,000 = Sales - Variable Costs
Variable Costs = Sales - 110,000

To find the total variable costs, we need to add the variable costs from both stores:

Total Variable Costs = (0.32x + 110,000) 
where x is the sales in the downtown store. 
We know that the total sales for both stores is $1.2 million:

x + (1.2 million - x) = 1.2 million 
x = 880,000

Therefore: 
Total Variable Costs = (0.32 x 880,000 + 110,000) 
Total Variable Costs = $770,000

Question 9

Trebecker Construction plans to discontinue its roofing segment which last year generated a contribution margin of $65,000 and incurred $70,000 in fixed costs. If the segment is discontinued, half of the fixed costs will be avoided. What effect is expected to occur to the company's overall profit?

Accepted Answer

Discontinuing the roofing segment would result in avoidance of half of the fixed costs ($35,000). However, the contribution margin from the segment is $65,000. Therefore, discontinuing the segment would result in a decrease in overall profit by $30,000 ($65,000 - $35,000).

Question 10

Which of the following statements regarding opportunity costs is true?

Accepted Answer

Opportunity costs represent the benefits an individual, investor, or business misses out on when choosing one alternative over another. These costs, while not recorded in the financial statements, are relevant for decision-making and are indeed incremental as they vary depending on the choice made between alternatives.

Question 11

Speedo produces signature goggles which it sells for $35. The company produces 15,000 pairs of these goggles annually but has the capacity to produce 20,000. An order for manufacturing and selling 1,000 pairs at $25 has been received from the U.S. Olympic swim team that would not disrupt current operations. Current costs for the signature goggles are as follows: $\begin{array}{lr}
\text { Direct materials } & \$ 6.00 \
\text { Direct labor } & 10.00 \
\text { Variable overhead } & 3.00 \
\text { Fixed overhead } & \$ 8.00 \
\text { Total } & \$ 27.00
\end{array}$ In addition, the Olympic coach would like to add the U.S. Olympic logo to each pair which would require an additional $2 per pair of goggles in additional labor costs. The company would also have to rent a logo stamper to stamp the logo which would cost $600. Which statement is true with regard to this order?

Accepted Answer

The incremental costs include direct materials, direct labor, variable overhead, additional labor for the logo, and the logo stamper rental. The total incremental cost per unit is $21 ($6 + $10 + $3 + $2) plus the fixed cost of $600 for the stamper. For 1,000 units, the total incremental cost is $21,000 + $600 = $21,600.

Question 12

Tannimen Square has 800 obsolete calculators in its inventory which have a cost of $16 each. If the calculators are reworked they could be sold for $23 each. If sold 'as-is', the revenue would be only $12 each. If Tannimen decides to rework the calculators, how much should the company be willing to invest to ensure that no additional loss occurs on the sale of the calculators?

Accepted Answer

The company has 800 calculators that cost $16 each, so the total cost is:
800 calculators x $16/calculator = $12,800

If the calculators are reworked, they can be sold for $23 each, so the total revenue would be:
800 calculators x $23/calculator = $18,400

If the calculators are sold 'as-is', the revenue would be:
800 calculators x $12/calculator = $9,600

To find out how much the company should invest to ensure no additional loss occurs, we need to calculate the profit or loss in each scenario.

If the calculators are reworked, the profit would be:
Total revenue - Total cost = $18,400 - $12,800 = $5,600

If the calculators are sold 'as-is', the loss would be:
Total revenue - Total cost = $9,600 - $12,800 = -$3,200 (a loss of $3,200)

Therefore, the company should choose to rework the calculators, and they should be willing to invest up to the amount of the potential profit to ensure no additional loss occurs. That amount is $5,600, so the answer is B.

Question 13

Watson Wheels currently makes 6,000 wheels annually that are used in other products it manufactures. Current unit costs for the wheels are as follows: $\begin{array}{lr}
\text { Direct materials } & \$ 22.00 \
\text { Direct labor } & 16.00 \
\text { Variable manufacturing overhead } & 12.00 \
\text { Fixed manufacturing overhead } & \underline{15.00} \
\text { Total } & \$ 65.00
\end{array}$ The company has an offer from a manufacturer to produce the wheels for $60 per wheel. If the company decides to buy the wheels, the empty warehouse space could be rented for $22,000 annually. In addition, half of the fixed manufacturing overhead costs would be avoided if the company decides to buy the wheels. If the company decides to accept the offer, what is the incremental effect on the company's net income?

Accepted Answer

The answer of Watson Wheels currently makes 6,000 wheels annually...

Question 14

Which of the following is a direct cost of a specific department in a retail store?

Accepted Answer

The cost of the department manager's salary is a direct cost of the specific department, as it is directly related to the operation of that particular department. Supplies used in cleaning the store, rent of the store, and utilities used by the store are indirect costs that are incurred by the store as a whole, rather than a specific department.

Question 15

Marshal Costumes owns two stores and management is considering eliminating the Mandarin store due to declining sales. Common fixed costs are allocated on the basis of sales. Contribution income statements are as follows: $\begin{array}{lrrr}&\text { Arlington }&\underline{\text { Mandarin }} &\underline{\text { Total }}\
\text { Sales } & \$ 300,000 & \$ 200,000 & \$ 500,000 \
\text { Variable costs } & 160,000 & 130,000 & 290,000 \
\text { Direct fixed costs } & 40,000 & 20,000 & 60,000 \
\text { Allocated fixed costs } & \underline{80,000} & \underline{65,000} & \underline{145,000} \
\text { Net Income } & \underline{\$ 20,000} & \underline{\$(15,000)} & \underline{\$ 5,000}
\end{array}$ Marshal's management feels that if they eliminate the Mandarin store, that sales in the Arlington store will increase by 10%. If the Mandarin store is closed, what is the incremental effect on profit for Marshal Costumes?

Accepted Answer

The answer of Marshal Costumes owns two stores and management...

Question 16

The following are production and cost data for two products, A and B, produced in batches of 100 units. $\begin{array}{lrr}&\text { Product A }&\text { Product B }\
\text { Contribution margin per batch } & \$ 450 & \$ 340 \
\text { Machine set-ups needed per batch } & 25 & 20
\end{array}$ The company can only perform 12,000 set-ups each period yet there is unlimited demand for each product. What is the incremental profit from producing Product A instead of Product B for the year?

Accepted Answer

The incremental profit is calculated by comparing the contribution margin per setup for each product. Product A has a contribution margin of $450 per 25 setups, which is $18 per setup. Product B has a contribution margin of $340 per 20 setups, which is $17 per setup. The difference is $1 per setup. With 12,000 setups available, the incremental profit is $12,000.

Question 17

Publix has 2,700 pounds of bananas with a total cost of $864. Because the bananas have become too ripe, Publix is contemplating whether it should use the bananas to bake banana bread or sell the bananas 'as is' to the homeless center for $1,485. In addition to the cost of the bananas, it would cost $2,565 to convert the bananas into bread, which could then be sold for a total of $4,480. However, a special oven to bake the bread will have to be rented for an additional $300. What is the incremental effect on income if Publix converts the bananas to banana bread?

Accepted Answer

The answer of Publix has 2,700 pounds of bananas with...

Question 18

The following are production and cost data for two products, buckets and pails, produced in batches of 600 each. $\begin{array}{lrr}&\text { Buckets }&\text { Pails }\
\text { Contribution margin per batch } & \$ 360 & \$ 250 \
\text { Machine set-ups needed per batch } & 14 & 9
\end{array}$ The company can only perform 9,450 set-ups each period, yet there is unlimited demand for each product. What is the maximum contribution margin for the year?

Accepted Answer

The answer of The following are production and cost data...

Question 19

Harrison Enterprises currently produces 8,000 units of part B13. Current unit costs for part B13 are as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 12 \
\text { Direct labor } & 9 \
\text { Factory rent } & 7 \
\text { Administrative costs } & 10 \
\text { General factory overhead (allocated) } & 7 \
\text { Total } & \underline { \$ 45 }
\end{array}$$ If Harrison decides to buy part B13, 50% of the administrative costs would be avoided. All of the company's items, including part B13, are manufactured in the same rented production facility. The company has an offer from a wholesaler that wishes to sell the part to Harrison for $31 per unit. What will occur if the company accepts the offer?

Accepted Answer

The answer of Harrison Enterprises currently produces 8,000 units of...

Question 20

Mel's Diner owns a single restaurant, which has a cantina primarily used to seat patrons while they wait on their tables. The company is considering eliminating the cantina. Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of square footage. $\begin{array}{lrrr}&\text { Restaurant } & \underline{\text { Cantina }}& \text { Total }\
\text { Sales } & \$ 800,000 & \$ 200,000 & \$ 1,000,000 \
\text { Variable costs } & 475,000 & 160,000 & 635,000 \
\text { Direct fixed costs } & 50,000 & 15,000 & 65,000 \
\text { Allocated fixed costs } & 212,500 & 37,500 & 250,000\
\text { Net income }&\$62,500&(\$12,500)&\$50,000
\end{array}$ What effect will occur if Mel's Diner eliminates the cantina if there is no effect on restaurant sales?

Accepted Answer

If the cantina is eliminated, the net income will decline by $25,000 because the cantina's contribution margin of $25,000 (Sales $200,000 - Variable costs $160,000 - Direct fixed costs $15,000) will be lost, while the allocated fixed costs of $37,500 will remain with the restaurant.

Quiz 7: The Use of Cost Information in Management Decision Making

When a department or product line is dropped, the common fixed costs that had been allocated to that department

Trebecker Construction plans to discontinue its roofing segment which last year generated a contribution margin of $65,000 and incurred $70,000 in fixed costs. If the segment is discontinued, half of the fixed costs will be avoided. What effect is expected to occur to the company's overall profit?

Which of the following statements regarding opportunity costs is true?

Which of the following is a direct cost of a specific department in a retail store?