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Chapter 13 - Short-Run Decision Making: Relevant Costing 1. Which of the following is NOT a step in the decision-making model? a. Determine costs and benefits for both feasible and unfeasible alternatives. b. Identify alternatives. c. Consider qualitative factors. d. Total the relevant costs and benefits for each alternative. ANSWER: a POINTS: 1 DIFFICULTY: Easy REFERENCES: p. 618 LEARNING OBJECTIVES: MACC.MOWE.15.13.1 - 13.1 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; classifying 2. What is the term for the act of choosing among alternatives with an immediate or limited end in view? a. assessing feasible alternatives b. strategic decision making c. constructing a decision model d. short-run decision making ANSWER: d POINTS: 1 DIFFICULTY: Medium REFERENCES: p. 618 LEARNING OBJECTIVES: MACC.MOWE.15.13.1 - 13.1 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; classifying 3. Which of the following costs are future costs that differ across alternatives? a. opportunity costs b. sunk costs c. relevant costs d. variable costs ANSWER: c POINTS: 1 DIFFICULTY: Easy REFERENCES: p. 622 LEARNING OBJECTIVES: MACC.MOWE.15.13.1 - 13.1 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; classifying 4. Which of the following costs is the depreciation of equipment an example of? a. a relevant cost

b. an opportunity cost c. a sunk cost d. a variable cost ANSWER: POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: KEYWORDS:

c 1 Easy p. 623 MACC.MOWE.15.13.1 - 13.1 United States - AACSB Analytic United States - IMA-Decision Analysis Bloom's Higher order; classifying

5. Berkman Company is considering the purchase of new equipment to replace one-year-old equipment that is not achieving the expected results. The following information is available: Expected maintenance costs of new machine $13,000 per year Purchase price of existing machine $160,000 Expected cost savings of new machine $ 30,000 per year Expected maintenance costs of existing machine $ 8,000 per year Resale value of existing machine $ 45,000 Which of these items is NOT relevant to this decision? a. the expected maintenance costs of the new machine b. the purchase cost of the existing machine c. the expected maintenance costs of the existing machine d. the expected resale value of the existing machine ANSWER: b POINTS: 1 DIFFICULTY: Easy REFERENCES: p. 623 LEARNING OBJECTIVES: MACC.MOWE.15.13.1 - 13.1 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; executing 6. Which resources can be purchased in the amount needed and at the time of use? a. lumpy resources b. flexible resources c. committed resources d. product resources ANSWER: b POINTS: 1 DIFFICULTY: Easy REFERENCES: p. 624 LEARNING OBJECTIVES: MACC.MOWE.15.13.1 - 13.1 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; classifying

7. Sasha Company produced 50 defective units last month at a unit manufacturing cost of $40. The defective units were discovered before leaving the plant. Sasha can sell them “as is” for $30 or can rework them at a cost of $25 and sell them at the regular price of $60. Which of the following is NOT relevant to the sell-or-rework decision? a. $25 for rework b. $30 selling price of defective units c. $40 manufacturing cost d. $60 regular selling price ANSWER: c POINTS: 1 DIFFICULTY: Medium REFERENCES: p. 625 LEARNING OBJECTIVES: MACC.MOWE.15.13.1 - 13.1 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; executing 8. Walbom Company produced 200 defective units last month at a unit manufacturing cost of $40. The defective units were discovered before leaving the plant. Walbom can sell them “as is” for $30 or can rework them at a cost of $25 and sell them at the regular price of $60. What is the total relevant cost of reworking the defective units? a. $2,250 b. $3,000 c. $5,000 d. $6,750 ANSWER: c Cost of reworking the defective units = 200($25) = $5,000 RATIONALE: POINTS: 1 DIFFICULTY: Medium REFERENCES: p. 625 LEARNING OBJECTIVES: MACC.MOWE.15.13.1 - 13.1 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; executing 9. Andrews Industries manufactures 10,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials $140,000 Direct labour 230,000 Inspecting products 50,000 Providing power 20,000 Providing supervision 30,000 Setting up equipment 50,000 Moving materials 10,000 Total $530,000 If the component is not produced by Andrews, inspection of products and provision of power costs will be only 10% of the production costs, moving materials costs and setting up equipment costs will be only 50% of the production costs, and supervision costs will amount to only 40% of the production amount. An outside supplier has offered to sell the component for $45. Suppose Andrews Industries purchases the component from the outside supplier. What will be the effect on Andrew’s income?

a. a $31,000 increase b. a $31,000 decrease c. a $91,000 increase d. a $91,000 decrease ANSWER: RATIONALE:

a SUPPORTING CALCULATIONS:

Make: Direct materials Direct labour Inspecting products (avoid 90%) Providing power (avoid 90%) Providing supervision (avoid 60%) Setting up equipment (avoid 50%) Moving materials (avoid 50%) Total

$(140,000) (230,000) (45,000) (18,000) (18,000) (25,000) (5,000) $(481,000)

Buy: Purchase price (10,000 × $45.00)

$(450,000)

$450,000 − $481,000 = $31,000 increase in income

POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: KEYWORDS:

1 Challenging p. 625 MACC.MOWE.15.13.2 - 13.2 United States - AACSB Analytic United States - IMA-Decision Analysis Bloom's Higher order; executing

10. Atlantic Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials $ 75,000 Direct labour 120,000 Variable manufacturing overhead 45,000 Fixed manufacturing overhead 60,000 Total $300,000 An outside supplier has offered to sell the component for $12.75. What is the effect on income if Atlantic Industries purchases the component from the outside supplier? a. a $30,000 increase b. a $30,000 decrease c. a $270,000 increase d. a $270,000 decrease ANSWER: d SUPPORTING CALCULATIONS: RATIONALE:

Make: Direct materials Direct labour Variable overhead Total Buy:

$ (75,000) (120,000) (45,000) $(240,000)

Purchase price (40,000 × $12.75)

$(510,000)

$510,000 − $240,000 = $270,000 decrease in income

POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: KEYWORDS:

1 Challenging p. 625 MACC.MOWE.15.13.2 - 13.2 United States - AACSB Analytic United States - IMA-Decision Analysis Bloom's Higher order; executing

11. Western Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials $ 75,000 Direct labour 120,000 Variable manufacturing overhead 45,000 Fixed manufacturing overhead 60,000 Total $300,000 An outside supplier has offered to sell the component for $12.75. Western Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier. What is the effect on income if Western purchases the component from the outside supplier? a. a $135,000 increase b. a $165,000 decrease c. a $195,000 increase d. a $225,000 decrease ANSWER: d SUPPORTING CALCULATIONS: RATIONALE:

Make: Direct materials Direct labour Variable overhead Total

$ (75,000) (120,000) (45,000) $(240,000)

Buy: Purchase price (40,000 × $12.75) Rental income Total

$(510,000) 45,000 $(465,000)

$465,000 − $240,000 = $225,000 decrease in income

POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: KEYWORDS:

1 Challenging p. 625 MACC.MOWE.15.13.2 - 13.2 United States - AACSB Analytic United States - IMA-Decision Analysis Bloom's Higher order; executing

12. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows:

Variable costs per unit: Direct materials Direct labour Factory overhead Distribution Total

Fixed costs per month: $ 9.00Factory overhead 4.50Selling and administrative 3.00Total 1.50 $18.00

$120,000 60,000 $180,000

The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $17.00 per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on profits if Miller Company buys from the firm? a. a decrease of $6,000 b. a decrease of $19,000 c. an increase of $19,000 d. an increase of $38,000 ANSWER: d SUPPORTING CALCULATIONS: RATIONALE:

Cost to buy ($17 × 20,000) Cost to make: Variable costs ($18.00 × 20,000) Opportunity costs Profit will increase by POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: KEYWORDS:

$340,000 $360,000 18,000

378,000 $ 38,000

1 Challenging p. 625 MACC.MOWE.15.13.2 - 13.2 United States - AACSB Analytic United States - IMA-Decision Analysis Bloom's Higher order; implementing

13. Houser Corporation manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: Direct materials $ 32 Direct labour 40 Variable overhead 16 Fixed overhead 32 Total $120 Kingston Company has offered to sell Houser Corporation 5,000 units of the part for $112 per unit. If Houser Corporation accepts Kingston Company’s offer, total fixed costs will be reduced to $60,000. Which alternative is more desirable, and by what amount is it more desirable? Alternative Amount a. Make $20,000 b. Make $120,000 c. Buy $40,000 d. Buy $100,000 ANSWER: a SUPPORTING CALCULATIONS: RATIONALE:

Make ($120 × 5,000)

$600,000

Buy [($112 × 5,000) + $60,000] Make increases profits by POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: KEYWORDS:

620,000 $ 20,000

1 Challenging p. 625 MACC.MOWE.15.13.2 - 13.2 United States - AACSB Analytic United States - IMA-Decision Analysis Bloom's Higher order; implementing

14. What kind of decision involves a choice between internal and external production? a. a make-or-buy decision b. a keep-or-drop decision c. a sell-or-process-further decision d. a special-order decision ANSWER: a POINTS: 1 DIFFICULTY: Easy REFERENCES: p. 626 LEARNING OBJECTIVES: MACC.MOWE.15.13.2 - 13.2 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; classifying 15. What is the decision called when a manager must decide whether to produce a part or to purchase it from an external supplier? a. keep or drop b. special order c. process further d. make or buy ANSWER: d POINTS: 1 DIFFICULTY: Easy REFERENCES: p. 626 LEARNING OBJECTIVES: MACC.MOWE.15.13.5 - 13.5 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; classifying 16. Which qualitative factor should NOT be considered when evaluating a make-or-buy decision? a. the quality of the outside supplier’s product b. whether the outside supplier can provide the needed quantities c. whether the outside supplier can provide the product when it is needed d. the split-off costs of the product ANSWER: d POINTS: 1 DIFFICULTY: Easy

REFERENCES: p. 626 LEARNING OBJECTIVES: MACC.MOWE.15.13.1 - 13.1 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; classifying 17. Which of the following is an important qualitative factor to consider regarding a special order? a. variable costs associated with the special order b. avoidable fixed costs associated with the special order c. the effect the sale of special-order units will have on the sale of regularly priced units d. incremental revenue from the special order ANSWER: c POINTS: 1 DIFFICULTY: Easy REFERENCES: p. 629 LEARNING OBJECTIVES: MACC.MOWE.15.13.1 - 13.1 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; classifying 18. What kind of decision focuses on whether a one-off order should be accepted or rejected? a. a relevant decision b. a make-or-buy decision c. a sell-or-process-further decision d. a special-order decision ANSWER: d POINTS: 1 DIFFICULTY: Easy REFERENCES: p. 629 LEARNING OBJECTIVES: MACC.MOWE.15.13.2 - 13.2 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; classifying 19. A company is considering a special order for 2,000 units to be priced at $18.90 (the normal price would be $21.50). The order would require specialized materials costing $4.00 per unit. Direct labour and variable factory overhead would cost $2.15 per unit. Fixed factory overhead is $2.20 per unit. However, the company has excess capacity, and acceptance of the order would not raise total fixed factory overhead. The warehouse, however, would have to add capacity costing $2,600. Which of the following is relevant to the special order? a. $2.20 fixed factory overhead per unit b. $2.60 per unit of revenue c. $18.90 selling price per unit of special order d. $21.50 normal selling price ANSWER: c POINTS: 1 DIFFICULTY: Medium REFERENCES: p. 629 LEARNING OBJECTIVES: MACC.MOWE.15.13.1 - 13.1

NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; implementing 20. Bonder Company makes a variety of paper products. One product is printer paper, packaged 2,000 sheets to a box. One box normally sells for $30 A large bank offered to purchase 5,000 boxes at $26 per box. Costs per box are as follows: Direct materials $128 Direct labour 53 Variable overhead 21 Fixed overhead 65 No variable marketing costs would be incurred on the order. The company is operating significantly below the maximum production capacity. No fixed costs are avoidable. Which of the following represents the solution? a. Do not accept the order because income will decrease by $35,000. b. Do not accept the order because income will decrease by $5,000. c. Accept the order because income will increase by $35,000. d. Accept the order because income will increase by $5,000. ANSWER: c SUPPORTING CALCULATIONS: Bonder will make $35,000 if the order is accepted. $35,000 RATIONALE: = ($26 − 128 − 53 − 21) × 5,000

POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: KEYWORDS:

1 Easy p. 629 MACC.MOWE.15.13.2 - 13.2 United States - AACSB Analytic United States - IMA-Decision Analysis Bloom's Higher order; implementing

21. Aerotoy Company makes toy airplanes. One plane is an excellent replica of a 737, which sells for $5. Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children who are flying unaccompanied. Costs per plane are as follows: Direct materials $1.00 Direct labour 0.50 Variable overhead 0.10 Fixed overhead 0.90 No variable marketing costs would be incurred. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. However, Vacation Airlines wants its own logo and colours on the planes. The cost of the decals is $0.01 per plane, and a special machine costing $1,500 would be required to affix the decals. After the order is complete, the machine would be scrapped. Which of the following represents the solution? a. Do not accept the order, because income will decrease by $1,500. b. Do not accept the order, because income will decrease by $180. c. Accept the order, because income will increase by $180. d. Accept the order, because income will increase by $300. ANSWER: c SUPPORTING CALCULATIONS: RATIONALE:

Contribution margin [($1.75 − 1.61) ×12,000] Less: cost of special machine Increased income POINTS: DIFFICULTY:

1 Medium

$1,680 1,500 $ 180

REFERENCES: p. 629 LEARNING OBJECTIVES: MACC.MOWE.15.13.2 - 13.2 NATIONAL STANDARDS: United States - AACSB Analytic United States - IMA-Decision Analysis KEYWORDS: Bloom's Higher order; implementing 22. The following information relates to a product produced by Creamer Company: Direct materials $24 Direct labour 15 Variable overhead 30 Fixed overhead 18 Unit cost $87 Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each. What is the incremental cost per unit associated with the special order? a. $64 b. $69 c. $81 d. $84 ANSWER: c SUPPORTING CALCULATIONS: RATIONALE:

Direct materials Direct labour Variable overhead Variable selling and administrative POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: KEYWORDS:

$24 15 30 12 $81

1 Medium p. 629 MACC.MOWE.15.13.2 - 13.2 United States - AACSB Analytic United States - IMA-Decision Analysis Bloom's Higher order; implementing

23. Meco Company produces a product that has a regular selling price of $360 per unit. At a typical monthly production volume of 2,000 units, the product’s average unit cost of goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order. Assume that Meco Company has excess capacity. Suppose Meco accepts the order. What would be the effect on profits? a. a $30,000 increase b. a $30,000 decrease c. a $60,000 increase d. a $60,000 decrease ANSWER: a SUPPORTING CALCULATIONS: 1,000 × [$240 − ($270 − $120,000/2,000)] = $30,000 RATIONALE:

increase

POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: KEYWORDS:

1 Medium p. 629 MACC.MOWE.15.13.2 - 13.2 United States - AACSB Analytic United States - IMA-Decision Analysis Bloom's Higher order; implementing

24. The following information relates to a product produced by Creamer Company: Direct materials $24 Direct labour 15 Variable overhead 30 Fixed overhead 18 Unit cost $87 Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each. Suppose the firm produces the special order. What would be the effect on Creamer’s annual income? a. a $360,000 increase b. a $360,000 decrease c. a $540,000 increase d. a $540,000 decrease ANSWER: c SUPPORTING CALCULATIONS: RATIONALE:

Incremental revenue (60,000 × $90) Less: Incremental costs (60,000 × $81) Incremental profit POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: KEYWORDS:

$5,400,000 4,860,000 $ 540,000

1 Medium p. 629 MACC.MOWE.15.13.2 - 13.2 U...