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Chapter 13Relevant Costs for Decision-MakingTrue/False1.TMediumOne of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.2. T MediumFuture costs that do not differ among the alternatives are not relevant ...

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Chapt er13 Rel ev antCos t sf orDeci si onMak i ng

True/False 1. T Medium

One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.

2. T Medium

Future costs that do not differ among the alternatives are not relevant in a decision.

3. F Medium

Variable costs are always relevant costs.

4. T Easy

An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another.

5. T Easy

A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of what action is chosen.

6. T Easy

The book value of old equipment is not a relevant cost in an equipment replacement decision problem.

7. F Medium

Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product.

8. T Easy

If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin, then the firm is better off economically if the product is dropped.

9. T Easy

The cost of a resource that has no alternative use in a make or buy decision problem has an opportunity cost of zero.

10. F Hard

Managers should pay little attention to bottleneck operations since they have limited capacity for producing output.

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11. F Easy

Opportunity costs are recorded in the accounts of an organization.

12. T Easy

All other things equal, it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from further processing exceeds the incremental costs of further processing.

13. F Medium

Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.

14. F Medium

Two or more different products that are manufactured in the same production period are known as joint products.

15. F Easy

A merchandising firm which buys all of its inventory from outside suppliers is an example of a firm that is vertically integrated.

Multiple Choice 16. B Easy

Costs which are always relevant in decision making are those costs which are: a. variable. b. avoidable. c. sunk. d. fixed.

17. D Easy

Consider a decision facing a firm of either accepting or rejecting a special offer for one of its products. A cost that is not relevant is: a. direct materials. b. variable overhead. c. fixed overhead that will be avoided if the special offer is accepted. d. common fixed overhead that will continue if the special offer is not accepted.

18. C Easy

To maximize total contribution margin, a firm faced with a production constraint should: a. promote those products having the highest unit contribution margins. b. promote those products having the highest contribution margin ratios. c. promote those products having the highest contribution margin per unit of constrained resource. d. promote those products have the highest contribution margins and contribution margin ratios.

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19. B Hard

A plant operating at capacity would suggest that: a. every machine and person in the plant is working at the maximum possible rate. b. only some specific machines or processes are operating at the maximum rate possible. c. fixed costs will need to change to accommodate increased demand. d. managers should produce those products with the highest contribution margin in order to deal with the constrained resource.

20. C Medium

Which of the following is not an effective way of dealing with a production constraint (i.e., bottleneck)? a. Reduce the number of defective units produced at the bottleneck. b. Pay overtime to workers assigned to the bottleneck. c. Pay overtime to workers assigned to work stations located after the bottleneck in the production process. d. Subcontract work that would otherwise required use of the bottleneck.

21. D Medium

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. cost of the production given up in order to manufacture the component. d. net benefit foregone from the best alternative use of the capacity required.

22. D Easy

A joint product is: a. any product which consists of several parts. b. any product produced by a firm with more than one product line. c. any product involved in a make or buy decision. d. one of several products produced from a common input.

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23. D Medium

Consider the following statements: I. A vertically integrated firm is more dependent on its suppliers than a firm that is not vertically integrated. II. Many firms feel they can control quality better by making their own parts. III. A vertically integrated firm realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations. Which of the above statements represent advantages to a firm that is vertically integrated? a. Only I b. Only III c. Only I and II d. Only II and III

24. A Easy CPA adapted

The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of $20,000. If the lanterns are remachined for $5,000, they could be sold for $9,000. Alternatively, the lanterns could be sold for scrap for $1,000. Which alternative is more desirable and what are the total relevant costs for that alternative? a. remachine and $5,000. b. remachine and $25,000. c. scrap and $20,000. d. scrap and $19,000.

25. B Medium CPA adapted

Relay Corporation manufactures batons. Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000. Based on Relay's predictions for next year, 240,000 batons will be sold at the regular price of $5.00 each. In addition, a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased or decreased as a result of the special order? a. $60,000 decrease. b. $30,000 increase. c. $36,000 increase. d. $180,000 increase.

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26. B Medium CPA adapted

The manufacturing capacity of Jordan Company's facilities is 30,000 units a year. A summary of operating results for last year follows: Sales (18,000 units @ $100) .... $1,800,000 Variable costs ................. 990,000 Contribution margin ........... 810,000 Fixed costs .................... 495,000 Net operating income ........... $ 315,000 A foreign distributor has offered to buy 15,000 units at $90 per unit next year. Jordan expects its regular sales next year to be 18,000 units. If Jordan accepts this offer and rejects some business from regular customers so as not to exceed capacity, what would be the total net operating income next year? (Assume that the total fixed costs would be the same no matter how many units are produced and sold.) a. $390,000. b. $705,000. c. $840,000. d. $855,000.

27. A Easy CPA adapted

Wagner Company sells product A for $21 per unit. Wagner's unit product cost based on the full capacity of 200,000 units is as follows: Direct materials ..................... Direct labor ......................... Manufacturing overhead ............... Unit product cost ..................

$ 4 5 6 $15

A special order offering to buy 20,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $3 per unit for shipping. Wagner has sufficient idle capacity to manufacture the additional units. Two-thirds of the manufacturing overhead is fixed and would not be affected by this order. Assume that direct labor is an avoidable cost in this decision. In negotiating a price for the special order, the minimum acceptable selling price per unit should be: a. $14. b. $15. c. $16. d. $18.

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28. C Easy

A study has been conducted to determine if one of the departments in Parry Company should be discontinued. The contribution margin in the department is $50,000 per year. Fixed expenses charged to the department are $65,000 per year. It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, the company's overall net operating income would: a. decrease by $25,000 per year. b. increase by $25,000 per year. c. decrease by $10,000 per year. d. increase by $10,000 per year.

29. C Easy

A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would: a. decrease by $20,000 per year. b. increase by $20,000 per year. c. decrease by $10,000 per year. d. increase by $30,000 per year.

30. A Easy

Lusk Company produces and sells 15,000 units of Product A each month. The selling price of Product A is $20 per unit, and variable expenses are $14 per unit. A study has been made concerning whether Product A should be discontinued. The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product was discontinued. These data indicate that if Product A is discontinued, the company's overall net operating income would: a. decrease by $60,000 per month. b. increase by $10,000 per month. c. increase by $20,000 per month. d. decrease by $20,000 per month.

31. B Easy CPA adapted

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 avoided. The effect of this discontinuance on Manor's overall 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.

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32. C Easy CPA adapted

Gata Co. plans to discontinue a department that has a $48,000 contribution margin and $96,000 of fixed costs. Of these fixed costs, $42,000 cannot be avoided. What would be the effect of this discontinuance on Gata's overall net operating income? a. Increase of $48,000 b. Decrease of $48,000 c. Increase of $6,000 d. Decrease of $6,000

33. B Medium

The Cook Company has two divisions--Eastern and Western. The divisions have the following revenues and expenses: Eastern Western Sales ......................... $550,000 $500,000 Variable costs ................ 275,000 200,000 Direct fixed costs ............ 180,000 150,000 Allocated corporate costs ..... 170,000 135,000 Net income (loss) ............. (75,000) 15,000 The management of Cook is considering the elimination of the Eastern Division. If the Eastern Division were eliminated, the direct fixed costs associated with this division could be avoided. However, corporate costs would still be $305,000 in total. Given these data, the elimination of the Eastern Division would result in an overall company net income (loss) of: a. $15,000. b. ($155,000). c. ($75,000). d. ($60,000).

34. B Medium

Manor Company plans to discontinue a department that has a contribution margin of $25,000 and $50,000 in fixed costs. Of the fixed costs, $21,000 cannot be eliminated. The effect on the profit of Manor Company of discontinuing this department would be: a. a decrease of $4,000. b. an increase of $4,000. c. a decrease of $25,000. d. an increase of $25,000.

35. D Easy

Green Company produces 1,000 parts per year, which are used in the assembly of one of its products. The unit product cost of these parts is: Variable manufacturing cost ..... $12 Fixed manufacturing cost ........ 9 Unit product cost ............. $21 The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be: a. $1,000 increase.

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b. $1,000 decrease. c. $5,000 increase. d. $2,000 decrease.

36. A Easy

Pitkin Company produces a part used in the manufacture of one of its products. The unit product cost of the part is $33, computed as follows: Direct materials ..................... $12 Direct labor ......................... 8 Variable manufacturing overhead ...... 3 Fixed manufacturing overhead ......... 10 Unit product cost .................. $33 An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each. The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision. Based on these data, the per unit dollar advantage or disadvantage of purchasing the parts from the outside supplier would be: a. $3 advantage. b. $1 advantage. c. $1 disadvantage. d. $4 disadvantage.

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37. B Easy CPA adapted

Cardinal Company needs 20,000 units of a certain part to use in one of its products. The following information is available: Cost to Cardinal to make the part: Direct materials ................. $ 4 Direct labor ..................... 16 Variable manufacturing overhead .. 8 Fixed manufacturing overhead ..... 10 $38 Cost to buy the part from the Oriole Company ............. $36 Oriole Company has offered to sell this part to Cardinal company for $36 each. If Cardinal buys the part from Oriole instead of making it, Cardinal would not have any use for the released capacity. In addition, 60% of the fixed manufacturing overhead costs will continue regardless of what decision is made. Assume that direct labor is an avoidable cost in this decision. In deciding whether to make or buy the part, the total relevant costs to make the part are: a. $560,000. b. $640,000. c. $720,000. d. $760,000.

38. B Easy CPA adapted

Golden, Inc., has been manufacturing 5,000 units of Part 10541 which is used in one of its products. At this level of production, the unit product cost of Part 10541 is as follows: Direct materials ..................... $ 2 Direct labor ......................... 8 Variable manufacturing overhead ...... 4 Fixed manufacturing overhead ......... 6 Unit product cost .................. $20 Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit. Golden has determined that two thirds of the fixed manufacturing overhead will continue even if Part 10541 is purchased from Brown. Assume that direct labor is an avoidable cost in this decision. To determine whether to accept Brown's offer, the relevant costs to Golden of manufacturing the parts internally are: a. $70,000. b. $80,000. c. $90,000. d. $95,000.

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39. B Easy CPA adapted

The following standard costs pertain to a component part manufactured by Ashby Company: Direct materials ................. $ 2 Direct labor ..................... 5 Manufacturing overhead ........... 20 Standard cost per unit ........ $27 The company can purchase the part from an outside supplier for $25 per unit. The manufacturing overhead is 60% fixed and this fixed portion would not be affected by this decision. Assume that direct labor is an avoidable cost in this decision. What is the relevant amount of the standard cost per unit to be considered in a decision of whether to make the part internally or buy it from the external supplier? a. $2 b. $15 c. $19 d. $27

40. B Medium

The SP Company makes 40,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials ............ Direct labor ................ Variable factory overhead ... Fixed factory overhead ......

$5.50 $5.60 $4.75 $4.45

An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Company for this motor is $18. If SP Company decides not to make the motors, there would be no other use for the production facilities and total fixed factory overhead costs would not change. If SP Company decides to continue making the motor, how much higher or lower would net income be than if the motors are purchased from the outside suppler? Assume that direct labor is a variable cost in this company. a. $276,000 higher. b. $86,000 higher. c. $92,000 lower. d. $178,000 higher.

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41. B Medium

Manico Company produces three products -- X, Y, & Z -- with the following characteristics: X Y Z o Selling price per unit ...... $20 100% $16 100% $15 100% Variable cost per unit ...... 12 60 12 75 6 40 Contribution margin per unit $ 8 40% $ 4 25% $ 9 60% Machine hours per unit ...... 5 3 6 The company has only 2,000 machine-hours available each month. If demand exceeds the company's capacity, in what sequence should orders be filled if the company wants to maximize its total contribution margin? a. orders for Z first, X second, and Y third. b. orders for X first, Z second, and Y third. c. orders for Y first, X second, and Z third. d. orders for Z first and no orders for X or Y.

42. B Medium

Consider the following production and cost data for two products, L and C:

Contribution margin per unit ....... Machine set-ups needed per unit ....

Product L $130 10 set-ups

Product C $120 8 set-ups

The company can only perform 65,000 machine set-ups each period due to limited skilled labor and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period? a. $845,000. b. $975,000. c. $910,000. d. $1,820,000. 43. B Medium

Products A, B, and C are produced from a single raw material input. The raw material costs $90,000, from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period. Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of $12,500 and then sold for $5 per unit. Product A should be: a. sold at the split-off point, since further processing would result in a loss of $0.50 per unit. b. processed further, since this will increase profits by $2,500 each period. c. sold at the split-off point, since further processing will result in a loss of $2,500 each period. d. processed further, since this will increase profits by $12,500 each period.

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44. C Easy

The Wyeth Company produces three products, A, B, and C, from a single raw material input. Product A can be sold at the split-off point for $40,000, or it can be processed further at a total cost of $15,000 and then sold for $58,000. Joint product costs total $60,000 annually. Product A should...