chapter 13 relevant costs for decision making - garrison

Chapter 13 Relevant Costs for Decision Making

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-5

True/False Questions

1. Sunk costs are costs that have proven to be unproductive.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Decision Making; Reporting LO: 1 Level: Medium

2. All costs are avoidable in a decision except sunk costs and future costs that do not

differ between the alternatives at hand.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

3. Consistency demands that a cost that is relevant in one decision be regarded as

relevant in other decisions as well.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking


4. A cost may be relevant for one decision making situation but irrelevant for another

situation.



5. A future cost that does not vary among alternatives under consideration is irrelevant.



6. Opportunity costs represent economic benefits that are forgone as a result of pursuing

some course of action.



7. An existing asset should not be replaced until its original cost has been fully

recovered.




13-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

8. Fixed costs are irrelevant in decisions about whether a product line should be dropped.



9. In a special order situation, any fixed cost associated with the order would be

irrelevant.



10. When a company has a production constraint, total contribution margin will be

maximized by emphasizing the products with the highest contribution margin per unit

of the constrained resource.



11. Eliminating nonproductive time is particularly important in a bottleneck operation.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking


12. One way to increase the effective utilization of a bottleneck is to reduce the number of

defective units.



13. As a general guide, it is profitable to continue processing joint products after the split-

off point if their total revenues exceed the joint costs.



14. Joint costs are irrelevant in the decision of whether to sell a joint product at the split-

off point or process it further and then sell it.





15. A key advantage of using activity-based costing is that any cost that is assigned to a

product is also a relevant cost in any decision involving that product.



Multiple Choice Questions

16. Costs which can be eliminated in whole or in part if a particular business segment is

discontinued are called:

A) sunk costs.

B) opportunity costs.

C) avoidable costs.

D) irrelevant costs.

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking


17. Consider the following statements:

I. Assemble all costs associated with each alternative being considered.

II. Eliminate those costs that are sunk.

III. Eliminate those costs that differ between alternatives.

Which of the above statements does not represent a step in identifying the relevant

costs in a decision problem?

A) Only I

B) Only II

C) Only III

D) Only I and III

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking




18. Which of the following cash flows is relevant in a decision about accepting

Alternative X or Alternative Y?

A) a cash inflow for Alternative X that is not a cash inflow for Alternative Y.

B) a cash inflow that is lost if Alternative X is accepted and is not lost if

Alternative Y is accepted.

C) a cash outflow that is avoided if Alternative X is accepted and is not avoided if

Alternative Y is accepted.

D) all of the above.

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking


19. Which of the following best describes an opportunity cost:

A) it is a relevant cost in decision making, but is not part of the traditional

accounting records.

B) it is not a relevant cost in decision making, but is part of the traditional

accounting records.

C) it is a relevant cost in decision making, and is part of the traditional accounting

records.

D) it is not a relevant cost in decision making, and is not part of the traditional

accounting records.

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking


Source: CPA, adapted

20. Consider the following statements:

I. A division's net operating income, after deducting both traceable and allocated

common corporate costs, is negative.

II. The division's avoidable fixed costs exceed its contribution margin.

III. The division's traceable fixed costs plus its allocated common corporate costs

exceed its contribution margin.

Which of the above statements give an economic reason for eliminating the division?

A) Only I

B) Only II

C) Only III

D) Only I and II

Ans: B AACSB: Analytic AICPA BB: Critical Thinking




21. The Jabba Company manufactures the “Snack Buster” which consists of a wooden

snack chip bowl with an attached porcelain dip bowl. Which of the following would

be relevant in Jabba's decision to make the dip bowls or buy them from an outside

supplier?

Fixed overhead cost The variable

that can be eliminated if selling

the bowls are purchased cost of the

from the outside supplier Snack Buster

A) Yes Yes

B) Yes No

C) No Yes

D) No No



22. The acceptance of a special order will improve overall net operating income so long as

the revenue from the special order exceeds:

A) the contribution margin on the order.

B) the incremental costs associated with the order.

C) the variable costs associated with the order.

D) the sunk costs associated with the order.



23. Kinsi Corporation manufactures five different products. All five of these products

must pass through a stamping machine in its fabrication department. This machine is

Kinsi's constrained resource. Kinsi would make the most profit if it produces the

product that:

A) uses the lowest number of stamping machine hours.

B) generates the highest contribution margin per unit.

C) generates the highest contribution margin ratio.

D) generates the highest contribution margin per stamping machine hour.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking




24. In a sell or process further decision, consider the following costs:

I. A variable production cost incurred prior to split-off.

II. A variable production cost incurred after split-off.

III. An avoidable fixed production cost incurred after split-off.

Which of the above costs is (are) not relevant in a decision regarding whether the

product should be processed further?

A) Only I

B) Only III

C) Only I and II

D) Only I and III

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


25. Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a

manufacturing cost of $50,000. If the lamps are reworked for $20,000, they could be

sold for $35,000. Alternatively, the lamps could be sold for $8,000 for scrap. In a

decision model analyzing these alternatives, the sunk cost would be:

A) $8,000

B) $15,000

C) $20,000

D) $50,000






26. Hodge Inc. has some material that originally cost $74,600. The material has a scrap

value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for

$54,400. What would be the incremental effect on the company's overall profit of

reworking and selling the material rather than selling it as is as scrap?

A) -$79,100

B) -$21,700

C) -$4,500

D) $52,900

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


Source: CIMA, adapted

Solution:

Incremental revenue from reworking ($54,400 − $1,500) $52,900

Less incremental revenue from selling as scrap ................ 57,400

Net loss from reworking .................................................... ($ 4,500)

27. Milford Corporation has in stock 16,100 kilograms of material R that it bought five

years ago for $5.75 per kilogram. This raw material was purchased to use in a product

line that has been discontinued. Material R can be sold as is for scrap for $3.91 per

kilogram. An alternative would be to use material R in one of the company's current

products, S88Y, which currently requires 2 kilograms of a raw material that is

available for $7.60 per kilogram. Material R can be modified at a cost of $0.77 per

kilogram so that it can be used as a substitute for this material in the production of

product S88Y. However, after modification, 4 kilograms of material R is required for

every unit of product S88Y that is produced. Milford Corporation has now received a

request from a company that could use material R in its production process. Assuming

that Milford Corporation could use all of its stock of material R to make product S88Y

or the company could sell all of its stock of the material at the current scrap price of

$3.91 per kilogram, what is the minimum acceptable selling price of material R to the

company that could use material R in its own production process?

A) $0.88

B) $3.03

C) $4.57

D) $3.91


AICPA FN: Decision Making; Reporting LO: 1 Level: Hard




Solution:

Product S88Y:

Current cost (2 kg @ $7.60): $15.20

If material R were used, 4 kilograms would be needed. It currently costs $15.20 for

Product S88Y; to maintain this same cost, material R would need to cost $3.03 per

kilogram [($15.20 ÷ 4 kg) − $0.77]. The company should sell material R for $3.91 per

kilogram.

28. Otool Inc. is considering using stocks of an old raw material in a special project. The

special project would require all 240 kilograms of the raw material that are in stock

and that originally cost the company $2,112 in total. If the company were to buy new

supplies of this raw material on the open market, it would cost $9.25 per kilogram.

However, the company has no other use for this raw material and would sell it at the

discounted price of $8.35 per kilogram if it were not used in the special project. The

sale of the raw material would involve delivery to the purchaser at a total cost of

$71.00 for all 240 kilograms. What is the relevant cost of the 240 kilograms of the raw

material when deciding whether to proceed with the special project?

A) $1,933

B) $2,004

C) $2,220

D) $2,112




Solution:

Opportunity cost of sales foregone if special project is

undertaken ($8.35 × 240) .............................................. $2,004

Less: delivery cost ............................................................. 71

Relevant cost of 240 kilograms of raw material ............... $1,933



29. Hamby Corporation is preparing a bid for a special order that would require 780 liters

of material W34C. The company already has 640 liters of this raw material in stock

that originally cost $8.30 per liter. Material W34C is used in the company's main

product and is replenished on a periodic basis. The resale value of the existing stock of

the material is $7.60 per liter. New stocks of the material can be readily purchased for

$8.35 per liter. What is the relevant cost of the 780 liters of the raw material when

deciding how much to bid on the special order?

A) $6,481

B) $6,376

C) $6,513

D) $5,928




Solution:

Relevant cost = $8.35 per liter × 780 liters = $6,513

30. Schickel Inc. regularly uses material B39U and currently has in stock 460 liters of the

material for which it paid $3,128 several weeks ago. If this were to be sold as is on the

open market as surplus material, it would fetch $5.95 per liter. New stocks of the

material can be purchased on the open market for $6.45 per liter, but it must be

purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of

760 liters of the material to be used in a job for a customer. The relevant cost of the

760 liters of material B39U is:

A) $4,902

B) $4,672

C) $4,522

D) $6,450




Solution:

Relevant cost = $6.45 per liter × 760 liters = $4,902



31. Munafo Corporation is a specialty component manufacturer with idle capacity.

Management would like to use its extra capacity to generate additional profits. A

potential customer has offered to buy 6,500 units of component VGI. Each unit of

VGI requires 1 unit of material I57 and 5 units of material M97. Data concerning these

two materials follow:

Material

Units in

Stock

Original

Cost Per

Unit

Current

Market

Price

Per Unit

Disposal

Value

Per Unit

I57 ....... 2,400 $9.10 $9.40 $8.95

M97 ..... 33,960 $4.70 $4.70 $3.50

Material I57 is in use in many of the company's products and is routinely replenished.

Material M97 is no longer used by the company in any of its normal products and

existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining

a minimum acceptable price for the order for product VGI?

A) $174,850

B) $213,130

C) $213,850

D) $171,925




Solution:

Material

# Required

per unit

Relevant

price Total

I57 ............... 1 × $9.40 = $ 9.40

M97 ............. 5 × $3.50 = 17.50

Total per unit relevant cost ...................... $26.90

Minimum acceptable price for 6,500 units of VGI =

$26.90 per unit × 6,500 units = $174,850



32. Winder Corporation is a specialty component manufacturer with idle capacity.

Management would like to use its extra capacity to generate additional profits. A

potential customer has offered to buy 3,000 units of component QEA. Each unit of

QEA requires 5 units of material F85 and 5 units of material E71. Data concerning

these two materials follow:

Material

Units in

Stock

Original

Cost Per

Unit

Current

Market Price

Per Unit

Disposal

Value Per

Unit

F85 ............. 740 $4.90 $4.75 $4.20

E71 ............. 13,680 $5.00 $4.70 $3.60

Material F85 is in use in many of the company's products and is routinely replenished.

Material E71 is no longer used by the company in any of its normal products and

existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining

a minimum acceptable price for the order for product QEA?

A) $126,702

B) $141,750

C) $126,295

D) $145,965




Solution:

Total needed Inventory

# of units to

purchase on

market

Relevant

price Total cost

F85 .............

(3,000 × 5) =

15,000 15,000 $4.75 $ 71,250

E71 .............

(3,000 × 5) =

15,000

(15,000 −

13,680) = 1,320 $4.70 6,204

13,680 $3.60 49,248

Minimum acceptable price for 3,000 units of QEA ........... $126,702



33. Rice Corporation currently operates two divisions which had operating results last

year as follows:

West Troy

Division Division

Sales .......................................................... $600,000 $300,000

Variable costs ............................................ 310,000 200,000

Contribution margin .................................. 290,000 100,000

Traceable fixed costs ................................. 110,000 70,000

Allocated common corporate costs ........... 90,000 45,000

Net operating income (loss) ...................... $ 90,000 ($ 15,000)

Since the Troy Division also sustained an operating loss in the prior year, Rice's

president is considering the elimination of this division. Troy Division's traceable

fixed costs could be avoided if the division were eliminated. The total common

corporate costs would be unaffected by the decision. If the Troy Division had been

eliminated at the beginning of last year, Rice Corporation's operating income for last

year would have been:

A) $15,000 higher

B) $30,000 lower

C) $45,000 lower

D) $60,000 higher




Solution:

Troy Division:

Contribution margin .......................................................... $100,000

Less: traceable fixed costs ................................................. 70,000

Segment margin of Troy Division .................................... $ 30,000

Rice Corporation’s operating income would have been $30,000 less without the

segment margin contributed by the Troy Division.



34. Beaver Company (a multi-product firm) produces 5,000 units of Product X each year.

Each unit of Product X sells for $8 and has a contribution margin of $5. If Product X

is discontinued, $18,000 of fixed overhead would be eliminated. As a result of

discontinuing Product X, the company's overall operating income would:

A) decrease by $25,000

B) increase by $43,000

C) decrease by $7,000

D) increase by $7,000



Solution:

Fixed overhead savings if Product X is eliminated ........... $18,000

Less: contribution margin lost if Product X is

discontinued ($5 × 5,000) .............................................. 25,000

Decrease in overall operating income if Product X is

eliminated ....................................................................... ($ 7,000)

35. Milli Company plans to discontinue a division that generates a total contribution

margin of $20,000 per year. Fixed overhead associated with this division is $50,000,

of which $5,000 cannot be eliminated. The effect of this discontinuance on Milli's

operating income would be an increase of:

A) $5,000

B) $20,000

C) $25,000

D) $30,000




Solution:

Fixed overhead savings if division is discontinued ........... $45,000

Less: contribution margin lost if division is eliminated .... 20,000

Increase in operating income if division is eliminated ...... $25,000



36. ABD Realty manages five apartment complexes in its region. Shown below are

summary income statements for each apartment complex:

U V W X Y

Rental income .......... $1,000 $1,210 $2,347 $1,878 $1,065

Expenses ................... 800 1,300 2,600 2,400 1,300

Operating income ..... $ 200 ($ 90) ($ 253) ($ 522) ($ 235)

Included in the expenses is $1,200 of common corporate expenses that have been

allocated to the apartment complexes based on rental income. These common

corporate expenses would have to be incurred regardless of how many apartment

complexes ABD Realty manages. The apartment complex(es) that ABD Realty should

consider dropping is (are):

A) V, W, X, Y

B) W, X, Y

C) X, Y

D) X



Source: CMA, adapted

Solution:

Total rental income = $1,000 + $1,210 + $2,347 + $1,878 + $1,065 = $7,500

U V W X Y

Rental income .......... $1,000 $1,210 $2,347 $1,878 $1,065

Less expenses ........... 800 1,300 2,600 2,400 1,300

Add back proportional

share of common

expenses [(Rental

income in each

column ÷ Total

rental income of

$7,500) × $1,200]* 160 194 376 300 170

Apartment complex

margin $ 360 $ 104 $ 123 ($222) ($ 65)

*expenses rounded to nearest whole dollar

Since complexes X and Y have negative margins, ABD Realty should consider

dropping those two divisions.



37. The following information relates to next year's projected operating results of the

Children's Division of Grunge Clothing Corporation:

Contribution margin .......... $200,000

Fixed expenses .................. 500,000

Net operating loss .............. ($300,000)

If Children's Division is dropped, half of the fixed costs above can be eliminated.

What will be the effect on Grunge's profit next year if Children's Division is dropped

instead of being kept?

A) $50,000 increase

B) $250,000 increase

C) $250,000 decrease

D) $550,000 increase



Solution:

Keep the

Division

Drop the

Division Difference

Contribution margin ...................... $200,000 $ 0 ($200,000)

Fixed expenses .............................. 500,000 250,000 250,000

Net operating income (loss) .......... ($300,000) ($250,000) ($ 50,000)

Net operating income would increase by $50,000 if the Children’s Division were

dropped. Therefore, the division should be dropped.



38. The management of Furrow Corporation is considering dropping product L07E. Data

from the company's accounting system appear below:

Sales ...................................................................... $830,000

Variable expenses ................................................. $365,000

Fixed manufacturing expenses .............................. $291,000

Fixed selling and administrative expenses ............ $166,000

In the company's accounting system all fixed expenses of the company are fully

allocated to products. Further investigation has revealed that $186,000 of the fixed

manufacturing expenses and $106,000 of the fixed selling and administrative expenses

are avoidable if product L07E is discontinued. What would be the effect on the

company's overall net operating income if product L07E were dropped?

A) Overall net operating income would increase by $8,000.

B) Overall net operating income would decrease by $173,000.

C) Overall net operating income would decrease by $8,000.

D) Overall net operating income would increase by $173,000.



Solution:

Keep the

Product

Drop the

Product Difference

Sales .............................................. $830,000 $ 0 ($830,000)

Variable expenses ......................... 365,000 0 365,000

Contribution margin ...................... 465,000 0 (465,000)

Fixed expenses:

Fixed manufacturing expenses ... 291,000 *105,000 186,000

Fixed selling and administrative

expenses.................................. 166,000 **60,000 106,000

Total fixed expenses ...................... 457,000 165,000 292,000

Net operating income (loss) .......... $ 8,000 ($165,000) ($173,000)

Net operating income would decline by $173,000 if product L07E were dropped.

Therefore, the product should not be dropped.

*$291,000 − $186,000 = $105,000

**$166,000 − $106,000 = $60,000



39. Product U23N has been considered a drag on profits at Jinkerson Corporation for

some time and management is considering discontinuing the product altogether. Data


Sales ....................................................................... $730,000

Variable expenses .................................................. $350,000



In the company's accounting system all fixed expenses of the company are fully

allocated to products. Further investigation has revealed that $144,000 of the fixed


are avoidable if product U23N is discontinued. What would be the effect on the

company's overall net operating income if product U23N were dropped?


B) Overall net operating income would increase by $143,000.


D) Overall net operating income would decrease by $15,000.



Solution:

Keep the

Product

Drop the

Product Difference

Sales ............................................... $730,000 $ 0 ($730,000)

Variable expenses .......................... 350,000 0 350,000

Contribution margin ...................... 380,000 0 ( 380,000)

Fixed expenses:

Fixed manufacturing expenses ... 234,000 *90,000 144,000


expenses .................................. 161,000 **68,000 93,000


Net operating income (loss) .......... ($ 15,000) ($ 158,000) ($143,000)

Net operating income would decline by $143,000 if product U23N were dropped.


*$234,000 − $144,000 = $90,000

**$161,000 − $93,000 = $68,000



40. Supler Company produces a part used in the manufacture of one of its products. The

unit product cost is $18, computed as follows:

Direct materials ......................................... $ 8

Direct labor ............................................... 4

Variable manufacturing overhead ............. 1

Fixed manufacturing overhead .................. 5

Unit product cost ....................................... $18

An outside supplier has offered to provide the annual requirement of 4,000 of the parts

for only $14 each. It is estimated that 60 percent of the fixed overhead cost above

could be eliminated if the parts are purchased from the outside supplier. Based on

these data, the per-unit dollar advantage or disadvantage of purchasing from the

outside supplier would be:

A) $1 disadvantage

B) $1 advantage

C) $2 advantage

D) $4 disadvantage



Solution:

Relevant cost per unit:

Direct materials ............................................... $ 8

Direct labor ..................................................... 4

Variable manufacturing overhead ................... 1

Fixed manufacturing overhead ($5 × 0.60) ..... 3

Relevant manufacturing cost ........................... $16

Net advantage (disadvantage):

Relevant manufacturing cost savings ........ $16

Less: cost from outside supplier ................ 14

Net advantage ............................................ $ 2



41. Sharp Company produces 8,000 parts each year, which are used in the production of

one of its products. The unit product cost of a part is $36, computed as follows:

Variable production costs ........ $16

Fixed production costs ............. 20

Unit product cost ..................... $36

The parts can be purchased from an outside supplier for only $28 each. The space in

which the parts are now produced would be idle and fixed production costs would be

reduced by one-fourth. If the parts are purchased from the outside supplier, the annual

impact on the company's operating income will be:

A) $24,000 increase

B) $24,000 decrease

C) $56,000 increase

D) $56,000 decrease



Solution:


Variable production costs ................................ $16

Fixed manufacturing overhead ($20 × 0.25) ... 5


Relevant manufacturing cost savings ($21 × 8,000) ............ $168,000

Less: cost to purchase from outside supplier ($28 × 8,000) . 224,000

Net disadvantage of purchasing from outside supplier ........ ($ 56,000)



42. Motor Company manufactures 10,000 units of Part M-l each year for use in its

production. The following total costs were reported last year:

Direct materials ......................................... $ 20,000

Direct labor ............................................... 55,000

Variable manufacturing overhead ............. 45,000

Fixed manufacturing overhead .................. 70,000

Total manufacturing cost .......................... $190,000

Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If

Motor accepts the offer, some of the facilities presently used to manufacture Part M-l

could be rented to a third party at an annual rental of $15,000. Additionally, $4 per

unit of the fixed overhead applied to Part M-l would be totally eliminated. Should

Motor Company accept Valve Company's offer, and why?

A) No, because it would be $5,000 cheaper to make the part.

B) Yes, because it would be $10,000 cheaper to buy the part.

C) No, because it would be $15,000 cheaper to make the part.

D) Yes, because it would be $25,000 cheaper to buy the part.




Solution:

Relevant cost of manufacturing:

Direct materials ..................................................... $ 20,000

Direct labor ........................................................... 55,000

Variable manufacturing overhead ......................... 45,000

Fixed manufacturing overhead ($4 × 10,000) ....... 40,000

Relevant manufacturing cost ................................. $160,000


Relevant manufacturing cost savings ........... $160,000

Annual rental of manufacturing facilities

given up if manufacture Part M-1 ............ 15,000

Cost of purchasing the part ($18 × 10,000) . ( 180,000)

Net disadvantage of purchasing part M-1 .... ($ 5,000)



43. Kingston Company needs 10,000 units of a certain part to be used in its production

cycle. The following information is available concerning Kingston's unit product cost:


Direct labor ................................................ 24

Variable manufacturing overhead ............. 12

Fixed manufacturing overhead .................. 15

Unit product cost ....................................... $57

Utica Company has offered to supply Kingston's entire annual requirements of the part

for $53 each. If Kingston buys the part from Utica instead of making it, Kingston

would have no other use for the facilities and 60 percent of the fixed manufacturing

overhead would continue. In deciding whether to make or buy the part, the total

relevant costs to make the part internally are:

A) $342,000

B) $480,000

C) $530,000

D) $570,000




Solution:


Direct materials ............................................... $ 6

Direct labor ...................................................... 24

Variable manufacturing overhead ................... 12

Fixed manufacturing overhead ($15 × 0.40) ... 6


Total relevant costs to make the part internally ($48 × 10,000) = $480,000



44. The following standard costs pertain to a component part manufactured by Bor

Company:

Direct materials ....................... $ 4

Direct labor ............................. 10

Manufacturing overhead ......... 40

Standard cost per unit .............. $54

An outside supplier has offered to supply all of the parts needed by Bor Company for

$50 each. The 60% of the manufacturing overhead cost that is fixed would be

unaffected by this decision. In the decision to “make or buy,” what is the relevant unit

cost to make the part internally?

A) $54

B) $38

C) $30

D) $5




Solution:



Direct labor ............................................... 10

Manufacturing overhead ($40 × 0.40) ...... 16

Relevant manufacturing cost ..................... $30



45. Gordon Company produces 1,000 units of a part per year which are used in the

assembly of one of its products. The unit cost of producing these parts is:

Variable manufacturing cost ......... $15

Fixed manufacturing cost .............. 12

Total manufacturing cost ............... $27

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 total fixed costs incurred in

producing the part can be eliminated. The annual increase or decrease on the

company's operating incomes as a result of buying the part from the outside supplier

would be:

A) $3,000 increase

B) $1,000 decrease

C) $7,000 increase

D) $5,000 decrease



Solution:


Variable production costs ................................ $15

Fixed manufacturing overhead ($12 × 2/3) ..... 8


Net advantage (disadvantage) per unit:

Manufacturing cost savings ....................... $23

Cost of purchasing the part ........................ 20

Net advantage (disadvantage) ................... $ 3

Total = $3 × 1,000 units = $3000 increase



46. Quikcook Microwave Company currently manufactures the doors that it uses for its

microwave ovens. The annual costs to manufacture the 40,000 doors needed each year

are as follows:

Total Cost

Direct material .................................. $200,000

Direct labor ...................................... 40,000

Variable manufacturing overhead .... 80,000

Fixed manufacturing overhead ......... 320,000

Total ................................................. $640,000

Delilah Glass Corporation has offered to provide Quikcook with all of its annual door

needs for $14 per door. If Quikcook accepts this offer, only 40% of the fixed overhead

above could be totally eliminated. Also, Quikcook has no alternative use for the idle

facilities if the decision was made to go with Delilah's offer. Based on this

information, would Quikcook be better off to make the doors or buy the doors and by

how much?

A) $48,000 better to buy

B) $48,000 better to make

C) $112,000 better to buy

D) $112,000 better to make



Solution:

Relevant cost:

Direct materials ....................................................... $200,000

Direct labor ............................................................. 40,000

Variable manufacturing overhead ........................... 80,000

Fixed manufacturing overhead ($320,000 × 0.40) .. 128,000

Relevant manufacturing cost ................................... $448,000


Manufacturing cost savings .................................... $448,000

Cost of purchasing the part ($14 × 40,000) ............ ( 560,000)

Net advantage (disadvantage) of buying ................. ($112,000)



47. Sardi Inc. is considering whether to continue to make a component or to buy it from an

outside supplier. The company uses 17,000 of the components each year. The unit

product cost of the component according to the company's cost accounting system is

given as follows:

Direct materials ......................................... $ 8.20

Direct labor ................................................ 8.30

Variable manufacturing overhead ............. 1.20

Fixed manufacturing overhead .................. 4.30

Unit product cost ....................................... $22.00

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 70%

is avoidable if the component were bought from the outside supplier. In addition,

making the component uses 2 minutes on the machine that is the company's current

constraint. If the component were bought, this machine time would be freed up for use

on another product that requires 4 minutes on the constraining machine and that has a

contribution margin of $7.00 per unit.

When deciding whether to make or buy the component, what cost of making the

component should be compared to the price of buying the component?

A) $24.21

B) $25.50

C) $20.71

D) $22.00




Solution:


Direct materials .................................................. $ 8.20

Direct labor ......................................................... 8.30

Variable manufacturing overhead ...................... 1.20

Fixed manufacturing overhead ($4.30 × 0.70) ... 3.01

Relevant manufacturing cost .............................. $20.71

Add contribution margin lost* ........................... 3.50

$24.21

*$7.00 ÷ 4 minutes = $1.75 per minute; $1.75 per minute × 2 minutes = $3.50



48. Part S51 is used in one of Haberkorn Corporation's products. The company makes

12,000 units of this part each year. The company's Accounting Department reports the

following costs of producing the part at this level of activity:

Per Unit

Direct materials ......................................... $6.30

Direct labor ............................................... $5.70

Variable manufacturing overhead ............. $4.80

Supervisor’s salary .................................... $7.00

Depreciation of special equipment ............ $8.60

Allocated general overhead ....................... $7.20

An outside supplier has offered to produce this part and sell it to the company for

$37.70 each. If this offer is accepted, the supervisor's salary and all of the variable

costs, including direct labor, can be avoided. The special equipment used to make the

part was purchased many years ago and has no salvage value or other use. The

allocated general overhead represents fixed costs of the entire company. If the outside

supplier's offer were accepted, only $17,000 of these allocated general overhead costs

would be avoided.

If management decides to buy part S51 from the outside supplier rather than to

continue making the part, what would be the annual impact on the company's overall

net operating income?

A) Net operating income would decline by $5,800 per year.

B) Net operating income would decline by $22,800 per year.

C) Net operating income would decline by $149,800 per year.

D) Net operating income would decline by $39,800 per year.





Solution:

Make Buy

Direct materials (12,000 units @ $6.30 per unit) ..... $ 75,600

Direct labor (12,000 units @ $5.70 per unit) ........... 68,400

Variable overhead (12,000 units @ $4.80 per unit) . 57,600

Supervisor’s salary (12,000 units @ $7.00 per unit) 84,000

Depreciation of special equipment (not relevant) .... 0

Allocated general overhead (avoidable only) ........... 17,000

Outside purchase price (12,000 units @ $37.70 per

unit) ....................................................................... $452,400

Total cost .................................................................. $302,600 $452,400

The total cost of the make alternative is lower by $149,800 ($302,600 − $452,400).

Thus, net operating income would decline by $149,800 if the offer from the supplier

were accepted. Therefore, the company should continue to make the part itself.



49. Norgaard Corporation makes 8,000 units of part G25 each year. This part is used in

one of the company's products. The company's Accounting Department reports the

following costs of producing the part at this level of activity:

Per Unit

Direct materials.......................................... $6.70

Direct labor ................................................ $8.10





An outside supplier has offered to make and sell the part to the company for $21.20

each. If this offer is accepted, the supervisor's salary and all of the variable costs,

including direct labor, can be avoided. The special equipment used to make the part

was purchased many years ago and has no salvage value or other use. The allocated

general overhead represents fixed costs of the entire company. If the outside supplier's

offer were accepted, only $2,000 of these allocated general overhead costs would be

avoided. In addition, the space used to produce part G25 would be used to make more

of one of the company's other products, generating an additional segment margin of

$16,000 per year for that product.

What would be the impact on the company's overall net operating income of buying

part G25 from the outside supplier?


B) Net operating income would increase by $16,000 per year.







Solution:

Make Buy

Direct materials (8,000 units @ $6.70 per unit) ....... $ 53,600

Direct labor (8,000 units @ $8.10 per unit) ............. 64,800

Variable overhead (8,000 units @ $1.10 per unit) ... 8,800

Supervisor’s salary (8,000 units @ $2.00 per unit) .. 16,000


Allocated general overhead (avoidable only) ........... 2,000


unit) ....................................................................... $169,600

Opportunity cost ....................................................... ( 16,000)

Total cost .................................................................. $145,200 $153,600






50. Rebelo Corporation is presently making part E07 that is used in one of its products. A

total of 17,000 units of this part are produced and used every year. The company's

Accounting Department reports the following costs of producing the part at this level

of activity:

Per Unit


Direct labor ............................................... $3.80





An outside supplier has offered to make and sell the part to the company for $20.80

each. If this offer is accepted, the supervisor's salary and all of the variable costs can

be avoided. The special equipment used to make the part was purchased many years

ago and has no salvage value or other use. The allocated general overhead represents

fixed costs of the entire company, none of which would be avoided if the part were

purchased instead of produced internally. If management decides to buy part E07 from

the outside supplier rather than to continue making the part, what would be the annual

impact on the company's overall net operating income?



C) Net operating income would increase by $163,200 per year.

D) Net operating income would increase by $6,800 per year.





Solution:

Make Buy

Direct materials (17,000 units @ $3.80 per unit) ....... $ 64,600

Direct labor (17,000 units @ $3.80 per unit) ............. 64,600

Variable overhead (17,000 units @ $1.10 per unit) ... 18,700

Supervisor’s salary (17,000 units @ $2.50 per unit) .. 42,500

Depreciation of special equipment (not relevant) ...... 0

Allocated general overhead (not relevant) ................. 0


unit) ......................................................................... $353,600

Total cost .................................................................... $190,400 $353,600






51. Part U16 is used by Mcvean Corporation to make one of its products. A total of

13,000 units of this part are produced and used every year. The company's Accounting

Department reports the following costs of producing the part at this level of activity:

Per Unit


Direct labor ............................................... $7.50





An outside supplier has offered to make the part and sell it to the company for $29.80


including the direct labor, can be avoided. The special equipment used to make the

part was purchased many years ago and has no salvage value or other use. The

allocated general overhead represents fixed costs of the entire company, none of which

would be avoided if the part were purchased instead of produced internally. In

addition, the space used to make part U16 could be used to make more of one of the

company's other products, generating an additional segment margin of $25,000 per

year for that product. What would be the impact on the company's overall net

operating income of buying part U16 from the outside supplier?

A) Net operating income would increase by $25,000 per year.








Solution:

Make Buy

Direct materials (13,000 units @ $2.90 per unit) ..... $ 37,700

Direct labor (13,000 units @ $7.50 per unit) ........... 97,500

Variable overhead (13,000 units @ $8.00 per unit) . 104,000

Supervisor’s salary (13,000 units @ $3.40 per unit) 44,200


Allocated general overhead (not relevant) ............... 0


unit) ....................................................................... $387,400

Opportunity cost (segment margin) .......................... ( 25,000)

Total cost .................................................................. $283,400 $362,400




52. Landor Appliance Company makes and sells electric fans. Each fan regularly sells for

$42. The following cost data per fan is based on a full capacity of 150,000 fans

produced each period.

Direct materials .............................................................. $8

Direct labor ..................................................................... $9

Manufacturing overhead

(70% variable and 30% unavoidable fixed) ................ $10

A special order has been received by Landor for a sale of 25,000 fans to an overseas

customer. The only selling costs that would be incurred on this order would be $4 per

fan for shipping. Landor is now selling 120,000 fans through regular channels each

period. What should Landor use as a minimum selling price per fan in negotiating a

price for this special order?

A) $28

B) $27

C) $31

D) $24





Solution:

Direct materials ................................................. $ 8

Direct labor ....................................................... 9

Variable manufacturing overhead ($10 × 0.70) 7

Variable selling cost .......................................... 4

Minimum selling price ...................................... $28

53. Ignace Timekeepers, Inc. manufactures and sells wrist watches. Ignace has the

capacity to manufacture and sell 20,000 watches each year but is currently only

manufacturing and selling 15,000. The following costs relate to annual operations at

15,000 watches:

Total Cost

Variable manufacturing cost ..................... $150,000

Fixed manufacturing cost .......................... $120,000

Variable selling and administrative cost ... $90,000

Fixed selling and administrative cost ........ $180,000

Ignace normally sells its watches for $42 each. A discount chain is interesting in

purchasing Ignace's excess capacity of 5,000 watches. This special order would not

affect regular sales or the cost structure above. Ignace's profits for the year will

increase as long as the price on this special order exceeds:

A) $12.00

B) $13.50

C) $16.00

D) $31.00



Solution:

Total relevant costs:

Variable manufacturing cost .............................. $150,000

Variable selling and administrative cost ............ 90,000

Total relevant costs ............................................... $240,000

Divided by 15,000 watches ...................................

÷

15,000

Minimum selling price for special order ............... $16



54. Gallerani Corporation has received a request for a special order of 6,000 units of

product A90 for $21.20 each. Product A90's unit product cost is $16.20, determined as

follows:


Direct labor ................................................ 4.20




Direct labor is a variable cost. The special order would have no effect on the

company's total fixed manufacturing overhead costs. The customer would like

modifications made to product A90 that would increase the variable costs by $4.20 per

unit and that would require an investment of $21,000 in special molds that would have

no salvage value.

This special order would have no effect on the company's other sales. The company

has ample spare capacity for producing the special order. If the special order is

accepted, the company's overall net operating income would increase (decrease) by:

A) ($18,600)

B) ($16,200)

C) $30,000

D) $5,400

Answer:

D



Solution:

Incremental revenue (6,000 units @ $21.20 per unit) ...................... $127,200

Less incremental costs:

Direct materials (6,000 units @ $6.10 per unit) ............................ 36,600

Direct labor (6,000 units @ $4.20 per unit) .................................. 25,200

Variable manufacturing overhead (6,000 units @ $2.30 per unit) 13,800

Modifications (6,000 units @ $4.20 per unit) ............................... 25,200

Special molds ................................................................................ 21,000

Total incremental cost ...................................................................... 121,800

Incremental net operating income .................................................... $ 5,400



55. A customer has requested that Lewelling Corporation fill a special order for 9,000

units of product S47 for $20.50 a unit. While the product would be modified slightly

for the special order, product S47's normal unit product cost is $14.40:


Direct labor ............................................... 1.50





company's total fixed manufacturing overhead costs. The customer would like

modifications made to product S47 that would increase the variable costs by $5.00 per

unit and that would require an investment of $36,000 in special molds that would have

no salvage value.

This special order would have no effect on the company's other sales. The company

has ample spare capacity for producing the special order. If the special order is

accepted, the company's overall net operating income would increase (decrease) by:

A) ($9,900)

B) $4,500

C) $54,900

D) ($26,100)



Solution:

Incremental revenue (9,000 units @ $20.50 per unit) ..................... $184,500


Direct materials (9,000 units @ $3.10 per unit) ........................... 27,900




Special molds ................................................................................ 36,000





56. Holden Company produces three products, with costs and selling prices as follows:

Product A Product B Product C

Selling price per unit ............... $30 100% $20 100% $15 100%

Variable costs per unit ............. 18 60% 15 75% 6 40%

Contribution margin per unit ... $12 40% $ 5 25% $ 9 60%

A particular machine is a bottleneck. On that machine, 3 machine hours are required to

produce each unit of Product A, 1 hour is required to produce each unit of Product B,

and 2 hours are required to produce each unit of Product C. In which order should it

produce its products?

A) C, A, B

B) A, C, B

C) B, C, A

D) The order of production doesn't matter.



Solution:


Contribution margin per unit ............... $12 $5 $9

Machine-hours per unit ........................ 3 1 2

Contribution margin per hour .............. $4.00 $5.00 $4.50

Rank in terms of profitability .............. 3 1 2



57. Wood Carving Corporation manufactures three products. Because of a recent lack of

skilled wood carvers, the corporation has had a shortage of available labor hours. The

following per unit data relates to the three products of the corporation:

Letter Openers Elvis Statues Candle Holders

Sales price ................... $30 $80 $42

Variable costs .............. $20 $40 $20

Labor hours required ... 1 6 2

Assume that Wood Carving only has 1,800 labor hours available next month. Also

assume that Wood Carving can only sell 800 units of each product in a given month.

What is the maximum amount of contribution margin that Wood Carving can generate

next month given this labor hour shortage?

A) $12,000

B) $19,000

C) $19,600

D) $19,800





Solution:

Demand for wood carvers:


Labor-hours per unit .......... 1 6 2

Monthly demand in units ... 800 800 800

Total hours required ........... 800 4,800 1,600

Total time required for all products: 7,200

Optimal production plan:


Selling price per unit ............................ $30.00 $80.00 $42.00

Variable cost per unit ........................... $20.00 $40.00 $20.00

Contribution margin per unit ............... $10.00 $40.00 $22.00

Labor-hours per unit ............................ 1 6 2

Contribution margin per hour .............. $10.00 $6.67 $11.00


Optimal production .............................. 200 0 800

Total hours available ........................................................................ 1,800

Less: hours required for 800 Candle Holders (800 × 2) ................... 1,600

Hours remaining ............................................................................... 200

Divided by hours required per Letter Opener .................................. ÷ 1

Number of Letter Openers to produce .............................................. 200

Maximum contribution margin:

Candle Holders (800 × $22).......................................................... $17,600

Letter Openers (200 × $10) ........................................................... 2,000

Maximum contribution margin ........................................................ $19,600



58. Banfield Corporation makes three products that use compound W, the current

constrained resource. Data concerning those products appear below:

VP YI WX

Selling price per unit ..................... $248.04 $230.66 $505.44

Variable cost per unit .................... $190.71 $172.14 $388.80

Centiliters of compound W ........... 3.90 3.80 8.10

Rank the products in order of their current profitability from most profitable to least

profitable. In other words, rank the products in the order in which they should be

emphasized.

A) WX, VP, YI

B) YI, VP, WX

C) WX, YI, VP

D) VP, WX, YI



Solution:


VP YI WX

Selling price per unit ........................... $248.04 $230.66 $505.44

Variable cost per unit .......................... 190.71 172.14 388.80


Centiliters per unit ............................... 3.90 3.80 8.10

Contribution margin per centiliter ....... $14.70 $15.40 $14.40




59. An automated turning machine is the current constraint at Jordison Corporation. Three

products use this constrained resource. Data concerning those products appear below:

LN JQ RQ



Minutes on the constraint .............. 2.60 4.90 7.80

Rank the products in order of their current profitability from most profitable to least


emphasized.

A) LN, JQ, RQ

B) RQ, LN, JQ

C) RQ, JQ, LN

D) JQ, RQ, LN



Solution:


LN JQ RQ


Variable selling cost per unit ............... 118.30 239.61 381.42


Machine minutes per unit .................... 2.60 4.90 7.80

Contribution margin per minute .......... $18.30 $15.00 $14.50




60. The constraint at Rauchwerger Corporation is time on a particular machine. The

company makes three products that use this machine. Data concerning those products

appear below:

WX KD FS



Minutes on the constraint .............. 3.20 8.60 3.60

Assume that sufficient time is available on the constrained machine to satisfy demand

for all but the least profitable product. Up to how much should the company be willing

to pay to acquire more of the constrained resource?

A) $33.28 per unit

B) $10.40 per minute

C) $122.12 per unit

D) $15.30 per minute



Solution:

WX KD FS


Variable cost per unit .......................... 158.72 420.54 167.76


Machine minutes per unit .................... 3.20 8.60 3.60



The company should be willing to pay up to the contribution margin per minute for

the least profitable job, which is $10.40.



61. The Freed Company produces three products, X, Y, Z, from a single raw material

input. Product Y can be sold at the splitoff point for total revenues of $50,000, or it

can be processed further at a total cost of $16,000 and then sold for $68,000. Product

Y:

A) should be sold at the split-off point, rather than processed further.

B) would increase the company's overall net operating income by $18,000 if

processed further and then sold.

C) would increase the company's overall net operating income by $68,000 if


D) would increase the company's overall net operating income by $2,000 if




Solution:

Product Y

Sales value after further processing .......... $68,000

Costs of further processing ........................ 16,000

Benefit of further processing ..................... 52,000

Less: Sales value at split-off point ............ 50,000

Net advantage ............................................ $ 2,000



62. Pendall Company manufactures products Dee and Eff from a joint process. Product

Dee has been allocated $2,500 of the $20,000 in total joint costs associated with the

production of 1,000 units each of Dee and Eff each year. Dee can be sold at the split-

off point for $3 per unit, or it can be processed further with additional costs of $1,000

and sold for $5 per unit. If Dee is processed further and sold, the result would be:

A) A break-even situation.

B) An additional gain of $1,000 from further processing.

C) A loss of $1,000 from further processing.

D) An additional gain of $2,000 from further processing.




Solution:

Dee

Sales value after further processing ($5 × 1,000) . $5,000

Costs of further processing ................................... 1,000

Benefit of further processing................................. 4,000

Less: Sales value at split-off point ($3 × 1,000) ... 3,000

Net advantage ........................................................ $1,000



63. Faustina Chemical Company manufactures three chemicals (TX14, NJ35, and KS63)

from a joint process. The three chemicals are in industrial grade form at the split-off

point. They can either be sold at that point or processed further into premium grade.

Costs related to each batch of this chemical process is as follows:

TX14 NJ35 KS63

Sales value at split-off point ...................... $16,000 $12,000 $5,000

Allocated joint costs .................................. $6,000 $6,000 $6,000

Sales value after further processing ........... $20,000 $18,000 $9,000

Cost of further processing ......................... $5,000 $3,000 $2,000

For which product(s) above would it be more profitable for Faustina to sell at the split-

off point rather than process further?

A) TX14 only

B) KS63 only

C) TX14 and KS63 only

D) NJ35 and KS63 only



Solution:

TX14 NJ35 KS63

Sales value after further processing .... $20,000 $18,000 $9,000

Sales value at split-off ......................... 16,000 12,000 5,000

Incremental revenue ............................ 4,000 6,000 4,000

Further processing costs ...................... 5,000 3,000 2,000

Incremental income (loss) ................... ($1,000) $ 3,000 $2,000

Product TX14 should be sold at the split-off point without any further processing.

Products NJ35 and KS63 should be sold after further processing beyond the split-off

point.



64. Khiem, Inc. manufactures baseball gloves that normally sell for $55 each. Khiem

currently has 400 defective gloves in inventory that have $35 of materials, labor, and

overhead assigned to each glove. The defective gloves can either be completely

repaired at a cost of $25 per glove or sold as is at a reduced price of $18 per glove.

Khiem would be better off by:

A) $2,000 to sell the gloves at the reduced price.

B) $2,800 to sell the gloves at the reduced price.

C) $4,800 to repair the gloves and sell them at the normal price.

D) $5,200 to sell the gloves at the reduced price.



Solution:

Sales value after repairing ($55 × 400) ................. $22,000

Sales value at split-off ($18 × 400) ....................... 7,200

Incremental revenue .............................................. 14,800

Repair costs ($25 × 400) ....................................... 10,000

Incremental income from further processing ........ $ 4,800

65. Two products, QI and VH, emerge from a joint process. Product QI has been allocated

$9,600 of the total joint costs of $12,000. A total of 9,000 units of product QI are

produced from the joint process. Product QI can be sold at the split-off point for $13

per unit, or it can be processed further for an additional total cost of $54,000 and then

sold for $18 per unit. If product QI is processed further and sold, what would be the

effect on the overall profit of the company compared with sale in its unprocessed form

directly after the split-off point?

A) $18,600 less profit

B) $108,000 more profit

C) $600 more profit

D) $9,000 less profit






Solution:

Product QI

Sales value after further processing ($18 × 9,000) .... $162,000

Costs of further processing ........................................ 54,000

Benefit of further processing ..................................... 108,000

Less: Sales value at split-off point ($13 × 9,000) ..... 117,000

Net advantage (disadvantage) ................................... ($ 9,000)

66. Two products, UG and BC, emerge from a joint process. Product UG has been

allocated $29,400 of the total joint costs of $42,000. A total of 9,000 units of product

UG are produced from the joint process. Product UG can be sold at the split-off point

for $15 per unit, or it can be processed further for an additional total cost of $63,000

and then sold for $17 per unit. If product UG is processed further and sold, what

would be the effect on the overall profit of the company compared with sale in its

unprocessed form directly after the split-off point?

A) $74,400 less profit

B) $15,600 less profit

C) $45,000 less profit

D) $90,000 more profit




Solution:

Product HG

Sales value after further processing ($17 × 9,000) ... $153,000

Costs of further processing ....................................... 63,000

Benefit of further processing .................................... 90,000

Less: Sales value at split-off point ($15 × 9,000) .... 135,000

Net advantage (disadvantage) .................................. ($ 45,000)



67. Priddy Corporation processes sugar cane in batches. The company purchases a batch

of sugar cane for $62 from farmers and then crushes the cane in the company's plant at

the cost of $18. Two intermediate products, cane fiber and cane juice, emerge from the

crushing process. The cane fiber can be sold as is for $28 or processed further for $13

to make the end product industrial fiber that is sold for $36. The cane juice can be sold

as is for $43 or processed further for $23 to make the end product molasses that is sold

for $85. Which of the intermediate products should be processed further?

A) Cane fiber should NOT be processed into industrial fiber; Cane juice should be

processed into molasses

B) Cane fiber should be processed into industrial fiber; Cane juice should NOT be


C) Cane fiber should be processed into industrial fiber; Cane juice should be


D) Cane fiber should NOT be processed into industrial fiber; Cane juice should

NOT be processed into molasses



Solution:

Cane Fiber Cane Juice

Sales value after further processing .......... $36 $85

Costs of further processing ....................... 13 23

Benefit of further processing..................... 23 62

Less: Sales value at split-off point ............ 28 43

Net advantage (disadvantage) ................... ($ 5) $19



68. Vannorman Corporation processes sugar beets in batches. A batch of sugar beets costs

$78 to buy from farmers and $18 to crush in the company's plant. Two intermediate

products, beet fiber and beet juice, emerge from the crushing process. The beet fiber

can be sold as is for $25 or processed further for $16 to make the end product

industrial fiber that is sold for $57. The beet juice can be sold as is for $39 or

processed further for $22 to make the end product refined sugar that is sold for $84.

How much profit (loss) does the company make by processing one batch of sugar

beets into the end products industrial fiber and refined sugar?

A) ($134)

B) ($32)

C) $7

D) $39



Solution:

Beet Fiber Beet Juice


Costs of further processing ........................ 16 22

Benefit of further processing ..................... 41 62


Net advantage (disadvantage) ................... $16 $23

Revenue:

Industrial fiber ................................................ $57

Refined sugar .................................................. 84

Total revenue ...................................................... $141

Less expenses:

Purchase from farmers .................................... 78

Crushing costs ................................................. 18

Processing fiber further ................................... 16

Processing juice further .................................. 22

Total expenses .................................................... 134

Net profit from one batch ................................... $ 7



69. Stinehelfer Beet Processors, Inc., processes sugar beets in batches. A batch of sugar

beets costs $56 to buy from farmers and $13 to crush in the company's plant. Two

intermediate products, beet fiber and beet juice, emerge from the crushing process.

The beet fiber can be sold as is for $24 or processed further for $12 to make the end

product industrial fiber that is sold for $31. The beet juice can be sold as is for $43 or


How much profit (loss) does the company make by processing the intermediate

product beet juice into refined sugar rather than selling it as is?

A) $19

B) $6

C) ($50)

D) ($16)



Solution:

Beet Juice

Sales value after further processing .......... $91

Costs of further processing ....................... 29

Benefit of further processing..................... 62

Less: Sales value at split-off point ............ 43

Net advantage (disadvantage) ................... $19



70. Paine Corporation processes sugar beets in batches that it purchases from farmers for

$72 a batch. A batch of sugar beets costs $11 to crush in the company's plant. Two

intermediate products, beet fiber and beet juice, emerge from the crushing process.

The beet fiber can be sold as is for $27 or processed further for $16 to make the end

product industrial fiber that is sold for $40. The beet juice can be sold as is for $43 or


Which of the intermediate products should be processed further?

A) beet fiber should NOT be processed into industrial fiber; beet juice should be

processed into refined sugar

B) beet fiber should NOT be processed into industrial fiber; beet juice should NOT

be processed into refined sugar

C) beet fiber should be processed into industrial fiber; beet juice should NOT be


D) beet fiber should be processed into industrial fiber; beet juice should be




Solution:






Net advantage (disadvantage) ................... ($ 3) $ 29

Use the following to answer questions 71-72:

Ouzts Corporation is considering two alternatives: A and B. Costs associated with the

alternatives are listed below:

Alternative

A Alternative B

Materials costs ................... $40,000 $56,000

Processing costs ................ $37,000 $37,000

Equipment rental ............... $13,000 $13,000

Occupancy costs ................ $15,000 $22,000



71. Are the materials costs and processing costs relevant in the choice between

alternatives A and B? (Ignore the equipment rental and occupancy costs in this

question.)

A) Both materials costs and processing costs are relevant

B) Neither materials costs nor processing costs are relevant

C) Only processing costs are relevant

D) Only materials costs are relevant



72. What is the differential cost of Alternative B over Alternative A, including all of the

relevant costs?

A) $105,000

B) $23,000

C) $128,000

D) $116,500



Solution:

Alternative A Alternative B

Differential

Costs

Materials costs ................... $40,000 $56,000 $16,000

Occupancy costs ................ $15,000 $22,000 7,000

Differential cost ............. $23,000


Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs

associated with the alternatives are listed below.

Alternative

X

Alternative

Y

Materials costs ................... $41,000 $59,000

Processing costs ................ $45,000 $45,000

Equipment rental ............... $17,000 $17,000

Occupancy costs ................ $16,000 $24,000



73. Are the materials costs and processing costs relevant in the choice between

alternatives X and Y? (Ignore the equipment rental and occupancy costs in this

question.)

A) Neither materials costs nor processing costs are relevant

B) Only processing costs are relevant

C) Only materials costs are relevant

D) Both materials costs and processing costs are relevant



74. What is the differential cost of Alternative Y over Alternative X, including all of the

relevant costs?

A) $132,000

B) $119,000

C) $145,000

D) $26,000



Solution:

Alternative X Alternative Y

Differential

Costs

Materials costs ................... $41,000 $59,000 $18,000

Occupancy costs ................ $16,000 $24,000 8,000

Differential cost.............. $26,000


The Draper Company is considering dropping its Doombug toy due to continuing losses.

Revenue and cost data on the toy for the past year follow:

Sales of 15,000 units ......... $150,000

Variable expenses .............. 120,000

Contribution margin .......... 30,000

Fixed expenses .................. 40,000

Net operating loss .............. ($ 10,000)

If the toy were discontinued, then Draper could avoid $8,000 per year in fixed costs.



75. Under the given conditions, the change in annual operating income from discontinuing

the production and sale of Doombugs would be:

A) $30,000 decrease

B) $10,000 increase

C) $22,000 decrease

D) $18,000 increase



Solution:

Keep Doombugs Drop Doombugs Difference

Sales .............................................. $150,000 $ 0 ($150,000)



Avoidable fixed expenses .............. 40,000 32,000 8,000

Product margin .............................. ($ 10,000) ($32,000) ($ 22,000)

Net operating income would decline by $22,000 if Doombugs were dropped.

Therefore, Doombugs should not be dropped.

76. Assuming all other conditions stay the same, at what level of annual sales of

Doombugs (in units) should Draper be indifferent to discontinuing Doombugs or

continuing the production and sale of Doombugs?

A) 20,000 units

B) 18,000 units

C) 6,000 units

D) 4,000 units



Solution:

Total contribution margin ............. $30,000

Divided by 15,000 units ............... ÷15,000

Contribution margin per unit ........ $2

Breakeven point in units = Avoidable fixed expenses ÷ Unit contribution margin

= $8,000 ÷ $2 = 4,000 units



77. Suppose that if the Doombug toy is dropped, the production and sale of other Draper

toys would increase so as to generate a $16,000 increase in the contribution margin

received from these other toys. If all other conditions are the same, the change in

annual operating income from discontinuing the production and sale of Doombugs

would be:

A) $6,000 decrease

B) $14,000 increase

C) $2,000 decrease

D) $28,000 increase



Solution:

Sales ................................... $150,000

Variable expenses .............. 120,000

Contribution margin .......... 30,000

Avoidable fixed expenses .. 8,000

Doombug product margin . ($ 22,000)

Additional contribution margin ....... $16,000

Less Doombug product margin ....... ( 22,000)

Decrease in net operating income ... ($ 6,000)

78. Suppose again that if the Doombug toy is dropped, the production and sale of other

Draper toys would increase so as to generate a $16,000 increase in the contribution

margin received from these other toys. At what selling price per Doombug should

Draper be indifferent (on economic grounds) between dropping the Doombug or

continuing its production and sale? (All other conditions remain the same, including

annual sales of 15,000 units of the Doombug toy.)

A) $8.33

B) $9.25

C) $9.60

D) $10.70





Solution:

Total variable expenses ................ $120,000

Divided by 15,000 units ............... ÷ 15,000

Variable expense per unit ............ $8

Total contribution margin = Fixed expenses plus increase in contribution margin from

other toys

Total contribution margin = 15,000 × (Selling price − Variable expense per unit)

15,000 × (Selling price − $8) = $8,000 + $16,000

15,000 × Selling price − $120,000 = $24,000

15,000 × Selling price = $144,000

Selling price = $9.60


The management of Bonga Corporation is considering dropping product D74F. Data from the

company's accounting system appear below:

Sales ...................................................................... $830,000

Variable expenses .................................................. $390,000



All fixed expenses of the company are fully allocated to products in the company's accounting

system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses

and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F

is discontinued.



79. According to the company's accounting system, what is the net operating income

earned by product D74F?

A) ($58,000)

B) ($440,000)

C) $58,000

D) $440,000


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Sales ................................................................... $830,000

Variable expenses .............................................. 390,000

Contribution margin .......................................... 440,000

Fixed expenses:

Fixed manufacturing expenses ....................... 266,000

Fixed selling and administrative expenses ..... 232,000

Total fixed expenses .......................................... 498,000

Net operating income (loss) .............................. ($ 58,000)

80. What would be the effect on the company's overall net operating income if product

D74F were dropped?


B) Overall net operating income would increase by $58,000.


D) Overall net operating income would decrease by $58,000.





Solution:

Keep the

Product

Drop the

Product Difference

Sales .................................................... $830,000 $ 0 ($830,000)

Variable expenses ............................... 390,000 0 390,000

Contribution margin ............................ 440,000 0 ( 440,000)

Fixed expenses:

Fixed manufacturing expenses ......... 266,000 155,000 111,000


expenses........................................ 232,000 129,000 103,000

Total fixed expenses ............................ 498,000 284,000 214,000

Net operating income (loss) ................ ($ 58,000) ($284,000) ($226,000)

Net operating income would decline by $226,000 if product D74F were dropped.



The management of Woznick Corporation has been concerned for some time with the

financial performance of its product V86O and has considered discontinuing it on several

occasions. Data from the company's accounting system appear below:

Sales ................................................................ $150,000

Variable expenses ............................................ $72,000

Fixed manufacturing expenses ........................ $50,000

Fixed selling and administrative expenses ...... $33,000

In the company's accounting system all fixed expenses of the company are fully allocated to

products. Further investigation has revealed that $30,000 of the fixed manufacturing expenses

and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is

discontinued.



81. According to the company's accounting system, what is the net operating income

earned by product V86O?

A) $78,000

B) ($5,000)

C) ($78,000)

D) $5,000


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Sales ................................................................. $150,000

Variable expenses ............................................ 72,000

Contribution margin ........................................ 78,000

Fixed expenses:

Fixed manufacturing expenses ..................... 50,000

Fixed selling and administrative expenses ... 33,000

Total fixed expenses ........................................ 83,000

Net operating income (loss) ............................

($

5,000)

82. What would be the effect on the company's overall net operating income if product

V86O were dropped?

A) Overall net operating income would decrease by $35,000.

B) Overall net operating income would decrease by $5,000.

C) Overall net operating income would increase by $35,000.

D) Overall net operating income would increase by $5,000.





Solution:

Keep the

Product

Drop the

Product Difference

Sales .............................................. $150,000 $ 0 ($150,000)

Variable expenses ......................... 72,000 0 72,000


Fixed expenses:

Fixed manufacturing expenses ... 50,000 20,000 30,000


expenses.................................. 33,000 20,000 13,000


Net operating income (loss) .......... ($ 5,000) ($ 40,000) ($ 35,000)

Net operating income would decline by $35,000 if product V86O were dropped.



Smithtone Company uses 8,000 units of a certain part in production each year. Presently, this

part is purchased from an outside supplier at $12 per unit. For some time now there has been

idle capacity in the factory that could be utilized to make this part. The following information

has been assembled on the unit costs of making this part internally:


Direct labor ................................................ $2.75


Fixed manufacturing overhead .................. $5.00

The fixed manufacturing overhead listed above represents an allocation of existing costs to

this part. However, there would be an increase of $12,000 in fixed manufacturing overhead

costs for the salary of a new supervisor.



83. If Smithtone chooses to make the part instead of buying it outside, the change in the

company's operating income per year would be:

A) $20,000 decrease.

B) $20,000 increase.

C) $8,000 decrease.

D) $8,000 increase.



Solution:


Direct materials ($3.25 × 8,000) .............................. $26,000

Direct labor ($2.75 × 8,000) ..................................... 22,000

Variable manufacturing overhead ($2.00 × 8,000) .. 16,000

Fixed manufacturing overhead ................................. 12,000

Total cost to make .................................................... $76,000


Cost of purchasing part ($12 × 8,000) ....... $96,000

Total cost to make ..................................... 76,000

Net savings from making part .................. $20,000

84. Assuming other things stay the same, at what price per unit from the outside supplier

should Smithtone be indifferent (on economic grounds) to buying or making the part?

A) $8.00

B) $8.50

C) $9.00

D) $9.50





Solution:


Direct materials ($3.25 × 8,000) ................................ $26,000

Direct labor ($2.75 × 8,000) ....................................... 22,000

Variable manufacturing overhead ($2.00 × 8,000) .... 16,000

Fixed manufacturing overhead ................................... 12,000

Total cost to make ...................................................... $76,000

Total cost to make .............................. $76,000

Divided by 8,000 units ....................... ÷ 8,000

Price per unit from outside supplier ... $9.50

85. Suppose that the idle capacity (floor space and machinery) is presently being rented to

another company for $32,000 per year. All the other conditions are still the same. If

Smithtone chooses to make the part instead of buying it outside, the net advantage or

disadvantage (per year) would be:

A) $15,000 disadvantage.

B) $4,000 advantage.

C) $12,000 disadvantage.

D) $10,000 advantage.



Solution:


Direct materials ($3.25 × 8,000) ............................. $26,000

Direct labor ($2.75 × 8,000) .................................... 22,000

Variable manufacturing overhead ($2.00 × 8,000) . 16,000

Fixed manufacturing overhead ................................ 12,000

Total cost to make ................................................... $76,000


Cost of purchasing part ($12 × 8,000) ...... $96,000

Total cost to make ..................................... ( 76,000)

Opportunity cost of rental income ............ ( 32,000)

Net disadvantage of making part .............. $12,000




Elly Industries is a multi-product company that currently manufactures 30,000 units of Part

MR24 each month for use in production. The facilities now being used to produce Part MR24

have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If

Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed

costs would continue at 40% of their present amount. The variable production costs of Part

MR24 are $11 per unit.

86. If Elly Industries continues to use 30,000 units of Part MR24 each month, it would

realize a net benefit by purchasing Part MR24 from an outside supplier only if the

supplier's unit price is less than:

A) $14.00

B) $11.00

C) $16.00

D) $13.00




Solution:

Avoidable fixed costs ($150,000 × 0.60) .. $90,000

Divided by 30,000 units ............................ ÷30,000

Relevant fixed cost per unit ....................... $ 3

Add variable production costs per unit ...... 11

Outside supplier price ................................ $14

87. If Elly industries is able to obtain Part MR24 from an outside supplier at a unit

purchase price of $15, the monthly usage at which it will be indifferent between

purchasing and making Part MR24 is:

A) 30,000 units

B) 32,000 units

C) 35,000 units

D) 22,500 units






Solution:

A company will be indifferent between purchasing and making a part when the outside

purchase price is equal to the total relevant cost per unit of making the part. The total

relevant cost per unit of making the part is composed of the variable production cost

per unit ($11) plus the fixed cost per unit. Since the total cost must be equal to $15,

then the fixed cost per unit must be $4 ($15 − $11).

The fixed cost per unit is calculated as:

Fixed cost per unit = Total relevant fixed costs ÷ Units to be produced

Substituting:

$4 = $90,000 ÷ Units to be produced

Units to be produced = 22,500


Ahron Company makes 80,000 units per year of a part it uses in the products it manufactures.

The unit product cost of this part is computed as follows:


Direct labor ................................................ 17.50




An outside supplier has offered to sell the company all of these parts it needs for $46.60 a

unit. If the company accepts this offer, the facilities now being used to make the part could be

used to make more units of a product that is in high demand. The additional contribution

margin on this other product would be $560,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part

would be avoided. However, $13.60 of the fixed manufacturing overhead cost being applied

to the part would continue even if the part were purchased from the outside supplier. This

fixed manufacturing overhead cost would be applied to the company's remaining products.



88. How much of the unit product cost of $55.40 is relevant in the decision of whether to

make or buy the part?

A) $34.30

B) $17.50

C) $55.40

D) $41.80



Solution:


Direct materials ........................................................ $14.90

Direct labor ............................................................... 17.50

Variable manufacturing overhead ............................ 1.90

Fixed manufacturing overhead ($21.10 − $13.60) ... 7.50

Relevant manufacturing cost .................................... $41.80

89. What is the net total dollar advantage (disadvantage) of purchasing the part rather than

making it?

A) $560,000

B) $704,000

C) $176,000

D) ($384,000)





Solution:


Direct materials ..................................................... $14.90

Direct labor ........................................................... 17.50

Variable manufacturing overhead ......................... 1.90

Fixed manufacturing overhead ($21.10 − $13.60) 7.50

Relevant manufacturing cost ................................. $41.80


Manufacturing cost savings ($41.80 × 80,000)........ $3,344,000

Additional contribution margin ................................ 560,000

Cost of purchasing the part ($46.60 × 80,000) ........ ( 3,728,000)

Net advantage (disadvantage) .................................. $ 176,000

90. What is the maximum amount the company should be willing to pay an outside

supplier per unit for the part if the supplier commits to supplying all 80,000 units

required each year?

A) $7.00

B) $62.40

C) $48.80

D) $55.40



Solution:



Direct labor ........................................................... 17.50


Fixed manufacturing overhead ($21.10 − $13.60) 7.50

Relevant manufacturing cost ................................. $41.80

Maximum acceptable purchase price:

Manufacturing cost savings ($41.80 × 80,000) ..... $3,344,000

Additional contribution margin ............................. 560,000

Total benefit ........................................................... $3,904,000

Number of units ..................................................... 80,000

Benefit per unit ...................................................... $48.80




Penagos Corporation is presently making part Z43 that is used in one of its products. A total

of 5,000 units of this part are produced and used every year. The company's Accounting


Per Unit


Direct labor ................................................ $3.10

Variable overhead ..................................... $6.90




An outside supplier has offered to produce and sell the part to the company for $20.80 each. If

this offer is accepted, the supervisor's salary and all of the variable costs, including direct

labor, can be avoided. The special equipment used to make the part was purchased many

years ago and has no salvage value or other use. The allocated general overhead represents

fixed costs of the entire company. If the outside supplier's offer were accepted, only $4,000 of

these allocated general overhead costs would be avoided.



91. If management decides to buy part Z43 from the outside supplier rather than to









Solution:

Make Buy

Direct materials (5,000 units @ $1.10 per unit) .......... $ 5,500

Direct labor (5,000 units @ $3.10 per unit) ................ 15,500

Variable overhead (5,000 units @ $6.90 per unit) ...... 34,500

Supervisor’s salary (5,000 units @ $5.80 per unit) .... 29,000

Depreciation of special equipment (not relevant) ....... 0

Allocated general overhead (avoidable only) ............. 4,000


unit).......................................................................... $104,000

Total cost ..................................................................... $88,500 $104,000

The total cost of the make alternative is lower by $15,500. Thus, net operating income

would decline by $15,500 if the offer from the supplier were accepted.



92. In addition to the facts given above, assume that the space used to produce part Z43

could be used to make more of one of the company's other products, generating an

additional segment margin of $24,000 per year for that product. What would be the

impact on the company's overall net operating income of buying part Z43 from the

outside supplier and using the freed space to make more of the other product?







Solution:

Make Buy

Direct materials (5,000 units @ $1.10 per unit) .... $ 5,500

Direct labor (5,000 units @ $3.10 per unit) .......... 15,500

Variable overhead (5,000 units @ $6.90 per unit) 34,500

Supervisor’s salary (5,000 units @ $5.80 per unit)

........................................................................... 29,000

Depreciation of special equipment (not relevant) . 0

Allocated general overhead (avoidable only) ........ 4,000


unit) .................................................................... $104,000

Opportunity cost .................................................... ( 24,000)

Total cost ............................................................... $88,500 $ 80,000

The total cost of the make alternative is higher by $8,500. Thus, net operating income

would increase by $8,500 if the offer from the supplier were accepted.




Mcfarlain Corporation is presently making part U98 that is used in one of its products. A total

of 7,000 units of this part are produced and used every year. The company's Accounting


Per Unit


Direct labor ................................................ $3.60

Variable overhead ..................................... $1.40




An outside supplier has offered to produce and sell the part to the company for $17.10 each. If

this offer is accepted, the supervisor's salary and all of the variable costs, including direct

labor, can be avoided. The special equipment used to make the part was purchased many

years ago and has no salvage value or other use. The allocated general overhead represents

fixed costs of the entire company, none of which would be avoided if the part were purchased

instead of produced internally.



93. If management decides to buy part U98 from the outside supplier rather than to




B) Net operating income would increase by $25,200 per year.





Solution:

Make Buy





........................................................................... 28,000


Allocated general overhead (not relevant) ............ 0


unit) .................................................................... $119,700

Total cost ............................................................... $88,900 $119,700

The total cost of the make alternative is lower by $30,800. Thus, net operating income


94. In addition to the facts given above, assume that the space used to produce part U98

could be used to make more of one of the company's other products, generating an

additional segment margin of $24,000 per year for that product. What would be the

impact on the company's overall net operating income of buying part U98 from the

outside supplier and using the freed space to make more of the other product?









Solution:

Make Buy





........................................................................... 28,000


Allocated general overhead (not relevant) ............ 0


unit).................................................................... $119,700


Total cost ............................................................... $88,900 $95,700

The total cost of the make alternative is less by $6,800. Thus, net operating income



Younes Inc. manufactures industrial components. One of its products, which is used in the

construction of industrial air conditioners, is known as P06. Data concerning this product are

given below:

Per Unit

Selling price .................................................... $220

Direct materials ............................................... $38

Direct labor ...................................................... $1

Variable manufacturing overhead ................... $8

Fixed manufacturing overhead ........................ $16

Variable selling expense ................................. $4

Fixed selling and administrative expense ....... $16

The above per unit data are based on annual production of 4,000 units of the component.

Direct labor can be considered to be a variable cost.



95. The company has received a special, one-time-only order for 400 units of component

P06. There would be no variable selling expense on this special order and the total

fixed manufacturing overhead and fixed selling and administrative expenses of the

company would not be affected by the order. Assuming that Younes has excess

capacity and can fill the order without cutting back on the production of any product,

what is the minimum price per unit on the special order below which the company

should not go?

A) $47

B) $83

C) $63

D) $220




Solution:

Variable cost per unit on normal sales:

Direct materials ..................................................... $38

Direct labor ............................................................ 1

Variable manufacturing overhead ......................... 8

Variable selling expense ........................................ 4

Variable cost per unit on normal sales .................. $51

Variable cost per unit on special order:

Normal variable cost per unit ................................ $51

Reduction in variable selling expense. .................. ( 4)

Variable cost per unit on special order .................. $47



96. The company has received a special, one-time-only order for 500 units of component

P06. There would be no variable selling expense on this special order and the total

fixed manufacturing overhead and fixed selling and administrative expenses of the

company would not be affected by the order. However, assume that Younes has no

excess capacity and this special order would require 30 minutes of the constraining

resource, which could be used instead to produce products with a total contribution

margin of $10,000. What is the minimum price per unit on the special order below

which the company should not go?

A) $67

B) $103

C) $20

D) $83


AICPA FN: Decision Making; Reporting LO: 4,5 Level: Hard


Solution:


Direct materials ............................................................. $38

Direct labor ................................................................... 1

Variable manufacturing overhead ................................. 8

Variable selling expense ............................................... 4

Variable cost per unit on normal sales .......................... $51


Normal variable cost per unit ........................................ $51

Reduction in variable selling expense. .......................... ( 4)

Opportunity cost of sales given up $10,000 ÷ 500) ...... 20

Variable cost per unit on special order .......................... $67



97. Refer to the original data in the problem. What is the current contribution margin per

unit for component P06 based on its selling price of $220 and its annual production of

4,000 units?

A) $51

B) $137

C) $169

D) $173


AICPA FN: Reporting LO: 4 Level: Easy Source: CMA, adapted

Solution:

Variable cost per unit:

Direct materials ..................................................... $38

Direct labor ............................................................ 1


Variable selling expense ........................................ 4

Variable cost per unit ............................................ $51

Contribution margin per unit:

Selling price ........................................................... $220

Variable cost per unit ............................................ 51

Contribution margin .............................................. $169




The following are Silver Company's unit costs of making and selling an item at a volume of

8,000 units per month (which represents the company's capacity):

Manufacturing:

Direct materials .......................... $4

Direct labor ................................ $5

Variable overhead ...................... $2

Fixed overhead ........................... $8

Selling and administrative:

Variable ...................................... $1

Fixed ........................................... $6

Present sales amount to 7,000 units per month. An order has been received from a customer in

a foreign market for 1,000 units at a price of $20 per unit. The order would not affect regular

sales. Fixed costs, both manufacturing and selling and administrative, are constant within the

relevant range between 6,000 and 8,000 units per month. The variable selling and

administrative costs would have to be incurred for this special order as well as all other sales.

98. If the company accepts the special order, the effect on total operating income will be

a:

A) $1,000 increase

B) $9,000 increase

C) $6,000 decrease

D) $8,000 increase





Solution:


Direct materials ..................................................... $ 4

Direct labor ............................................................ 5


Variable selling & administrative expense ............ 1

Variable cost per unit on normal sales .................. $12

Selling price for special order ............................... $20

Variable cost per unit on special order .................. 12

Unit contribution margin on special order ............ $ 8

Number of units in special order ........................... 1,000

Increase (decrease) in net operating income ......... $8,000

99. The company has 100 defective units of Product X left over from last year which will

have to be sold as scrap at reduced prices. The sale of these units would have no effect

on the company's other sales. The cost figure that is relevant as a guide for setting a

minimum price on these units is:

A) $7

B) $1

C) $19

D) $12



Solution:

Except for variable selling and administrative expenses ($1), all other expenses

associated with theses 100 defective units are sunk (already incurred) and therefore

irrelevant.




Elfving Company produces a single product. The cost of producing and selling a single unit of

this product at the company's normal activity level of 80,000 units per month is as follows:


Direct labor ............................................................ $6.00

Variable manufacturing overhead ......................... $1.00

Fixed manufacturing overhead .............................. $11.50

Variable selling & administrative expense ........... $1.80

Fixed selling & administrative expense ................ $8.00

The normal selling price of the product is $71.10 per unit.

An order has been received from an overseas customer for 1,000 units to be delivered this

month at a special discounted price. This order would have no effect on the company's normal

sales and would not change the total amount of the company's fixed costs. The variable selling

and administrative expense would be $1.50 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.



100. Suppose there is ample idle capacity to produce the units required by the overseas

customer and the special discounted price on the special order is $63.70 per unit. By

how much would this special order increase (decrease) the company's net operating

income for the month?

A) $7,400

B) ($5,900)

C) $18,900

D) ($2,100)



Solution:



Direct labor ............................................................ 6.00


Variable selling & administrative expense ............ 1.80

Variable cost per unit on normal sales .................. $46.30


Normal variable cost per unit ................................ $46.30

Reduction in variable selling and administrative

expense............................................................... ( 1.50)

Variable cost per unit on special order .................. $44.80

Selling price for special order ............................... $63.70

Variable cost per unit on special order .................. 44.80

Unit contribution margin on special order ............ $18.90





101. Suppose the company is already operating at capacity when the special order is

received from the overseas customer. What would be the opportunity cost of each unit

delivered to the overseas customer?

A) $24.80

B) $6.80

C) $7.40

D) $5.30



Solution:



Direct labor ........................................................... 6.00


Variable selling & administrative expense ........... 1.80


Selling price for normal sales ................................ $71.10

Variable cost per unit ............................................ 46.30

Unit contribution margin ....................................... $24.80

102. Suppose there is not enough idle capacity to produce all of the units for the overseas

customer and accepting the special order would require cutting back on production of

400 units for regular customers. The minimum acceptable price per unit for the special

order is closest to:

A) $56.00

B) $65.80

C) $71.10

D) $54.72





Solution:



Direct labor ............................................................ 6.00




Lost contribution margin:

Selling price for normal sales ............................ $71.10

Variable cost per unit on normal sales ............... 46.30

Contribution margin per unit ............................. $24.80

Number of units cut back in production ............ 400

Total lost contribution margin ........................... $9,920

Number of units in special order........................ 1,000

Lost contribution margin per unit .......................... $9.92


Normal variable cost per unit ............................................... $46.30

Add opportunity cost for lost contribution margin ............... 9.92

Reduction in variable selling and administrative expense. .. (1.50)

Variable cost per unit on special order ................................. $54.72




The Bharu Violin Company has the capacity to manufacture and sell 5,000 violins each year

but is currently only manufacturing and selling 4,800. The following per unit numbers relate

to annual operations at 4,800 units:

Per Violin

Selling price .............................................. $600

Manufacturing costs:

Variable .................................................. $130

Fixed ....................................................... $270

Selling and administrative costs:

Variable .................................................. $20

Fixed ....................................................... $40

Woolgar Symphony Orchestra is interested in purchasing Bharu's excess capacity of 200 units

but only if they can get the violins for $350 each. This special order would not affect regular

sales or the cost structure above.

103. If the special order from Woolgar Symphony Orchestra is accepted, Bharu's profits for

the year will:

A) increase by $40,000

B) decrease by $10,000

C) decrease by $22,000

D) decrease by $28,000



Solution:

Incremental revenues (200 units @ $350) ............ $70,000


Variable manufacturing (200 units @ $130) ..... ( 26,000)

Variable selling (200 units @ $20) .................... ( 4,000)

Net advantage of accepting the order .................... $ 40,000



104. Assume that Bharu is manufacturing and selling at capacity (5,000 units). Any special

order will mean a loss of regular sales. Under these conditions if the special order

from Woolgar Symphony Orchestra is accepted, Bharu's profits for the year will

decrease by:

A) $20,000

B) $22,000

C) $28,000

D) $50,000



Solution:

Contribution margin per unit of regular sales:

Selling price ....................................................... $600

Variable manufacturing costs ............................ 130

Variable selling costs ......................................... 20

Contribution margin per unit ............................. $450

Number of units of lost sales ............................. 200

Total lost contribution margin ............................... $90,000

Incremental revenues (200 units @ $350) ............. $70,000


Variable manufacturing (200 units @ $130) ...... ( 26,000)

Variable selling (200 units @ $20) .................... ( 4,000)

Less lost contribution margin ................................ ( 90,000)

Net disadvantage of accepting special order ......... ($50,000)




Browning Company makes four products in a single facility. These products have the

following unit product costs:

Product

A

Product

B

Product

C

Product

D

Direct materials ................................ $10.60 $7.90 $6.10 $3.80

Direct labor ....................................... 11.40 16.80 8.70 11.40

Variable manufacturing overhead .... 3.70 4.10 5.40 6.10

Fixed manufacturing overhead ......... 24.60 34.40 21.50 19.30

Unit product cost .............................. $50.30 $63.20 $41.70 $40.60

Additional data concerning these products are listed below.

Product

A

Product

B

Product

C

Product

D

Grinding minutes per unit ................ 2.60 1.80 2.50 1.40

Selling price per unit ........................ $69.50 $74.80 $59.50 $59.60

Variable selling cost per unit ............ $1.60 $1.50 $2.60 $3.40

Monthly demand in units ................. 4,000 2,000 3,000 4,000

The grinding machines are potentially the constraint in the production facility. A total of

24,500 minutes are available per month on these machines.


105. How many minutes of grinding machine time would be required to satisfy demand for

all four products?

A) 21,500

B) 27,100

C) 13,000

D) 24,500





Solution:

Demand on the grinding machine:

Product

A

Product

B

Product

C

Product

D

Grinding minutes per unit ................. 2.60 1.80 2.50 1.40

Monthly demand in units .................. 4,000 2,000 3,000 4,000

Total minutes required ...................... 10,400 3,600 7,500 5,600

Total time required for all products = 10,400 + 3,600 + 7,500 + 5,600 = 27,100

106. Which product makes the LEAST profitable use of the grinding machines?

A) Product A

B) Product B

C) Product C

D) Product D



Solution:


Product

A

Product

B

Product

C

Product

D

Selling price per unit ............................ $69.50 $74.80 $59.50 $59.60

Direct materials per unit ...................... 10.60 7.90 6.10 3.80

Direct labor per unit ............................. 11.40 16.80 8.70 11.40

Variable manufacturing overhead per unit

.......................................................... 3.70 4.10 5.40 6.10

Variable selling cost per unit ............... 1.60 1.50 2.60 3.40

Contribution margin per unit ............... $42.20 $44.50 $36.70 $34.90

Grinding minutes per unit .................... 2.60 1.80 2.50 1.40

Contribution margin per minute .......... $16.23 $24.72 $14.68 $24.93

Rank in terms of profitability .............. 3 2 4 1



107. Which product makes the MOST profitable use of the grinding machines?

A) Product A

B) Product B

C) Product C

D) Product D



Solution:


Product

A

Product

B

Product

C

Product

D

Selling price per unit .................... $69.50 $74.80 $59.50 $59.60

Direct materials per unit ............... 10.60 7.90 6.10 3.80

Direct labor per unit ..................... 11.40 16.80 8.70 11.40


.................................................. 3.70 4.10 5.40 6.10

Variable selling cost per unit ........ 1.60 1.50 2.60 3.40

Contribution margin per unit ........ $42.20 $44.50 $36.70 $34.90

Grinding minutes per unit ............ 2.60 1.80 2.50 1.40

Contribution margin per minute ... $16.23 $24.72 $14.68 $24.93

Rank in terms of profitability ....... 3 2 4 1



108. Up to how much should the company be willing to pay for one additional minute of

grinding machine time if the company has made the best use of the existing grinding

machine capacity? (Round off to the nearest whole cent.)

A) $0.00

B) $14.68

C) $34.90

D) $11.60



Solution:


Product

A

Product

B

Product

C

Product

D

Selling price per unit ............................ $69.50 $74.80 $59.50 $59.60

Direct materials per unit ...................... 10.60 7.90 6.10 3.80

Direct labor per unit ............................. 11.40 16.80 8.70 11.40


.......................................................... 3.70 4.10 5.40 6.10



Grinding minutes per unit .................... 2.60 1.80 2.50 1.40




the marginal job, which is $14.68.




Crawshan Company makes four products in a single facility. Data concerning these products

appear below:

Product

A

Product

B

Product

C

Product

D

Selling price per unit ........................... $38.50 $33.80 $37.70 $38.60

Variable manufacturing cost per unit .. $22.10 $19.50 $23.20 $25.70

Variable selling cost per unit............... $3.00 $2.90 $3.50 $1.10

Milling machine minutes per unit ....... 3.20 3.00 2.50 3.00

Monthly demand in units .................... 2,000 1,000 3,000 1,000

The milling machines are potentially the constraint in the production facility. A total of

17,000 minutes are available per month on these machines.

109. How many minutes of milling machine time would be required to satisfy demand for

all four products?

A) 19,900

B) 17,000

C) 14,600

D) 7,000



Solution:

Demand on the milling machine:

Product

A

Product

B

Product

C

Product

D


Monthly demand in units .................... 2,000 1,000 3,000 1,000

Total minutes required 6,400 3,000 7,500 3,000

Total time required for all products = 6,400 + 3,000 + 7,500 + 3,000 = 19,900



110. Which product makes the LEAST profitable use of the milling machines?

A) Product A

B) Product B

C) Product C

D) Product D



Solution:


Product

A

Product

B

Product

C

Product

D


Variable manufacturing cost per unit .. 22.10 19.50 23.20 25.70








111. Which product makes the MOST profitable use of the milling machines?

A) Product A

B) Product B

C) Product C

D) Product D



Solution:


Product

A

Product

B

Product

C

Product

D



Variable selling cost per unit .............. 3.00 2.90 3.50 1.10





112. Up to how much should the company be willing to pay for one additional minute of

milling machine time if the company has made the best use of the existing milling


A) $11.00

B) $0.00

C) $3.80

D) $13.40





Solution:


Product

A

Product

B

Product

C

Product

D









the least profitable job, which is $3.80.


Bertucci Corporation makes three products that use the current constraint-a particular type of

machine. Data concerning those products appear below:

TC GL NG

Selling price per unit ............ $494.40 $449.43 $469.68

Variable cost per unit ........... $395.20 $320.21 $373.92

Minutes on the constraint ..... 8.00 7.10 7.60



113. Rank the products in order of their current profitability from most profitable to least


emphasized.

A) TC, NG, GL

B) GL, NG, TC

C) GL, TC, NG

D) TC, GL, NG



Solution:

TC GL NG

Selling price per unit ................................. $494.40 $449.43 $469.68

Variable cost per unit ................................ 395.20 320.21 373.92

Contribution margin per unit ..................... $ 99.20 $129.22 $ 95.76

Minutes on the constraint .......................... 8.00 7.10 7.60

Contribution margin per unit of the

constrained resource .............................. $12.40 $18.20 $12.60

Ranking ..................................................... 3 1 2

Resulting ranking of products: GL, NG, TC

114. Assume that sufficient constraint time is available to satisfy demand for all but the

least profitable product. Up to how much should the company be willing to pay to

acquire more of the constrained resource?

A) $12.40 per minute


C) $129.22 per unit

D) $95.76 per unit





Solution:

TC GL NG


Variable cost per unit ........... 395.20 320.21 373.92

Contribution margin per unit $ 99.20 $129.22 $ 95.76


Contribution margin per unit

of the constrained resource $12.40 $18.20 $12.60

Ranking ................................ 3 1 2

The company should be willing to pay up to $12.40 per minute to obtain more of the

constrained resource because this is the value to the company of using this constrained

resource to make more of product TC. By assumption, the other products will already

have been produced up to demand.


The constraint at Pickrel Corporation is time on a particular machine. The company makes

three products that use this machine. Data concerning those products appear below:

VD JT SM


Variable cost per unit ........... $270.18 $310.88 $91.96




115. Rank the products in order of their current profitability from most profitable to least


emphasized.

A) JT, SM, VD

B) JT, VD, SM

C) VD, SM, JT

D) SM, VD, JT



Solution:

VD JT SM

Selling price per unit ......................... $344.85 $415.40 $119.32

Variable cost per unit ........................ 270.18 310.88 91.96

Contribution margin per unit ............ $ 74.67 $104.52 $ 27.36

Time on the constraint (minutes) ...... 5.70 6.70 1.90


constrained resource ...................... $13.10 $15.60 $14.40

Ranking ............................................. 3 1 2



116. Assume that sufficient time is available on the constrained machine to satisfy demand

for all but the least profitable product. Up to how much should the company be willing

to pay to acquire more of this constrained resource?

A) $15.60 per minute


C) $104.52 per unit

D) $27.36 per unit



Solution:

VD JT SM



Contribution margin per unit ............ $ 74.67 $104.52 $ 27.36




Ranking ............................................. 3 1 2

Resulting ranking of products: JT, SM, VD

The company should be willing to pay up to $13.10 per minute to obtain more of the

constrained resource because this is the value to the company of using this constrained

resource to make more of product VD. By assumption, the other products will already

have been produced up to demand.


The Anthony Company makes two products, X and Y, in a joint process. At the split-off

point, 60,000 units of product X and 70,000 units of product Y are available each month.

Monthly joint production costs total $200,000. Product X can be sold at the split-off point for

$3.20 per unit. Product Y can be either sold at the split-off point for $2.60 per unit or it can be

processed further and sold for $5.80 per unit. If product Y is processed further, additional

processing costs of $2.30 per unit will be incurred.



117. If product Y is processed further, rather than being sold at the split-off point, the

impact on monthly operating income should be:

A) $137,000 decrease

B) $245,000 increase

C) $63,000 increase

D) $244,000 increase



Solution:

Analysis of sell or process further:

Product Y

Final sales value after further processing ........... $5.80

Less sales value at split-off point ....................... 2.60

Incremental revenue from further processing .... 3.20

Less cost of further processing ........................... 2.30

Profit (loss) from further processing .................. $ 0.90

Total increase in monthly operating income: 70,000 units × $0.90 = $63,000

118. What would the unit selling price of product Y need to be at the split-off point in order

for Anthony to be economically indifferent between selling Y at split-off or processing

Y further before sale?

A) $3.80

B) $3.50

C) $3.20

D) $2.90



Solution:

For Anthony to be economically indifferent between selling Y at the split-off or

processing Y further, the incremental revenue from further processing would need to

be equal to the cost of further processing, or:

$5.80 − Sales value at split-off point = $2.30

Sales value at split-off point = $3.50




Dodd Company makes two products from a common input. Joint processing costs up to the

split-off point total $35,000 a year. The company allocates these costs to the joint products on

the basis of their total sales values at the split-off point. Each product may be sold at the split-

off point or processed further. Data concerning these products appear below:

Product X Product Y Total

Allocated joint processing costs ................ $14,000 $21,000 $35,000

Sales value at split-off point ...................... $20,000 $30,000 $50,000

Costs of further processing ........................ $23,500 $16,900 $40,400

Sales value after further processing .......... $45,500 $47,500 $93,000

119. What is the net monetary advantage (disadvantage) of processing Product X beyond

the split-off point?

A) $22,000

B) $8,000

C) $28,000

D) $2,000



Solution:

Product X


Costs of further processing ........................ 23,500

Benefit of further processing ..................... 22,000


Net advantage (disadvantage) ................... $ 2,000



120. What is the net monetary advantage (disadvantage) of processing Product Y beyond

the split-off point?

A) $30,600

B) $9,600

C) $39,600

D) $600



Solution:

Product Y


Costs of further processing ....................... 16,900

Benefit of further processing..................... 30,600


Net advantage (disadvantage) ................... $ 600

121. What is the minimum amount the company should accept for Product X if it is to be

sold at the split-off point?

A) $45,500

B) $14,000

C) $22,000

D) $37,500



Solution:

Product X


Costs of further processing ....................... 23,500

Benefit of processing Product X further ... $22,000

Since the company could earn $22,000 in incremental benefits from processing

Product X further, the $22,000 represents the minimum that the company should

accept for Product X if it is sold at the split-off point.




Mae Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is

processed in batches. A batch of sugar cane costs $60 to buy from farmers and $13 to crush in

the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the

crushing process. The cane fiber can be sold as is for $29 or processed further for $13 to make

the end product industrial fiber that is sold for $61. The cane juice can be sold as is for $40 or

processed further for $28 to make the end product molasses that is sold for $67.

122. How much profit (loss) does the company make by processing one batch of sugar cane

into the end products industrial fiber and molasses?

A) ($4)

B) ($114)

C) $18

D) $14



Solution:






Net advantage (disadvantage) ................... $19 ($1)

Revenue:

Industrial fiber ................... $61

Refined sugar ..................... 67

Total revenue ......................... $128

Less expenses:

Purchase from farmers ....... 60

Crushing costs .................... 13

Processing fiber further ...... 13

Processing juice further ..... 28

Total expenses ....................... 114

Net profit from one batch ...... $ 14



123. How much profit (loss) does the company make by processing the intermediate

product cane juice into molasses rather than selling it as is?

A) ($74)

B) ($14)

C) ($1)

D) ($38)



Solution:

Cane Juice





Net advantage (disadvantage) ................... ($1)

124. Which of the intermediate products should be processed further?

A) Cane fiber should be processed into industrial fiber; Cane juice should be


B) Cane fiber should be processed into industrial fiber; Cane juice should NOT be


C) Cane fiber should NOT be processed into industrial fiber; Cane juice should

NOT be processed into molasses

D) Cane fiber should NOT be processed into industrial fiber; Cane juice should be




Solution:






Net advantage (disadvantage) ................... $19 ($1)




Boney Corporation processes sugar beets that it purchases from farmers. Sugar beets are

processed in batches. A batch of sugar beets costs $53 to buy from farmers and $18 to crush

in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the

crushing process. The beet fiber can be sold as is for $25 or processed further for $18 to make

the end product industrial fiber that is sold for $39. The beet juice can be sold as is for $32 or


125. How much profit (loss) does the company make by processing one batch of sugar

beets into the end products industrial fiber and refined sugar?

A) $15

B) ($14)

C) ($117)

D) $1



Solution:






Net advantage (disadvantage) ................... ($4) $19

Revenue:

Industrial fiber ............................... $39

Refined sugar ................................. 79

Total revenue ..................................... $118

Less expenses:

Purchase from farmers ................... 53

Crushing costs ................................ 18

Processing fiber further .................. 18

Processing juice further ................. 28

Total expenses ................................... 117

Net profit from one batch .................. $ 1



126. How much profit (loss) does the company make by processing the intermediate

product beet juice into refined sugar rather than selling it as is?

A) $1

B) ($17)

C) $19

D) ($52)



Solution:

Beet Juice





Net advantage (disadvantage) ................... $19

127. Which of the intermediate products should be processed further?

A) beet fiber should be processed into industrial fiber; beet juice should be


B) beet fiber should NOT be processed into industrial fiber; beet juice should NOT

be processed into refined sugar

C) beet fiber should NOT be processed into industrial fiber; beet juice should be


D) beet fiber should be processed into industrial fiber; beet juice should NOT be




Solution:






Net advantage (disadvantage) ................... ($4) $19



Essay Questions

128. Saalfrank Corporation is considering two alternatives that are code-named M and N.

Costs associated with the alternatives are listed below:

Alternative

M

Alternative

N

Supplies costs ........ $43,000 $53,000

Assembly costs ...... $43,000 $56,000

Power costs ............ $26,000 $26,000

Inspection costs ..... $19,000 $26,000

Required:

a. Which costs are relevant and which are not relevant in the choice between these

two alternatives?

b. What is the differential cost between the two alternatives?

Ans:

a.

Supplies costs Relevant, since costs differ between alternatives

Assembly costs Relevant, since costs differ between alternatives

Power costs Not relevant since the costs do not differ between alternatives

Inspection costs Relevant, since costs differ between alternatives

b.

Alternative

M

Alternative

N Differential

Supplies costs ........ $ 43,000 $ 53,000 $10,000

Assembly costs ...... 43,000 56,000 13,000

Power costs ............ 26,000 26,000 0

Inspection costs ..... 19,000 26,000 7,000

Total ...................... $131,000 $161,000 $30,000

AACSB: Analytic AICPA BB: Critical Thinking




129. Costs associated with two alternatives, code-named Q and R, being considered by

Albiston Corporation are listed below:

Alternative

Q Alternative R

Supplies costs ........ $65,000 $65,000

Power costs ........... $30,000 $29,000

Inspection costs ..... $18,000 $29,000

Assembly costs ...... $33,000 $33,000

Required:

a. Which costs are relevant and which are not relevant in the choice between these

two alternatives?

b. What is the differential cost between the two alternatives?

Ans:

a.

Supplies costs Not relevant since the costs do not differ between alternatives

Power costs Relevant, since costs differ between alternatives

Inspection costs Relevant, since costs differ between alternatives

Assembly costs Not relevant since the costs do not differ between alternatives

b.

Alternative Q Alternative R Differential

Supplies costs ........ $ 65,000 $ 65,000 $ 0

Power costs ........... 30,000 29,000 (1,000)

Inspection costs ..... 18,000 29,000 11,000

Assembly costs ...... 33,000 33,000 0

Total ...................... $146,000 $156,000 $10,000





130. The most recent monthly income statement for Benner Stores is given below:

Total Store A Store B

Sales ................................... $1,000,000 $400,000 $600,000

Variable expenses .............. 580,000 160,000 420,000

Contribution margin .......... 420,000 240,000 180,000

Traceable fixed expenses ... 300,000 100,000 200,000

Store segment margin ........ 120,000 140,000 (20,000)

Common fixed expenses ... 50,000 20,000 30,000

Net operating income ........ $ 70,000 $120,000 ($ 50,000)

Due to its poor showing, consideration is being given to closing Store B. Studies show

that if Store B is closed, one-fourth of its traceable fixed expenses will continue

unchanged. The studies also show that closing Store B would result in a 10 percent

decrease in sales in Store A. The company allocates common fixed expenses to the

stores on the basis of sales dollars.

Required:

Compute the overall increase or decrease in the company's operating income if Store

B is closed.

Ans:

Loss in contribution margin if Store B is closed:

Store B loss ........................................................................... ($180,000)

Store A loss (10% × $240,000) ............................................ ( 24,000)

Total lost contribution margin .............................................. ( 204,000)

Fixed costs avoided if Store B is closed (75% × $200,000). 150,000

Net disadvantage of closing Store B .................................... ($ 54,000)





131. Companies often allocate common fixed costs among segments. For example,

common fixed corporate costs are often allocated to divisions and appear as part of the

divisional performance reports.

Required:

What dangers are there in allocating common fixed costs to segments when involved

in a decision to possibly drop a segment such as a product or a division?

Ans:

A segment such as a product or a division may show a net loss only because of the

allocated common fixed cost. However, if the segment is dropped, the common fixed

expense will continue. A segment should be dropped only if its contribution margin

does not cover its own avoidable fixed costs. And even in cases where a segment does

not cover its own costs, it may be beneficial to retain the segment if it has positive

effects on other segments. For example, a “losing” product may be important in luring

customers into a store where they will buy other products.



132. The management of Schmader Corporation is considering dropping product M12C.

Data from the company's accounting system appear below:

Sales ................................................................ $550,000

Variable expenses ........................................... $242,000



All fixed expenses of the company are fully allocated to products in the company's

accounting system. Further investigation has revealed that $137,000 of the fixed


are avoidable if product M12C is discontinued.

Required:

a. What is the net operating income earned by product M12C according to the

company's accounting system? Show your work!

b. What would be the effect on the company's overall net operating income of

dropping product M12C? Should the product be dropped? Show your work!



Ans:

Keep the

Product

Drop the

Product Difference

Sales ............................................... $550,000 $ 0 ($550,000)



Fixed expenses:

Fixed manufacturing expenses ... 215,000 78,000 137,000


expenses .................................. 132,000 53,000 79,000


Net operating income (loss) .......... ($ 39,000) ($131,000) ($92,000)

a. According to the company’s accounting system, the product’s net operating loss is

$39,000.

b. Net operating income would decline by $92,000 if product M12C were dropped.




133. Suire Corporation is considering dropping product D14E. Data from the company's

accounting system appear below:

Sales ................................................................. $340,000

Variable expenses ............................................ $156,000






are avoidable if product D14E is discontinued.

Required:

a. According to the company's accounting system, what is the net operating income

earned by product D14E? Show your work!

b. What would be the effect on the company's overall net operating income of

dropping product D14E? Should the product be dropped? Show your work!



Ans:

Keep the

Product

Drop the

Product Difference

Sales ............................................... $340,000 $ 0 ($340,000)


Contribution margin ....................... 184,000 0 ( 184,000)

Fixed expenses:

Fixed manufacturing expenses ....... 116,000 44,000 72,000


expenses ...................................... 75,000 27,000 48,000

Total fixed expenses....................... 191,000 71,000 120,000

Net operating income (loss) ........... ($ 7,000) ($71,000) ($ 64,000)

a. According to the company’s accounting system, the product’s net operating loss is

$7,000.

b. Net operating income would decline by $64,000 if product D14E were dropped.




134. The management of Wengel Corporation is considering dropping product B90D. Data


Sales ................................................................ $720,000

Variable expenses ........................................... $374,000






are avoidable if product B90D is discontinued.

Required:

What would be the effect on the company's overall net operating income if product

B90D were dropped? Should the product be dropped? Show your work!



Ans:

Keep the

Product

Drop the

Product Difference

Sales ............................................... $720,000 $ 0 ($720,000)

Variable expenses ........................... 374,000 0 374,000

Contribution margin ....................... 346,000 0 ( 346,000)

Fixed expenses:

Fixed manufacturing expenses ....... 245,000 72,000 173,000


expenses ...................................... 209,000 59,000 150,000

Total fixed expenses ....................... 454,000 131,000 323,000

Net operating income (loss) ........... ($108,000) ($131,000) ($ 23,000)

Net operating income would decline by $23,000 if product B90D were dropped.






135. Foubert Company makes 40,000 units per year of a part it uses in the products it

manufactures. The unit product cost of this part is computed as follows:

Direct materials ................................... $13.80

Direct labor ......................................... 18.10

Variable manufacturing overhead ....... 4.30

Fixed manufacturing overhead ............ 24.60

Unit product cost ................................. $60.80

An outside supplier has offered to sell the company all of these parts it needs for

$51.80 a unit. If the company accepts this offer, the facilities now being used to make

the part could be used to make more units of a product that is in high demand. The

additional contribution margin on this other product would be $268,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the

part would be avoided. However, $17.00 of the fixed manufacturing overhead cost

being applied to the part would continue even if the part were purchased from the

outside supplier. This fixed manufacturing overhead cost would be applied to the

company's remaining products.

Required:

a. How much of the unit product cost of $60.80 is relevant in the decision of whether

to make or buy the part?

b. What is the net total dollar advantage (disadvantage) of purchasing the part rather

than making it?

c. What is the maximum amount the company should be willing to pay an outside

supplier per unit for the part if the supplier commits to supplying all 40,000 units

required each year?



Ans:

a. Relevant cost per unit:

Direct materials .......................................... $13.80

Direct labor ................................................ 18.10

Variable manufacturing overhead .............. 4.30


Relevant manufacturing cost ..................... $43.80

b. Net advantage (disadvantage):

Manufacturing cost savings ....................... $1,752,000

Additional contribution margin ................. 268,000

Cost of purchasing the part ........................ ( 2,072,000)

Net advantage (disadvantage) .................... ($ 52,000)

c. Maximum acceptable purchase price:

Manufacturing cost savings ....................... $1,752,000

Additional contribution margin ................. 268,000

Total benefit ............................................... $2,020,000

Number of units ......................................... 40,000

Benefit per unit .......................................... $50.50





136. Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for

use in one of its products. Data concerning the unit production costs of the B345

gasket follow:

Direct materials ................................... $0.15

Direct labor ......................................... 0.10

Variable manufacturing overhead ....... 0.13

Fixed manufacturing overhead ............ 0.24

Total manufacturing cost per unit ....... $0.62

An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it

requires. If Kirsten Corporation decided to discontinue making the B345 gaskets, 25%

of the above fixed manufacturing overhead costs could be avoided.

Required:

a. Assume Kirsten Corporation has no alternative use for the facilities presently

devoted to production of the B345 gaskets. If the outside supplier offers to sell the

gaskets for $0.46 each, should Kirsten Corporation accept the offer? Fully support

your answer with appropriate calculations.

b. Assume that Kirsten Corporation could use the facilities presently devoted to

production of the B345 gaskets to expand production of another product that

would yield an additional contribution margin of $10,000 annually. What is the

maximum price Kirsten Corporation should be willing to pay the outside supplier

for B345 gaskets?



Ans:

a. The analysis of the alternatives follows below:

Make Buy

Purchase cost ..................................... $0.46

Direct materials ................................. $0.15

Direct labor ....................................... 0.10

Variable manufacturing overhead ..... 0.13

Fixed manufacturing overhead* ....... 0.06

Total cost ........................................... $0.44 $0.46

*25% × $0.24

The company should make the part rather than buy it from the outside supplier

since it costs $0.02 less under that alternative.

b. The maximum acceptable price is $0.54 since that is the cost to the company of

making the part itself when the opportunity cost is included:

Total cost of making the part internally ................ $0.44

Opportunity cost per unit ($10,000 ÷ 100,000) ..... 0.10

Total ....................................................................... $0.54





137. McGraw Company uses 5,000 units of Part X each year as a component in the

assembly of one of its products. The company is presently producing Part X internally

at a total cost of $100,000, computed as follows:

Direct materials ................................... $ 15,000

Direct labor ......................................... 30,000

Variable manufacturing overhead ....... 10,000

Fixed manufacturing overhead ............ 45,000

Total costs ........................................... $100,000

An outside supplier has offered to provide Part X at a price of $18 per unit. If McGraw

Company stops producing the part internally, one-third of the fixed manufacturing

overhead would be eliminated.

Required:

Prepare an analysis showing the annual dollar advantage or disadvantage of accepting

the outside supplier's offer.

Ans:

Cost of Cost of

Making Buying

Outside purchase ................................. $90,000

Direct materials ................................... $15,000

Direct labor ......................................... 30,000

Variable manufacturing overhead ....... 10,000

Fixed manufacturing overhead* .......... 15,000

Total cost ............................................. $70,000 $90,000

*1/3 × $45,000 = $15,000

Therefore, the annual advantage to make the parts is $20,000.





138. Gottshall Inc. makes a range of products. The company's predetermined overhead rate

is $19 per direct labor-hour, which was calculated using the following budgeted data:

Variable manufacturing overhead ....... $225,000

Fixed manufacturing overhead ............ $630,000

Direct labor-hours ................................ 45,000

Component P0 is used in one of the company’s products. The unit cost of the

component according to the company’s cost accounting system is determined as

follows:


Direct labor ................................................ 40.80

Manufacturing overhead applied ............... 32.30


An outside supplier has offered to supply component P0 for $78 each. The outside

supplier is known for quality and reliability. Assume that direct labor is a variable

cost, variable manufacturing overhead is really driven by direct labor-hours, and total

fixed manufacturing overhead would not be affected by this decision. Gottshall

chronically has idle capacity.

Required:

Is the offer from the outside supplier financially attractive? Why?



Ans:

Direct materials, direct labor, and variable manufacturing overhead are relevant in this

decision. Fixed manufacturing overhead is not relevant since it would not be affected

by the decision. The variable portion of the manufacturing overhead rate is computed

as follows:

Variable portion of the predetermined overhead rate = Variable manufacturing

overhead ÷ Direct labor-hours = $225,000 ÷ 45,000 DLHs = $5.00 per DLH

The direct-labor hours per unit for the special order can be determined as follows:

Direct labor-hours = Manufacturing overhead applied ÷ Predetermined overhead rate

= $32.30 ÷ $19.00 per DLH = 1.70 DLHs

Consequently, the variable manufacturing overhead for the special order would be:

Variable manufacturing overhead = Variable portion of the predetermined overhead

rate × Direct labor-hours = $5.00 per DLH × 1.70 DLHs = $8.50

Putting this all together:


Direct labor ............................................... 40.80


Total variable cost ..................................... $70.30

Since the outside supplier has offered to sell the component for $78.00 each, but it

only costs the company $70.30 to make the component internally, this is not a

financially attractive offer.






139. Recher Corporation uses part Q89 in one of its products. The company's Accounting

Department reports the following costs of producing the 8,000 units of the part that are

needed every year.

Per Unit


Direct labor ................................................ $4.40

Variable overhead ...................................... $8.60










avoided. In addition, the space used to produce part Q89 could be used to make more

of one of the company's other products, generating an additional segment margin of

$16,000 per year for that product.

Required:

a. Prepare a report that shows the effect on the company's total net operating income

of buying part Q89 from the supplier rather than continuing to make it inside the

company.

b. Which alternative should the company choose?



Ans:

a.

Make Buy





........................................................................... 25,600


Allocated general overhead (avoidable only) ....... 3,000


unit).................................................................... $220,800


Total cost ............................................................... $197,400 $204,800

b. The total cost of the make alternative is lower by $7,400. Thus, net operating

income would decline by $7,400 if the offer from the supplier were accepted.

Therefore, the company should continue to make the part itself.





140. Part U67 is used in one of Broce Corporation's products. The company's Accounting

Department reports the following costs of producing the 7,000 units of the part that are

needed every year.

Per Unit

Direct materials .......................................... $8.70

Direct labor ................................................ $2.70

Variable overhead ...................................... $3.30

Supervisor’s salary ..................................... $1.90


Allocated general overhead........................ $5.50







avoided.

Required:

a. Prepare a report that shows the effect on the company's total net operating income

of buying part U67 from the supplier rather than continuing to make it inside the

company.

b. Which alternative should the company choose?

Ans:

a.

Make Buy

Direct materials (7,000 units @ $8.70 per unit) ............. $ 60,900

Direct labor (7,000 units @ $2.70 per unit) ................... 18,900

Variable overhead (7,000 units @ $3.30 per unit) ......... 23,100

Supervisor’s salary (7,000 units @ $1.90 per unit) ........ 13,300

Depreciation of special equipment (not relevant) .......... 0

Allocated general overhead (avoidable only) ................. 6,000

Outside purchase price (7,000 units @ $21.40 per unit) $149,800

Total cost ........................................................................ $122,200 $149,800

b. The total cost of the make alternative is lower by $27,600. Thus, net operating

income would decline by $27,600 if the offer from the supplier were accepted.

Therefore, the company should continue to make the part itself.





141. Juline Company produces a single product. The cost of producing and selling a single

unit of this product at the company's normal activity level of 40,000 units per month is

as follows:


Direct labor ........................................................... $5.30

Variable manufacturing overhead ......................... $1.40

Fixed manufacturing overhead .............................. $13.20

Variable selling and administrative expense ......... $1.60

Fixed selling and administrative expense ............. $9.10

The normal selling price of the product is $91.60 per unit.

An order has been received from an overseas customer for 3,000 units to be delivered

this month at a special discounted price. This order would have no effect on the

company's normal sales and would not change the total amount of the company's fixed

costs. The variable selling and administrative expense would be $1.00 less per unit on

this order than on normal sales.


Required:

a. Suppose there is ample idle capacity to produce the units required by the overseas

customer and the special discounted price on the special order is $81.90 per unit.

By how much would this special order increase (decrease) the company's net

operating income for the month?

b. Suppose the company is already operating at capacity when the special order is

received from the overseas customer. What would be the opportunity cost of each

unit delivered to the overseas customer?

c. Suppose there is not enough idle capacity to produce all of the units for the

overseas customer and accepting the special order would require cutting back on

production of 2,100 units for regular customers. What would be the minimum

acceptable price per unit for the special order?



Ans:

b. Variable cost per unit on normal sales:


Direct labor ............................................................ 5.30





Normal variable cost per unit ................................ $61.90

Reduction in variable selling and administrative

expense............................................................... 1.00

Variable cost per unit on special order .................. $60.90

Selling price for special order ............................... $81.90

Variable cost per unit on special order .................. 60.90

Unit contribution margin on special order ............ 21.00



b. The opportunity cost is just the contribution margin on normal sales:

Normal selling price per unit ................................. $91.60

Variable cost per unit on normal sales .................. 61.90

Unit contribution margin on normal sales ............. $29.70

c. Minimum acceptable price:

Unit contribution margin on normal sales ............. $29.70

Displaced normal sales .......................................... 2,100

Lost contribution margin displaced sales .............. $ 62,370

Total variable cost on special order ....................... 182,700

$245,070


Minimum acceptable price on special order .......... $81.69





142. Marsdon Company has an annual production capacity of 15,000 units. The costs

associated with production and sale of the company's product are given below:

Manufacturing costs:

Variable .................................................. $12 per unit

Fixed (annual cost) ................................. $90,000

Selling and administrative costs:

Variable (sales commissions) ................ $3 per unit

Fixed (annual cost) ................................. $60,000

The company presently is selling 12,000 units annually at a selling price of $28 each.

A special order has been received from a distributor who wants to purchase 3,000

units at a special price of $20 each. Regular sales would not be affected by this order

and the order could be filled without any impact on total fixed costs. Sales

commissions on the special order would be reduced by one-third.

Required:

Determine whether the company should accept the special order.

Ans:

Incremental revenues (3,000 units @ $20) ............ $60,000


Variable manufacturing (3,000 units @ $12) ..... ( 36,000)

Variable selling (3,000 units @ $2).................... ( 6,000)

Net advantage of accepting the order .................... $ 18,000

Yes, the order should be accepted.





143. Mcniff Corporation makes a range of products. The company's predetermined

overhead rate is $28 per direct labor-hour, which was calculated using the following

budgeted data:

Variable manufacturing overhead ............. $180,000

Fixed manufacturing overhead .................. $380,000

Direct labor-hours ...................................... 20,000

Management is considering a special order for 200 units of product O96S at $122

each. The normal selling price of product O96S is $149 and the unit product cost is

determined as follows:


Direct labor ................................................ 32.00

Manufacturing overhead applied ............... 44.80


If the special order were accepted, normal sales of this and other products would not

be affected. The company has ample excess capacity to produce the additional units.

Assume that direct labor is a variable cost, variable manufacturing overhead is really

driven by direct labor-hours, and total fixed manufacturing overhead would not be

affected by the special order.

Required:

If the special order were accepted, what would be the impact on the company's overall

profit?

Ans:

Direct materials, direct labor, and variable manufacturing overhead are relevant in this

decision. Fixed manufacturing overhead is not relevant since it would not be affected

by the decision. The variable portion of the manufacturing overhead rate is computed

as follows:

Variable portion of the predetermined overhead rate = Variable manufacturing

overhead ÷ Direct labor-hours = $180,000 ÷ 20,000 direct labor-hours = $9.00 per

direct labor-hour



The direct-labor hours per unit for the special order can be determined as follows:

Direct labor-hours = Manufacturing overhead applied ÷ Predetermined overhead rate

= $44.80 ÷ $28.00 per direct labor-hour = 1.60 direct labor-hours

Consequently, the variable manufacturing overhead for the special order would be:

Variable manufacturing overhead = Variable portion of the predetermined overhead

rate × Direct labor-hours = $9.00 per direct labor-hour × 1.60 direct labor-hours =

$14.40

Putting this all together:

Special order price ......................................................... $122.00

Variable costs:

Direct materials ........................................................... 67.00

Direct labor ................................................................. 32.00

Variable manufacturing overhead ............................... 14.40

Total variable cost .......................................................... 113.40

Contribution margin ....................................................... $ 8.60

× Units ordered............................................................... 200

= Total increase in profit from the special order ............ $1,720






144. Kneller Co. manufactures and sells medals for winners of athletic and other events. Its

manufacturing plant has the capacity to produce 12,000 medals each month; current

monthly production is 9,600 medals. The company normally charges $99 per medal.

Cost data for the current level of production are shown below:

Variable costs:

Direct materials .......................... $480,000

Direct labor ................................. $153,600

Selling and administrative .......... $24,960

Fixed costs:

Manufacturing ............................ $144,000


The company has just received a special one-time order for 500 medals at $89 each.

For this particular order, no variable selling and administrative costs would be

incurred. This order would also have no effect on fixed costs.

Required:

Should the company accept this special order? Why?

Ans:

Only the direct materials and direct labor costs are relevant in this decision. To make

the decision, we must compute the average direct materials and direct labor cost per

unit.

Direct materials .............................................................. $480,000

Direct labor ..................................................................... 153,600

Total ................................................................................ $633,600

Current monthly production ........................................... 9,600

Average direct materials and direct labor cost per unit .. $66

Since price on the special order is $89 per medal and the relevant cost is only $66, the

company would earn a profit of $23 per medal. Therefore, the special order should be

accepted.






145. Anglen Co. manufactures and sells trophies for winners of athletic and other events.

Its manufacturing plant has the capacity to produce 18,000 trophies each month;

current monthly production is 14,400 trophies. The company normally charges $103

per trophy. Cost data for the current level of production are shown below:

Variable costs:

Direct materials .......................... $460,800

Direct labor ................................ $316,800


Fixed costs:

Manufacturing ............................ $404,640


The company has just received a special one-time order for 900 trophies at $48 each.

For this particular order, no variable selling and administrative costs would be

incurred. This order would also have no effect on fixed costs.

Required:

Should the company accept this special order? Why?

Ans:

Only the direct materials and direct labor costs are relevant in this decision. To make

the decision, we must compute the average direct materials and direct labor cost per

unit.

Direct materials .............................................................. $460,800

Direct labor .................................................................... 316,800

Total ............................................................................... $777,600

Current monthly production ........................................... 14,400

Average direct materials and direct labor cost per unit . $54

Because price on the special order is $48 per trophy and the relevant cost is $54, the

company would suffer a loss of $6 per trophy. Therefore, the special order should not

be accepted.






146. Wehrs Corporation has received a request for a special order of 6,000 units of product

K19 for $32.30 each. The normal selling price of this product is $33.45 each, but the

units would need to be modified slightly for the customer. The normal unit product

cost of product K19 is computed as follows:


Direct labor ................................................ 3.80





company's total fixed manufacturing overhead costs. The customer would like some

modifications made to product K19 that would increase the variable costs by $4.90 per

unit and that would require a one-time investment of $23,000 in special molds that

would have no salvage value. This special order would have no effect on the

company's other sales. The company has ample spare capacity for producing the

special order.

Required:

Determine the effect on the company's total net operating income of accepting the

special order. Show your work!

Ans:

Incremental revenue (6,000 units @ $32.30 per unit) ...................... $193,800


Direct materials (6,000 units @ $15.00 per unit) .......................... 90,000




Special molds ................................................................................ 23,000







147. A customer has asked Lalka Corporation to supply 3,000 units of product H60, with

some modifications, for $34.70 each. The normal selling price of this product is

$46.35 each. The normal unit product cost of product H60 is computed as follows:


Direct labor ............................................... 1.30





company's total fixed manufacturing overhead costs. The customer would like some

modifications made to product H60 that would increase the variable costs by $3.80 per

unit and that would require a one-time investment of $24,000 in special molds that

would have no salvage value. This special order would have no effect on the

company's other sales. The company has ample spare capacity for producing the

special order.

Required:

Determine the effect on the company's total net operating income of accepting the

special order. Show your work!

Ans:

Incremental revenue (3,000 units @ $34.70 per unit) ...... $104,100


Direct materials (3,000 units @ $14.70 per unit) .......... 44,100

Direct labor (3,000 units @ $1.30 per unit) ................... 3,900

Variable manufacturing overhead (3,000 units @ $7.00

per unit) ...................................................................... 21,000

Modifications (3,000 units @ $3.80 per unit) ................ 11,400

Special molds ................................................................. 24,000

Total incremental cost ....................................................... 104,400

Incremental net operating income ..................................... ($ 300)





148. Gloddy Company makes three products in a single facility. These products have the

following unit product costs:


Direct materials ................................ $24.90 $25.70 $26.60

Direct labor ....................................... 13.30 17.10 15.70

Variable manufacturing overhead .... 2.50 2.80 3.10

Fixed manufacturing overhead ......... 19.80 27.70 21.00

Unit product cost .............................. $60.50 $73.30 $66.40

Additional data concerning these products are listed below.


Mixing minutes per unit ................... 2.50 1.70 1.60

Selling price per unit ........................ $71.50 $87.90 $83.00

Variable selling cost per unit ............ $2.30 $1.90 $3.80

Monthly demand in units .................. 1,000 3,000 3,000

The mixing machines are potentially the constraint in the production facility. A total

of 10,800 minutes are available per month on these machines.


Required:

a. How many minutes of mixing machine time would be required to satisfy demand

for all four products?

b. How much of each product should be produced to maximize net operating

income? (Round off to the nearest whole unit.)

c. Up to how much should the company be willing to pay for one additional hour of

mixing machine time if the company has made the best use of the existing mixing




Ans:

a. Demand on the mixing machine:


Mixing minutes per unit .... 2.50 1.70 1.60

Monthly demand in units .. 1,000 3,000 3,000

Total minutes required ...... 2,500 5,100 4,800

Total time required for all products: 12,400

b. Optimal production plan:



Direct materials ................................... $24.90 $25.70 $26.60

Direct labor ......................................... 13.30 17.10 15.70

Variable manufacturing overhead ....... 2.50 2.80 3.10

Variable selling cost per unit .............. 2.30 1.90 3.80

Total variable cost per unit .................. $43.00 $47.50 $49.20


Mixing minutes per unit ...................... 2.50 1.70 1.60



Optimal production ............................. 360 3,000 3,000

c. The company should be willing to pay up to the contribution margin per minute

for the marginal job, which is $11.40.





149. Holzmeyer Company makes three products in a single facility. Data concerning these

products follow:




Direct labor ....................................... $30.80 $33.40 $26.00

Variable manufacturing overhead .... $1.60 $1.90 $2.10

Variable selling cost per unit ............ $1.00 $3.40 $1.50


Monthly demand in units .................. 4,000 2,000 4,000

The mixing machines are potentially the constraint in the production facility. A total

of 32,400 minutes are available per month on these machines.


Required:

a. How many minutes of mixing machine time would be required to satisfy demand

for all four products?

b. How much of each product should be produced to maximize net operating

income? (Round off to the nearest whole unit.)

c. Up to how much should the company be willing to pay for one additional hour of

mixing machine time if the company has made the best use of the existing mixing




Ans:

a. Demand on the mixing machine:

Product A Product B Product C Total

Mixing minutes per unit .... 3.50 3.10 3.50

Monthly demand in units .. 4,000 2,000 4,000

Total minutes required ...... 14,000 6,200 14,000 34,200

b. Optimal production plan:


Selling price per unit ........................ $ 64.50 $ 64.80 $ 63.30


Direct labor ...................................... 30.80 33.40 26.00

Variable manufacturing overhead .... 1.60 1.90 2.10

Variable selling cost per unit ........... 1.00 3.40 1.50

Total variable cost per unit ............... $54.30 $53.20 $47.90

Contribution margin per unit ............ $10.20 $11.60 $15.40


Contribution margin per minute ....... $2.91 $3.74 $4.40

Rank in terms of profitability ........... 3 2 1

Optimal production .......................... 3,486 2,000 4,000

c. The company should be willing to pay up to the contribution margin per minute

for the marginal job, which is $2.91.





150. Garson, Inc. produces three products. Data concerning the selling prices and unit costs

of the three products appear below:

Product F Product G Product H

Selling price ................................... $50 $80 $70

Variable costs ................................. $40 $50 $55

Fixed costs ..................................... $15 $20 $12

Milling machine time (minutes) .... 4 2 5

Fixed costs are applied to the products on the basis of direct labor hours.

Demand for the three products exceeds the company's productive capacity. The

milling machine is the constraint, with only 2,400 minutes of milling machine time

available this week.

Required:

a. Given the milling machine constraint, which product should be emphasized?

Support your answer with appropriate calculations.

b. Assuming that there is still unfilled demand for the product that the company

should emphasize in part (a) above, up to how much should the company be

willing to pay for an additional hour of milling machine time?

Ans:

a. The product to emphasize can be determined by computing the contribution

margin per unit of the scarce resource, which in this case is milling machine time.

Product F Product G Product H

Selling price ................................... $50 $80 $70

Variable costs ................................ 40 50 55

Contribution margin ...................... $10 $30 $15

Milling machine time (minutes) .... 4 2 5

Contribution margin per minute .... $2.50 $15.00 $3.00

Product G should be emphasized because it has the greatest contribution margin

per unit of the scarce resource.

b. If additional milling machine time would be used to produce more of Product G,

the time would be worth 60 minutes per hour × $15 per minute = $900 per hour.





151. Brissett Corporation makes three products that use the current constraint, which is a

particular type of machine. Data concerning those products appear below:

GK LQ XK



Time on the constraint (minutes) .. 1.90 3.70 3.60

Required:

a. Rank the products in order of their current profitability from the most profitable to

the least profitable. In other words, rank the products in the order in which they

should be emphasized. Show your work!

b. Assume that sufficient constraint time is available to satisfy demand for all but the



Ans:

a. GK LQ XK



Contribution margin per unit ............. $ 29.64 $ 49.21 $ 50.04




Ranking ............................................. 1 3 2

Resulting ranking of products: GK, XK, LQ

b. The company should be willing to pay up to $13.30 per minute to obtain more of

the constrained resource because this is the value to the company of using this

constrained resource to make more of product LQ. By assumption, the other

products will already have been produced up to demand.





152. The constraint at Dreyfus Inc. is an expensive milling machine. The three products

listed below use this constrained resource.

VY QX AM


Variable cost per unit ....................... $62.40 $331.20 $113.28


Required:

a. Rank the products in order of their current profitability from the most profitable to

the least profitable. In other words, rank the products in the order in which they

should be emphasized. Show your work!

b. Assume that sufficient constraint time is available to satisfy demand for all but the



Ans:

a. VY QX AM

Selling price per unit ............................... $78.65 $421.59 $145.92

Variable cost per unit .............................. 62.40 331.20 113.28

Contribution margin per unit ................... $16.25 $ 90.39 $ 32.64

Time on the constraint (minutes) ............. 1.30 6.90 2.40


constrained resource ............................ $12.50 $13.10 $13.60

Ranking ................................................... 3 2 1

Resulting ranking of products: AM, QX, VY

b. The company should be willing to pay up to $12.50 per minute to obtain more of

the constrained resource because this is the value to the company of using this

constrained resource to make more of product VY. By assumption, enough of the

other two products will already have been produced to fully satisfy demand.





153. Iaria Corporation makes two products from a common input. Joint processing costs up

to the split-off point total $33,600 a year. The company allocates these costs to the

joint products on the basis of their total sales values at the split-off point. Each product

may be sold at the split-off point or processed further. Data concerning these products

appear below:

Product X Product Y

Allocated joint processing costs .......... $19,600 $14,000

Sales value at split-off point ................ $28,000 $20,000

Costs of further processing ................. $22,400 $15,700

Sales value after further processing .... $53,500 $33,500

Required:

a. What is the net monetary advantage (disadvantage) of processing Product X

beyond the split-off point?

b. What is the net monetary advantage (disadvantage) of processing Product Y

beyond the split-off point?

c. What is the minimum amount the company should accept for Product X if it is to

be sold at the split-off point?

d. What is the minimum amount the company should accept for Product Y if it is to

be sold at the split-off point?

Ans:

a. & b.

Product X Product Y

Sales value after further processing .......... $53,500 $33,500

Costs of further processing ....................... 22,400 15,700

Benefit of further processing..................... 31,100 17,800

Less: Sales value at split-off point ............ 28,000 20,000

Net advantage (disadvantage) ................... $ 3,100 ($ 2,200)

c. & d.

Product X Product Y

Minimum selling price at split-off ............ $31,100 $17,800





154. Prosner Corp. manufactures three products from a common input in a joint processing

operation. Joint processing costs up to the split-off point total $500,000 per year. The

company allocates these costs to the joint products on the basis of their total sales

value at the split-off point.

Each product may be sold at the split-off point or processed further. The additional

processing costs and sales value after further processing for each product (on an

annual basis) are:

Sales Value

at Split-Off

Further

Processing

Costs

Sales Value

After Further

Processing

Product D ...... $300,000 $125,000 $534,000

Product F ...... $275,000 $210,000 $450,000

Product G ...... $195,000 $135,000 $360,000

The “Further Processing Costs” consist of variable and avoidable fixed costs.

Required:

Which product or products should be sold at the split-off point, and which product or

products should be processed further? Show computations.

Ans:

Product D Product F Product G

Sales value after further processing .... $534,000 $450,000 $360,000

Sales value at split-off ......................... 300,000 275,000 195,000

Incremental revenue ............................ 234,000 175,000 165,000

Further processing costs ...................... 125,000 210,000 135,000

Incremental income (loss) ................... $109,000 ($ 35,000) $ 30,000

Products D and G should be sold after further processing beyond the split-off point.

Product F should be sold at the split-off point without any further processing.





155. Swagger Corporation purchases potatoes from farmers. The potatoes are then peeled,

producing two intermediate products-peels and depeeled spuds. The peels can then be

processed further to make a cocktail of organic nutrients. And the depeeled spuds can

be processed further to make frozen french fries. A batch of potatoes costs $63 to buy

from farmers and $12 to peel in the company's plant. The peels produced from a batch

can be sold as is for animal feed for $29 or processed further for $15 to make the

cocktail of nutrients that are sold for $41. The depeeled spuds can be sold as is for $40

or processed further for $22 to make frozen french fries that are sold for $77.

Required:

a. Assuming that no other costs are involved in processing potatoes or in selling

products, how much money does the company make from processing one batch of

potatoes into the cocktail of organic nutrients and frozen french fries? Show your

work!

b. Should each of the intermediate products, peels and depeeled spuds, be sold as is

or processed further into an end product? Explain.

Ans:

a. Analysis of the profitability of the overall operation:

Combined final sales value ($41 + $77) ......... $118

Less costs of producing the end products:

Cost of potatoes ............................................ $63

Cost of peeling ............................................. 12

Cost of further processing peels ................... 15

Cost of further processing depeeled spuds ... 22 112

Profit (loss) ...................................................... $ 6

b. Analysis of sell or process further:

Cocktail of

Organic

Nutrients

Frozen

French

Fries

Final sales value after further processing ........ $41 $77

Less sales value at split-off point .................... 29 40

Incremental revenue from further processing . 12 37

Less cost of further processing ........................ 15 22

Profit (loss) from further processing ............... ($ 3) $15

Don’t

process

further

Process

further





156. Farrugia Corporation produces two intermediate products, A and B, from a common

input. Intermediate product A can be further processed into end product X.

Intermediate product B can be further processed into end product Y. The common

input is purchased in batches that cost $36 each and the cost of processing a batch to

produce intermediate products A and B is $15. Intermediate product A can be sold as

is for $21 or processed further for $14 to make end product X that is sold for $32.

Intermediate product B can be sold as is for $44 or processed further for $28 to make

end product Y that is sold for $64.

Required:

a. Assuming that no other costs are involved in processing potatoes or in selling

products, how much money does the company make from processing one batch of

the common input into the end products X and Y? Show your work!

b. Should each of the intermediate products, A and B, be sold as is or processed

further into an end product? Explain.

Ans:

a. Analysis of the profitability of the overall operation:

Combined final sales value ($32 + $64) .......... $96

Less costs of producing the end products:

Cost of common input .................................. $36

Cost of processing common input ................ 15

Cost of further processing product A ........... 14

Cost of further processing product B ........... 28 93

Profit (loss) ...................................................... $ 3

b. Analysis of sell or process further:

Product X Product Y

Final sales value after further processing ........... $32 $64

Less sales value at split-off point ....................... 21 44

Incremental revenue from further processing .... 11 20

Less cost of further processing ........................... 14 28

Profit (loss) from further processing .................. ($ 3) ($ 8)

Don’t

process

further

Don’t

process

further



chapter 13 relevant costs for decision making - garrison

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