Chapter 9 Ed 16
Chapter 9 Ed 16
Chapter 9 Ed 16
Student: ___________________________________________________________________________
3. Which of the following statement is true concerning the nature of tactical decisions?
A. Tactical decisions are often small-scale actions.
B. Tactical decisions often have an immediate or limited end in view.
C. Tactical decisions should support alternatives that result in long-term competitive
advantage.
D. All of these statements are true.
7. The use of relevant cost data to identify the alternative that provides the greatest
benefit to the organization describes
A. target cost analysis.
B. functional cost analysis.
C. activity cost analysis.
D. tactical cost analysis.
16. The Titanic hit an iceberg and sank. In deciding whether or not to salvage the ship,
its book value is a(n)
A. relevant cost.
B. sunk cost.
C. opportunity cost.
D. discretionary cost.
17. A purchasing agent has two potential firms from which to buy materials for
production. If both firms charge the same price, the material cost is a(n)
A. irrelevant cost.
B. relevant cost.
C. sunk cost.
D. opportunity cost.
18. Which of the following statements is TRUE when making a decision between two
alternatives?
A. Variable costs may not be relevant when the decision alternatives have the same
activity levels.
B. Variable costs are not relevant when the decision alternatives have different activity
levels.
C. Sunk costs are always relevant.
D. Fixed costs are never relevant.
21. Which of the following costs is NOT relevant to a decision to sell a product at split-off
or process the product further and then sell the product?
A. joint costs allocated to the product
B. the selling price of the product at split-off
C. the additional processing costs after split-off
D. the selling price of the product after further processing
22. Which of the following costs is NOT relevant for special decisions?
A. incremental costs
B. sunk costs
C. avoidable costs
D. all of the above costs are relevant for special decisions
24. Which of the following is NOT a way that companies might reduce tariffs?
A. Alter materials to increase the domestic content.
B. Restrict the amount of imported materials.
C. Increase the amount of imported materials.
D. Utilize foreign trade zones.
25. The U.S. government has set up foreign trade zones (FTZ) that
A. are located on U.S. soil but are considered to be outside of U.S. commerce for tariff
purposes.
B. are located in foreign countries and designed to export to the United States.
C. are located in foreign countries and are designed to import from the United States.
D. are located in the United States and are considered part of the United States for tariff
purposes.
Category
of Cost Relationships Relevancy
30. Salda Industries employs 500 workers in the factory. These workers produced 85,000
units in 2009. Due to a special order, the units produced in 2010 increased to 95,000
units. However, Salda produced these units without adding workers. How is that
possible?
A. The plant had some unused activity capacity.
B. The employees were a flexible resource in this situation.
C. The labor cost associated with the additional units sold will be a relevant cost.
D. None of these
33. Which of the following items would be classified as committed resources (short-
term)?
A. salaried employees
B. depreciation on building
C. fuel to generate electricity internally
D. lease on machinery
34. Which of the following items would be classified as committed resources (long-
term)?
A. salaried employees
B. depreciation on building
C. lease on machinery
D. both b and c
37. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
What is the effect on income if Foster Industries purchases the component from the outside supplier?
A. $30,000 decrease
B. $30,000 increase
C. $90,000 decrease
D. $90,000 increase
38. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
If the component is not produced by Foster, inspection of products and provision of power costs will only be 10 percent
of the production costs; moving materials costs and setting up equipment costs will only be 50 percent of the
production costs; and supervision costs will amount to only 40 percent of the production amount. An outside supplier
has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?
A. $25,000 increase
B. $45,000 increase
C. $90,000 decrease
D. $90,000 increase
39. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
Foster Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the
outside supplier.
What is the effect on income if Foster purchases the component from the outside supplier?
A. $45,000 increase
B. $15,000 increase
C. $75,000 decrease
D. $105,000 increase
40. Vest Industries manufactures 40,000 components per year. The manufacturing cost
of the components was determined as follows:
What is the effect on income if Vest Industries purchases the component from the outside supplier?
A. $270,000 decrease
B. $270,000 increase
C. $30,000 decrease
D. $30,000 increase
41. Vest Industries manufactures 40,000 components per year. The manufacturing cost
of the components was determined as follows:
Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside
supplier.
What is the effect on income if Vest purchases the component from the outside supplier?
A. $225,000 decrease
B. $195,000 increase
C. $165,000 decrease
D. $135,000 increase
42. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $6.00 per unit. If
Miller Company accepts the offer, it will be able to reduce variable costs by 30 percent and rent unused space to an
outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on
profits if Miller Company buys from the Tennessee firm?
A. decrease of $19,000
B. increase of $19,000
C. increase of $13,000
D. increase of $6,000
43. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $16.00 per unit. If
Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other
information remains the same as the original data. What is the effect on profits if Miller Company buys from the
Tennessee firm?
A. decrease of $19,000
B. increase of $19,000
C. increase of $38,000
D. decrease of $6,000
44. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
The speakers are currently unpackaged. Packaging them individually would increase costs by $1.20 per unit. However,
the units could then be sold for $33.00. All other information remains the same as the original data. What is the effect
on profits if Miller Company packages the speakers?
A. decrease of $36,000
B. decrease of $24,000
C. increase of $36,000
D. no change
45. Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing
one unit of part AA1 at this volume is as follows:
An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of $31.00. If
Harris Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part AA1. Furthermore, the
space devoted to the manufacture of part AA1 would be rented to another company for $24,000 per year. If Harris
Company accepts the offer of the outside supplier, annual profits will
A. increase by $29,000.
B. increase by $14,500.
C. increase by $22,000.
D. increase by $2,500.
M N O
Unit sales per month 9,000 14,000 8,000
M N O
Unit sales per month 9,000 14,000 8,000
Refer to Figure 17-1. When EWIN converted over to ABC it discovered the following:
Inspecting products 20% of the inspection activity was unused. The inspections
used were based on the number of batches produced.
Materials 10% of the materials handling activity was unused. The
handling materials handling activity used was based on the number of
production runs.
Customer 50% of the customer service activity was unused. The usage
service was given as follows: M 1,000, N 1000, O 500
M N O
Unit sales per month 9,000 14,000 8,000
Refer to Figure 17-1. When EWIN converted over to ABC it discovered the following:
Inspecting products 20% of the inspection activity was unused. The inspections
used were based on the number of batches produced.
Materials 10% of the materials handling activity was unused. The
handling materials handling activity used was based on the number
of production runs.
Customer 50% of the customer service activity was unused. The usage
service was given as follows: M 1,000, N 1000, O 500
M N O
Unit sales per month 9,000 14,000 8,000
Selling price per unit $6.00 $11.25 $ 7.50
Variable costs per unit 3.00 9.00 7.00
Unit contribution margin $3.00 $ 2.25 $ 0.50
Batches 5 10 5
Setups 6 3 1
Direct fixed costs
Advertising $3,000 $2,000 $1,000
Supervision 5,000 5,000 5,000
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
Refer to Figure 17-1. The product margin for product M using functional-based costing would be
A. $9,000.
B. $13,840.
C. $19,000.
D. $41,500.
50. Houston Corporation manufacturers a part for its production cycle. The costs per unit
for 5,000 units of this part are as follows:
Direct materials $ 32
Direct labor 40
Variable overhead 16
Fixed overhead 32
Total $120
Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If Houston
Corporation accepts Johnson Company's offer, total fixed costs will be reduced to $60,000. What alternative is more
desirable and by what amount is it more desirable?
Alternative Amount
A. Make $20,000
B. Make $120,000
C. Buy $40,000
D. Buy $100,000
Childs Jackson
Division Division Total
Sales $250,000 $180,000 $430,000
Variable costs 90,000 100,000 190,000
Contribution margin $160,000 $ 80,000 $240,000
Direct fixed costs 75,000 62,500 137,500
Segment margin $ 85,000 $ 17,500 $102,500
Allocated common costs 35,000 27,500 62,500
Operating income (loss) $ 50,000 $(10,000) $ 40,000
Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be
A. $22,500.
B. $40,000.
C. $50,000.
D. $60,000.
53. The operations of Knickers Corporation are divided into the Pacers Division and the
Bulls Division. Projections for the next year are as follows:
Pacers Bulls
Division Division Total
Sales $420,000 $252,000 $672,000
Variable costs 147,000 115,500 262,500
Contribution margin $273,000 $136,500 $409,500
Direct fixed costs 126,000 105,000 231,000
Segment margin $147,000 $ 31,500 $178,500
Allocated common costs 63,000 47,250 110,250
Operating income (loss) $ 84,000 $(15,750) $ 68,250
Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be
A. $99,750.
B. $84,000.
C. $68,250.
D. $36,750.
D E F
Unit sales per month 900 1,400 800
D E F
Unit sales per month 900 1,400 800
Assume that product F is discontinued and the space is used to produce E. Product E's production is increased to 2,200
units per month, but E's selling price of all units of E is reduced to $10.20. Monthly profits will
A. decrease by $2,070.
B. increase by $1,200.
C. decrease by $270.
D. increase by $2,640.
56. The following information pertains to the Ewing Company's three products:
D E F
Unit sales per month 900 1,400 800
Assume that the selling price of product F is increased to $8.25 with a reduction in monthly sales to 400 units. Monthly
profits will
A. increase by $2,070.
B. increase by $420.
C. increase by $180.
D. decrease by $60.
A B C
Unit sales per year 250 400 250
Assume that product C is discontinued and the extra space is rented for $300 per month. All other information remains
the same as the original data. Annual profits will
A. increase by $75.
B. decrease by $75.
C. increase by $525.
D. remain the same.
Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
Refer to Figure 17-2. A wholesaler has offered to pay $110 a unit for 7,500 units.
Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
Refer to Figure 17-2. If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income
would be a
A. $153,000 increase.
B. $45,000 increase.
C. $450,000 increase.
D. $90,000 decrease.
60. Firms may be asked to accept a special order of their product for a reduced price if
A. it can be concealed from the government.
B. excess capacity exists.
C. the order is small.
D. the plant is producing at maximum capacity.
61. A decision that focuses on whether a specially priced order should be accepted or
rejected is a
A. special-order decision.
B. keep-or-drop a product-line decision.
C. make-or-buy decision.
D. both a and c.
62. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
What is the profit earned by Reggie Corporation on the original 1,000 units?
A. $6,900,000
B. $8,400,000
C. $900,000
D. $2,640,000
The incremental cost per unit associated with the special order is
A. $84.
B. $81.
C. $69.
D. $64.
64. Meco Company produces a product that has a regular selling price of $360 per unit.
At a typical monthly production volume of 2,000 units, the product's average unit cost of
goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing
costs. All selling and administrative costs are fixed and amount to $30,000 per month.
Meco Company has just received a special order for 1,000 units at $240 per unit. The
buyer will pay transportation, and the regular selling price will not be affected if Meco
accepts the order.
Assuming Meco Company has excess capacity, the effect on profits of accepting the
order would be a
A. $60,000 increase.
B. $60,000 decrease.
C. $30,000 increase.
D. $30,000 decrease.
65. Meco Company produces a product that has a regular selling price of $360 per unit.
At a typical monthly production volume of 2,000 units, the product's average unit cost of
goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing
costs. All selling and administrative costs are fixed and amount to $30,000 per month.
Meco Company has just received a special order for 1,000 units at $240 per unit. The
buyer will pay transportation, and the regular selling price will not be affected if Meco
accepts the order.
Assuming Meco Company is operating at capacity and accepting the order would require
an offsetting reduction in regular sales, the effect on profits of accepting the order would
be a
A. $240,000 decrease.
B. $30,000 increase.
C. $120,000 decrease.
D. $150,000 decrease.
66. The following information relates to a product produced by Creamer Company:
Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production
capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product
normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.
If the firm produces the special order, the effect on income would be a
A. $360,000 increase.
B. $360,000 decrease.
C. $540,000 increase.
D. $540,000 decrease.
67. If there is excess capacity, the minimum acceptable price for a special order must
cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus the
contribution margin usually earned on regular units.
68. If a firm is at full capacity, the minimum special order price must cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus
foregone contribution margin on regular units not produced.
69. Gundy Company manufactures a product with the following costs per unit at the
expected production of 30,000 units:
Direct materials $4
Direct labor 12
Variable manufacturing overhead 6
Fixed manufacturing overhead 8
The company has the capacity to produce 40,000 units. The product regularly sells for $40. A wholesaler has offered to
pay $32 a unit for 2,000 units.
If the firm is at capacity and the special order is accepted, the effect on operating income would be
A. a $20,000 increase.
B. a $16,000 decrease.
C. a $4,000 increase.
D. $-0-.
70. Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered
to pay $110 a unit for 7,500 units.
71. Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income would be a
A. $153,000 increase.
B. $45,000 increase.
C. $450,000 increase.
D. $90,000 decrease.
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that sufficient unused
production capacity exists to produce the order and no regular customers will be affected by the order, how much
additional profit (loss) will be generated by accepting the special order?
A. $12,000 profit
B. $96,000 profit
C. $84,000 loss
D. $24,000 loss
73. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced price of $24 per
unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative
costs of $3,000. All other information remains the same as the original data. What is the effect on profits if the special
order is accepted?
A. increase of $75,000
B. increase of $57,000
C. decrease of $168,000
D. increase of $12,000
74. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of $25.20 per
unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative
costs of $6,000. In addition, assume that overtime production is not possible and that all other information remains the
same as the original data. What is the effect on profits if the special order is accepted?
A. increase of $54,900
B. increase of $30,900
C. increase of $36,900
D. increase of $176,400
A one-time customer has offered to buy 1,000 units at a special price of $48 per unit. Assuming that sufficient unused
production capacity exists to produce the order and no regular customers will be affected by the order, how much
additional profit (loss) will be generated from the special order?
A. $12,000 loss
B. $14,000 profit
C. $48,000 profit
D. $6,000 profit
76. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
If Reggie Corporation wants to increase its profit by $18,000 on the special order, what is the minimum price it should
charge per unit?
A. $4,014
B. $4,164
C. $5,100
D. $6,900
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of capacity constraints,
1,000 units will need to be produced during overtime. Overtime premium is $8 per unit. How much additional profit
(loss) will be generated by accepting the special order?
A. $30,000 loss
B. $4,000 loss
C. $24,000 loss
D. $4,000 profit
79. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales by 40 units in
order to contract the special order. There are selling expenses on only the sales to the regular customers. What is the
net income if the special order of 100 units is accepted?
A. $831,960
B. $876,960
C. $1,011,600
D. $900,000
80. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint
process. The joint costs amount to $200,000.
If Processed Further
Sales Value Additional
Product Units Produced at Split-Off Costs Sales Value
A1 3,000 $10,000 $2,500 $15,000
B2 5,000 30,000 3,000 35,000
C3 4,000 20,000 4,000 25,000
D4 6,000 40,000 6,000 45,000
81. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint
process. The joint costs amount to $200,000.
If Processed Further
Sales Value Additional
Product Units Produced at Split-Off Costs Sales Value
A1 3,000 $10,000 $2,500 $15,000
B2 5,000 30,000 3,000 35,000
C3 4,000 20,000 4,000 25,000
D4 6,000 40,000 6,000 45,000
Which product(s) should be sold at split-off to maximize profits in the short run?
A. Product A1
B. Product D4
C. Product B2
D. Products A1 and D4
82. Manning Company uses a joint process to produce products W, X, Y, and Z. Each
product may be sold at its split-off point or processed further. Additional processing costs
of specific products are entirely variable. Joint processing costs for a single batch of joint
products are $120,000. Other relevant data are as follows:
83. Manning Company uses a joint process to produce products W, X, Y, and Z. Each
product may be sold at its split-off point or processed further. Additional processing costs
of specific products are entirely variable. Joint processing costs for a single batch of joint
products are $120,000. Other relevant data are as follows:
A B C
Anticipated production 5,000 lbs. 1,000 lbs. 2,000 lbs.
Selling price/lb. at split-off $10 $30 $16
Additional processing costs/lb.
after split-off (all variable) $ 6 $12 $24
Selling price/lb. after further
processing $20 $40 $50
The cost of the joint process is $60,000. Which of the joint products should be sold at split-off?
A. A
B. B
C. C
D. both A and B
X Y Z
Anticipated production 12,000 lbs. 8,000 lbs. 7,000 lbs.
Selling price/lb. at split-off $16 $26 $48
Additional processing costs/lb.
after split-off (all variable) $ 8 $20 $20
Selling price/lb. after further
processing $20 $40 $70
The cost of the joint process is $140,000. Which of the joint products should be processed further?
A. X
B. Y
C. Z
D. both X and Y
X Y Z
Anticipated production 12,000 lbs. 8,000 lbs. 7,000 lbs.
Selling price/lb. at split-off $16 $26 $48
Additional processing costs/lb.
after split-off (all variable) $ 8 $20 $20
Selling price/lb. after further
processing $20 $40 $70
If the firm is currently processing all three products beyond split-off, the firm's income would be
A. $736,000.
B. $654,000.
C. $596,000.
D. $514,000.
X Y Z
Anticipated production 12,000 lbs. 8,000 lbs. 7,000 lbs.
Selling price/lb. at split-off $16 $26 $48
Additional processing costs/lb.
after split-off (all variable) $ 8 $20 $20
Selling price/lb. after further
processing $20 $40 $70
Assuming all of the sell now or process further decisions were correctly made, what will be the firm's income?
A. $736,000
B. $654,000
C. $596,000
D. $610,000
88. Describe the steps in the decision-making process. What is the role of qualitative
factors in tactical decision-making?
89. What are relevant costs? How do they relate to decision making?
90. How is understanding of committed resources and flexible resources important to the
activity resource usage model? How does this relate to relevance?
91. Given the following three situations:
I. Clessin Architects employs 10 architects who can supply a capacity of 18,000 billable hours
per year. The costs related to these 10 architects amounts to $900,000 or $50 per hour. Last
year, the firm billed 17,800 hours. Next year, the firm estimates billing hours to take a slight
downturn to 17,000 hours. However, Clessin plans to retain all 10 architects.
II. Clessin Architects also employs surveyors on a contract basis. Last year, Clessin contracted
with 8 surveyors to provide surveys for existing projects. Due to the expected downturn for
next year, Clessin will only contract services of 7 surveyors as needed.
III. Clessin currently leases space in a building at the cost of $36,000 per year. They are
outgrowing their space and contemplating a decision to design and build their own building at
a cost of $250,000. The new building would have space for at least 18 architects.
Identify which resource category relates to each situation under the activity resource usage model and explain your
choice.
92. Junior Company currently buys 30,000 units of a part used to manufacture its product
at $40 per unit. Recently the supplier informed Junior Company that a 20 percent
increase will take effect next year. Junior has some additional space and could produce
the units for the following per-unit costs (based on 30,000 units):
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant
can be rented out for $20,000 per year if the parts are purchased externally.
Required:
Direct materials $ 60
Direct labor 30
Factory overhead (40% variable) 90
Selling expenses (60% variable) 30
Administrative expenses (20% variable) 15
Total per unit $225
Recently, a company approached Rippey Corporation about buying 1,000 units for $225. Currently, the models are sold
to dealers for $412.50. Rippey's capacity is sufficient to produce the extra 1,000 units. No additional selling expenses
would be incurred on the special order.
Required:
a. What is the profit earned by Rippey Corporation on the original 5,000 units?
b. Should Rippey accept the special order if its goal is to maximize short-run profits? How much will income be
affected?
c. Determine the minimum price Rippey would want to receive in order to increase profits by $7,500 on the
special order.
d. When making a special order decision, what qualitative aspects of the decision should Rippey Corporation
consider?
94. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint
process is $30,000. Information about the three products follows:
X Y Z
Anticipated production 5,600 lbs. 10,000 lbs. 2,500 lbs.
Selling price/lb. at split-off $2.00 $1.00 $3.00
Additional processing costs/lb.
after split-off (all variable) $1.50 $1.25 $.75
Selling price/lb. after
further processing $2.50 $3.75 $6.25
Allocated joint costs $12,000 $10,500 $7,500
Required:
a. Determine whether each product should be sold at split-off or processed further. Show all supporting
calculations in good form.
b. Determine the firm's income if the firm processed all three products beyond split-off.
95. The operations of Grant Corporation are divided into the Fix Division and the Roach
Division. Projections for the next year are as follows:
Fix Roach
Division Division Total
Sales $60,000 $ 40,000 $100,000
Variable costs 20,000 15,000 35,000
Contribution margin $40,000 $ 25,000 $ 65,000
Direct fixed costs 12,500 30,000 42,500
Segment margin $27,500 $ (5,000) $ 22,500
Allocated common costs 10,000 7,500 17,500
Operating income (loss) $17,500 $(12,500) $ 5,000
Required:
a. Determine operating income for Grant Corporation as a whole if the Roach Division is dropped.
b. Should the Roach Division be eliminated?
96. Arcadia, Inc., uses a joint process to produce Products W, X, Y, Z. Each product may
be sold at its split-off point or processed further. Additional processing costs of specific
products are entirely variable. Joint processing costs for a single batch of joint products
are $200,000. Other relevant data are as follows:
In an attempt to improve the company's profit performance, management is considering a number of alternative
actions.
Required:
Determine the effect of each of the following on monthly profit. Each situation is to be evaluated independently of all
the others.
a. Purchasing automated assembly equipment. This action should reduce direct labor costs by 40 percent. It also
will increase variable overhead costs by 10 percent and fixed factory overhead by $2,500.
b. Reducing the unit selling price by $2 per unit. This should increase the monthly sales by 5,000 units. Fixed
factory overhead will increase by $1,500.
c. Increase fixed selling and administrative expenses by $1,000 for advertising costs. The number of units sold
will increase to 8,000 units.
98. The management of James Industries has been evaluating whether the company
should continue manufacturing a component or buy it from an outside supplier. A $200
cost per component was determined as follows:
Direct materials $ 15
Direct labor 40
Variable manufacturing overhead 10
Fixed manufacturing overhead 35
Total $100
James Industries uses 4,000 components per year. After Light, Inc., submitted a bid of $80 per component, some
members of management felt they could reduce costs by buying from outside and discontinuing production of the
component. If the component is obtained from Light, Inc., James's unused production facilities could be leased to
another company for $50,000 per year.
Required:
a. Determine the maximum amount per unit James should pay an outside supplier.
b. Indicate if the company should make or buy the component and the total dollar difference in favor of that
alternative.
c. Assume the company could eliminate production supervisors with salaries totaling $30,000 if the component
is purchased from an outside supplier. Indicate if the company should make or buy the component and the
total dollar difference in favor of that alternative.
99. Scott Company has an annual capacity of 18,000 units. Budgeted operating results
for 2006 are as follows:
Fixed costs:
Manufacturing $160,000
Selling and administrative 120,000 280,000
Operating income $168,000
A foreign wholesaler wants to buy 1,000 units at a price of $40 per unit. All fixed costs would remain within the
relevant range. Variable selling costs on the special order would be the same as variable selling costs for regular
orders.
Required:
a. Determine the effect on operating income if the company produces the special order.
b. Should the company produce the special order?
c. Determine operating income if the customer had wanted a special order of 3,000 units and the company
produced the special order.
d. Should the company produce the 3,000-unit special order?
e. Discuss any nonquantitative factors the company might want to consider when making the decision.
100. Bonilla Corporation, which produces one product, had the following income
statement for a recent month:
Bonilla Corporation
Income Statement
For the Month of April 2011
Sales $30,000
Cost of goods sold 27,000
Gross profit $ 3,000
Selling and administrative 2,500
Net income $ 500
There were no beginning or ending inventories of work-in-process or finished goods. Bonilla's manufacturing costs
were as follows:
Bonilla has just received a special order from a firm in Canada to purchase 800 units at $20 each. The order will not
affect the selling price to regular customers.
Required:
a. Prepare a differential analysis of the relevant costs and revenues associated with the decision to accept or
reject the special order, assuming Bonilla has excess capacity.
b. Determine the net advantage or disadvantage (profit increase or decrease) of accepting the order, assuming
Bonilla does not have excess capacity.
Chapter 17--Activity Resource Usage Model and
Tactical Decision Making Key
3. Which of the following statement is true concerning the nature of tactical decisions?
A. Tactical decisions are often small-scale actions.
B. Tactical decisions often have an immediate or limited end in view.
C. Tactical decisions should support alternatives that result in long-term competitive
advantage.
D. All of these statements are true.
7. The use of relevant cost data to identify the alternative that provides the greatest
benefit to the organization describes
A. target cost analysis.
B. functional cost analysis.
C. activity cost analysis.
D. tactical cost analysis.
16. The Titanic hit an iceberg and sank. In deciding whether or not to salvage the ship,
its book value is a(n)
A. relevant cost.
B. sunk cost.
C. opportunity cost.
D. discretionary cost.
17. A purchasing agent has two potential firms from which to buy materials for
production. If both firms charge the same price, the material cost is a(n)
A. irrelevant cost.
B. relevant cost.
C. sunk cost.
D. opportunity cost.
18. Which of the following statements is TRUE when making a decision between two
alternatives?
A. Variable costs may not be relevant when the decision alternatives have the same
activity levels.
B. Variable costs are not relevant when the decision alternatives have different activity
levels.
C. Sunk costs are always relevant.
D. Fixed costs are never relevant.
21. Which of the following costs is NOT relevant to a decision to sell a product at split-off
or process the product further and then sell the product?
A. joint costs allocated to the product
B. the selling price of the product at split-off
C. the additional processing costs after split-off
D. the selling price of the product after further processing
22. Which of the following costs is NOT relevant for special decisions?
A. incremental costs
B. sunk costs
C. avoidable costs
D. all of the above costs are relevant for special decisions
24. Which of the following is NOT a way that companies might reduce tariffs?
A. Alter materials to increase the domestic content.
B. Restrict the amount of imported materials.
C. Increase the amount of imported materials.
D. Utilize foreign trade zones.
25. The U.S. government has set up foreign trade zones (FTZ) that
A. are located on U.S. soil but are considered to be outside of U.S. commerce for tariff
purposes.
B. are located in foreign countries and designed to export to the United States.
C. are located in foreign countries and are designed to import from the United States.
D. are located in the United States and are considered part of the United States for tariff
purposes.
Category
of Cost Relationships Relevancy
30. Salda Industries employs 500 workers in the factory. These workers produced 85,000
units in 2009. Due to a special order, the units produced in 2010 increased to 95,000
units. However, Salda produced these units without adding workers. How is that
possible?
A. The plant had some unused activity capacity.
B. The employees were a flexible resource in this situation.
C. The labor cost associated with the additional units sold will be a relevant cost.
D. None of these
33. Which of the following items would be classified as committed resources (short-
term)?
A. salaried employees
B. depreciation on building
C. fuel to generate electricity internally
D. lease on machinery
34. Which of the following items would be classified as committed resources (long-
term)?
A. salaried employees
B. depreciation on building
C. lease on machinery
D. both b and c
37. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
What is the effect on income if Foster Industries purchases the component from the outside supplier?
A. $30,000 decrease
B. $30,000 increase
C. $90,000 decrease
D. $90,000 increase
38. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
If the component is not produced by Foster, inspection of products and provision of power costs will only be 10 percent
of the production costs; moving materials costs and setting up equipment costs will only be 50 percent of the
production costs; and supervision costs will amount to only 40 percent of the production amount. An outside supplier
has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?
A. $25,000 increase
B. $45,000 increase
C. $90,000 decrease
D. $90,000 increase
39. Foster Industries manufactures 20,000 components per year. The manufacturing cost
of the components was determined as follows:
Foster Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the
outside supplier.
What is the effect on income if Foster purchases the component from the outside supplier?
A. $45,000 increase
B. $15,000 increase
C. $75,000 decrease
D. $105,000 increase
40. Vest Industries manufactures 40,000 components per year. The manufacturing cost
of the components was determined as follows:
What is the effect on income if Vest Industries purchases the component from the outside supplier?
A. $270,000 decrease
B. $270,000 increase
C. $30,000 decrease
D. $30,000 increase
41. Vest Industries manufactures 40,000 components per year. The manufacturing cost
of the components was determined as follows:
Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside
supplier.
What is the effect on income if Vest purchases the component from the outside supplier?
A. $225,000 decrease
B. $195,000 increase
C. $165,000 decrease
D. $135,000 increase
42. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $6.00 per unit. If
Miller Company accepts the offer, it will be able to reduce variable costs by 30 percent and rent unused space to an
outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on
profits if Miller Company buys from the Tennessee firm?
A. decrease of $19,000
B. increase of $19,000
C. increase of $13,000
D. increase of $6,000
43. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $16.00 per unit. If
Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other
information remains the same as the original data. What is the effect on profits if Miller Company buys from the
Tennessee firm?
A. decrease of $19,000
B. increase of $19,000
C. increase of $38,000
D. decrease of $6,000
44. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
The speakers are currently unpackaged. Packaging them individually would increase costs by $1.20 per unit. However,
the units could then be sold for $33.00. All other information remains the same as the original data. What is the effect
on profits if Miller Company packages the speakers?
A. decrease of $36,000
B. decrease of $24,000
C. increase of $36,000
D. no change
45. Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing
one unit of part AA1 at this volume is as follows:
An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of $31.00. If
Harris Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part AA1. Furthermore, the
space devoted to the manufacture of part AA1 would be rented to another company for $24,000 per year. If Harris
Company accepts the offer of the outside supplier, annual profits will
A. increase by $29,000.
B. increase by $14,500.
C. increase by $22,000.
D. increase by $2,500.
M N O
Unit sales per month 9,000 14,000 8,000
M N O
Unit sales per month 9,000 14,000 8,000
Refer to Figure 17-1. When EWIN converted over to ABC it discovered the following:
Inspecting products 20% of the inspection activity was unused. The inspections
used were based on the number of batches produced.
Materials 10% of the materials handling activity was unused. The
handling materials handling activity used was based on the number of
production runs.
Customer 50% of the customer service activity was unused. The usage
service was given as follows: M 1,000, N 1000, O 500
M N O
Unit sales per month 9,000 14,000 8,000
Refer to Figure 17-1. When EWIN converted over to ABC it discovered the following:
Inspecting products 20% of the inspection activity was unused. The inspections
used were based on the number of batches produced.
Materials 10% of the materials handling activity was unused. The
handling materials handling activity used was based on the number
of production runs.
Customer 50% of the customer service activity was unused. The usage
service was given as follows: M 1,000, N 1000, O 500
M N O
Unit sales per month 9,000 14,000 8,000
Selling price per unit $6.00 $11.25 $ 7.50
Variable costs per unit 3.00 9.00 7.00
Unit contribution margin $3.00 $ 2.25 $ 0.50
Batches 5 10 5
Setups 6 3 1
Direct fixed costs
Advertising $3,000 $2,000 $1,000
Supervision 5,000 5,000 5,000
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
Refer to Figure 17-1. The product margin for product M using functional-based costing would be
A. $9,000.
B. $13,840.
C. $19,000.
D. $41,500.
50. Houston Corporation manufacturers a part for its production cycle. The costs per unit
for 5,000 units of this part are as follows:
Direct materials $ 32
Direct labor 40
Variable overhead 16
Fixed overhead 32
Total $120
Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If Houston
Corporation accepts Johnson Company's offer, total fixed costs will be reduced to $60,000. What alternative is more
desirable and by what amount is it more desirable?
Alternative Amount
A. Make $20,000
B. Make $120,000
C. Buy $40,000
D. Buy $100,000
Childs Jackson
Division Division Total
Sales $250,000 $180,000 $430,000
Variable costs 90,000 100,000 190,000
Contribution margin $160,000 $ 80,000 $240,000
Direct fixed costs 75,000 62,500 137,500
Segment margin $ 85,000 $ 17,500 $102,500
Allocated common costs 35,000 27,500 62,500
Operating income (loss) $ 50,000 $(10,000) $ 40,000
Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be
A. $22,500.
B. $40,000.
C. $50,000.
D. $60,000.
53. The operations of Knickers Corporation are divided into the Pacers Division and the
Bulls Division. Projections for the next year are as follows:
Pacers Bulls
Division Division Total
Sales $420,000 $252,000 $672,000
Variable costs 147,000 115,500 262,500
Contribution margin $273,000 $136,500 $409,500
Direct fixed costs 126,000 105,000 231,000
Segment margin $147,000 $ 31,500 $178,500
Allocated common costs 63,000 47,250 110,250
Operating income (loss) $ 84,000 $(15,750) $ 68,250
Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be
A. $99,750.
B. $84,000.
C. $68,250.
D. $36,750.
D E F
Unit sales per month 900 1,400 800
D E F
Unit sales per month 900 1,400 800
Assume that product F is discontinued and the space is used to produce E. Product E's production is increased to 2,200
units per month, but E's selling price of all units of E is reduced to $10.20. Monthly profits will
A. decrease by $2,070.
B. increase by $1,200.
C. decrease by $270.
D. increase by $2,640.
56. The following information pertains to the Ewing Company's three products:
D E F
Unit sales per month 900 1,400 800
Assume that the selling price of product F is increased to $8.25 with a reduction in monthly sales to 400 units. Monthly
profits will
A. increase by $2,070.
B. increase by $420.
C. increase by $180.
D. decrease by $60.
A B C
Unit sales per year 250 400 250
Assume that product C is discontinued and the extra space is rented for $300 per month. All other information remains
the same as the original data. Annual profits will
A. increase by $75.
B. decrease by $75.
C. increase by $525.
D. remain the same.
Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
Refer to Figure 17-2. A wholesaler has offered to pay $110 a unit for 7,500 units.
Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
Refer to Figure 17-2. If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income
would be a
A. $153,000 increase.
B. $45,000 increase.
C. $450,000 increase.
D. $90,000 decrease.
60. Firms may be asked to accept a special order of their product for a reduced price if
A. it can be concealed from the government.
B. excess capacity exists.
C. the order is small.
D. the plant is producing at maximum capacity.
61. A decision that focuses on whether a specially priced order should be accepted or
rejected is a
A. special-order decision.
B. keep-or-drop a product-line decision.
C. make-or-buy decision.
D. both a and c.
62. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
What is the profit earned by Reggie Corporation on the original 1,000 units?
A. $6,900,000
B. $8,400,000
C. $900,000
D. $2,640,000
The incremental cost per unit associated with the special order is
A. $84.
B. $81.
C. $69.
D. $64.
64. Meco Company produces a product that has a regular selling price of $360 per unit.
At a typical monthly production volume of 2,000 units, the product's average unit cost of
goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing
costs. All selling and administrative costs are fixed and amount to $30,000 per month.
Meco Company has just received a special order for 1,000 units at $240 per unit. The
buyer will pay transportation, and the regular selling price will not be affected if Meco
accepts the order.
Assuming Meco Company has excess capacity, the effect on profits of accepting the
order would be a
A. $60,000 increase.
B. $60,000 decrease.
C. $30,000 increase.
D. $30,000 decrease.
65. Meco Company produces a product that has a regular selling price of $360 per unit.
At a typical monthly production volume of 2,000 units, the product's average unit cost of
goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing
costs. All selling and administrative costs are fixed and amount to $30,000 per month.
Meco Company has just received a special order for 1,000 units at $240 per unit. The
buyer will pay transportation, and the regular selling price will not be affected if Meco
accepts the order.
Assuming Meco Company is operating at capacity and accepting the order would require
an offsetting reduction in regular sales, the effect on profits of accepting the order would
be a
A. $240,000 decrease.
B. $30,000 increase.
C. $120,000 decrease.
D. $150,000 decrease.
66. The following information relates to a product produced by Creamer Company:
Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production
capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product
normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.
If the firm produces the special order, the effect on income would be a
A. $360,000 increase.
B. $360,000 decrease.
C. $540,000 increase.
D. $540,000 decrease.
67. If there is excess capacity, the minimum acceptable price for a special order must
cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus the
contribution margin usually earned on regular units.
68. If a firm is at full capacity, the minimum special order price must cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus
foregone contribution margin on regular units not produced.
69. Gundy Company manufactures a product with the following costs per unit at the
expected production of 30,000 units:
Direct materials $4
Direct labor 12
Variable manufacturing overhead 6
Fixed manufacturing overhead 8
The company has the capacity to produce 40,000 units. The product regularly sells for $40. A wholesaler has offered to
pay $32 a unit for 2,000 units.
If the firm is at capacity and the special order is accepted, the effect on operating income would be
A. a $20,000 increase.
B. a $16,000 decrease.
C. a $4,000 increase.
D. $-0-.
70. Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered
to pay $110 a unit for 7,500 units.
71. Walton Company manufactures a product with the following costs per unit at the
expected production level of 84,000 units:
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income would be a
A. $153,000 increase.
B. $45,000 increase.
C. $450,000 increase.
D. $90,000 decrease.
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that sufficient unused
production capacity exists to produce the order and no regular customers will be affected by the order, how much
additional profit (loss) will be generated by accepting the special order?
A. $12,000 profit
B. $96,000 profit
C. $84,000 loss
D. $24,000 loss
73. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
The variable distribution costs are for transportation to the retail stores. The current production and sales volume is
20,000 per year. Capacity is 25,000 units per year.
A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced price of $24 per
unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative
costs of $3,000. All other information remains the same as the original data. What is the effect on profits if the special
order is accepted?
A. increase of $75,000
B. increase of $57,000
C. decrease of $168,000
D. increase of $12,000
74. Miller Company produces speakers for home stereo units. The speakers are sold to
retail stores for $30. Manufacturing and other costs are as follows:
An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of $25.20 per
unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative
costs of $6,000. In addition, assume that overtime production is not possible and that all other information remains the
same as the original data. What is the effect on profits if the special order is accepted?
A. increase of $54,900
B. increase of $30,900
C. increase of $36,900
D. increase of $176,400
A one-time customer has offered to buy 1,000 units at a special price of $48 per unit. Assuming that sufficient unused
production capacity exists to produce the order and no regular customers will be affected by the order, how much
additional profit (loss) will be generated from the special order?
A. $12,000 loss
B. $14,000 profit
C. $48,000 profit
D. $6,000 profit
76. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models
are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional
selling expenses would be incurred on the special order.
If Reggie Corporation wants to increase its profit by $18,000 on the special order, what is the minimum price it should
charge per unit?
A. $4,014
B. $4,164
C. $5,100
D. $6,900
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of capacity constraints,
1,000 units will need to be produced during overtime. Overtime premium is $8 per unit. How much additional profit
(loss) will be generated by accepting the special order?
A. $30,000 loss
B. $4,000 loss
C. $24,000 loss
D. $4,000 profit
79. Reggie Corporation manufactures a single product with the following unit costs for
1,000 units:
Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales by 40 units in
order to contract the special order. There are selling expenses on only the sales to the regular customers. What is the
net income if the special order of 100 units is accepted?
A. $831,960
B. $876,960
C. $1,011,600
D. $900,000
80. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint
process. The joint costs amount to $200,000.
If Processed Further
Sales Value Additional
Product Units Produced at Split-Off Costs Sales Value
A1 3,000 $10,000 $2,500 $15,000
B2 5,000 30,000 3,000 35,000
C3 4,000 20,000 4,000 25,000
D4 6,000 40,000 6,000 45,000
81. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint
process. The joint costs amount to $200,000.
If Processed Further
Sales Value Additional
Product Units Produced at Split-Off Costs Sales Value
A1 3,000 $10,000 $2,500 $15,000
B2 5,000 30,000 3,000 35,000
C3 4,000 20,000 4,000 25,000
D4 6,000 40,000 6,000 45,000
Which product(s) should be sold at split-off to maximize profits in the short run?
A. Product A1
B. Product D4
C. Product B2
D. Products A1 and D4
82. Manning Company uses a joint process to produce products W, X, Y, and Z. Each
product may be sold at its split-off point or processed further. Additional processing costs
of specific products are entirely variable. Joint processing costs for a single batch of joint
products are $120,000. Other relevant data are as follows:
83. Manning Company uses a joint process to produce products W, X, Y, and Z. Each
product may be sold at its split-off point or processed further. Additional processing costs
of specific products are entirely variable. Joint processing costs for a single batch of joint
products are $120,000. Other relevant data are as follows:
A B C
Anticipated production 5,000 lbs. 1,000 lbs. 2,000 lbs.
Selling price/lb. at split-off $10 $30 $16
Additional processing costs/lb.
after split-off (all variable) $ 6 $12 $24
Selling price/lb. after further
processing $20 $40 $50
The cost of the joint process is $60,000. Which of the joint products should be sold at split-off?
A. A
B. B
C. C
D. both A and B
X Y Z
Anticipated production 12,000 lbs. 8,000 lbs. 7,000 lbs.
Selling price/lb. at split-off $16 $26 $48
Additional processing costs/lb.
after split-off (all variable) $ 8 $20 $20
Selling price/lb. after further
processing $20 $40 $70
The cost of the joint process is $140,000. Which of the joint products should be processed further?
A. X
B. Y
C. Z
D. both X and Y
X Y Z
Anticipated production 12,000 lbs. 8,000 lbs. 7,000 lbs.
Selling price/lb. at split-off $16 $26 $48
Additional processing costs/lb.
after split-off (all variable) $ 8 $20 $20
Selling price/lb. after further
processing $20 $40 $70
If the firm is currently processing all three products beyond split-off, the firm's income would be
A. $736,000.
B. $654,000.
C. $596,000.
D. $514,000.
X Y Z
Anticipated production 12,000 lbs. 8,000 lbs. 7,000 lbs.
Selling price/lb. at split-off $16 $26 $48
Additional processing costs/lb.
after split-off (all variable) $ 8 $20 $20
Selling price/lb. after further
processing $20 $40 $70
Assuming all of the sell now or process further decisions were correctly made, what will be the firm's income?
A. $736,000
B. $654,000
C. $596,000
D. $610,000
88. Describe the steps in the decision-making process. What is the role of qualitative
factors in tactical decision-making?
Not all costs are readily quantifiable so qualitative information must be incorporated into
the process. Reliability, quality, and strategic fit are examples of things that must be
weighed into the decision-making process.
89. What are relevant costs? How do they relate to decision making?
Relevant costs are future costs that would differ among alternatives. They are important
to decision making because only relevant costs should be considered. Decisions are
about something that will take place in the future. Costs that are past costs or that do
not differ between alternatives should not be considered in decision making.
90. How is understanding of committed resources and flexible resources important to the
activity resource usage model? How does this relate to relevance?
The activity resource usage model is useful for understanding how costs behave. There
are two categories of activity resources: flexible and committed. Flexible resources are
resources purchased when needed so the resources used equals the resources supplied.
Committed resources are those that are acquired in advance so the usage may or may
not be equal to the supply. These distinctions are important for understanding relevance
and costs that can be avoided.
91. Given the following three situations:
I. Clessin Architects employs 10 architects who can supply a capacity of 18,000 billable hours
per year. The costs related to these 10 architects amounts to $900,000 or $50 per hour. Last
year, the firm billed 17,800 hours. Next year, the firm estimates billing hours to take a slight
downturn to 17,000 hours. However, Clessin plans to retain all 10 architects.
II. Clessin Architects also employs surveyors on a contract basis. Last year, Clessin contracted
with 8 surveyors to provide surveys for existing projects. Due to the expected downturn for
next year, Clessin will only contract services of 7 surveyors as needed.
III. Clessin currently leases space in a building at the cost of $36,000 per year. They are
outgrowing their space and contemplating a decision to design and build their own building at
a cost of $250,000. The new building would have space for at least 18 architects.
Identify which resource category relates to each situation under the activity resource usage model and explain your
choice.
Situation II is an example of a flexible resource. In this instance, the cost of the activity
reduces due to a change in activity level.
Situation III is an example of a longer-term decision that would affect the companys
multi-period capabilities. This would be an example of a capital decision and is not in the
realm of tactical decision making.
92. Junior Company currently buys 30,000 units of a part used to manufacture its product
at $40 per unit. Recently the supplier informed Junior Company that a 20 percent
increase will take effect next year. Junior has some additional space and could produce
the units for the following per-unit costs (based on 30,000 units):
Required:
If purchased externally:
Purchase price (30,000 $40 1.20) $1,440,000
Fixed costs 200,000
Rent received (20,000)
Net cost to purchase $1,620,000
If produced internally:
Cost to produce (30,000 $50) $1,500,000
93. Rippey Corporation manufactures a single product with the following unit costs for
5,000 units:
Direct materials $ 60
Direct labor 30
Factory overhead (40% variable) 90
Selling expenses (60% variable) 30
Administrative expenses (20% variable) 15
Total per unit $225
Recently, a company approached Rippey Corporation about buying 1,000 units for $225. Currently, the models are sold
to dealers for $412.50. Rippey's capacity is sufficient to produce the extra 1,000 units. No additional selling expenses
would be incurred on the special order.
Required:
a. What is the profit earned by Rippey Corporation on the original 5,000 units?
b. Should Rippey accept the special order if its goal is to maximize short-run profits? How much will income be
affected?
c. Determine the minimum price Rippey would want to receive in order to increase profits by $7,500 on the
special order.
d. When making a special order decision, what qualitative aspects of the decision should Rippey Corporation
consider?
94. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint
process is $30,000. Information about the three products follows:
X Y Z
Anticipated production 5,600 lbs. 10,000 lbs. 2,500 lbs.
Selling price/lb. at split-off $2.00 $1.00 $3.00
Additional processing costs/lb.
after split-off (all variable) $1.50 $1.25 $.75
Selling price/lb. after
further processing $2.50 $3.75 $6.25
Allocated joint costs $12,000 $10,500 $7,500
Required:
a. Determine whether each product should be sold at split-off or processed further. Show all supporting
calculations in good form.
b. Determine the firm's income if the firm processed all three products beyond split-off.
Y $10,000 $37,500
(12,500) Process further
$25,000
Z $ 7,500 $15,625
(1,875) Process further
$13,750
Fix Roach
Division Division Total
Sales $60,000 $ 40,000 $100,000
Variable costs 20,000 15,000 35,000
Contribution margin $40,000 $ 25,000 $ 65,000
Direct fixed costs 12,500 30,000 42,500
Segment margin $27,500 $ (5,000) $ 22,500
Allocated common costs 10,000 7,500 17,500
Operating income (loss) $17,500 $(12,500) $ 5,000
Required:
a. Determine operating income for Grant Corporation as a whole if the Roach Division is dropped.
b. Should the Roach Division be eliminated?
a. Sales $60,000
Variable costs 20,000
Contribution margin $40,000
Direct fixed costs 12,500
Segment margin $27,500
Allocated common costs:
($10,000 + $7,500) 17,500
Operating income $10,000
b. Yes. The Roach division should be dropped, since it has a negative segment margin of $5,000. Dropping the
Roach Division increases the firm's income by $5,000.
96. Arcadia, Inc., uses a joint process to produce Products W, X, Y, Z. Each product may
be sold at its split-off point or processed further. Additional processing costs of specific
products are entirely variable. Joint processing costs for a single batch of joint products
are $200,000. Other relevant data are as follows:
Required:
Arcadia, Inc., should process products W and Y further because they increase profits by $6,000 and $18,000,
respectively. Products X and Z should be sold at the split-off point.
In an attempt to improve the company's profit performance, management is considering a number of alternative
actions.
Required:
Determine the effect of each of the following on monthly profit. Each situation is to be evaluated independently of all
the others.
a. Purchasing automated assembly equipment. This action should reduce direct labor costs by 40 percent. It also
will increase variable overhead costs by 10 percent and fixed factory overhead by $2,500.
b. Reducing the unit selling price by $2 per unit. This should increase the monthly sales by 5,000 units. Fixed
factory overhead will increase by $1,500.
c. Increase fixed selling and administrative expenses by $1,000 for advertising costs. The number of units sold
will increase to 8,000 units.
Direct materials $ 15
Direct labor 40
Variable manufacturing overhead 10
Fixed manufacturing overhead 35
Total $100
James Industries uses 4,000 components per year. After Light, Inc., submitted a bid of $80 per component, some
members of management felt they could reduce costs by buying from outside and discontinuing production of the
component. If the component is obtained from Light, Inc., James's unused production facilities could be leased to
another company for $50,000 per year.
Required:
a. Determine the maximum amount per unit James should pay an outside supplier.
b. Indicate if the company should make or buy the component and the total dollar difference in favor of that
alternative.
c. Assume the company could eliminate production supervisors with salaries totaling $30,000 if the component
is purchased from an outside supplier. Indicate if the company should make or buy the component and the
total dollar difference in favor of that alternative.
Buy Make
Outside supplier's price
($80 4,000) $(320,000)
Direct materials
($15 4,000) $ (60,000)
Direct labor
($40 4,000) (160,000)
Variable manufacturing overhead
($10 4,000) (40,000)
Fixed manufacturing overhead
($35 4,000) (140,000) (140,000)
Rental revenue 50,000
Totals $(410,000) $(400,000)
The make or buy alternatives also could be analyzed as follows excluding the fixed manufacturing overhead:
Buy Make
Outside supplier's price $(320,000)
Direct materials $ (60,000)
Direct labor (160,000)
Variable manufacturing overhead (40,000)
Rental revenue 50,000
Totals $(270,000) $(260,000)
c. $20,000 difference in favor of buying the component from the outside supplier
Buy Make
Outside supplier's price
($80 4,000) $(320,000)
Direct materials
($15 4,000) $ (60,000)
Direct labor
($40 4,000) (160,000)
Variable manufacturing overhead
($10 4,000) (40,000)
Fixed manufacturing overhead
($35 4,000) (140,000)
($140,000 - $30,000) (110,000)
Rental revenue 50,000
Totals $(380,000) $(400,000)
Buy Make
Outside supplier's price
($80 4,000) $(320,000)
Direct materials
($15 4,000) $ (60,000)
Direct labor
($40 4,000) (160,000)
Variable manufacturing overhead
($10 4,000) (40,000)
Avoidable fixed manufacturing overhead (30,000)
Rental revenue 50,000
Totals $(270,000) $(290,000)
99. Scott Company has an annual capacity of 18,000 units. Budgeted operating results
for 2006 are as follows:
Fixed costs:
Manufacturing $160,000
Selling and administrative 120,000 280,000
Operating income $168,000
A foreign wholesaler wants to buy 1,000 units at a price of $40 per unit. All fixed costs would remain within the
relevant range. Variable selling costs on the special order would be the same as variable selling costs for regular
orders.
Required:
a. Determine the effect on operating income if the company produces the special order.
b. Should the company produce the special order?
c. Determine operating income if the customer had wanted a special order of 3,000 units and the company
produced the special order.
d. Should the company produce the 3,000-unit special order?
e. Discuss any nonquantitative factors the company might want to consider when making the decision.
a. $8,000 increase
Since the company would still be operating within the relevant range, fixed costs would remain the same.
c. $164,000
Without With
Special Order Special Order
Revenues:
(16,000 $60) $ 960,000
(15,000 $60) $900,000
(3,000 $40) 120,000
Variable costs:
Manufacturing:
(16,000 $24) (384,000)
(18,000 $24) (432,000)
Selling:
(16,000 $8) (128,000)
(18,000 $8) _ (144,000)
Contribution margin $508,000 $ 384,000
Fixed costs:
Manufacturing (160,000) (160,000)
Selling and administrative (120,000) (120,000)
Operating income $228,000 $ 104,000
d. No. If the decision is based on quantitative factors, the company should not produce the special order.
Bonilla Corporation
Income Statement
For the Month of April 2011
Sales $30,000
Cost of goods sold 27,000
Gross profit $ 3,000
Selling and administrative 2,500
Net income $ 500
There were no beginning or ending inventories of work-in-process or finished goods. Bonilla's manufacturing costs
were as follows:
Bonilla has just received a special order from a firm in Canada to purchase 800 units at $20 each. The order will not
affect the selling price to regular customers.
Required:
a. Prepare a differential analysis of the relevant costs and revenues associated with the decision to accept or
reject the special order, assuming Bonilla has excess capacity.
b. Determine the net advantage or disadvantage (profit increase or decrease) of accepting the order, assuming
Bonilla does not have excess capacity.
a. Increase $16,000
in
revenues
(800
$20)
Increas
e in
costs:
Direct materials (800 $5) $4,000
Direct labor (800 $8) 6,400
Variable overhead (800 3,600 14,000
4.50)
Increas $ 2,000
e in
profits
b. Contrib $ 2,000
ution
margin
of
special
order
Opport
unity
cost:
Regular selling price $25.00
Variable costs ($5 + $8 + 17.50
$4.50)
Regular unit contribution $ 7.50
margin
Lost 800 6,000
sales
Net $ 4,000
disadv
antage