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  1. Cost Accounting, 13e (Horngren et al.)
  2. Chapter 11  
  3.  
  4. Decision Making and Relevant Information
  5.  
  6.  
  7. 58)
  8.  
  9. A decision model involves:
  10. A)
  11.  
  12. only quantitative analyses
  13. B)
  14.  
  15. both quantitative and qualitative analyses
  16. C)
  17.  
  18. only qualitative analyses
  19. D)
  20.  
  21. a manager's instinct
  22. Answer:  
  23.  
  24. B
  25. Diff: 1
  26. Terms:  
  27.  
  28. decision model
  29. Objective:  
  30.  
  31. 1
  32. AACSB:  
  33.  
  34. Reflective thinking
  35.  
  36.  
  37. 59)
  38.  
  39. Feedback regarding previous actions may affect:  
  40. A)
  41.  
  42. future predictions  
  43. B)
  44.  
  45. implementation of the decision  
  46. C)
  47.  
  48. the decision model  
  49. D)
  50.  
  51. All of these answers are correct.  
  52. Answer:  
  53.  
  54. D
  55. Diff: 2
  56. Terms:  
  57.  
  58. decision model
  59. Objective:  
  60.  
  61. 1
  62. AACSB:  
  63.  
  64. Reflective thinking
  65. 60)
  66.  
  67. Place the following steps from the five-step decision process in order:
  68.         A = Make predictions about future costs
  69.         B = Evaluate performance to provide feedback
  70.         C = Implement the decision
  71.         D = Choose an alternative  
  72. A)
  73.  
  74. D C A B  
  75. B)
  76.  
  77. C D A B  
  78. C)
  79.  
  80. A D C B  
  81. D)
  82.  
  83. D C B A  
  84. Answer:  
  85.  
  86. C
  87. Diff: 2
  88. Terms:  
  89.  
  90. decision model
  91. Objective:  
  92.  
  93. 1
  94. AACSB:  
  95.  
  96. Reflective thinking
  97.  
  98. 61)
  99.  
  100. The formal process of choosing between alternatives is known as a(n):  
  101. A)
  102.  
  103. relevant model  
  104. B)
  105.  
  106. decision model  
  107. C)
  108.  
  109. alternative model  
  110. D)
  111.  
  112. prediction model  
  113. Answer:  
  114.  
  115. B
  116. Diff: 1
  117. Terms:  
  118.  
  119. decision model
  120. Objective:  
  121.  
  122. 1
  123. AACSB:  
  124.  
  125. Reflective thinking
  126.  
  127.  
  128. 62)
  129.  
  130. Ruggles Circuit Company manufactures circuit boards for other firms. Management is attempting to search for ways to reduce manufacturing labor costs and has received a proposal from a consulting company to rearrange the production floor next year. Using the information below regarding current operations and the new proposal, which of the following decisions should management accept?
  131.  
  132.         Currently       Proposed
  133. Required machine operators      5       4.5
  134. Materials-handling workers      1.25    1.25
  135. Employee average pay    $8 per hour     $9 per hour
  136. Hours worked per employee       2,100   2,000
  137.  
  138. A)
  139.  
  140. Do not change the production floor.  
  141. B)
  142.  
  143. Rearrange the production floor.  
  144. C)
  145.  
  146. Either, because it makes no difference to the employees.  
  147. D)
  148.  
  149. It doesn't matter because the costs incurred will remain the same.  
  150. Answer:  
  151.  
  152. B
  153. Explanation:  
  154.  
  155. B)
  156.  
  157. Current operations:     5 workers ? 2,100 hours ? $8.00 = $84,000
  158. Proposal: 4.5 workers ? 2,000 hours ? $9.00 = $81,000
  159.  
  160. Diff: 2
  161. Terms:  
  162.  
  163. decision model
  164. Objective:  
  165.  
  166. 1
  167. AACSB:  
  168.  
  169. Analytical skills
  170. Answer the following questions using the information below:
  171.  
  172. LeBlanc Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 3,000 units.
  173.  
  174.         Currently       Projected
  175.         Demand  20,000 units    17,000 units
  176.         Selling price   $4.50   $5.00
  177.         Incremental cost per unit       $3.00   $3.00
  178.  
  179. 63)
  180.  
  181. If the price increase is implemented, operating profit is projected to:  
  182. A)
  183.  
  184. increase by $4,000  
  185. B)
  186.  
  187. decrease by $4,000  
  188. C)
  189.  
  190. increase by $6,000  
  191. D)
  192.  
  193. decrease by $4,500  
  194. Answer:  
  195.  
  196. A
  197. Explanation:  
  198.  
  199. A)
  200.  
  201. [17,000 ? ($5 - $3)] - [20,000 ? ($4.50 - $3.00)] = increase of $4,000  
  202. Diff: 2
  203. Terms:  
  204.  
  205. decision model
  206. Objective:  
  207.  
  208. 1
  209. AACSB:  
  210.  
  211. Analytical skills
  212.  
  213.  
  214. 64)
  215.  
  216. Would you recommend the 50-cent price increase?  
  217. A)
  218.  
  219. No, because demand decreased.  
  220. B)
  221.  
  222. No, because the selling price increases.  
  223. C)
  224.  
  225. Yes, because contribution margin per unit increases.  
  226. D)
  227.  
  228. Yes, because operating profits increase.  
  229. Answer:  
  230.  
  231. D
  232. Diff: 2
  233. Terms:  
  234.  
  235. decision model
  236. Objective:  
  237.  
  238. 1
  239. AACSB:  
  240.  
  241. Analytical skills
  242.  
  243. 65)
  244.  
  245. When using the five-step decision process, which one of the following steps should be done last?  
  246. A)
  247.  
  248. Obtain information  
  249. B)
  250.  
  251. Choose an alternative  
  252. C)
  253.  
  254. Evaluation and feedback  
  255. D)
  256.  
  257. Implementing the decision  
  258. Answer:  
  259.  
  260. C
  261. Diff: 2
  262. Terms:  
  263.  
  264. decision model
  265. Objective:  
  266.  
  267. 1
  268. AACSB:  
  269.  
  270. Reflective thinking
  271.  
  272. 66)
  273.  
  274. When using the five-step decision process, which one of the following steps should be done first?  
  275. A)
  276.  
  277. Obtain information  
  278. B)
  279.  
  280. Choose an alternative  
  281. C)
  282.  
  283. Evaluation and feedback  
  284. D)
  285.  
  286. Implementing the decision  
  287. Answer:  
  288.  
  289. A
  290. Diff: 2
  291. Terms:  
  292.  
  293. decision model
  294. Objective:  
  295.  
  296. 1
  297. AACSB:  
  298.  
  299. Reflective thinking
  300. 67)
  301.  
  302. For decision making, a listing of the relevant costs:  
  303. A)
  304.  
  305. will help the decision maker concentrate on the pertinent data  
  306. B)
  307.  
  308. will only include future costs  
  309. C)
  310.  
  311. will only include costs that differ among alternatives  
  312. D)
  313.  
  314. All of these answers are correct.  
  315. Answer:  
  316.  
  317. D
  318. Diff: 2
  319. Terms:  
  320.  
  321. relevant costs
  322. Objective:  
  323.  
  324. 2
  325. AACSB:  
  326.  
  327. Reflective thinking
  328.  
  329. 68)
  330.  
  331. Sunk costs:
  332. A)
  333.  
  334. are future costs
  335. B)
  336.  
  337. are past costs
  338. C)
  339.  
  340. have future implications
  341. D)
  342.  
  343. are relevant to all decisions
  344. Answer:  
  345.  
  346. B
  347. Diff: 2
  348. Terms:  
  349.  
  350. sunk costs
  351. Objective:  
  352.  
  353. 2
  354. AACSB:  
  355.  
  356. Reflective thinking
  357.  
  358. 69)
  359.  
  360. Sunk costs:  
  361. A)
  362.  
  363. are relevant  
  364. B)
  365.  
  366. are differential  
  367. C)
  368.  
  369. have future implications  
  370. D)
  371.  
  372. are ignored when evaluating alternatives  
  373. Answer:  
  374.  
  375. D
  376. Diff: 1
  377. Terms:  
  378.  
  379. relevant costs, sunk costs
  380. Objective:  
  381.  
  382. 2
  383. AACSB:  
  384.  
  385. Reflective thinking
  386.  
  387. 70)
  388.  
  389. A computer system installed last year is an example of a(n):  
  390. A)
  391.  
  392. sunk cost  
  393. B)
  394.  
  395. relevant cost  
  396. C)
  397.  
  398. differential cost  
  399. D)
  400.  
  401. avoidable cost  
  402. Answer:  
  403.  
  404. A
  405. Diff: 1
  406. Terms:  
  407.  
  408. sunk costs
  409. Objective:  
  410.  
  411. 2
  412. AACSB:  
  413.  
  414. Use of Information Technology
  415.  
  416. 71)
  417.  
  418. Costs that CANNOT be changed by any decision made now or in the future are:  
  419. A)
  420.  
  421. fixed costs  
  422. B)
  423.  
  424. indirect costs  
  425. C)
  426.  
  427. avoidable costs  
  428. D)
  429.  
  430. sunk costs  
  431. Answer:  
  432.  
  433. D
  434. Diff: 1
  435. Terms:  
  436.  
  437. sunk costs
  438. Objective:  
  439.  
  440. 2
  441. AACSB:  
  442.  
  443. Reflective thinking
  444. 72)
  445.  
  446. In evaluating different alternatives, it is useful to concentrate on:  
  447. A)
  448.  
  449. variable costs  
  450. B)
  451.  
  452. fixed costs  
  453. C)
  454.  
  455. total costs  
  456. D)
  457.  
  458. relevant costs  
  459. Answer:  
  460.  
  461. D
  462. Diff: 1
  463. Terms:  
  464.  
  465. relevant costs
  466. Objective:  
  467.  
  468. 2
  469. AACSB:  
  470.  
  471. Reflective thinking
  472.  
  473. 73)
  474.  
  475. Which of the following costs always differ among future alternatives?  
  476. A)
  477.  
  478. fixed costs  
  479. B)
  480.  
  481. historical costs  
  482. C)
  483.  
  484. relevant costs  
  485. D)
  486.  
  487. variable costs  
  488. Answer:  
  489.  
  490. C
  491. Diff: 1
  492. Terms:  
  493.  
  494. relevant costs
  495. Objective:  
  496.  
  497. 2
  498. AACSB:  
  499.  
  500. Reflective thinking
  501.  
  502. 74)
  503.  
  504. Which of the following costs are never relevant in the decision-making process?  
  505. A)
  506.  
  507. fixed costs  
  508. B)
  509.  
  510. historical costs  
  511. C)
  512.  
  513. relevant costs  
  514. D)
  515.  
  516. variable costs  
  517. Answer:  
  518.  
  519. B
  520. Diff: 1
  521. Terms:  
  522.  
  523. relevant costs
  524. Objective:  
  525.  
  526. 2
  527. AACSB:  
  528.  
  529. Reflective thinking
  530.  
  531. Answer the following questions using the information below:
  532.  
  533. Jim's 5-year-old Geo Prizm requires repairs estimated at $3,000 to make it roadworthy again. His friend, Julie, suggested that he should buy a 5-year-old used Honda Civic instead for $3,000 cash. Julie estimated the following costs for the two cars:
  534.  
  535.         Geo Prizm       Honda Civic
  536.         Acquisition cost        $15,000 $3,000
  537.         Repairs $ 3,000 ?
  538.         Annual operating costs
  539.         (Gas, maintenance, insurance)   $ 2,280 $2,100
  540.  
  541. 75)
  542.  
  543. The cost NOT relevant for this decision is the:  
  544. A)
  545.  
  546. acquisition cost of the Geo Prizm  
  547. B)
  548.  
  549. acquisition cost of the Honda Civic  
  550. C)
  551.  
  552. repairs to the Geo Prizm  
  553. D)
  554.  
  555. annual operating costs of the Honda Civic  
  556. Answer:  
  557.  
  558. A
  559. Diff: 2
  560. Terms:  
  561.  
  562. relevant costs
  563. Objective:  
  564.  
  565. 2
  566. AACSB:  
  567.  
  568. Analytical skills
  569. 76)
  570.  
  571. What should Jim do? What are his savings in the first year?  
  572. A)
  573.  
  574. Buy the Honda Civic; $9,780  
  575. B)
  576.  
  577. Fix the Geo Prizm; $5,518  
  578. C)
  579.  
  580. Buy the Honda Civic; $180  
  581. D)
  582.  
  583. Fix the Geo Prizm; $5,280  
  584. Answer:  
  585.  
  586. C
  587. Explanation:  
  588.  
  589. C)
  590.  
  591. Geo ($3,000 + $2,280) - Honda ($3,000 + $2,100) = $180 cost savings with the Honda option
  592.  
  593. Diff: 2
  594. Terms:  
  595.  
  596. relevant costs
  597. Objective:  
  598.  
  599. 2
  600. AACSB:  
  601.  
  602. Analytical skills
  603.  
  604.  
  605. 77)
  606.  
  607. A relevant revenue is a revenue that is a(n):  
  608. A)
  609.  
  610. past revenue  
  611. B)
  612.  
  613. future revenue  
  614. C)
  615.  
  616. in-hand revenue  
  617. D)
  618.  
  619. earned revenue  
  620. Answer:  
  621.  
  622. B
  623. Diff: 2
  624. Terms:  
  625.  
  626. relevant revenues
  627. Objective:  
  628.  
  629. 2
  630. AACSB:  
  631.  
  632. Reflective thinking
  633.  
  634. 78)
  635.  
  636. A relevant cost is a cost that is a (n):
  637. A)
  638.  
  639. future cost
  640. B)
  641.  
  642. past cost
  643. C)
  644.  
  645. sunk cost
  646. D)
  647.  
  648. non-cash expense
  649. Answer:  
  650.  
  651. A
  652. Diff: 2
  653. Terms:  
  654.  
  655. relevant costs
  656. Objective:  
  657.  
  658. 2
  659. AACSB:  
  660.  
  661. Reflective thinking
  662.  
  663. 79)
  664.  
  665. Relevant information has all of these characteristics EXCEPT:
  666. A)
  667.  
  668. past costs are irrelevant
  669. B)
  670.  
  671. all future revenues and expenses are relevant
  672. C)
  673.  
  674. different alternatives can be compared by examining differences in total revenue and expenses
  675. D)
  676.  
  677. qualitative factors should be considered
  678. Answer:  
  679.  
  680. B
  681. Diff: 2
  682. Terms:  
  683.  
  684. relevant revenues, relevant costs
  685. Objective:  
  686.  
  687. 2
  688. AACSB:  
  689.  
  690. Reflective thinking
  691.  
  692. 80)
  693.  
  694. Quantitative factors:  
  695. A)
  696.  
  697. include financial information, but not nonfinancial information  
  698. B)
  699.  
  700. can be expressed in monetary terms  
  701. C)
  702.  
  703. are always relevant when making decisions  
  704. D)
  705.  
  706. include employee morale  
  707. Answer:  
  708.  
  709. B
  710. Diff: 2
  711. Terms:  
  712.  
  713. quantitative factors
  714. Objective:  
  715.  
  716. 2
  717. AACSB:  
  718.  
  719. Reflective thinking
  720. 81)
  721.  
  722. Qualitative factors:  
  723. A)
  724.  
  725. generally are easily measured in quantitative terms  
  726. B)
  727.  
  728. are generally irrelevant for decision making  
  729. C)
  730.  
  731. may include either financial or nonfinancial information  
  732. D)
  733.  
  734. include customer satisfaction  
  735. Answer:  
  736.  
  737. D
  738. Diff: 2
  739. Terms:  
  740.  
  741. qualitative factors
  742. Objective:  
  743.  
  744. 2
  745. AACSB:  
  746.  
  747. Reflective thinking
  748.  
  749. 82)
  750.  
  751. Historical costs are helpful:  
  752. A)
  753.  
  754. for making future predictions  
  755. B)
  756.  
  757. for decision making  
  758. C)
  759.  
  760. because they are quantitative  
  761. D)
  762.  
  763. None of these answers is correct.  
  764. Answer:  
  765.  
  766. A
  767. Diff: 2
  768. Terms:  
  769.  
  770. relevant costs
  771. Objective:  
  772.  
  773. 2
  774. AACSB:  
  775.  
  776. Reflective thinking
  777.  
  778. 83)
  779.  
  780. When making decisions:  
  781. A)
  782.  
  783. quantitative factors are the most important  
  784. B)
  785.  
  786. qualitative factors are the most important  
  787. C)
  788.  
  789. appropriate weight must be given to both quantitative and qualitative factors  
  790. D)
  791.  
  792. both quantitative and qualitative factors are unimportant  
  793. Answer:  
  794.  
  795. C
  796. Diff: 2
  797. Terms:  
  798.  
  799. qualitative factors, quantitative factors
  800. Objective:  
  801.  
  802. 2
  803. AACSB:  
  804.  
  805. Ethical reasoning
  806.  
  807. 84)
  808.  
  809. Employee morale at Dos Santos, Inc., is very high. This type of information is known as a:  
  810. A)
  811.  
  812. qualitative factor  
  813. B)
  814.  
  815. quantitative factor  
  816. C)
  817.  
  818. nonmeasurable factor  
  819. D)
  820.  
  821. financial factor  
  822. Answer:  
  823.  
  824. A
  825. Diff: 1
  826. Terms:  
  827.  
  828. qualitative factors
  829. Objective:  
  830.  
  831. 2
  832. AACSB:  
  833.  
  834. Reflective thinking
  835.  
  836. 85)
  837.  
  838. Roberto owns a small body shop. His major costs include labor, parts, and rent. In the decision-making process, these costs are considered to be:  
  839. A)
  840.  
  841. fixed  
  842. B)
  843.  
  844. qualitative factors  
  845. C)
  846.  
  847. quantitative factors  
  848. D)
  849.  
  850. variable  
  851. Answer:  
  852.  
  853. C
  854. Diff: 1
  855. Terms:  
  856.  
  857. qualitative factors
  858. Objective:  
  859.  
  860. 2
  861. AACSB:  
  862.  
  863. Reflective thinking
  864.  
  865. 86)
  866.  
  867. One-time-only special orders should only be accepted if:  
  868. A)
  869.  
  870. incremental revenues exceed incremental costs  
  871. B)
  872.  
  873. differential revenues exceed variable costs  
  874. C)
  875.  
  876. incremental revenues exceed fixed costs  
  877. D)
  878.  
  879. total revenues exceed total costs  
  880. Answer:  
  881.  
  882. A
  883. Diff: 3
  884. Terms:  
  885.  
  886. one-time-only special order, incremental revenue
  887. Objective:  
  888.  
  889. 2
  890. AACSB:  
  891.  
  892. Reflective thinking
  893.  
  894. 87)
  895.  
  896. When deciding to accept a one-time-only special order from a wholesaler, management should do all of the following EXCEPT:  
  897. A)
  898.  
  899. analyze product costs  
  900. B)
  901.  
  902. consider the special order's impact on future prices of their products  
  903. C)
  904.  
  905. determine whether excess capacity is available  
  906. D)
  907.  
  908. verify past design costs for the product  
  909. Answer:  
  910.  
  911. D
  912. Diff: 3
  913. Terms:  
  914.  
  915. one-time-only special order
  916. Objective:  
  917.  
  918. 2
  919. AACSB:  
  920.  
  921. Reflective thinking
  922.  
  923. 88)
  924.  
  925. When there is excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price when:  
  926. A)
  927.  
  928. incremental revenues exceed incremental costs  
  929. B)
  930.  
  931. additional fixed costs must be incurred to accommodate the order  
  932. C)
  933.  
  934. the company placing the order is in the same market segment as your current customers  
  935. D)
  936.  
  937. it never makes sense  
  938. Answer:  
  939.  
  940. A
  941. Diff: 3
  942. Terms:  
  943.  
  944. one-time-only special order, incremental cost, incremental revenue
  945. Objective:  
  946.  
  947. 2
  948. AACSB:  
  949.  
  950. Reflective thinking
  951.  
  952. 89)
  953.  
  954. Full cost of the product is:
  955. A)
  956.  
  957. the sum of fixed costs in all the business functions of the value chain
  958. B)
  959.  
  960. the sum of variable costs in all the business functions of the value chain
  961. C)
  962.  
  963. the sum of all variable and fixed costs in all the business functions of the value chain
  964. D)
  965.  
  966. the sum of all costs in the value chain minus marketing costs
  967. Answer:  
  968.  
  969. C
  970. Diff: 3
  971. Terms:  
  972.  
  973. full costs of the product
  974. Objective:  
  975.  
  976. 2
  977. AACSB:  
  978.  
  979. Reflective thinking
  980.  
  981. Answer the following questions using the information below:
  982.  
  983. Welch Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Welch Manufacturing has excess capacity. The following per unit data apply for sales to regular customers:
  984.  
  985.         Variable costs:
  986.         Direct materials        $40
  987.         Direct labor    20
  988.         Manufacturing support   35
  989.         Marketing costs 15
  990.         Fixed costs:
  991.         Manufacturing support   45
  992.         Marketing costs 15
  993.         Total costs     170
  994.         Markup (50%)    85
  995.         Targeted selling price  $255
  996.  
  997.  
  998. 90)
  999.  
  1000. What is the full cost of the product per unit?  
  1001. A)
  1002.  
  1003. $110  
  1004. B)
  1005.  
  1006. $170  
  1007. C)
  1008.  
  1009. $255  
  1010. D)
  1011.  
  1012. $85  
  1013. Answer:  
  1014.  
  1015. B
  1016. Explanation:  
  1017.  
  1018. B)
  1019.  
  1020. $40 + $20 + $35 + $15 + $45 + $15 = $170
  1021.  
  1022. Diff: 3
  1023. Terms:  
  1024.  
  1025. full costs of the product
  1026. Objective:  
  1027.  
  1028. 2
  1029. AACSB:  
  1030.  
  1031. Analytical skills
  1032.  
  1033. 91)
  1034.  
  1035. What is the contribution margin per unit?  
  1036. A)
  1037.  
  1038. $85  
  1039. B)
  1040.  
  1041. $110  
  1042. C)
  1043.  
  1044. $145  
  1045. D)
  1046.  
  1047. $255  
  1048. Answer:  
  1049.  
  1050. C
  1051. Explanation:  
  1052.  
  1053. C)
  1054.  
  1055. $255 - ($40 + $20 + $35 + $15) = $145
  1056.  
  1057. Diff: 3
  1058. Terms:  
  1059.  
  1060. one-time-only special order
  1061. Objective:  
  1062.  
  1063. 2
  1064. AACSB:  
  1065.  
  1066. Analytical skills
  1067.  
  1068.  
  1069. 92)
  1070.  
  1071. For Welch Manufacturing, what is the minimum acceptable price of this special order?  
  1072. A)
  1073.  
  1074. $110  
  1075. B)
  1076.  
  1077. $145  
  1078. C)
  1079.  
  1080. $170  
  1081. D)
  1082.  
  1083. $255  
  1084. Answer:  
  1085.  
  1086. A
  1087. Explanation:  
  1088.  
  1089. A)
  1090.  
  1091. $40 + $20 + $35 + $15 = $110  
  1092. Diff: 3
  1093. Terms:  
  1094.  
  1095. one-time-only special order
  1096. Objective:  
  1097.  
  1098. 2
  1099. AACSB:  
  1100.  
  1101. Analytical skills
  1102. 93)
  1103.  
  1104. What is the change in operating profits if the one-time-only special order for 1,000 units is accepted for $180 a unit by Welch?  
  1105. A)
  1106.  
  1107. $70,000 increase in operating profits  
  1108. B)
  1109.  
  1110. $10,000 increase in operating profits  
  1111. C)
  1112.  
  1113. $10,000 decrease in operating profits  
  1114. D)
  1115.  
  1116. $75,000 decrease in operating profits  
  1117. Answer:  
  1118.  
  1119. A
  1120. Explanation:  
  1121.  
  1122. A)
  1123.  
  1124. $180 - ($40 + $20 + $35 + $15) = $70; 1,000 ? $70 = $70,000 increase  
  1125. Diff: 3
  1126. Terms:  
  1127.  
  1128. one-time-only special order
  1129. Objective:  
  1130.  
  1131. 2
  1132. AACSB:  
  1133.  
  1134. Analytical skills
  1135.  
  1136. 94)
  1137.  
  1138. Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level are:
  1139.  
  1140. Direct materials        $0.25
  1141. Direct labor    0.40
  1142. Variable overhead       0.15
  1143. Fixed overhead  0.20
  1144. Marketing - fixed       0.20
  1145. Marketing/distribution - variable       0.40
  1146.  
  1147. Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each. Current sales would not be affected by the one-time-only special order, and variable marketing/distribution costs would not be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted?  
  1148. A)
  1149.  
  1150. $400 increase in operating profits  
  1151. B)
  1152.  
  1153. $400 decrease in operating profits  
  1154. C)
  1155.  
  1156. $1,800 increase in operating profits  
  1157. D)
  1158.  
  1159. $1,800 decrease in operating profits  
  1160. Answer:  
  1161.  
  1162. C
  1163. Explanation:  
  1164.  
  1165. C)
  1166.  
  1167. Manufacturing cost per unit = $0.25 + $0.40 + $0.15 = $0.80 1,500 ? ($2.00 - $0.80) = $1,800 increase
  1168.  
  1169. Diff: 3
  1170. Terms:  
  1171.  
  1172. one-time-only special order
  1173. Objective:  
  1174.  
  1175. 2
  1176. AACSB:  
  1177.  
  1178. Analytical skills
  1179.  
  1180.  
  1181. 95)
  1182.  
  1183. Black Tool Company has a production capacity of 1,500 units per month, but current production is only 1,250 units. The manufacturing costs are $60 per unit and marketing costs are $16 per unit. Doug Hall offers to purchase 250 units at $76 each for the next five months. Should Black accept the one-time-only special order if only absorption-costing data are available?  
  1184. A)
  1185.  
  1186. Yes, good customer relations are essential.  
  1187. B)
  1188.  
  1189. No, the company will only break even.  
  1190. C)
  1191.  
  1192. No, since only the employees will benefit.  
  1193. D)
  1194.  
  1195. Yes, since operating profits will most likely increase.  
  1196. Answer:  
  1197.  
  1198. D
  1199. Explanation:  
  1200.  
  1201. D)
  1202.  
  1203. Since the $60 absorption cost per unit is most likely not all variable costs and since the entire $16 per unit of marketing costs may not be incurred, operating profits will most likely increase.
  1204.  
  1205. Diff: 3
  1206. Terms:  
  1207.  
  1208. one-time-only special order
  1209. Objective:  
  1210.  
  1211. 2
  1212. AACSB:  
  1213.  
  1214. Analytical skills
  1215. Answer the following questions using the information below:
  1216.  
  1217. Grant's Kitchens is approached by Ms. Tammy Wang, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:
  1218.  
  1219.         Direct materials        $455
  1220.         Direct labor    300
  1221.         Variable manufacturing support  45
  1222.         Fixed manufacturing support     100
  1223.         Total manufacturing costs       900
  1224.         Markup (60%)    540
  1225.         Targeted selling price  $1440
  1226.  
  1227. Grant's Kitchens has excess capacity. Ms. Wang wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit.
  1228.  
  1229. 96)
  1230.  
  1231. For Grant's Kitchens, what is the minimum acceptable price of this one-time-only special order?  
  1232. A)
  1233.  
  1234. $830  
  1235. B)
  1236.  
  1237. $930  
  1238. C)
  1239.  
  1240. $785  
  1241. D)
  1242.  
  1243. $1,440  
  1244. Answer:  
  1245.  
  1246. A
  1247. Explanation:  
  1248.  
  1249. A)
  1250.  
  1251. $455 + $300 + $45 + $30 = $830  
  1252. Diff: 2
  1253. Terms:  
  1254.  
  1255. one-time-only special order
  1256. Objective:  
  1257.  
  1258. 2
  1259. AACSB:  
  1260.  
  1261. Analytical skills
  1262.  
  1263.  
  1264. 97)
  1265.  
  1266. Other than price, what other items should Grant's Kitchens consider before accepting this one-time-only special order?  
  1267. A)
  1268.  
  1269. reaction of shareholders  
  1270. B)
  1271.  
  1272. reaction of existing customers to the lower price offered to Ms. Wang  
  1273. C)
  1274.  
  1275. demand for cherry cabinets  
  1276. D)
  1277.  
  1278. price is the only consideration
  1279. Answer:  
  1280.  
  1281. B
  1282. Diff: 2
  1283. Terms:  
  1284.  
  1285. one-time-only special order, qualitative factors
  1286. Objective:  
  1287.  
  1288. 2
  1289. AACSB:  
  1290.  
  1291. Analytical skills
  1292.  
  1293. 98)
  1294.  
  1295. If Ms. Wang wanted a long-term commitment for supplying this product, this analysis:  
  1296. A)
  1297.  
  1298. would definitely be different  
  1299. B)
  1300.  
  1301. may be different  
  1302. C)
  1303.  
  1304. would not be different  
  1305. D)
  1306.  
  1307. does not contain enough information to determine if there would be a difference  
  1308. Answer:  
  1309.  
  1310. A
  1311. Diff: 2
  1312. Terms:  
  1313.  
  1314. one-time-only special order
  1315. Objective:  
  1316.  
  1317. 2
  1318. AACSB:  
  1319.  
  1320. Analytical skills
  1321. 99)
  1322.  
  1323. An example of a quantitative factor for the decision-making process is:  
  1324. A)
  1325.  
  1326. customer satisfaction  
  1327. B)
  1328.  
  1329. employee morale  
  1330. C)
  1331.  
  1332. product quality  
  1333. D)
  1334.  
  1335. manufacturing overhead  
  1336. Answer:  
  1337.  
  1338. D
  1339. Diff: 1
  1340. Terms:  
  1341.  
  1342. quantitative factors
  1343. Objective:  
  1344.  
  1345. 2
  1346. AACSB:  
  1347.  
  1348. Reflective thinking
  1349.  
  1350. 100)
  1351.  
  1352. If there was limited capacity, all of the following amounts would change EXCEPT:  
  1353. A)
  1354.  
  1355. opportunity costs  
  1356. B)
  1357.  
  1358. differential costs  
  1359. C)
  1360.  
  1361. variable costs  
  1362. D)
  1363.  
  1364. the minimum acceptable price  
  1365. Answer:  
  1366.  
  1367. C
  1368. Diff: 3
  1369. Terms:  
  1370.  
  1371. constraint
  1372. Objective:  
  1373.  
  1374. 3
  1375. AACSB:  
  1376.  
  1377. Reflective thinking
  1378.  
  1379.  
  1380. Answer the following questions using the information below:
  1381.  
  1382. Northwoods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $90 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Northwoods' policy to add a 50% markup to full costs.
  1383.  
  1384. 101)
  1385.  
  1386. Northwoods is invited to bid on a one-time-only special order to supply 100 rustic tables. What is the lowest price Northwoods should bid on this special order?  
  1387. A)
  1388.  
  1389. $6,300  
  1390. B)
  1391.  
  1392. $7,200  
  1393. C)
  1394.  
  1395. $9,000  
  1396. D)
  1397.  
  1398. $13,500  
  1399. Answer:  
  1400.  
  1401. B
  1402. Explanation:  
  1403.  
  1404. B)
  1405.  
  1406. $90 ? 80% ? 100 tables = $7,200
  1407.  
  1408. Diff: 2
  1409. Terms:  
  1410.  
  1411. one-time-only special order
  1412. Objective:  
  1413.  
  1414. 2
  1415. AACSB:  
  1416.  
  1417. Analytical skills
  1418.  
  1419. 102)
  1420.  
  1421. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Northwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Northwoods should bid on this long-term order?  
  1422. A)
  1423.  
  1424. $63  
  1425. B)
  1426.  
  1427. $72  
  1428. C)
  1429.  
  1430. $90  
  1431. D)
  1432.  
  1433. $135  
  1434. Answer:  
  1435.  
  1436. D
  1437. Explanation:  
  1438.  
  1439. D)
  1440.  
  1441. $90 + ($90 ? 50%) = $135
  1442.  
  1443. Diff: 2
  1444. Terms:  
  1445.  
  1446. one-time-only special order
  1447. Objective:  
  1448.  
  1449. 2
  1450. AACSB:  
  1451.  
  1452. Analytical skills
  1453.  
  1454. 103)
  1455.  
  1456. Cochran Corporation has a plant capacity of 100,000 units per month. Unit costs at capacity are:
  1457.  
  1458. Direct materials        $4.00
  1459. Direct labor    6.00
  1460. Variable overhead       3.00
  1461. Fixed overhead  1.00
  1462. Marketing?fixed 7.00
  1463. Marketing/distribution?variable 3.60
  1464.  
  1465. Current monthly sales are 95,000 units at $30.00 each. Suzie, Inc., has contacted Cochran Corporation about purchasing 2,000 units at $24.00 each. Current sales would not be affected by the one-time-only special order. What is Cochran's change in operating profits if the one-time-only special order is accepted?  
  1466. A)
  1467.  
  1468. $14,800 increase  
  1469. B)
  1470.  
  1471. $17,200 increase  
  1472. C)
  1473.  
  1474. $22,000 increase  
  1475. D)
  1476.  
  1477. $33,200 increase  
  1478. Answer:  
  1479.  
  1480. A
  1481. Explanation:  
  1482.  
  1483. A)
  1484.  
  1485. ($4.00 + $6.00 + $3.00 + $3.60) = $16.60
  1486. ($24.00 - $16.60) ? 2,000 = $14,800 increase  
  1487. Diff: 3
  1488. Terms:  
  1489.  
  1490. one-time-only special order
  1491. Objective:  
  1492.  
  1493. 2
  1494. AACSB:  
  1495.  
  1496. Analytical skills
  1497.  
  1498. 104)
  1499.  
  1500. The sum of all the costs incurred in a particular business function (for example, marketing) is called the:  
  1501. A)
  1502.  
  1503. business function cost  
  1504. B)
  1505.  
  1506. full product cost  
  1507. C)
  1508.  
  1509. gross product cost  
  1510. D)
  1511.  
  1512. multiproduct cost  
  1513. Answer:  
  1514.  
  1515. A
  1516. Diff: 1
  1517. Terms:  
  1518.  
  1519. business function costs
  1520. Objective:  
  1521.  
  1522. 2
  1523. AACSB:  
  1524.  
  1525. Reflective thinking
  1526.  
  1527. 105)
  1528.  
  1529. The sum of all costs incurred in all business functions in the value chain (product design, manufacturing, marketing, and customer service, for example) is known as the:  
  1530. A)
  1531.  
  1532. business cost  
  1533. B)
  1534.  
  1535. full product cost  
  1536. C)
  1537.  
  1538. gross product cost  
  1539. D)
  1540.  
  1541. multiproduct cost  
  1542. Answer:  
  1543.  
  1544. B
  1545. Diff: 1
  1546. Terms:  
  1547.  
  1548. full costs of the product
  1549. Objective:  
  1550.  
  1551. 2
  1552. AACSB:  
  1553.  
  1554. Reflective thinking
  1555.  
  1556. 106)
  1557.  
  1558. An example of a qualitative factor for the decision-making process is:  
  1559. A)
  1560.  
  1561. customer satisfaction  
  1562. B)
  1563.  
  1564. units sold  
  1565. C)
  1566.  
  1567. material cost  
  1568. D)
  1569.  
  1570. labor hours incurred  
  1571. Answer:  
  1572.  
  1573. A
  1574. Diff: 2
  1575. Terms:  
  1576.  
  1577. qualitative factors
  1578. Objective:  
  1579.  
  1580. 2
  1581. AACSB:  
  1582.  
  1583. Ethical reasoning
  1584.  
  1585. 107)
  1586.  
  1587. Outsourcing is:
  1588. A)
  1589.  
  1590. purchasing goods and services internally
  1591. B)
  1592.  
  1593. never a viable option
  1594. C)
  1595.  
  1596. more desirable than insourcing
  1597. D)
  1598.  
  1599. purchasing goods and services from outside vendors
  1600. Answer:  
  1601.  
  1602. D
  1603. Diff: 2
  1604. Terms:  
  1605.  
  1606. outsourcing
  1607. Objective:  
  1608.  
  1609. 2
  1610. AACSB:  
  1611.  
  1612. Reflective thinking
  1613.  
  1614. 108)
  1615.  
  1616. Insourcing is:
  1617. A)
  1618.  
  1619. purchasing goods and services internally
  1620. B)
  1621.  
  1622. purchasing goods and services from outside vendors
  1623. C)
  1624.  
  1625. more expensive than outsourcing
  1626. D)
  1627.  
  1628. less expensive than outsourcing
  1629. Answer:  
  1630.  
  1631. A
  1632. Diff: 2
  1633. Terms:  
  1634.  
  1635. insourcing
  1636. Objective:  
  1637.  
  1638. 2
  1639. AACSB:  
  1640.  
  1641. Reflective thinking
  1642.  
  1643. 109)
  1644.  
  1645. Problems that should be avoided when identifying relevant costs include all of the following EXCEPT:  
  1646. A)
  1647.  
  1648. assuming all variable costs are relevant  
  1649. B)
  1650.  
  1651. assuming all fixed costs are irrelevant  
  1652. C)
  1653.  
  1654. using unit costs that do not separate variable and fixed components  
  1655. D)
  1656.  
  1657. using total costs that separate variable and fixed components  
  1658. Answer:  
  1659.  
  1660. D
  1661. Diff: 2
  1662. Terms:  
  1663.  
  1664. relevant costs
  1665. Objective:  
  1666.  
  1667. 2
  1668. AACSB:  
  1669.  
  1670. Reflective thinking
  1671.  
  1672. 110)
  1673.  
  1674. The BEST way to avoid misidentification of relevant costs is to focus on:  
  1675. A)
  1676.  
  1677. expected future costs that differ among the alternatives  
  1678. B)
  1679.  
  1680. historical costs  
  1681. C)
  1682.  
  1683. unit fixed costs  
  1684. D)
  1685.  
  1686. total unit costs  
  1687. Answer:  
  1688.  
  1689. A
  1690. Diff: 2
  1691. Terms:  
  1692.  
  1693. relevant costs
  1694. Objective:  
  1695.  
  1696. 2
  1697. AACSB:  
  1698.  
  1699. Reflective thinking
  1700. 111)
  1701.  
  1702. Factors used to decide whether to outsource a part include:  
  1703. A)
  1704.  
  1705. the supplier's cost of direct materials  
  1706. B)
  1707.  
  1708. if the supplier is reliable  
  1709. C)
  1710.  
  1711. the original cost of equipment currently used for production of that part  
  1712. D)
  1713.  
  1714. past design costs used to develop the current composition of the part  
  1715. Answer:  
  1716.  
  1717. B
  1718. Diff: 2
  1719. Terms:  
  1720.  
  1721. outsourcing, make-or-buy decision
  1722. Objective:  
  1723.  
  1724. 2
  1725. AACSB:  
  1726.  
  1727. Reflective thinking
  1728.  
  1729. 112)
  1730.  
  1731. Relevant costs of a make-or-buy decision include all of the following EXCEPT:  
  1732. A)
  1733.  
  1734. fixed salaries that will not be incurred if the part is outsourced  
  1735. B)
  1736.  
  1737. current direct material costs of the part  
  1738. C)
  1739.  
  1740. special machinery for the part that has no resale value  
  1741. D)
  1742.  
  1743. material-handling costs that can be eliminated  
  1744. Answer:  
  1745.  
  1746. C
  1747. Diff: 3
  1748. Terms:  
  1749.  
  1750. relevant costs, outsourcing, make-or-buy decision
  1751. Objective:  
  1752.  
  1753. 2
  1754. AACSB:  
  1755.  
  1756. Reflective thinking
  1757.  
  1758. 113)
  1759.  
  1760. Which of following are risks of outsourcing the production of a part?  
  1761. A)
  1762.  
  1763. unpredictable quality  
  1764. B)
  1765.  
  1766. unreliable delivery  
  1767. C)
  1768.  
  1769. unscheduled price increases  
  1770. D)
  1771.  
  1772. All of these answers are correct.  
  1773. Answer:  
  1774.  
  1775. D
  1776. Diff: 1
  1777. Terms:  
  1778.  
  1779. outsourcing, make-or-buy decision
  1780. Objective:  
  1781.  
  1782. 2
  1783. AACSB:  
  1784.  
  1785. Reflective thinking
  1786.  
  1787. 114)
  1788.  
  1789. Which of the following minimize the risks of outsourcing?  
  1790. A)
  1791.  
  1792. the use of short-term contracts that specify price  
  1793. B)
  1794.  
  1795. the responsibility for on-time delivery is now the responsibility of the supplier  
  1796. C)
  1797.  
  1798. building close relationships with the supplier  
  1799. D)
  1800.  
  1801. All of these answers are correct.  
  1802. Answer:  
  1803.  
  1804. C
  1805. Diff: 3
  1806. Terms:  
  1807.  
  1808. outsourcing, make-or-buy decision
  1809. Objective:  
  1810.  
  1811. 2
  1812. AACSB:  
  1813.  
  1814. Reflective thinking
  1815.  
  1816.  
  1817. 115)
  1818.  
  1819. The cost to produce Part A was $10 per unit in 20X3 and in 20X4 it has increased to $11 per unit. In 20X4, Supplier XYZ has offered to supply Part A for $9 per unit. For the make-or-buy decision:  
  1820. A)
  1821.  
  1822. incremental revenues are $2 per unit  
  1823. B)
  1824.  
  1825. incremental costs are $1 per unit  
  1826. C)
  1827.  
  1828. net relevant costs are $1 per unit  
  1829. D)
  1830.  
  1831. differential costs are $2 per unit  
  1832. Answer:  
  1833.  
  1834. D
  1835. Diff: 2
  1836. Terms:  
  1837.  
  1838. outsourcing, make-or-buy decision
  1839. Objective:  
  1840.  
  1841. 2
  1842. AACSB:  
  1843.  
  1844. Analytical skills
  1845. 116)
  1846.  
  1847. When evaluating a make-or-buy decision, which of the following does NOT need to be considered?  
  1848. A)
  1849.  
  1850. alternative uses of the production capacity  
  1851. B)
  1852.  
  1853. the original cost of the production equipment  
  1854. C)
  1855.  
  1856. the quality of the supplier's product  
  1857. D)
  1858.  
  1859. the reliability of the supplier's delivery schedule  
  1860. Answer:  
  1861.  
  1862. B
  1863. Diff: 2
  1864. Terms:  
  1865.  
  1866. outsourcing, make-or-buy decision
  1867. Objective:  
  1868.  
  1869. 2
  1870. AACSB:  
  1871.  
  1872. Reflective thinking
  1873.  
  1874. 117)
  1875.  
  1876. For make-or-buy decisions, a supplier's ability to deliver the item on a timely basis is considered a(n):  
  1877. A)
  1878.  
  1879. qualitative factor  
  1880. B)
  1881.  
  1882. relevant cost  
  1883. C)
  1884.  
  1885. differential factor  
  1886. D)
  1887.  
  1888. opportunity cost  
  1889. Answer:  
  1890.  
  1891. A
  1892. Diff: 1
  1893. Terms:  
  1894.  
  1895. outsourcing, make-or-buy decision
  1896. Objective:  
  1897.  
  1898. 2
  1899. AACSB:  
  1900.  
  1901. Reflective thinking
  1902.  
  1903. 118)
  1904.  
  1905. The incremental costs of producing one more unit of product include all of the following EXCEPT:  
  1906. A)
  1907.  
  1908. direct materials  
  1909. B)
  1910.  
  1911. direct labor  
  1912. C)
  1913.  
  1914. variable overhead costs  
  1915. D)
  1916.  
  1917. fixed overhead costs  
  1918. Answer:  
  1919.  
  1920. D
  1921. Diff: 2
  1922. Terms:  
  1923.  
  1924. incremental cost
  1925. Objective:  
  1926.  
  1927. 2
  1928. AACSB:  
  1929.  
  1930. Reflective thinking
  1931.  
  1932.  
  1933. 119)
  1934.  
  1935. Direct materials $40, direct labor $10, variable overhead costs $30, and fixed overhead costs $20. In the short term, the incremental cost of one unit is:  
  1936. A)
  1937.  
  1938. $30  
  1939. B)
  1940.  
  1941. $50  
  1942. C)
  1943.  
  1944. $80  
  1945. D)
  1946.  
  1947. $100  
  1948. Answer:  
  1949.  
  1950. C
  1951. Diff: 2
  1952. Terms:  
  1953.  
  1954. incremental cost
  1955. Objective:  
  1956.  
  1957. 2
  1958. AACSB:  
  1959.  
  1960. Analytical skills
  1961.  
  1962. 120)
  1963.  
  1964. Unit cost data can MOST mislead decisions by:  
  1965. A)
  1966.  
  1967. not computing fixed overhead costs  
  1968. B)
  1969.  
  1970. computing labor and materials costs only  
  1971. C)
  1972.  
  1973. computing administrative costs  
  1974. D)
  1975.  
  1976. not computing unit costs at the same output level  
  1977. Answer:  
  1978.  
  1979. D
  1980. Diff: 1
  1981. Terms:  
  1982.  
  1983. full costs of the product
  1984. Objective:  
  1985.  
  1986. 2
  1987. AACSB:  
  1988.  
  1989. Reflective thinking
  1990. 121)
  1991.  
  1992. Schmidt Sewing Company incorporates the services of Deb's Sewing. Schmidt purchases pre-cut dresses from Deb's. This is primarily known as:  
  1993. A)
  1994.  
  1995. insourcing  
  1996. B)
  1997.  
  1998. outsourcing  
  1999. C)
  2000.  
  2001. relevant costing  
  2002. D)
  2003.  
  2004. sunk costing  
  2005. Answer:  
  2006.  
  2007. B
  2008. Diff: 1
  2009. Terms:  
  2010.  
  2011. outsourcing
  2012. Objective:  
  2013.  
  2014. 2
  2015. AACSB:  
  2016.  
  2017. Reflective thinking
  2018.  
  2019. 122)
  2020.  
  2021. Pearce Sign Company manufactures signs from direct materials to the finished product. This is considered:  
  2022. A)
  2023.  
  2024. insourcing  
  2025. B)
  2026.  
  2027. outsourcing  
  2028. C)
  2029.  
  2030. relevant costing  
  2031. D)
  2032.  
  2033. sunk costing  
  2034. Answer:  
  2035.  
  2036. A
  2037. Diff: 1
  2038. Terms:  
  2039.  
  2040. insourcing
  2041. Objective:  
  2042.  
  2043. 2
  2044. AACSB:  
  2045.  
  2046. Reflective thinking
  2047.  
  2048.  
  2049. 123)
  2050.  
  2051. Which of the following would NOT be considered in a make-or-buy decision?  
  2052. A)
  2053.  
  2054. fixed costs that will no longer be incurred  
  2055. B)
  2056.  
  2057. variable costs of production  
  2058. C)
  2059.  
  2060. potential rental income from space occupied by the production area  
  2061. D)
  2062.  
  2063. unchanged supervisory costs  
  2064. Answer:  
  2065.  
  2066. D
  2067. Diff: 2
  2068. Terms:  
  2069.  
  2070. make-or-buy decision
  2071. Objective:  
  2072.  
  2073. 2
  2074. AACSB:  
  2075.  
  2076. Reflective thinking
  2077. Answer the following questions using the information below:
  2078.  
  2079. Konrade's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:
  2080.  
  2081.         Direct materials        $ 40,000
  2082.         Direct labor    10,000
  2083.         Variable overhead costs 30,000
  2084.         Fixed overhead costs    20,000
  2085.         Total costs     $100,000
  2086.  
  2087. It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Konrade's Engine Company has the option of purchasing the part from an outside supplier at $85 per unit.
  2088.  
  2089. 124)
  2090.  
  2091. If Konrade's Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total:  
  2092. A)
  2093.  
  2094. $ 82,000  
  2095. B)
  2096.  
  2097. $ 98,000
  2098. C)
  2099.  
  2100. $ 50,000  
  2101. D)
  2102.  
  2103. $100,000  
  2104. Answer:  
  2105.  
  2106. A
  2107. Explanation:  
  2108.  
  2109. A)
  2110.  
  2111. $40,000 + $10,000 + $30,000 + ($20,000 ? 10%) = $82,000  
  2112. Diff: 2
  2113. Terms:  
  2114.  
  2115. make-or-buy decision, outsourcing
  2116. Objective:  
  2117.  
  2118. 2
  2119. AACSB:  
  2120.  
  2121. Analytical skills
  2122.  
  2123. 125)
  2124.  
  2125. If Konrade's Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its monthly operating income will:  
  2126. A)
  2127.  
  2128. increase by $2,000  
  2129. B)
  2130.  
  2131. increase by $80,000  
  2132. C)
  2133.  
  2134. decrease by $3,000  
  2135. D)
  2136.  
  2137. decrease by $85,000  
  2138. Answer:  
  2139.  
  2140. C
  2141. Explanation:  
  2142.  
  2143. C)
  2144.  
  2145. Avoidable costs $82,000 - ($85 ? 1,000 units) = decrease of $3,000
  2146.  
  2147. Diff: 2
  2148. Terms:  
  2149.  
  2150. make-or-buy decision, outsourcing
  2151. Objective:  
  2152.  
  2153. 2
  2154. AACSB:  
  2155.  
  2156. Analytical skills
  2157.  
  2158.  
  2159. 126)
  2160.  
  2161. The maximum price that Konrade's Engine Company should be willing to pay the outside supplier is:  
  2162. A)
  2163.  
  2164. $80 per TE456 part  
  2165. B)
  2166.  
  2167. $82 per TE456 part  
  2168. C)
  2169.  
  2170. $98 per TE456 part  
  2171. D)
  2172.  
  2173. $100 per TE456 part  
  2174. Answer:  
  2175.  
  2176. B
  2177. Explanation:  
  2178.  
  2179. B)
  2180.  
  2181. Avoidable costs $82,000 / 1,000 units = $82 per part
  2182.  
  2183. Diff: 2
  2184. Terms:  
  2185.  
  2186. make-or-buy decision, outsourcing
  2187. Objective:  
  2188.  
  2189. 2
  2190. AACSB:  
  2191.  
  2192. Analytical skills
  2193. Answer the following questions using the information below:
  2194.  
  2195. Schmidt Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows:
  2196.  
  2197.         Direct materials        $ 45,000
  2198.         Direct labor    65,000
  2199.         Variable factory overhead       30,000
  2200.         Fixed factory overhead  70,000
  2201.         Total costs     $210,000
  2202.  
  2203. Of the fixed factory overhead costs, $30,000 is avoidable.
  2204.  
  2205. 127)
  2206.  
  2207. Phil Company has offered to sell 10,000 units of the same part to Schmidt Corporation for $18 per unit. Assuming there is no other use for the facilities, Schmidt should:  
  2208. A)
  2209.  
  2210. make the part, as this would save $3 per unit  
  2211. B)
  2212.  
  2213. buy the part, as this would save $3 per unit  
  2214. C)
  2215.  
  2216. buy the part, as this would save the company $30,000  
  2217. D)
  2218.  
  2219. make the part, as this would save $1 per unit  
  2220. Answer:  
  2221.  
  2222. D
  2223. Explanation:  
  2224.  
  2225. D)
  2226.  
  2227. Avoidable costs total $170,000 = $45,000 + $65,000 + $30,000 + $30,000.
  2228. $18 - ($170,000/10,000) = $1
  2229.  
  2230. Diff: 3
  2231. Terms:  
  2232.  
  2233. make-or-buy decision, outsourcing
  2234. Objective:  
  2235.  
  2236. 2
  2237. AACSB:  
  2238.  
  2239. Analytical skills
  2240.  
  2241. 128)
  2242.  
  2243. Assuming no other use of their facilities, the highest price that Schmidt should be willing to pay for 10,000 units of the part is:  
  2244. A)
  2245.  
  2246. $210,000  
  2247. B)
  2248.  
  2249. $140,000  
  2250. C)
  2251.  
  2252. $170,000  
  2253. D)
  2254.  
  2255. $180,000  
  2256. Answer:  
  2257.  
  2258. C
  2259. Explanation:  
  2260.  
  2261. C)
  2262.  
  2263. $45,000 + $65,000 + $30,000 + $30,000 = $170,000
  2264.  
  2265. Diff: 3
  2266. Terms:  
  2267.  
  2268. make-or-buy decision, outsourcing
  2269. Objective:  
  2270.  
  2271. 2
  2272. AACSB:  
  2273.  
  2274. Analytical skills
  2275.  
  2276. 129)
  2277.  
  2278. Relevant costs in a make-or-buy decision of a part include:  
  2279. A)
  2280.  
  2281. setup overhead for the manufacture of the product using the outsourced part  
  2282. B)
  2283.  
  2284. currently used manufacturing capacity that has alternative uses  
  2285. C)
  2286.  
  2287. annual plant insurance costs that will remain the same  
  2288. D)
  2289.  
  2290. corporate office costs that will be allocated differently  
  2291. Answer:  
  2292.  
  2293. B
  2294. Diff: 3
  2295. Terms:  
  2296.  
  2297. make-or-buy decision, outsourcing, relevant costs
  2298. Objective:  
  2299.  
  2300. 3
  2301. AACSB:  
  2302.  
  2303. Reflective thinking
  2304. 130)
  2305.  
  2306. If Horsley Corporation doesn't use one of its limited resources in the best possible way, the lost contribution to income could be called a(n):  
  2307. A)
  2308.  
  2309. variable cost  
  2310. B)
  2311.  
  2312. fixed cost  
  2313. C)
  2314.  
  2315. opportunity cost  
  2316. D)
  2317.  
  2318. sunk cost  
  2319. Answer:  
  2320.  
  2321. C
  2322. Diff: 1
  2323. Terms:  
  2324.  
  2325. opportunity cost
  2326. Objective:  
  2327.  
  2328. 3
  2329. AACSB:  
  2330.  
  2331. Reflective thinking
  2332.  
  2333. 131)
  2334.  
  2335. When a firm has constrained capacity as opposed to surplus capacity, opportunity costs will be:  
  2336. A)
  2337.  
  2338. lower  
  2339. B)
  2340.  
  2341. the same  
  2342. C)
  2343.  
  2344. greater  
  2345. D)
  2346.  
  2347. variable  
  2348. Answer:  
  2349.  
  2350. C
  2351. Diff: 2
  2352. Terms:  
  2353.  
  2354. opportunity cost, constraint
  2355. Objective:  
  2356.  
  2357. 3
  2358. AACSB:  
  2359.  
  2360. Reflective thinking
  2361.  
  2362. 132)
  2363.  
  2364. Opportunity costs:  
  2365. A)
  2366.  
  2367. result in a cash outlay  
  2368. B)
  2369.  
  2370. only are considered when selecting among alternatives  
  2371. C)
  2372.  
  2373. are recorded in the accounting records  
  2374. D)
  2375.  
  2376. should be maximized for the best decision  
  2377. Answer:  
  2378.  
  2379. B
  2380. Diff: 2
  2381. Terms:  
  2382.  
  2383. opportunity cost
  2384. Objective:  
  2385.  
  2386. 3
  2387. AACSB:  
  2388.  
  2389. Reflective thinking
  2390.  
  2391.  
  2392. 133)
  2393.  
  2394. Opportunity cost(s):  
  2395. A)
  2396.  
  2397. of a resource with excess capacity is zero  
  2398. B)
  2399.  
  2400. should be maximized by organizations  
  2401. C)
  2402.  
  2403. are recorded as an expense in the accounting records  
  2404. D)
  2405.  
  2406. are most important to financial accountants  
  2407. Answer:  
  2408.  
  2409. A
  2410. Diff: 2
  2411. Terms:  
  2412.  
  2413. opportunity cost
  2414. Objective:  
  2415.  
  2416. 3
  2417. AACSB:  
  2418.  
  2419. Reflective thinking
  2420.  
  2421. 134)
  2422.  
  2423. ________ would be a consideration in a make-or-buy decision.
  2424. A)
  2425.  
  2426. Excess capacity
  2427. B)
  2428.  
  2429. Rental income from unused facilities
  2430. C)
  2431.  
  2432. Variable factory overhead
  2433. D)
  2434.  
  2435. All of the above are correct.
  2436. Answer:  
  2437.  
  2438. D
  2439. Diff: 2
  2440. Terms:  
  2441.  
  2442. make-or-buy decision
  2443. Objective:  
  2444.  
  2445. 3
  2446. AACSB:  
  2447.  
  2448. Reflective thinking
  2449. 135)
  2450.  
  2451. If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the:
  2452. A)
  2453.  
  2454. total variable cost of producing the product
  2455. B)
  2456.  
  2457. market value less the usual markup on the product
  2458. C)
  2459.  
  2460. total cost of producing the product
  2461. D)
  2462.  
  2463. market value of the product
  2464. Answer:  
  2465.  
  2466. A
  2467. Diff: 2
  2468. Terms:  
  2469.  
  2470. make-or-buy decision
  2471. Objective:  
  2472.  
  2473. 3
  2474. AACSB:  
  2475.  
  2476. Reflective thinking
  2477.  
  2478. 136)
  2479.  
  2480. For make-or-buy decisions, relevant costs include:  
  2481. A)
  2482.  
  2483. direct material costs plus direct labor costs  
  2484. B)
  2485.  
  2486. incremental costs plus opportunity costs  
  2487. C)
  2488.  
  2489. differential costs plus fixed costs  
  2490. D)
  2491.  
  2492. incremental costs plus differential costs  
  2493. Answer:  
  2494.  
  2495. B
  2496. Diff: 3
  2497. Terms:  
  2498.  
  2499. make-or-buy decision, outsourcing, opportunity cost, incremental cost
  2500. Objective:  
  2501.  
  2502. 3
  2503. AACSB:  
  2504.  
  2505. Reflective thinking
  2506.  
  2507.  
  2508. 137)
  2509.  
  2510. The opportunity cost of holding significant inventory includes:  
  2511. A)
  2512.  
  2513. the interest forgone on an alternative investment  
  2514. B)
  2515.  
  2516. additional insurance costs  
  2517. C)
  2518.  
  2519. additional storage costs  
  2520. D)
  2521.  
  2522. All of these answers are correct.  
  2523. Answer:  
  2524.  
  2525. A
  2526. Diff: 2
  2527. Terms:  
  2528.  
  2529. opportunity cost
  2530. Objective:  
  2531.  
  2532. 3
  2533. AACSB:  
  2534.  
  2535. Reflective thinking
  2536. Answer the following questions using the information below:
  2537.  
  2538. Stephans Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows:
  2539.  
  2540.         Direct materials        $ 1.00
  2541.         Direct labor    10.00
  2542.         Variable overhead       5.00
  2543.         Fixed overhead  8.00
  2544.         Total   $24.00
  2545.  
  2546. Bill Company has contacted Stephans with an offer to sell them 5,000 of the subassemblies for $22.00 each. Stephans will eliminate $25,000 of fixed overhead if it accepts the proposal.
  2547.  
  2548. 138)
  2549.  
  2550. What are the relevant costs for Stephans?  
  2551. A)
  2552.  
  2553. $140,000  
  2554. B)
  2555.  
  2556. $125,000  
  2557. C)
  2558.  
  2559. $105,000  
  2560. D)
  2561.  
  2562. $80,000  
  2563. Answer:  
  2564.  
  2565. C
  2566. Explanation:  
  2567.  
  2568. C)
  2569.  
  2570. [($1 + $10 + $5) ? 5,000 + $25,000] = $105,000
  2571.  
  2572. Diff: 2
  2573. Terms:  
  2574.  
  2575. make-or-buy decision, outsourcing
  2576. Objective:  
  2577.  
  2578. 3
  2579. AACSB:  
  2580.  
  2581. Analytical skills
  2582.  
  2583. 139)
  2584.  
  2585. Should Stephans make or buy the subassemblies? What is the difference between the two alternatives?  
  2586. A)
  2587.  
  2588. Buy; savings = $20,000  
  2589. B)
  2590.  
  2591. Buy; savings = $50,000  
  2592. C)
  2593.  
  2594. Make; savings = $60,000  
  2595. D)
  2596.  
  2597. Make; savings = $5,000  
  2598. Answer:  
  2599.  
  2600. D
  2601. Explanation:  
  2602.  
  2603. D)
  2604.  
  2605. Cost to buy: 5,000 ? $22 = $110,000
  2606. Cost to make: $110,000 - [($1 + $10 + $5) ? 5,000 + $25,000] = $5,000; make the subassemblies
  2607.  
  2608. Diff: 3
  2609. Terms:  
  2610.  
  2611. make-or-buy decision, outsourcing
  2612. Objective:  
  2613.  
  2614. 3
  2615. AACSB:  
  2616.  
  2617. Analytical skills
  2618.  
  2619.  
  2620. 140)
  2621.  
  2622. A recent college graduate has the choice of buying a new auto for $20,000 or investing the money for four years with a 6% expected annual rate of return. If the graduate decides to purchase the auto, the BEST estimate of the opportunity cost of that decision is:  
  2623. A)
  2624.  
  2625. $1,200  
  2626. B)
  2627.  
  2628. $4,800  
  2629. C)
  2630.  
  2631. $20,000  
  2632. D)
  2633.  
  2634. zero since there is no opportunity cost for this decision  
  2635. Answer:  
  2636.  
  2637. B
  2638. Explanation:  
  2639.  
  2640. B)
  2641.  
  2642. $20,000 ? 6% ? 4 years = $4,800 cost of the opportunity not chosen.
  2643.  
  2644. Diff: 2
  2645. Terms:  
  2646.  
  2647. opportunity cost
  2648. Objective:  
  2649.  
  2650. 3
  2651. AACSB:  
  2652.  
  2653. Analytical skills
  2654. 141)
  2655.  
  2656. A supplier offers to make Part A for $70. Jansen Company has relevant costs of $80 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is:  
  2657. A)
  2658.  
  2659. 0  
  2660. B)
  2661.  
  2662. $10,000  
  2663. C)
  2664.  
  2665. $70,000  
  2666. D)
  2667.  
  2668. indeterminable  
  2669. Answer:  
  2670.  
  2671. A
  2672. Diff: 2
  2673. Terms:  
  2674.  
  2675. make-or-buy decision, outsourcing, opportunity cost
  2676. Objective:  
  2677.  
  2678. 3
  2679. AACSB:  
  2680.  
  2681. Analytical skills
  2682.  
  2683. 142)
  2684.  
  2685. Jensen Company has relevant costs of $80 per unit to manufacture Part A. A current supplier offers to make Part A for $70 per unit. If capacity is constrained, the opportunity cost of buying Part A from the supplier is:  
  2686. A)
  2687.  
  2688. 0  
  2689. B)
  2690.  
  2691. $10,000  
  2692. C)
  2693.  
  2694. $70,000  
  2695. D)
  2696.  
  2697. indeterminable  
  2698. Answer:  
  2699.  
  2700. D
  2701. Explanation:  
  2702.  
  2703. D)
  2704.  
  2705. Information regarding alternative uses for the capacity would determine the opportunity cost.
  2706.  
  2707. Diff: 2
  2708. Terms:  
  2709.  
  2710. make-or-buy decision, outsourcing, opportunity cost
  2711. Objective:  
  2712.  
  2713. 3
  2714. AACSB:  
  2715.  
  2716. Analytical skills
  2717.  
  2718. 143)
  2719.  
  2720. Determining which products should be produced when the plant is operating at full capacity is referred to as:  
  2721. A)
  2722.  
  2723. an outsourcing analysis  
  2724. B)
  2725.  
  2726. production scheduling analysis  
  2727. C)
  2728.  
  2729. a product-mix decision  
  2730. D)
  2731.  
  2732. a short-run focus decision  
  2733. Answer:  
  2734.  
  2735. C
  2736. Diff: 1
  2737. Terms:  
  2738.  
  2739. product-mix decisions
  2740. Objective:  
  2741.  
  2742. 4
  2743. AACSB:  
  2744.  
  2745. Reflective thinking
  2746.  
  2747.  
  2748. 144)
  2749.  
  2750. Product mix decisions:  
  2751. A)
  2752.  
  2753. have a long-run focus  
  2754. B)
  2755.  
  2756. help determine how to maximize operating profits  
  2757. C)
  2758.  
  2759. focus on selling price per unit  
  2760. D)
  2761.  
  2762. All of these answers are correct.  
  2763. Answer:  
  2764.  
  2765. B
  2766. Diff: 2
  2767. Terms:  
  2768.  
  2769. product-mix decisions
  2770. Objective:  
  2771.  
  2772. 4
  2773. AACSB:  
  2774.  
  2775. Reflective thinking
  2776. 145)
  2777.  
  2778. Constraints may include:  
  2779. A)
  2780.  
  2781. the availability of direct materials in manufacturing  
  2782. B)
  2783.  
  2784. linear square feet of display space for a retailer  
  2785. C)
  2786.  
  2787. direct labor in the service industry  
  2788. D)
  2789.  
  2790. All of these answers are correct.  
  2791. Answer:  
  2792.  
  2793. D
  2794. Diff: 1
  2795. Terms:  
  2796.  
  2797. constraint
  2798. Objective:  
  2799.  
  2800. 4
  2801. AACSB:  
  2802.  
  2803. Reflective thinking
  2804.  
  2805. 146)
  2806.  
  2807. With a constraining resource, managers should choose the product with the:
  2808. A)
  2809.  
  2810. lowest contribution margin per unit of the constraining resource
  2811. B)
  2812.  
  2813. highest sales price
  2814. C)
  2815.  
  2816. highest contribution margin per unit of the constraining resource
  2817. D)
  2818.  
  2819. highest gross profit
  2820. Answer:  
  2821.  
  2822. C
  2823. Diff: 1
  2824. Terms:  
  2825.  
  2826. constraint, product-mix decisions
  2827. Objective:  
  2828.  
  2829. 4
  2830. AACSB:  
  2831.  
  2832. Reflective thinking
  2833.  
  2834. 147)
  2835.  
  2836. For determining the best mix of products, the one with the LEAST amount of influence is:  
  2837. A)
  2838.  
  2839. the market price of the products  
  2840. B)
  2841.  
  2842. corporate office costs allocated to each product  
  2843. C)
  2844.  
  2845. the use of capacity resources  
  2846. D)
  2847.  
  2848. contribution margins  
  2849. Answer:  
  2850.  
  2851. B
  2852. Diff: 3
  2853. Terms:  
  2854.  
  2855. constraint, product-mix decisions
  2856. Objective:  
  2857.  
  2858. 4
  2859. AACSB:  
  2860.  
  2861. Reflective thinking
  2862.  
  2863. 148)
  2864.  
  2865. In product-mix decisions:  
  2866. A)
  2867.  
  2868. always focus on maximizing total contribution margin  
  2869. B)
  2870.  
  2871. focus on the product with the greatest contribution margin per machine-hour  
  2872. C)
  2873.  
  2874. focus on the full costs of the product  
  2875. D)
  2876.  
  2877. never focus on the short-term, but include only long-term considerations  
  2878. Answer:  
  2879.  
  2880. A
  2881. Diff: 3
  2882. Terms:  
  2883.  
  2884. product-mix decisions
  2885. Objective:  
  2886.  
  2887. 4
  2888. AACSB:  
  2889.  
  2890. Reflective thinking
  2891. Answer the following questions using the information below:
  2892.  
  2893. Braun's Brakes manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:
  2894.  
  2895.         Model X Model Y Model Z
  2896.         Selling price   $50     $60     $70
  2897.         Direct materials        6       6       6
  2898.         Direct labor ($12 per hour)     12      12      24
  2899.         Variable support costs ($4 per machine-hour)    4       8       8
  2900.         Fixed support costs     10      10      10
  2901.  
  2902. 149)
  2903.  
  2904. Which model has the greatest contribution margin per unit?  
  2905. A)
  2906.  
  2907. Model X  
  2908. B)
  2909.  
  2910. Model Y  
  2911. C)
  2912.  
  2913. Model Z  
  2914. D)
  2915.  
  2916. Models X and Y  
  2917. Answer:  
  2918.  
  2919. B
  2920. Explanation:  
  2921.  
  2922. B)
  2923.  
  2924. Model X $50 - $6 - $12 - $4 = $28
  2925. Model Y $60 - $6 - $12 - $8 = $34 highest
  2926. Model Z $70 v $6 - $24 - $8 = $32
  2927.  
  2928. Diff: 2
  2929. Terms:  
  2930.  
  2931. product-mix decisions
  2932. Objective:  
  2933.  
  2934. 4
  2935. AACSB:  
  2936.  
  2937. Analytical skills
  2938.  
  2939. 150)
  2940.  
  2941. Which model has the greatest contribution margin per machine-hour?  
  2942. A)
  2943.  
  2944. Model X  
  2945. B)
  2946.  
  2947. Model Y  
  2948. C)
  2949.  
  2950. Model Z  
  2951. D)
  2952.  
  2953. Models Y and Z  
  2954. Answer:  
  2955.  
  2956. A
  2957. Explanation:  
  2958.  
  2959. A)
  2960.  
  2961. Model X $50 - $6 - $12 - $4 = $28 highest
  2962. Model Y $60 - $6 - $12 - $8 = $34
  2963. Model Z $70 v $6 - $24 - $8 = $32  
  2964. Diff: 2
  2965. Terms:  
  2966.  
  2967. product-mix decisions, constraint
  2968. Objective:  
  2969.  
  2970. 4
  2971. AACSB:  
  2972.  
  2973. Analytical skills
  2974.  
  2975.  
  2976. 151)
  2977.  
  2978. If there is excess capacity, which model is the most profitable to produce?  
  2979. A)
  2980.  
  2981. Model X  
  2982. B)
  2983.  
  2984. Model Y  
  2985. C)
  2986.  
  2987. Model Z  
  2988. D)
  2989.  
  2990. Models X and Y  
  2991. Answer:  
  2992.  
  2993. B
  2994. Explanation:  
  2995.  
  2996. B)
  2997.  
  2998. Model Y since it has the greatest contribution margin per unit
  2999. Model X $50 - $6 - $12 - $4 = $28
  3000. Model Y $60 - $6 - $12 - $8 = $34 highest
  3001. Model Z $70 v $6 - $24 - $8 = $32
  3002.  
  3003. Diff: 3
  3004. Terms:  
  3005.  
  3006. product-mix decisions
  3007. Objective:  
  3008.  
  3009. 4
  3010. AACSB:  
  3011.  
  3012. Analytical skills
  3013. 152)
  3014.  
  3015. If there is a machine breakdown, which model is the most profitable to produce?  
  3016. A)
  3017.  
  3018. Model X  
  3019. B)
  3020.  
  3021. Model Y  
  3022. C)
  3023.  
  3024. Model Z  
  3025. D)
  3026.  
  3027. Models Y and Z  
  3028. Answer:  
  3029.  
  3030. A
  3031. Explanation:  
  3032.  
  3033. A)
  3034.  
  3035. Model X since it has the greatest contribution margin per machine-hour
  3036. Model X $50 - $6 - $12 - $4 = $28 highest
  3037. Model Y $60 - $6 - $12 - $8 = $34
  3038. Model Z $70 v $6 - $24 - $8 = $32  
  3039. Diff: 3
  3040. Terms:  
  3041.  
  3042. product-mix decisions, constraint
  3043. Objective:  
  3044.  
  3045. 4
  3046. AACSB:  
  3047.  
  3048. Analytical skills
  3049.  
  3050. 153)
  3051.  
  3052. How can Lisa Braun encourage her salespeople to promote the more profitable model?  
  3053. A)
  3054.  
  3055. Put all sales persons on salary.  
  3056. B)
  3057.  
  3058. Provide higher sales commissions for higher priced items.  
  3059. C)
  3060.  
  3061. Provide higher sales commissions for items with the greatest contribution margin per constrained resource.  
  3062. D)
  3063.  
  3064. Both B and C are correct.  
  3065. Answer:  
  3066.  
  3067. C
  3068. Diff: 2
  3069. Terms:  
  3070.  
  3071. product-mix decisions, constraint
  3072. Objective:  
  3073.  
  3074. 4
  3075. AACSB:  
  3076.  
  3077. Reflective thinking
  3078.  
  3079.  
  3080. Answer the following questions using the information below:
  3081.  
  3082. Helmer's Rockers manufactures two models, Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 70 units of the Premium Model. The following per unit data apply:
  3083.  
  3084.         Standard        Premium
  3085.         Contribution margin per unit    $18     $20
  3086.         Number of machine-hours required        3       4
  3087.  
  3088. 154)
  3089.  
  3090. The contribution per machine-hour is:  
  3091. A)
  3092.  
  3093. $18 for Standard, $20 for Premium  
  3094. B)
  3095.  
  3096. $54 for Standard, $80 for Premium  
  3097. C)
  3098.  
  3099. $15 for Standard, $16 for Premium  
  3100. D)
  3101.  
  3102. $6 for Standard, $5 for Premium  
  3103. Answer:  
  3104.  
  3105. D
  3106. Explanation:  
  3107.  
  3108. D)
  3109.  
  3110. Standard $18 / 3 = $6; Premium $20 / 4 = $5
  3111.  
  3112. Diff: 2
  3113. Terms:  
  3114.  
  3115. product-mix decisions, constraint
  3116. Objective:  
  3117.  
  3118. 4
  3119. AACSB:  
  3120.  
  3121. Analytical skills
  3122. 155)
  3123.  
  3124. If there are 496 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits?  
  3125. A)
  3126.  
  3127. 100 units of Standard and 49 units of Premium  
  3128. B)
  3129.  
  3130. 72 units of Standard and 70 units of Premium  
  3131. C)
  3132.  
  3133. 100 units of Standard and 70 units of Premium  
  3134. D)
  3135.  
  3136. 85 units of Standard and 60 units of Premium  
  3137. Answer:  
  3138.  
  3139. A
  3140. Explanation:  
  3141.  
  3142. A)
  3143.  
  3144. Standard (100 units ? 3mh) + Premium (49 units ? 4 mh) = 496 machine-hours of the constrained resource  
  3145. Diff: 2
  3146. Terms:  
  3147.  
  3148. product-mix decisions, constraint
  3149. Objective:  
  3150.  
  3151. 4
  3152. AACSB:  
  3153.  
  3154. Analytical skills
  3155.  
  3156. 156)
  3157.  
  3158. If there are 600 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits?  
  3159. A)
  3160.  
  3161. 100 units of Standard and 49 units of Premium  
  3162. B)
  3163.  
  3164. 72 units of Standard and 70 units of Premium  
  3165. C)
  3166.  
  3167. 100 units of Standard and 70 units of Premium  
  3168. D)
  3169.  
  3170. 85 units of Standard and 60 units of Premium  
  3171. Answer:  
  3172.  
  3173. C
  3174. Explanation:  
  3175.  
  3176. C)
  3177.  
  3178. Standard (100 units ? 3mh) + Premium (70 units ? 4 mh) = 580 machine-hours for the current demand
  3179.  
  3180. Diff: 2
  3181. Terms:  
  3182.  
  3183. product-mix decisions, constraint
  3184. Objective:  
  3185.  
  3186. 4
  3187. AACSB:  
  3188.  
  3189. Analytical skills
  3190.  
  3191. Answer the following questions using the information below:
  3192.  
  3193. Raines Company manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below.
  3194.         Small   Medium  Large
  3195.         Unit selling price      $150    $250    $500
  3196.         Unit costs:
  3197.         Variable manufacturing  (60)    (120)   (200)
  3198.         Fixed manufacturing     (40)    (50)    (120)
  3199.         Variable selling and administrative     (30)    (30)    (30)
  3200.         Unit profit     $ 20    $ 50    $150
  3201.  
  3202.         Demand in units 100     120     100
  3203.         Machine-hours per unit  20      40      100
  3204.  
  3205. The maximum machine-hours available are 6,000 per week.
  3206.  
  3207. 157)
  3208.  
  3209. What is the contribution margin per machine-hour for a large chair?  
  3210. A)
  3211.  
  3212. $5.00  
  3213. B)
  3214.  
  3215. $3.00  
  3216. C)
  3217.  
  3218. $2.70  
  3219. D)
  3220.  
  3221. $1.80  
  3222. Answer:  
  3223.  
  3224. C
  3225. Explanation:  
  3226.  
  3227. C)
  3228.  
  3229. $500 - $200 - $30 = $270
  3230. $270 / 100 = $2.70
  3231.  
  3232. Diff: 2
  3233. Terms:  
  3234.  
  3235. product-mix decisions, constraint
  3236. Objective:  
  3237.  
  3238. 4
  3239. AACSB:  
  3240.  
  3241. Analytical skills
  3242.  
  3243. 158)
  3244.  
  3245. Which of the three product models should be produced first if management incorporates a short-run profit maximizing strategy?  
  3246. A)
  3247.  
  3248. small chairs  
  3249. B)
  3250.  
  3251. medium chairs  
  3252. C)
  3253.  
  3254. large chairs  
  3255. D)
  3256.  
  3257. either medium or large chairs  
  3258. Answer:  
  3259.  
  3260. A
  3261. Explanation:  
  3262.  
  3263. A)
  3264.  
  3265. Small   ($150 - $60 - $30) = $60 / 20 = $3.00 highest
  3266. Medium  ($250 - $120 - $30) = $100 / 40 = $2.50
  3267. Large   ($500 - $200 - $30) = $270 / 100 = $2.70  
  3268. Diff: 2
  3269. Terms:  
  3270.  
  3271. product-mix decisions, constraint
  3272. Objective:  
  3273.  
  3274. 4
  3275. AACSB:  
  3276.  
  3277. Analytical skills
  3278.  
  3279. 159)
  3280.  
  3281. How many of each product should be produced per month using the short-run profit maximizing strategy?
  3282.         Small   Medium  Large
  3283. A)
  3284.  
  3285.         0       120     12       
  3286. B)
  3287.  
  3288.         100     0       40
  3289. C)
  3290.  
  3291.         100     100     0
  3292. D)
  3293.  
  3294.         100     20      40
  3295. Answer:  
  3296.  
  3297. B
  3298. Explanation:  
  3299.  
  3300. B)
  3301.  
  3302. Small (100 ? 20) + Large (40 ? 100) = 6,000 total machine-hours
  3303.  
  3304. Diff: 3
  3305. Terms:  
  3306.  
  3307. product-mix decisions, constraint
  3308. Objective:  
  3309.  
  3310. 4
  3311. AACSB:  
  3312.  
  3313. Analytical skills
  3314.  
  3315. 160)
  3316.  
  3317. Favata Corporation manufactures two products, AA and CC.  The following information was available:
  3318.  
  3319.         AA      CC
  3320. Selling price per unit                             $37                 $26
  3321. Variable cost per unit                              32                   22
  3322.  
  3323. Total fixed costs                                              $18,000
  3324.  
  3325. If Favata Corporation could produce and sell either 10,000 units of AA or 5,000 units of CC at full capacity, it should produce and sell:
  3326. A)
  3327.  
  3328. 10,000 units of AA and none of CC
  3329. B)
  3330.  
  3331. 3,000 units of CC and 6,000 units of AA
  3332. C)
  3333.  
  3334. 5,000 units of CC and none of AA
  3335. D)
  3336.  
  3337. 4,000 units of AA and 5,000 units of CC
  3338. Answer:  
  3339.  
  3340. A
  3341. Explanation:  
  3342.  
  3343. A)
  3344.  
  3345. 10,000 ? ($37-$32) = $50,000  
  3346. Diff: 3
  3347. Terms:  
  3348.  
  3349. product-mix decisions, constraint
  3350. Objective:  
  3351.  
  3352. 4
  3353. AACSB:  
  3354.  
  3355. Analytical skills
  3356.  
  3357. 161)
  3358.  
  3359. When deciding whether to discontinue a segment of a business, managers should focus on:  
  3360. A)
  3361.  
  3362. equipment used by that segment that could become idle  
  3363. B)
  3364.  
  3365. reallocation of corporate costs  
  3366. C)
  3367.  
  3368. how total costs differ among alternatives  
  3369. D)
  3370.  
  3371. operating income per unit of the discontinued segment  
  3372. Answer:  
  3373.  
  3374. C
  3375. Diff: 3
  3376. Terms:  
  3377.  
  3378. differential revenue, differential cost
  3379. Objective:  
  3380.  
  3381. 5
  3382. AACSB:  
  3383.  
  3384. Reflective thinking
  3385.  
  3386. 162)
  3387.  
  3388. When deciding whether to discontinue a segment of a business, relevant costs include all of the following EXCEPT:  
  3389. A)
  3390.  
  3391. fixed supervision costs that can be eliminated  
  3392. B)
  3393.  
  3394. variable marketing costs per unit of product sold  
  3395. C)
  3396.  
  3397. cost of goods sold  
  3398. D)
  3399.  
  3400. future administrative costs that will continue  
  3401. Answer:  
  3402.  
  3403. D
  3404. Diff: 2
  3405. Terms:  
  3406.  
  3407. relevant costs
  3408. Objective:  
  3409.  
  3410. 5
  3411. AACSB:  
  3412.  
  3413. Reflective thinking
  3414.  
  3415. 163)
  3416.  
  3417. Molly, Inc. is considering eliminating one of its product lines.  The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance.  What financial effects occur if the product line is discontinued?
  3418. A)
  3419.  
  3420. net income will decrease by the amount of the contribution margin of the product line being discontinued
  3421. B)
  3422.  
  3423. the company's total fixed costs will increase
  3424. C)
  3425.  
  3426. total fixed costs will decrease by the amount of the product line's fixed costs
  3427. D)
  3428.  
  3429. net income will decrease by the amount of the product line's fixed costs
  3430. Answer:  
  3431.  
  3432. A
  3433. Diff: 2
  3434. Terms:  
  3435.  
  3436. relevant costs
  3437. Objective:  
  3438.  
  3439. 5
  3440. AACSB:  
  3441.  
  3442. Reflective thinking
  3443.  
  3444. 164)
  3445.  
  3446. Discontinuing unprofitable products will increase profitability:  
  3447. A)
  3448.  
  3449. if the resources no longer required by the discontinued product can be eliminated  
  3450. B)
  3451.  
  3452. if capacity constraints are adjusted  
  3453. C)
  3454.  
  3455. automatically  
  3456. D)
  3457.  
  3458. when a large portion of the fixed costs are unavoidable  
  3459. Answer:  
  3460.  
  3461. A
  3462. Diff: 2
  3463. Terms:  
  3464.  
  3465. relevant revenues, relevant costs
  3466. Objective:  
  3467.  
  3468. 5
  3469. AACSB:  
  3470.  
  3471. Reflective thinking
  3472.  
  3473.  
  3474. 165)
  3475.  
  3476. A segment has the following data:
  3477.  
  3478. Sales                           $600,000
  3479. Variable costs               320,000
  3480. Fixed costs                    310,000
  3481.  
  3482. What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs will be allocated to profitable segments?
  3483. A)
  3484.  
  3485. $30,000 increase
  3486. B)
  3487.  
  3488. $310,000 decrease
  3489. C)
  3490.  
  3491. $280,000 decrease
  3492. D)
  3493.  
  3494. $290,000 decrease
  3495. Answer:  
  3496.  
  3497. C
  3498. Explanation:  
  3499.  
  3500. C)
  3501.  
  3502. $600,000 ? $320,000 = $280,000 decrease
  3503.  
  3504. Diff: 2
  3505. Terms:  
  3506.  
  3507. relevant costs
  3508. Objective:  
  3509.  
  3510. 5
  3511. AACSB:  
  3512.  
  3513. Analytical skills
  3514. 166)
  3515.  
  3516. Camera Corner is considering eliminating Model AE2 from its camera line because of losses over the past quarter. The past three months of information for Model AE2 are summarized below:
  3517.  
  3518.         Sales (1,000 units)     $300,000
  3519.         Manufacturing costs:
  3520.         Direct materials        150,000
  3521.         Direct labor ($15 per hour)     60,000
  3522.         Overhead        100,000
  3523.         Operating loss  ($10,000)
  3524.  
  3525. Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for model AE2 that has no resale value.
  3526.  
  3527. If Model AE2 is dropped from the product line, operating income will:  
  3528. A)
  3529.  
  3530. increase by $10,000  
  3531. B)
  3532.  
  3533. decrease by $20,000  
  3534. C)
  3535.  
  3536. increase by $30,000  
  3537. D)
  3538.  
  3539. decrease by $10,000  
  3540. Answer:  
  3541.  
  3542. B
  3543. Explanation:  
  3544.  
  3545. B)
  3546.  
  3547. $300,000 - $150,000 - $60,000 - $70,000 = $20,000 This product contributes $20,000 toward corporate profits, therefore, discontinuing this product will decrease operating income by $20,000.
  3548.  
  3549. Diff: 3
  3550. Terms:  
  3551.  
  3552. relevant revenues, relevant costs
  3553. Objective:  
  3554.  
  3555. 5
  3556. AACSB:  
  3557.  
  3558. Analytical skills
  3559.  
  3560.  
  3561. Answer the following questions using the information below:
  3562.  
  3563. The management accountant for Martha's Book Store has prepared the following income statement for the most current year:
  3564.         Cookbook        Travel Book     Classics        Total
  3565.         Sales   $60,000 $100,000        $40,000 $200,000
  3566.         Cost of goods sold      36,000  65,000  20,000  121,000
  3567.         Contribution margin     24,000  35,000  20,000  79,000
  3568.         Order and delivery processing   18,000  21,000  8,000   47,000
  3569.         Rent (per sq. foot used)        2,000   1,000   3,000   6,000
  3570.         Allocated corporate costs       7,000   7,000   7,000   21,000
  3571.         Corporate profit        $ (3,000)       $ 6,000 $ 2,000 $ 5,000
  3572.  
  3573. 167)
  3574.  
  3575. If the cookbook product line had been discontinued prior to this year, the company would have reported:  
  3576. A)
  3577.  
  3578. greater corporate profits  
  3579. B)
  3580.  
  3581. the same amount of corporate profits  
  3582. C)
  3583.  
  3584. less corporate profits  
  3585. D)
  3586.  
  3587. resulting profits cannot be determined  
  3588. Answer:  
  3589.  
  3590. C
  3591. Explanation:  
  3592.  
  3593. C)
  3594.  
  3595. $60,000 - $36,000 - $18,000 - $2,000 = $4,000
  3596. The cookbook product line contributed $4,000 toward corporate profits. Without the cookbooks, corporate profits would be $4,000 less than currently reported.
  3597.  
  3598. Diff: 3
  3599. Terms:  
  3600.  
  3601. relevant revenues, relevant costs
  3602. Objective:  
  3603.  
  3604. 5
  3605. AACSB:  
  3606.  
  3607. Analytical skills
  3608. 168)
  3609.  
  3610. If the travel book line had been discontinued, corporate profits for the current year would have decreased by:  
  3611. A)
  3612.  
  3613. $35,000  
  3614. B)
  3615.  
  3616. $14,000  
  3617. C)
  3618.  
  3619. $13,000  
  3620. D)
  3621.  
  3622. $6,000  
  3623. Answer:  
  3624.  
  3625. C
  3626. Explanation:  
  3627.  
  3628. C)
  3629.  
  3630. $100,000 - $65,000 - $21,000 - $1,000 = $13,000
  3631.  
  3632. Diff: 3
  3633. Terms:  
  3634.  
  3635. relevant revenues, relevant costs
  3636. Objective:  
  3637.  
  3638. 5
  3639. AACSB:  
  3640.  
  3641. Analytical skills
  3642.  
  3643.  
  3644. Answer the following questions using the information below:
  3645.  
  3646. Denly Company has three products, A, B, and C. The following information is available:
  3647.  
  3648.         Product A       Product B       Product C
  3649.         Sales   $60,000 $90,000 $24,000
  3650.         Variable costs  36,000  48,000  15,000
  3651.         Contribution margin     24,000  42,000  9,000
  3652.         Fixed costs:
  3653.         Avoidable       9,000   18,000  6,000
  3654.         Unavoidable     6,000   9,000   5,400
  3655.         Operating income        $ 9,000 $15,000 $ (2,400)
  3656.  
  3657.  
  3658. 169)
  3659.  
  3660. Denly Company is thinking of dropping Product C because it is reporting a loss. Assuming Denly drops Product C and does not replace it, operating income will:  
  3661. A)
  3662.  
  3663. increase by $2,400  
  3664. B)
  3665.  
  3666. increase by $3,000  
  3667. C)
  3668.  
  3669. decrease by $3,000  
  3670. D)
  3671.  
  3672. decrease by $5,400  
  3673. Answer:  
  3674.  
  3675. C
  3676. Explanation:  
  3677.  
  3678. C)
  3679.  
  3680. $24,000 - $15,000 - $6,000 = $3,000. Product C contributes $3,000 toward corporate profits. Without Product C, operating income would be $3,000 less than currently reported.
  3681.  
  3682. Diff: 3
  3683. Terms:  
  3684.  
  3685. relevant revenues, relevant costs
  3686. Objective:  
  3687.  
  3688. 5
  3689. AACSB:  
  3690.  
  3691. Analytical skills
  3692.  
  3693. 170)
  3694.  
  3695. Assuming Product C is discontinued and the space formerly used to produce Product C is rented for $12,000 per year, operating income will:  
  3696. A)
  3697.  
  3698. increase by $6,600  
  3699. B)
  3700.  
  3701. increase by $9,000  
  3702. C)
  3703.  
  3704. increase by $12,000  
  3705. D)
  3706.  
  3707. increase by $14,400  
  3708. Answer:  
  3709.  
  3710. B
  3711. Explanation:  
  3712.  
  3713. B)
  3714.  
  3715. $12,000 - $3,000 = $9,000
  3716.  
  3717. Diff: 3
  3718. Terms:  
  3719.  
  3720. relevant revenues, relevant costs, opportunity cost
  3721. Objective:  
  3722.  
  3723. 5
  3724. AACSB:  
  3725.  
  3726. Analytical skills
  3727.  
  3728. Answer the following questions using the information below:
  3729.  
  3730. Melodee's Preserves currently makes jams and jellies and a variety of decorative jars used for packaging. An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars:
  3731.  
  3732.         Direct materials        $0.25
  3733.         Direct labor    0.03
  3734.         Unit-related support costs      0.10
  3735.         Batch-related support costs     0.12
  3736.         Product-sustaining support costs        0.22
  3737.         Facility-sustaining support costs       0.28
  3738.         Total cost per jar      $1.00
  3739.  
  3740.  
  3741. 171)
  3742.  
  3743. The relevant cost per jar is:  
  3744. A)
  3745.  
  3746. $0.28 per jar  
  3747. B)
  3748.  
  3749. $0.38 per jar  
  3750. C)
  3751.  
  3752. $0.72 per jar  
  3753. D)
  3754.  
  3755. $1.00 per jar  
  3756. Answer:  
  3757.  
  3758. D
  3759. Explanation:  
  3760.  
  3761. D)
  3762.  
  3763. All avoidable costs are relevant for this decision.
  3764.  
  3765. Diff: 2
  3766. Terms:  
  3767.  
  3768. relevant costs
  3769. Objective:  
  3770.  
  3771. 2, 5
  3772. AACSB:  
  3773.  
  3774. Analytical skills
  3775.  
  3776. 172)
  3777.  
  3778. The maximum price that Melodee's Preserves should be willing to pay for the decorative jars is:  
  3779. A)
  3780.  
  3781. $0.28 per jar  
  3782. B)
  3783.  
  3784. $0.38 per jar  
  3785. C)
  3786.  
  3787. $0.72 per jar  
  3788. D)
  3789.  
  3790. $1.00 per jar  
  3791. Answer:  
  3792.  
  3793. D
  3794. Explanation:  
  3795.  
  3796. D)
  3797.  
  3798. Considering only quantitative factors, the company should not pay more than the avoidable costs of $1.00 per jar. There may be qualitative factors that are also important.
  3799.  
  3800. Diff: 2
  3801. Terms:  
  3802.  
  3803. relevant costs
  3804. Objective:  
  3805.  
  3806. 2, 5
  3807. AACSB:  
  3808.  
  3809. Analytical skills
  3810.  
  3811. 173)
  3812.  
  3813. Costs are relevant to a particular decision if they:  
  3814. A)
  3815.  
  3816. are variable costs  
  3817. B)
  3818.  
  3819. are fixed costs  
  3820. C)
  3821.  
  3822. differ across the alternatives being considered  
  3823. D)
  3824.  
  3825. remain unchanged across the alternatives being considered  
  3826. Answer:  
  3827.  
  3828. C
  3829. Diff: 2
  3830. Terms:  
  3831.  
  3832. relevant costs
  3833. Objective:  
  3834.  
  3835. 6
  3836. AACSB:  
  3837.  
  3838. Reflective thinking
  3839.  
  3840. 174)
  3841.  
  3842. When deciding to lease a new cutting machine or continue using the old machine, the following costs are relevant EXCEPT the:  
  3843. A)
  3844.  
  3845. $50,000 cost of the old machine  
  3846. B)
  3847.  
  3848. $20,000 cost of the new machine  
  3849. C)
  3850.  
  3851. $10,000 selling price of the old machine  
  3852. D)
  3853.  
  3854. $3,000 annual savings in operating costs if the new machine is purchased
  3855. Answer:  
  3856.  
  3857. A
  3858. Diff: 2
  3859. Terms:  
  3860.  
  3861. relevant costs
  3862. Objective:  
  3863.  
  3864. 6
  3865. AACSB:  
  3866.  
  3867. Reflective thinking
  3868.  
  3869. 175)
  3870.  
  3871. For machine-replacement decisions, depreciation is a cost that is:  
  3872. A)
  3873.  
  3874. not relevant
  3875. B)
  3876.  
  3877. differential  
  3878. C)
  3879.  
  3880. incremental  
  3881. D)
  3882.  
  3883. variable  
  3884. Answer:  
  3885.  
  3886. A
  3887. Diff: 1
  3888. Terms:  
  3889.  
  3890. relevant costs
  3891. Objective:  
  3892.  
  3893. 6
  3894. AACSB:  
  3895.  
  3896. Reflective thinking
  3897.  
  3898. 176)
  3899.  
  3900. ________ is relevant in a decision to replace equipment.
  3901. A)
  3902.  
  3903. Cost of old equipment
  3904. B)
  3905.  
  3906. Book value of old equipment
  3907. C)
  3908.  
  3909. Accumulated depreciation on old equipment
  3910. D)
  3911.  
  3912. Future maintenance costs of old equipment
  3913. Answer:  
  3914.  
  3915. D
  3916. Diff: 1
  3917. Terms:  
  3918.  
  3919. relevant costs
  3920. Objective:  
  3921.  
  3922. 6
  3923. AACSB:  
  3924.  
  3925. Reflective thinking
  3926.  
  3927. 177)
  3928.  
  3929. In a decision to keep or replace existing equipment, ________ is a false statement.
  3930. A)
  3931.  
  3932. the book value of the old equipment is irrelevant
  3933. B)
  3934.  
  3935. the disposal value of the old equipment is irrelevant
  3936. C)
  3937.  
  3938. the cost of the new equipment is relevant
  3939. D)
  3940.  
  3941. depreciation on the new equipment is relevant
  3942. Answer:  
  3943.  
  3944. B
  3945. Diff: 1
  3946. Terms:  
  3947.  
  3948. relevant costs
  3949. Objective:  
  3950.  
  3951. 6
  3952. AACSB:  
  3953.  
  3954. Reflective thinking
  3955.  
  3956.  
  3957. 178)
  3958.  
  3959. A company decided to replace an old machine with a new machine.  Which of the following is considered a relevant cost?
  3960. A)
  3961.  
  3962. the book value of the old equipment
  3963. B)
  3964.  
  3965. depreciation expense on the old equipment
  3966. C)
  3967.  
  3968. the loss on the disposal of the old equipment
  3969. D)
  3970.  
  3971. the current disposal price of the old equipment
  3972. Answer:  
  3973.  
  3974. D
  3975. Diff: 1
  3976. Terms:  
  3977.  
  3978. relevant costs
  3979. Objective:  
  3980.  
  3981. 6
  3982. AACSB:  
  3983.  
  3984. Reflective thinking
  3985. 179)
  3986.  
  3987. What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?
  3988. A)
  3989.  
  3990. it is relevant since it increases the cost of the new equipment
  3991. B)
  3992.  
  3993. it is not relevant since it reduces the cost of the old equipment
  3994. C)
  3995.  
  3996. it is not relevant to the decision since it does not impact the cost of the new equipment
  3997. D)
  3998.  
  3999. it is relevant since it reduces the cost of the new equipment
  4000. Answer:  
  4001.  
  4002. D
  4003. Diff: 1
  4004. Terms:  
  4005.  
  4006. relevant costs, relevant revenues
  4007. Objective:  
  4008.  
  4009. 6
  4010. AACSB:  
  4011.  
  4012. Reflective thinking
  4013.  
  4014. Answer the following questions using the information below:
  4015.  
  4016. Flowers For Everyone is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:
  4017.  
  4018.         Existing van    New van
  4019.         Original cost   $100,000        $180,000
  4020.         Annual operating cost   $ 35,000        $ 20,000
  4021.         Accumulated depreciation        $ 60,000        ?
  4022.         Current salvage value of the existing van       $ 45,000        ?
  4023.         Remaining life  10 years        10 years
  4024.         Salvage value in 10 years       $ 0     $ 0
  4025.         Annual depreciation     $ 4,000 $ 18,000
  4026.  
  4027. 180)
  4028.  
  4029. Sunk costs include:  
  4030. A)
  4031.  
  4032. the original cost of the existing van  
  4033. B)
  4034.  
  4035. the original cost of the new van  
  4036. C)
  4037.  
  4038. the current salvage value of the existing van  
  4039. D)
  4040.  
  4041. the annual operating cost of the new van  
  4042. Answer:  
  4043.  
  4044. A
  4045. Diff: 2
  4046. Terms:  
  4047.  
  4048. sunk costs
  4049. Objective:  
  4050.  
  4051. 6
  4052. AACSB:  
  4053.  
  4054. Reflective thinking
  4055.  
  4056.  
  4057. 181)
  4058.  
  4059. Relevant costs for this decision include:  
  4060. A)
  4061.  
  4062. the original cost of the existing van  
  4063. B)
  4064.  
  4065. accumulated depreciation  
  4066. C)
  4067.  
  4068. the current salvage value  
  4069. D)
  4070.  
  4071. the salvage value in 10 years  
  4072. Answer:  
  4073.  
  4074. C
  4075. Diff: 2
  4076. Terms:  
  4077.  
  4078. relevant costs
  4079. Objective:  
  4080.  
  4081. 6
  4082. AACSB:  
  4083.  
  4084. Reflective thinking
  4085. 182)
  4086.  
  4087. If Flowers For Everyone replaces the existing delivery van with the new one, over the next 10 years operating income will:  
  4088. A)
  4089.  
  4090. decrease by $180,000  
  4091. B)
  4092.  
  4093. increase by $150,000  
  4094. C)
  4095.  
  4096. decrease by $150,000  
  4097. D)
  4098.  
  4099. None of these answers is correct.  
  4100. Answer:  
  4101.  
  4102. B
  4103. Explanation:  
  4104.  
  4105. B)
  4106.  
  4107. New van ($20,000 ? 10 years) - Existing van ($35,000 ? 10 years) = $150,000 less in operating costs, which results in a $150,000 increase in operating income.
  4108.  
  4109. Diff: 3
  4110. Terms:  
  4111.  
  4112. relevant revenues, relevant costs
  4113. Objective:  
  4114.  
  4115. 6
  4116. AACSB:  
  4117.  
  4118. Analytical skills
  4119.  
  4120. Answer the following questions using the information below:
  4121.  
  4122. Frederick, Inc., is considering replacing a machine. The following data are available:
  4123.  
  4124.         Replacement
  4125.         Old Machine     Machine
  4126.         Original cost   $45,000 $35,000
  4127.         Useful life in years    10      5
  4128.         Current age in years    5       0
  4129.         Book value      $25,000 ?
  4130.         Disposal value now      $8,000  ?
  4131.         Disposal value in 5 years       0       0
  4132.         Annual cash operating costs     $7,000  $4,000
  4133.  
  4134. 183)
  4135.  
  4136. Which of the data provided in the table is a sunk cost?  
  4137. A)
  4138.  
  4139. the annual cash operating costs of the old machine  
  4140. B)
  4141.  
  4142. the annual cash operating costs of the replacement machine  
  4143. C)
  4144.  
  4145. the disposal value of the old machine  
  4146. D)
  4147.  
  4148. the original cost of the old machine  
  4149. Answer:  
  4150.  
  4151. D
  4152. Diff: 2
  4153. Terms:  
  4154.  
  4155. sunk costs
  4156. Objective:  
  4157.  
  4158. 6
  4159. AACSB:  
  4160.  
  4161. Analytical skills
  4162.  
  4163.  
  4164. 184)
  4165.  
  4166. For the decision to keep the old machine, the relevant costs of keeping the old machine total:  
  4167. A)
  4168.  
  4169. $60,000  
  4170. B)
  4171.  
  4172. $35,000  
  4173. C)
  4174.  
  4175. $47,000  
  4176. D)
  4177.  
  4178. $72,000  
  4179. Answer:  
  4180.  
  4181. B
  4182. Explanation:  
  4183.  
  4184. B)
  4185.  
  4186. $7,000 ? 5 = $35,000
  4187.  
  4188. Diff: 3
  4189. Terms:  
  4190.  
  4191. relevant costs
  4192. Objective:  
  4193.  
  4194. 6
  4195. AACSB:  
  4196.  
  4197. Analytical skills
  4198. 185)
  4199.  
  4200. The difference between keeping the old machine and replacing the old machine is:  
  4201. A)
  4202.  
  4203. $37,000 in favor of keeping the old machine  
  4204. B)
  4205.  
  4206. $12,000 in favor of keeping the old machine  
  4207. C)
  4208.  
  4209. $37,000 in favor of replacing the old machine  
  4210. D)
  4211.  
  4212. $12,000 in favor of replacing the old machine  
  4213. Answer:  
  4214.  
  4215. B
  4216. Explanation:  
  4217.  
  4218. B)
  4219.  
  4220. New [$35,000 + (5 ? $4,000)] - Old [$8,000 + (5 ? $7,000)] = $12,000
  4221.  
  4222. Diff: 3
  4223. Terms:  
  4224.  
  4225. relevant costs
  4226. Objective:  
  4227.  
  4228. 6
  4229. AACSB:  
  4230.  
  4231. Analytical skills
  4232.  
  4233. 186)
  4234.  
  4235. The difference between the original cost of an asset and the accumulated depreciation is known as the:  
  4236. A)
  4237.  
  4238. historical cost  
  4239. B)
  4240.  
  4241. market value  
  4242. C)
  4243.  
  4244. book value  
  4245. D)
  4246.  
  4247. depreciable cost  
  4248. Answer:  
  4249.  
  4250. C
  4251. Diff: 1
  4252. Terms:  
  4253.  
  4254. relevant costs
  4255. Objective:  
  4256.  
  4257. 6
  4258. AACSB:  
  4259.  
  4260. Reflective thinking
  4261.  
  4262. 187)
  4263.  
  4264. Managers tend to favor the alternative that makes their performance look best. Therefore, they tend to focus on:  
  4265. A)
  4266.  
  4267. how to implement the chosen alternative  
  4268. B)
  4269.  
  4270. the measures used in the decision model  
  4271. C)
  4272.  
  4273. the measures used in the performance evaluation model  
  4274. D)
  4275.  
  4276. gathering the required information  
  4277. Answer:  
  4278.  
  4279. C
  4280. Diff: 2
  4281. Terms:  
  4282.  
  4283. decision model
  4284. Objective:  
  4285.  
  4286. 7
  4287. AACSB:  
  4288.  
  4289. Ethical reasoning
  4290.  
  4291.  
  4292. 188)
  4293.  
  4294. If management takes a multiple-year view in the decision model and judges success according to the current year's results, a problem will occur in the:  
  4295. A)
  4296.  
  4297. decision model  
  4298. B)
  4299.  
  4300. performance evaluation model  
  4301. C)
  4302.  
  4303. production evaluation model  
  4304. D)
  4305.  
  4306. quantitative model  
  4307. Answer:  
  4308.  
  4309. B
  4310. Diff: 2
  4311. Terms:  
  4312.  
  4313. decision model
  4314. Objective:  
  4315.  
  4316. 7
  4317. AACSB:  
  4318.  
  4319. Reflective thinking
  4320. 189)
  4321.  
  4322. Top management faces a persistent challenge to make sure that the performance evaluation model of lower level managers is:  
  4323. A)
  4324.  
  4325. focused on short-term performance  
  4326. B)
  4327.  
  4328. based solely on quantitative factors  
  4329. C)
  4330.  
  4331. consistent with the decision model  
  4332. D)
  4333.  
  4334. not consistent with the decision model  
  4335. Answer:  
  4336.  
  4337. D
  4338. Diff: 2
  4339. Terms:  
  4340.  
  4341. decision model
  4342. Objective:  
  4343.  
  4344. 7
  4345. AACSB:  
  4346.  
  4347. Reflective thinking
  4348.  
  4349. 190)
  4350.  
  4351. The three steps involved in linear programming include all of the following EXCEPT:  
  4352. A)
  4353.  
  4354. determining the objective  
  4355. B)
  4356.  
  4357. determining the basic relationship  
  4358. C)
  4359.  
  4360. computing the optimal solution  
  4361. D)
  4362.  
  4363. determining the relevant and irrelevant costs  
  4364. Answer:  
  4365.  
  4366. D
  4367. Diff: 2
  4368. Terms:  
  4369.  
  4370. linear programming (LP)
  4371. Objective:  
  4372.  
  4373. 7
  4374. AACSB:  
  4375.  
  4376. Reflective thinking
  4377.  
  4378. 191)
  4379.  
  4380. In linear programming, the goals of management are expressed in:  
  4381. A)
  4382.  
  4383. an objective function  
  4384. B)
  4385.  
  4386. constraints  
  4387. C)
  4388.  
  4389. operating policies  
  4390. D)
  4391.  
  4392. business functions  
  4393. Answer:  
  4394.  
  4395. A
  4396. Diff: 1
  4397. Terms:  
  4398.  
  4399. linear programming (LP)
  4400. Objective:  
  4401.  
  4402. 7
  4403. AACSB:  
  4404.  
  4405. Reflective thinking
  4406.  
  4407.  
  4408. 192)
  4409.  
  4410. A mathematical inequality or equality that must be appeased is known as a(n):  
  4411. A)
  4412.  
  4413. objective function  
  4414. B)
  4415.  
  4416. constraint  
  4417. C)
  4418.  
  4419. operating policy  
  4420. D)
  4421.  
  4422. business function  
  4423. Answer:  
  4424.  
  4425. B
  4426. Diff: 2
  4427. Terms:  
  4428.  
  4429. linear programming (LP), constraint
  4430. Objective:  
  4431.  
  4432. 7
  4433. AACSB:  
  4434.  
  4435. Reflective thinking
  4436.  
  4437. 193)
  4438.  
  4439. Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand for Regulars exceeds Computer Product's production capacity, which is limited by available machine-hours and direct manufacturing labor-hours. The maximum demand for Special keyboards is 80 per month. Management desires a product mix that will maximize the contribution toward fixed costs and profits.
  4440.  
  4441. Direct manufacturing labor is limited to 1,600 hours a month and machine-hours are limited to 1,200 a month. The Regular keyboards require 20 hours of labor and 8 machine-hours. Special keyboards require 34 labor-hours and 20 machine-hours.
  4442.  
  4443. Let R represent Regular keyboards and S represent Special keyboards. The correct set of equations for the keyboard production process is:  
  4444. A)
  4445.  
  4446.         Maximize:       $128R + $720S  
  4447. Constraints:
  4448.         Labor-hours:    20R + 34S ó 1,600
  4449.         Machine-hours:  8R + 20S ó 1,200
  4450.         Special:        S ó 80
  4451.         S ò 0
  4452.         Regular:        R ò 0  
  4453. B)
  4454.  
  4455.         Maximize:       $128R + $720S
  4456. Constraints:
  4457.         Labor-hours:    20R + 34S ò 1,600
  4458.         Machine-hours:  8R + 20S òó 1,200
  4459.         Special:        S ò 80
  4460.         S ò 0
  4461.         Regular:        R ò 0  
  4462. C)
  4463.  
  4464.         Maximize:       $720S + $128R
  4465. Constraints:
  4466.         Labor-hours:    20R + 8S ó 1,600
  4467.         Machine-hours:  34R + 20S ó 1,200
  4468.         Special:        S ó 80
  4469.         S ò 0
  4470.         Regular:        R ò 0  
  4471. D)
  4472.  
  4473.         Maximize:       $128R + $720S
  4474. Constraints:
  4475.         Labor-hours:    20R + 34S ó 1,600
  4476.         Machine-hours:  8R + 20S ó 1,200
  4477.         Special:        S ò 80
  4478.         S ó 0
  4479.         Regular:        R ó 0  
  4480. Answer:  
  4481.  
  4482. A
  4483. Diff: 3
  4484. Terms:  
  4485.  
  4486. linear programming (LP), constraint
  4487. Objective:  
  4488.  
  4489. 7
  4490. AACSB:  
  4491.  
  4492. Use of Information Technology
  4493.  
  4494. 194)
  4495.  
  4496. Fluty Corporation manufactures a product that has two parts, A and B. It is currently considering two alternative proposals related to these parts.
  4497.  
  4498. The first proposal is for buying Part A. This would free up some of the plant space for the manufacture of more of Part B and assembly of the final product. The product vice president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed.
  4499.  
  4500. The second proposal is for buying new equipment for the production of Part B. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of zero.
  4501.  
  4502. Required:
  4503.  
  4504. Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal independently.
  4505.  
  4506. a.      Total variable manufacturing overhead, Part A
  4507. b.      Total variable manufacturing overhead, Part B
  4508. c.      Cost of old equipment for manufacturing Part B
  4509. d.      Cost of new equipment for manufacturing Part B
  4510. e.      Total variable selling and administrative costs
  4511. f.      Sales revenue of the product
  4512. g.      Total variable costs of assembling final products
  4513. h.      Total direct manufacturing materials, Part A
  4514. i.      Total direct manufacturing materials, Part B
  4515. j.      Total direct manufacturing labor, Part A
  4516. k.      Total direct manufacturing labor, Part B  
  4517. Answer:  
  4518.  
  4519.         Proposal 1      Proposal 2
  4520. a.      R       I
  4521. b.      R       R
  4522. c.      I       I
  4523. d.      I       R
  4524. e.      R       I
  4525. f.      R       I
  4526. g.      R       I
  4527. h.      R       I
  4528. i.      R       I
  4529. j.      R       I
  4530. k.      R       R
  4531. Diff: 2
  4532. Terms:  
  4533.  
  4534. relevant revenues, relevant costs
  4535. Objective:  
  4536.  
  4537. 2
  4538. AACSB:  
  4539.  
  4540. Analytical