Managerial Accounting Ch 8

Managerial Accounting, 3e (Braun/Tietz) Chapter 8 Relevant Costs for Short-Term Decisions 1) Irrelevant costs are costs that do not affect short-term decisions. Answer: TRUE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 2) Relevant information is future data that do not differ among alternatives. Answer: FALSE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 3) Management accountants gather and analyze relevant information to compare alternatives. Answer: TRUE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 4) One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits. Answer: TRUE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 5) One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs. Answer: TRUE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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6) Relevant information is expected future data that will not differ among alternatives. Answer: FALSE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 7) Costs that differ between alternatives are irrelevant. Answer: FALSE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 8) One cost that is irrelevant in decision making is a sunk cost. Answer: TRUE Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 9) Managers' decisions are based solely on quantitative factors. Answer: FALSE Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 10) Which of the following best describes a "sunk cost"? A) Costs that were incurred in the past and cannot be changed B) Benefits foregone by choosing a particular alternative course of action C) A factor that restricts the production or sale of a product D) Expected future data that differ among alternatives Answer: A Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs

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11) An "opportunity cost" is best described by which of the following? A) Benefits foregone by choosing a particular alternative course of action B) Costs that were incurred in the past and cannot be changed C) The distribution of all products to be sold D) Expected future costs that differ among alternatives Answer: A Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 12) A "relevant cost" is best described by which of the following? A) A factor that restricts production or sales of a product B) Cost of developing, producing, and delivering a product or service C) Costs that were incurred in the past and can not be changed D) Expected future costs that differ among alternatives Answer: D Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 13) "Contribution margin per unit" is best described by which of the following? A) Sales price per unit minus fixed cost per unit B) Sales price per unit minus variable cost unit C) Sales price per unit minus fixed and variable costs per unit D) Units sold time contribution margin ratio Answer: B Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 14) Expected future data that differs among alternative courses of action are referred to as A) relevant information. B) historical information. C) predictable information. D) irrelevant information. Answer: A Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs

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15) Which of the following is irrelevant when making a decision? A) Fixed overhead costs that differ among alternatives B) The cost of an asset that the company is considering replacing C) The cost of further processing a product that could be sold as is D) The expected increase in contribution margin of one product line as a result of a decision to discontinue a separate unprofitable product line Answer: B Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 16) Fixed costs that do not differ between two alternatives are A) irrelevant to the decision. B) considered opportunity costs. C) relevant to the decision. D) important only if they represent a material dollar amount. Answer: A Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 17) Which of the following is a sunk cost? A) Operating costs for a new vehicle B) Trade in value of old vehicle C) Purchase price of vehicle to be traded in D) Purchase price of new vehicle Answer: C Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 18) Fixed costs that may be avoided in the future are referred to as A) relevant costs. B) opportunity costs. C) replacement costs. D) sunk costs. Answer: A Diff: 2 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 4 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

19) A sunk cost is described as which of the following? A) One that is relevant to a decision because it changes depending on the alternative course of action selected B) A historical cost that is always irrelevant C) An outlay expected to be incurred in the future D) A historical cost that may be relevant Answer: B Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 20) The effect of a plant closing on employee morale is an example of which of the following? A) A qualitative factor B) A quantitative factor C) A sunk cost D) A variable cost Answer: A Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 21) The format of the income statement most useful in decision-making is which of the following? A) Absorption costing format B) Traditional format C) Contribution margin format D) Single-step format Answer: C Diff: 2 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs

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22) Ida Enterprises is considering replacing a machine that is presently used in its production process. The following information is available:

Original cost Remaining useful life in years Current age in years Book value Current disposal value in cash Future disposal value in cash (in 5 years) Annual cash operating costs

Old Machine $60,000 5 5 $25,000 $8,000 $0 $7,000

Replacement Machine $35,000 5 0

$0 $4,000

Which of the information provided in the table is irrelevant to the replacement decision? A) The annual operating cost of the old machine B) The original cost of the old machine C) The current disposal value of the old machine D) Both A and C Answer: B Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Analytical Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 23) All of the following are relevant to the decision to replace equipment except the A) cost of old equipment. B) selling price of old equipment. C) future maintenance costs of old equipment. D) cost of new equipment. Answer: A Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 24) Which of the following is most important in making a short-term special decision? A) Focus on total costs B) Separate variable from fixed costs C) Use a conventional absorption costing approach D) Calculating the fixed cost per unit Answer: B Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 6 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

25) Managers should consider ________ when making any sort of decision. A) only fixed costs B) sunk costs C) only variable costs D) revenues that differ among alternatives Answer: D Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 26) Label each item below as relevant or irrelevant in making a decision. a) Cost of roof repair made on rental property last year b) The cost of insurance on a new vehicle when deciding to buy a new vehicle c) Cost of new equipment under evaluation to replace used equipment d) Original cost of old equipment that is being evaluated for replacement e) Cost of previous year's insurance policy on old equipment being evaluated for replacement f) Accumulated depreciation on old equipment being evaluated for replacement Answer: a) irrelevant b) relevant c) relevant d) irrelevant e) irrelevant f) irrelevant Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Analytical Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 27) What is the difference between relevant and irrelevant information for making decisions. Provide examples of each. Answer: Relevant information affects a decision and irrelevant information does not. Relevant information differs between alternatives and affects the future. For example, the cost of insurance for a car will differ depending upon the make, model, year, etc of the car. Therefore, this information is relevant when deciding upon which car to purchase. The cost of a parking sticker to park in the school lot is not relevant, since it is the same regardless of the make, model, year, etc. of car. Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Analytical Thinking Learning Outcome: Distinguish between relevant and irrelevant costs

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28) A special order occurs when a customer requests a one-time order at an increased sales price. Answer: FALSE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 29) Special orders increase income if the revenue from the order does not exceed the incremental variable and fixed costs incurred to fill the order. Answer: FALSE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 30) In deciding whether to accept a special sales order, any fixed costs that would remain unchanged are considered relevant data. Answer: FALSE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 31) Variable costs are irrelevant to a special decision when those variable costs differ between alternatives. Answer: FALSE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 32) Managers should consider the potential effect of a special order on long-run profits and operations. Answer: TRUE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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33) When deciding whether to accept a special order, managers need to consider whether they have available excess capacity. Answer: TRUE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 34) If the expected increase in revenues from a special order is greater than the expected increase in variable and fixed costs, then the special order should be accepted. Answer: TRUE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 35) In a special sales order decision, the special price must exceed the variable cost of filling the order. In other words, the special order must have ________. A) sunk costs B) a positive contribution margin C) opportunity costs D) a negative contribution margin Answer: B Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 36) In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be A) opportunity costs. B) irrelevant to the decision. C) relevant to the decision. D) sunk costs. Answer: C Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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37) Managers should consider all of the following when deciding whether to accept a special order, except A) available excess capacity. B) the variable costs associated with the special order. C) the effect of the order on regular sales. D) fixed costs that will not be affected by the order. Answer: D Diff: 2 LO: 8-1 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 38) A manager should always reject a special order if A) the special order price is less than the variable costs of the order. B) there is available excess capacity. C) the special order price is less than the regular sales price. D) the special order will require variable nonmanufacturing expenses. Answer: A Diff: 2 LO: 8-1 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 39) Which would be a consideration for making special orders? A) Available capacity to fill the order B) If price will cover incremental costs of filling the order C) If the order will affect regular sales in the long run D) All of the above Answer: D Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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40) A company should ________ when making a short-term special decision. A) focus on qualitative factors only B) focus on quantitative factors only C) separate variable costs from fixed costs D) use a traditional direct costing approach Answer: C Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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41) Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: Sale price per unit

$400

Variable costs per unit: Manufacturing Marketing and administrative

$220 $50

Total fixed costs: Manufacturing Marketing and administrative

$750,000 $200,000

If a special sales order is accepted for 7,000 seats at a price of $350 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A) Increase by $560,000 B) Decrease by $560,000 C) Increase by $2,450,000 D) Increase by $8,000,000 Answer: A Explanation: A) Variable Mfg. Cost $ 220 Variable Marketing $ 50 Total Variable $ 270 NOW Sales Price Less Total Variable Cost = Contribution Margin

$ 350 270 $ 80

Times units sold × 7,000 = Additional Profit $ 560,000 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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42) Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: Sale price per unit

$400

Variable costs per unit: Manufacturing Marketing and administrative

$220 $50

Total fixed costs: Manufacturing Marketing and administrative

$750,000 $200,000

If a special sales order is accepted for 4,000 seats at a price of $325 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A) Increase by $2,180,000 B) Increase by $420,000 C) Increase by $220,000 D) Decrease by $420,000 Answer: B Explanation: B) Sales Price $ 325 Less Total Variable Cost 220 = Contribution Margin $ 105 Times units sold × 4,000 = Additional Profit $ 420,000 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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43) Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: Sale price per unit

$400

Variable costs per unit: Manufacturing Marketing and administrative

$220 $50

Total fixed costs: Manufacturing Marketing and administrative

$750,000 $200,000

If a special sales order is accepted for 3,000 seats at a price of $300 per unit, and fixed costs increase by $10,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A) Decrease by $80,000 B) Increase by $230,000 C) Increase by $90,000 D) Increase by $80,000 Answer: D Explanation: D) Special sales order volume 3,000 Special order price per unit Additional revenue from order Variable manufacturing costs per unit Variable marketing and administrative costs per unit Total variable costs per unit

$ 900,000 $

220.00

$

270.00

Special sales order volume

3,000

Total variable costs per unit Additional variable expenses from order

$ 810,000

Additional revenue from order Additional variable expenses from order

$ 900,000 $ (810,000)

Special order increase in fixed expense Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 14 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

44) Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: Sale price per unit

$400

Variable costs per unit: Manufacturing Marketing and administrative

$220 $50

Total fixed costs: Manufacturing Marketing and administrative

$750,000 $200,000

If a special sales order is accepted for 2,500 seats at a price of $320 per unit, fixed costs increase by $5,000, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A) Increase by $187,500 B) Decrease by $182,500 C) Increase by $182,500 D) Increase by $245,000 Answer: C Explanation: C) Variable Mfg. Cost $ 220 Variable Marketing $ 25 Total Variable $ 245 Now Sales Price $ 320 Less Total Variable Cost 245 = Contribution Margin $ 75 Times units sold × 2,500 = Contribution Margin $ 187,500 Less: add'l fixed cost 5,000 = Add'l Profit $ 182,500 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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45) Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: Sale price per unit

$400

Variable costs per unit: Manufacturing Marketing and administrative

$220 $50

Total fixed costs: Manufacturing Marketing and administrative

$750,000 $200,000

If a special sales order is accepted for 6,500 seats at a price of $325 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A) Decrease by $357,500 B) Increase by $357,500 C) Increase by $2,112,500 D) Increase by $5,500,000 Answer: B Explanation: B) Variable Mfg. Cost $ 220 Variable Marketing $ 50 Total Variable $ 270 NOW Sales Price Less Total Variable Cost = Contribution Margin

$ 325 270 $ 55

Times units sold × 6,500 = Additional Profit $ 357,500 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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46) Comfort Cloud manufactures seats for airplanes. The company has the capacity to prroduce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: Sale price per unit

$400

Variable costs per unit: Manufacturing Marketing and administrative

$220 $50

Total fixed costs: Manufacturing Marketing and administrative

$750,000 $200,000

If a special sales order is accepted for 5,500 seats at a price of $325 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A) Increase by $2,997,500 B) Increase by $302,500 C) Increase by $577,500 D) Decrease by $577,500 Answer: C Explanation: C) Sales Price $ 325 Less Total Variable Cost 220 = Contribution Margin $ 105 Times units sold × 5,500 = Additional Profit $ 577,500 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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47) Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: Sale price per unit

$400

Variable costs per unit: Manufacturing Marketing and administrative

$220 $50

Total fixed costs: Manufacturing Marketing and administrative

$750,000 $200,000

If a special sales order is accepted for 3,200 seats at a price of $350 per unit, and fixed costs increase by $12,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A) Decrease by $244,000 B) Increase by $404,000 C) Increase by $256,000 D) Increase by $244,000 Answer: D Explanation: D) Special sales order volume 3,200 Special order price per unit Additional revenue from order Variable manufacturing costs per unit Variable marketing and administrative costs per unit Total variable costs per unit

$ 1,120,000 $

220.00

$

270.00

Special sales order volume

3,200

Total variable costs per unit Additional variable expenses from order

$ 864,000

Additional revenue from order Additional variable expenses from order

$ 1,120,000 $ (864,000)

Special order increase in fixed expenses Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 18 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

48) Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: Sale price per unit

$400

Variable costs per unit: Manufacturing Marketing and administrative

$220 $50

Total fixed costs: Manufacturing Marketing and administrative

$750,000 $200,000

If a special sales order is accepted for 2,500 seats at a price of $310 per unit, fixed costs increase by $6,500, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A) Increase by $218,500 B) Decrease by $156,000 C) Increase by $162,500 D) Increase by $156,000 Answer: D Explanation: D) Variable Mfg. Cost Variable Marketing Total Variable Now Sales Price Less Total Variable Cost = Contribution Margin

$ 220 $ 25 $ 245 $ 310 245 $ 65

Times units sold × 2,500 = Contribution Margin $ 162,500 Less: add'l fixed cost 6,500 = Add'l Profit $ 156,000 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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49) Samson Incorporated provided the following information regarding its only product: Sale price per unit Direct materials used Direct labor incurred Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead Fixed selling and administrative expenses Units produced and sold

$50.00 $160,000 $185,000 $120,000 $70,000 $65,000 $12,000 20,000

Assume no beginning inventory Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 5,000 units at a sale price of $40 per product? (NOTE: Assume regular sales are not affected by the special order.) A) Decrease by $66,250 B) Increase by $66,250 C) Increase by $200,000 D) Increase by $333,750 Answer: B Explanation: B) Direct Materials $ 160,000 Direct Labor 185,000 Variable Mfg. O/H 120,000 Variable Selling 70,000 Total Mfg. Cost $ 535,000 / units produced 20,000 = $ 26.75 Mfg. cost per unit Then Sales Price $ 40 Less Mfg cost per Unit 26.75 = Contribution Margin $ 13.25 Times units sold × 5,000 Profit = $66,250 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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50) Samson Incorporated provided the following information regarding its only product: Sale price per unit Direct materials used Direct labor incurred Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead Fixed selling and administrative expenses Units produced and sold

$50.00 $160,000 $185,000 $120,000 $70,000 $65,000 $12,000 20,000

Assume no beginning inventory Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 3,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.) A) Increase by $135,000 B) Decrease by $49,750 C) Increase by $49,750 D) Increase by $54,750 Answer: C Explanation: C) Direct Materials $ 160,000 Direct Labor 185,000 Variable Mfg. O/H 120,000 Variable Selling 70,000 Total Mfg. Cost $ 535,000 / units produced 20,000 = $ 26.75 Mfg. cost per unit Then Sales Price $ 45.00 Less Mfg cost per Unit 26.75 = Contribution Margin $ 18.25 Times units sold × 3,000 Total Contribution Margin = $54,750 Less Add'l Fixed cost - 5,000 Add'l Profit 49,750 Diff: 3 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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51) Samson Incorporated provided the following information regarding its only product: Sale price per unit Direct materials used Direct labor incurred Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead Fixed selling and administrative expenses Units produced and sold

$50.00 $160,000 $185,000 $120,000 $70,000 $65,000 $12,000 20,000

Assume no beginning inventory Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 1,200 units at a sale price of $47 per product? The 1,200 units would not require any variable selling and administrative expenses. (NOTE: Assume regular sales are not affected by the special order.) A) Increase by $84,300 B) Decrease by $28,500 C) Increase by $24,300 D) Increase by $28,500 Answer: D Explanation: D) Direct Materials Direct Labor Variable Mfg. O/H Variable Selling Total Mfg. Cost

$ 160,000 185,000 120,000 70,000 $ 465,000 / units produced 20,000 = $ 23.25 Mfg. cost per unit

Then Sales Price $ 47 Less Mfg cost per Unit 23.25 = Contribution Margin $ 23.75 Times units sold × 1,200 Profit = $28,500 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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52) Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30 per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14 per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no effect on regular sales.) How much are the expected increase (decrease) in revenues and expenses from the special sales order? A) Expected increase in revenues $220,000; expected increase in expenses $140,000 B) Expected increase in revenues $220,000; expected increase in expenses $40,000 C) Expected increase in revenues $300,000; expected increase in expenses $140,000 D) Expected increase in revenues $220,000; expected increase in expenses $120,000 Answer: A Explanation: A) $ 22 × 10,000 = $ 220,000 Add'l Revenue $ 14 × 10,000 = $ 140,000 Add'l Expense Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 53) Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30 per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14 per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no effect on regular sales.) Should Blue Technologies accept or reject the special sales order? A) Accept, because operating income would increase $360,000. B) Reject, because operating income would decrease $80,000. C) Accept, because operating income would increase $80,000. D) Reject, because operating income would decrease $160,000. Answer: C Explanation: C) $ 22 × 10,000 = $ 220,000 Add'l Revenue Less $ 14 × 10,000 = 140,000 Add'l Expense = $ 80,000 Operating Income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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54) ABC Toys manufactures and sells wooden toys for $15 each. The company has the capacity to produce 25,000 toys in a year, but is currently producing and selling 20,000 toys per year. The company currently is incurring the following costs at its current production level of 20,000 toys: Variable manufacturing costs Fixed manufacturing costs Variable selling and administrative costs Fixed selling and administrative costs

$ 70,000 $ 90,000 $ 75,000 $ 50,000

A retailer is interested in purchasing the excess capacity of 5,000 toys if it can receive a special price. This special order would not affect ABC Toys' regular sales or its cost structure. ABC Toys' profits would increase from this special order if the special order price per toy is greater than A) $8.00. B) $5.80. C) $7.25. D) $14.25. Answer: C Explanation: C) Variable Mfg Cost $ 70,000 Variable Selling Cost + 75,000 Total Cost $ 145,000/ 20,000 produced = $ 7.25 Contribution Margin Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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55) Apex Company produces artificial Christmas trees. A local shopping mall recently made a special order offer; the shopping mall would like to purchase 200 extra large white trees. Apex Company is currently producing and selling 20,000 trees; the company has the excess capacity to handle this special order. The shopping mall has offered to pay $120 for each tree. An accountant at Apex Company provides an estimate of the unit product cost as follows: Direct materials Direct labor (variable) Variable manufacturing overhead Fixed manufacturing overhead Total unit cost

$ 50.00 $ 3.50 $ 1.00 $ 4.00 $ 14.50

This special order would require an investment of $10,000 for the molds required for the extra large trees. These molds would have no other purpose and would have no salvage value. The special order trees would also have an additional variable cost of $5.00 per unit associated with having a white tree. This special order would not have any effect on the company's other sales. If the special order is accepted, the company's operating income would increase (decrease) by A) $2,300 decrease. B) $13,100 decrease. C) $2,100 increase. D) $13,100 increase. Answer: C Explanation: C) Direct materials $ 50.00 Direct Labor 3.50 Variable MOH 1.00 Add'l variable cost 5.00 Total Mfg cost $ 59.50 Now Selling Price $ 120.00 Mfg cost 59.50 Contribution Margin $ 60.50 × 200 units = 12,100 - 10,000 Add'l Fixed = $ 2,100 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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56) The following information relates to current production of outdoor chaise lounges at Backyard Posh: Variable manufacturing costs per unit Total fixed manufacturing costs Variable marketing and administrative costs per unit Total fixed marketing and administrative costs

$ 102.00 $ 525,000 $ 30.00 $ 250,000

The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 1,200 chaise lounges at a price of $225.00 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected? A) Increase by $270,000 B) Increase by $111,600 C) Decrease by $111,600 D) Decrease by $270,000 Answer: B Explanation: B) Special sales order volume 1,200 Special order price per unit Additional revenue from order Variable manufacturing costs per unit Variable marketing and administrative costs per unit Total variable costs per unit

$ 270,000 $

102.00

$

132.00

Special sales order volume

1,200

Total variable costs per unit Additional expenses from order

$ 158,400

Additional revenue from order

$ 270,000

Additional expenses from order Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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57) The following information relates to current production of outdoor chaise lounges at Backyard Posh: Variable manufacturing costs per unit Total fixed manufacturing costs Variable marketing and administrative costs per unit Total fixed marketing and administrative costs

$ 102.00 $ 525,000 $ 30.00 $ 250,000

The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 800 chaise lounge at a price of $250.00 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected? A) Decrease by $94,400 B) Decrease by $118,400 C) Increase by $94,400 D) Increase by $118,400 Answer: D Explanation: D) Special sales order volume 800 Special order price per unit Additional revenue from order

$ 200,000

Special sales order volume

800

Variable manufacturing costs per unit Additional expenses from order

$

Additional revenue from order

$ 200,000

81,600

Additional expenses from order Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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58) The following information relates to current production of outdoor chaise lounges Backyard Posh: Variable manufacturing costs per unit Total fixed manufacturing costs Variable marketing and administrative costs per unit Total fixed marketing and administrative costs

$ 102.00 $ 525,000 $ 30.00 $ 250,000

The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 200 chaise lounges at a price of $200.00 per unit. Fixed costs would increase by $20,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected? A) Decrease by $6,400 B) Increase by $13,600 C) Decrease by $13,600 D) Increase by $6,400 Answer: A Explanation: A) Special sales order volume 200 Special order price per unit Additional revenue from order Variable manufacturing costs per unit Variable marketing and administrative costs per unit Total variable costs per unit

$ 40,000 $

102.00

$

132.00

Special sales order volume Total variable costs per unit Additional variable expenses from order Additional revenue from order Additional variable expenses from order

200 $

26,400

$ 40,000 $ (26,400)

Special order increase in fixed expenses Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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59) The following information relates to current production of outdoor chaise lounges at Backyard Posh: Variable manufacturing costs per unit Total fixed manufacturing costs Variable marketing and administrative costs per unit Total fixed marketing and administrative costs

$ 102.00 $ 525,000 $ 30.00 $ 250,000

The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 500 chaise lounges at a price of $200.00 per unit. Variable marketing and administrative costs would be $10 per unit lower than on regular sales. Fixed costs would increase by $15,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected? A) Decrease by $39,000 B) Decrease by $24,000 C) Increase by $39,000 D) Increase by $24,000 Answer: D Explanation: D) Special sales order volume Special order price per unit Additional revenue from order Variable manufacturing costs per unit Variable marketing and administrative costs per unit Total variable costs per unit

500 $ 100,000 $

102.00

$

122.00

Special sales order volume

500

Total variable costs per unit Additional variable expenses from order

$

61,000

Additional revenue from order Additional variable expenses from order

$ $

100,000 (61,000)

Special order increase in fixed expenses Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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60) Pluto Incorporated provided the following information regarding its single product: Direct materials used Direct labor incurred Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

$ 240,000 $ 420,000 $ 160,000 $ 100,000 $ 60,000 $ 20,000

The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 3,500 units at a sale price of $55 per product? A) Increase by $115,500 B) Increase by $269,500 C) Decrease by $115,500 D) Decrease by $269,500 Answer: A Explanation: A) Direct Materials $ 240,000 Direct Labor 420,000 Variable Overhead 160,000 Variable Selling 60,000 Total $ 880,000 Total Divided by production Cost per unit

$880,000 40,000 $ 22.00

Selling Price Less cost per unit Contribution Margin × units sold Operating Income

$ 55.00 22.00 $ 33.00 × 3,500 $ 115,500

Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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61) Pluto Incorporated provided the following information regarding its single product: Direct materials used Direct labor incurred Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

$ 240,000 $ 420,000 $ 160,000 $ 100,000 $ 60,000 $ 20,000

The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 1,500 units at a sale price of $50 per product assuming additional fixed manufacturing overhead costs of $10,000 are incurred? A) Decrease by $42,000 B) Decrease by $32,000 C) Increase by $32,000 D) Increase by $42,000 Answer: C Explanation: C) Direct Materials Direct Labor Variable Overhead Variable Selling Total

$ 240,000 420,000 160,000 60,000 $ 880,000

Total Divided by production Cost per unit

$880,000 40,000 $ 22.00

Selling Price Less cost per unit Contribution Margin × units sold Operating Income Less Add’d Fixed Cost Operating (loss)

$ 50.00 22.00 $ 28.00 × 1,500 $ 42,000 10,000 $32,000

Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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62) Pluto Incorporated provided the following information regarding its single product: Direct materials used Direct labor incurred Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

$ 240,000 $ 420,000 $ 160,000 $ 100,000 $ 60,000 $ 20,000

The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 1,000 units at a sale price of $40 per product? The special order units would not require any variable selling and administrative expenses. A) Decrease by $18,000 B) Decrease by $19,500 C) Increase by $18,000 D) Increase by $19,500 Answer: D

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Explanation: D) Direct materials used Divide by

$ 240,000 Divide by

Units produced and sold Direct materials cost per unit Direct labor incurred Divide by

$

6.00

$ 420,000 Divide by

Units produced and sold Direct labor costs per unit Variable manufacturing overhead Divide by

$

10.50

$ 160,000 Divide by

Units produced and sold Variable manufacturing overhead cost per unit

$

4.00

Direct materials cost per unit Direct labor costs per unit

$ $

6.00 10.50

Variable manufacturing overhead per unit Total variable costs per unit

$

20.50

Special order volume

1,000

Special order sales price per unit Additional revenue from order

$ 40,000

Special order volume

1,000

Special order sales price per unit Additional revenue from order

$ 20,500

Additional revenue from order

$ 40,000

Additional variable costs per unit Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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63) Indicate whether each item below is a characteristic of a price-taker or a price-setter. Use PT for pricetaker and PS for price-setter. a) Cost-plus pricing b) Product lacks uniqueness c) Less competition d) Target pricing e) Heavy competition Answer: a) PS b) PT c) PS d) PT e) PT Diff: 1 LO: 8-2 EOC: E8-17A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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64) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Mountaintop charge for a round of golf? Answer: Variable costs per unit $ 8.00 Expected volume Total variable costs

$

3,200,000

Investors' return (% of assets)

12%

Total assets Desired profit

$

6,000,000

Total fixed costs

$

25,000,000

Total assets Total costs

$ 28,200,000

Desired profit Target revenue Divide by

$ 34,200,000 Divide by

Expected volume Cost-plus price per round of golf Diff: 3 LO: 8-2 EOC: E8-17A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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65) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level? Answer: Market price per unit $ 75.00 Expected volume Revenue at market price

$

30,000,000

Variable costs per unit

$

8.00

Expected volume Total variable costs

$

3,200,000

Revenue at market price Less: total fixed costs

$ 30,000,000 $ (25,000,000)

total variable costs Operating income Investors' return (% of ssets)

12%

Total assets Desired profit

$

6,000,000

Operating income Profit expectation shortfall

$

4,200,000

$

4,200,000 Divide by

Profit expectation shortfall Divide by Total assets Percent of assets

No, investors will not be happy. They wanted 12% ROI. Diff: 3 LO: 8-2 EOC: E8-17A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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66) Extreme Sports received a special order for 1,000 units of its extreme motorbike at a selling price of $250 per motorbike. Extreme Sports has enough extra capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct materials, $100; direct labor, $50; variable manufacturing overhead, $14; fixed manufacturing overhead, $10, and variable selling costs, $2. A) List the relevant costs. B) What will be the change in operating income if Extreme Sports accepts the special order? C) Should Extreme Sports accept the special order? Answer: A) Relevant costs: Direct material Direct labor Variable manufacturing overhead Total relevant costs

$ 100.00 $ 50.00 $ 14.00 $ 164.00

B) Special offer volume Special offer price Additional revenue from order

1,000 $ 250.00 $ 250,000

Relevant costs: Direct material Direct labor Variable manufacturing overhead Total relevant costs Special offer volume Additional expenses from order

$ 100.00 $ 50.00 $ 14.00 $ 164.00 1,000 $ 164,000

Additional revenue from order Additional expenses from order Change in operating income

$ 250,000 $ (164,000) $ 86,000

C) Yes, Extreme Sports should accept the order. Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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67) Jeff's Widget Corporation produces and sells a part used in the production of bicycles. The unit costs associated with this part are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost

$.14 .30 .20 .05 $.69

Saturn Company has approached Jeff's Widget Corporation with an offer to purchase 20,000 units of this part at a price of $.80. Accepting this special sales order will put idle manufacturing capacity to use and will not affect regular sales. Total fixed costs will not change. Determine whether or not the special order should be accepted. Justify your conclusion. Answer: Special offer volume Special offer price Additional revenue from order

20,000 $ 0.80 $ 16,000

Direct material Direct labor Variable manufacturing overhead Total costs Special offer volume Additional expenses from order

$ 0.14 $ 0.30 $ 0.20 $ 0.64 20,000 $ 12,800

Additional revenue from order Additional expenses from order Change in operating income

$ 16,000 $ (12,800) $ (3,200)

The company should accept the special order since total operating income would increase if the special order were to be accepted. Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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68) Revved Up Toys manufactures a computer chip used in the production of remote control cars. When 6,000 cars are produced, the costs per part are: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total

$2.50 1.50 1.00 1.75 $6.75

Sam's Associates has offered to sell Revved Up Toys 6,000 parts for $5.75 each. If Sarah accepts the offer, $1.00 of the fixed manufacturing overhead costs can be eliminated. a. What is the relevant per unit cost to manufacture the part? b. Which alternative is best for Revved Up Toys and by how much? Answer: a. Relevant costs to manufacture the part include direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead that can be eliminated, or: Direct materials Direct labor Variable manufacturing overhead Traceable fixed cost per unit Relevant cost to produce each unit

$2.50 $1.50 $1.00 $1.00 $6.00

b. Direct materials Direct labor Variable manufacturing overhead Traceable fixed cost per unit Relevant cost to produce each unit Offer price by supplier Savings per unit if bought Production level Total increase in operating income if bought

$2.50 $1.50 $1.00 $1.00 $6.00 $(5.75) $0.25 6,000 $1,500

Diff: 2 LO: 8-2 EOC: P8-43A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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69) Elite Office Furniture received a special order for 1,200 units of its executive chair at a selling price of $90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5. List the relevant costs (and amount) to Elite Office Furniture for this special order. Answer: Direct material $ 45.00 Direct labor $ 19.00 Variable manufacturing overhead $ 6.00 Total relevant costs $ 70.00 Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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70) Elite Office Furniture received a special order for 1,200 units of its executive chairs at a selling price of $90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5. What will be Elite Office Furniture's change in operating income if they accept the special order? Should Elite Office Furniture accept the order? Explain why or why not. Answer: Special offer volume 1,200 Special offer price $ 90.00 Additional revenue from order $ 108,000 Direct material Direct labor Variable manufacturing overhead Total relevant costs Special offer volume Additional expenses from order

$ 45.00 $ 19.00 $ 6.00 $ 70.00 1,200 $ 84,000

Additional revenue from order Additional expenses from order Increase in operating income

$ 108,000 $ (84,000) $ 24,000

Yes, they should accept the order as it results in additional operating income since the company has the additional capacity. Diff: 2 LO: 8-2 EOC: P8-43A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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71) Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no change in the number of units produced. What would be the operating income for Item Q? Answer: Production volume 100,000 Product Q selling price $ 15.00 Product Q revenue $ 1,500,000 Production volume Product Q variable costs Product Q total variable costs Product Q revenue Product Q total variable costs Fixed manufacturing overhead for product Q Operating income for Q

100,000 $ 12.00 $ 1,200,000 $ 1,500,000 $ (1,200,000) $ (72,000) $ 228,000

Diff: 2 LO: 8-2 EOC: P8-43A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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72) Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no change in the number of units produced. What would be the operating income for Item QR? Answer: Production volume 100,000 Product QR selling price $ 24.00 Product QR revenue $ 2,400,000 Product Q variable costs Product QR additional costs Product QR variable costs Production volume Product QR total variable costs Fixed manufacturing overhead for product Q Additional fixed manufacturing overhead Fixed manufacturing overhead for product QR Product QR revenue Product QR total variable costs Fixed manufacturing overhead for product QR Operating income for QR

$ 12.00 $ 7.00 $ 19.00 100,000 $ 1,900,000 $ 72,000 $ 4,500 $ 76,500 $ 2,400,000 $ (1,900,000) $ (76,500) $ 423,500

Diff: 2 LO: 8-2 EOC: P8-43A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 73) Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no change in the number of units produced. By what percent would Heinz Manufacturing's operating income improve if the change is made?

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Answer: Production volume Product Q selling price Product Q revenue

100,000 $ 15.00 $ 1,500,000

Production volume Product Q variable costs Product Q total variable costs

100,000 $ 12.00 $ 1,200,000

Product Q revenue Product Q total variable costs Fixed manufacturing overhead for product Q Operating income for Q

$ 1,500,000 $(1,200,000) $ (72000) $ 228,000

Product QR: Production volume Product QR selling price Product QR revenue

100,000 $ 24.00 $ 2,400,000

Product Q variable costs Product QR additional costs Product QR variable costs Production volume Product QR total variable costs

$ 12.00 $ 7.00 $ 19.00 100,000 $ 1,900,000

Fixed manufacturing overhead for product Q Additional fixed manufacturing overhead Fixed manufacturing overhead for product QR

$ 72,000 $ 4,500 $ 76,500

Product QR revenue Product QR total variable costs Fixed manufacturing overhead for product QR Operating income for QR

$ 2,400,000 $(1,900,000) $ (76,500) $ 423,500

Operating income for QR Divide by Operating income for Q

$ 423,500 Divide by $ 228,000 1.857 (1) 85.75%

Subtract Increase in income Diff: 2 LO: 8-2 EOC: P8-43A 44

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AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 74) Companies operating in highly competitive industries are generally price-setters. Answer: FALSE Diff: 1 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 75) When setting prices, a company need not consider whether it is a price-taker or a price-setter for each product that it sells. Answer: FALSE Diff: 1 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 76) A price-setter company emphasizes a cost-plus approach to pricing. Answer: TRUE Diff: 1 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 77) For a product, revenue at market price plus desired operating profit equals target total cost. Answer: FALSE Diff: 1 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 78) When a company is a price-setter, it emphasizes a target costing approach to pricing. Answer: FALSE Diff: 1 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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79) When making a pricing decision, it is not necessary to separate costs into fixed and variable. Answer: FALSE Diff: 1 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 80) Cost-plus price minus desired profit equals total cost. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 81) When using a target costing approach, the company starts with revenue at market price, and then subtracts its desired profit, to yield the target total cost. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 82) Companies often try to gain more control over pricing by attempting to differentiate their products. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 83) Product differentiation allows companies to become more of a price-setter, and less of a price-taker. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 84) When setting prices, managers need to consider all costs. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 46 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

85) Managers need to consider variable costs, fixed costs, inventoriable product costs and period costs when setting prices. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 86) Cost-plus pricing is essentially the opposite of target-costing. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 87) Which of the following best describes "target costing"? A) An approach to pricing that begins with revenue at market price and subtracts desired profit to arrive at target total cost B) A factor that restricts production or sales of a product C) All costs incurred along the value chain in connection with the product or service D) An approach to pricing that begins with the product's total cost and adds desired profit Answer: A Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 88) "Total cost of product or service" is best described as which of the following? A) Benefits foregone by choosing a particular alternative course of action B) A factor that restricts production or sales of a product C) Costs that were incurred in the past and can not be changed D) All costs incurred along the value chain in connection with the product or service Answer: D Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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89) Which of the following describes the products and services of companies that are price-setters? A) They tend to be unique. B) They are priced by managers using a target-costing emphasis. C) They tend to have a lot of competitors. D) They tend to be commodities. Answer: A Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 90) Stockholders' expectations of company profits are affected by which of the following? A) Industry risk B) Historical company earnings C) General economic conditions D) All of the above Answer: D Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 91) The cost-plus price is described by which of the following? A) Target total cost plus desired profit B) Total cost plus desired profit C) Revenue at market price plus desired profit D) Variable cost plus desired profit Answer: B Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 92) Target total cost is described by which of the following? A) Total cost plus desired profit B) Revenue at market price plus desired profit C) Revenue at market price minus desired profit D) Total cost minus actual cost Answer: C Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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93) Managers must consider which of the following when pricing a product or service? A) All costs B) Only period costs C) Only manufacturing costs D) Only variable costs Answer: A Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 94) Which of the following pairs are characteristics of price-takers? A) Less competition and target pricing B) Cost-plus pricing and less competition C) Target costing and heavy competition D) Cost-plus pricing and lack of product uniqueness Answer: C Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 95) Which of the following pairs are characteristics of price-setters? A) Less competition and target costing B) Cost-plus pricing and less competition C) Lack of product uniqueness and heavy competition D) Less competition and lack of product uniqueness Answer: B Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 96) Big-box retailers such as Lowe's are considered price-takers because A) their products are not unique. B) there is less competition in the home improvement retail sector. C) their products are unique. D) they emphasize cost-plus pricing. Answer: A Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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97) Target total cost is defined as A) cost of goods sold less desired profit. B) revenue at market price less desired profit. C) revenue at market price less variable costs. D) revenue at market price less fixed costs. Answer: B Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 98) Methods for a company to meet target total cost and the profit goals if the current cost of the product is higher than the target cost include which of the following? A) Accept a lower profit B) Cut fixed costs, cut variable costs C) Cut fixed costs D) Any of the above Answer: D Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 99) In pricing a product, managers should consider which of the following? A) Only fixed costs B) Only variable costs C) Only period costs D) None of the above Answer: D Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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100) All of the following factors affect the amount a customer is willing to pay for a product, except A) the selling company's costs. B) the competition's price. C) the product's uniqueness. D) general economic conditions. Answer: A Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 101) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $15 per golfer. Mountaintop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Mountaintop charge for a round of golf? A) $51.50 B) $71.00 C) $78.50 D) $ 0.21 Answer: C Explanation: C) Variable costs per unit $ 15.00 Expected volume 400,000 Total variable costs $ 6,000,000 Investors' return (% of assets) Total assets Desired profit

12% $45,000,000 $ 5,400,000

Total fixed costs Total variable costs Total costs Desired profit Target revenue Divide by Expected volume Cost-plus price per round of golf

$20,000,000 $ 6,000,000 $26,000,000 $ 5,400,000 $31,400,000 Divide by 400,000 $ 78.50

Diff: 3 LO: 8-3 EOC: S8-4 AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 51 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

102) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $15 per golfer. The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn in terms of dollars? A) $16,000,000 B) $(4,000,000) C) $ 4,000,000 D) $(20,000,000) Answer: C Explanation: C) Market price per unit $ 75.00 Expected volume Revenue

$

30,000,000

Expected volume

400,000

Variable costs per unit Total variable costs

$

6,000,000

Total fixed costs

$

20,000,000

Total variable costs Total product costs

$ 26,000,000

Revenue

$ 30,000,000

Total product costs Expected profit Diff: 3 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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103) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $15 per golfer. Mountaintop golf course is a pricetaker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn as a percent of assets? A) Loss of 8.89% B) Profit of 35.56% C) Profit of 8.89% D) Loss of 57.67% Answer: C Explanation: C) Market price per unit

$

Expected volume Revenue

$

75.00 30,000,000

Expected volume

400,000

Variable costs per unit Total variable costs

$

6,000,000

Total fixed costs

$

20,000,000

Total variable costs Total product costs

$ 26,000,000

Revenue

$ 30,000,000

Total product costs Expected profit

$

4,000,000

$

4,000,000 Divide by

Expected profit Divide by Total assets Expected profit as a percent of

assets Diff: 3 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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104) Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pool. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer. The Philadelphia Swim Club has a favorable reputation in the area and therefore, has some control over the membership price. Using a cost-plus approach, what price should Philadelphia Swim Club charge for a membership? A) $41.00 B) $37.50 C) $29.00 D) $ 0.17 Answer: A Explanation: A) Variable costs per unit $ 10.00 Expected volume 500,000 Total variable costs $ 5,000,000 Investors' return (% of assets) Total assets Desired profit

10% $30,000,000 $ 3,000,000

Total fixed costs Total variable costs Total costs Desired profit Target revenue Divide by Expected volume Cost-plus price per round of golf

$12,500,000 $ 5,000,000 $17,500,000 $ 3,000,000 $20,500,000 Divide by 500,000 $ 41.00

Diff: 3 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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105) Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37.00 for a membership. What profit will it earn in terms of dollars? A) $11,000,000 B) $(12,500,000) C) $1,000,000 D) $(1,000,000) Answer: C Explanation: C) Market price per unit $ 37.00 Expected volume Revenue

$

18,500,000

Expected volume

500,000

Variable costs per unit Total variable costs

$

5,000,000

Total fixed costs

$

12,500,000

Total variable costs Total product costs

$ 17,500,000

Revenue

$ 18,500,000

Total product costs Expected profit Diff: 3 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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106) Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37.00 per hour of court time. What profit will it earn as a percent of assets? A) Profit of 3.33% B) Loss of 3.33% C) Loss of 58.17% D) Profit of 36.67% Answer: A Explanation: A) Market price per unit

$

Expected volume Revenue

$

37.00 18,500,000

Expected volume

500,000

Variable costs per unit Total variable costs

$

5,000,000

Total fixed costs

$

12,500,000

Total variable costs Total product costs

$ 17,500,000

Revenue

$ 18,500,000

Total product costs Expected profit

$

1,000,000

$

1,000,000 Divide by

Expected profit Divide by Total assets Expected profit as a percent of

assets Diff: 3 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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107) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Green Pastures course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Based on these numbers, what are Green Pasture's total costs? Answer: $20,000, 000 in fixed costs + (500,000 golfers × $12 variable cost/golfer) = $26,000,000 Diff: 2 LO: 8-3 EOC: S8-4; E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 108) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Green Pastures course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Based on these numbers, what is Green Pasture's target revenue? Answer: $20,000, 000 in fixed costs + (500,000 golfers × $12 variable cost/golfer) = $26,000,000 $26,000, 000 in total costs + ($40,000,000 × 12% return) = $30,800,000 Diff: 2 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 109) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Green Pastures golf course is a price-taker and won't be able to charge more than $60 per round because of local competition. What will Green Pasture's revenue be at a market price of $60/round? Answer: 500,000 golfers × $60/round = $30,000,000 Diff: 2 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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110) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Green Pastures golf course is a price-taker and won't be able to charge more than $60 per round because of local competition. What will Green Pasture's expected profit shortfall be if it charges $60/round? Answer: $20,000,000 in fixed costs + (500,000 golfers × $12 variable cost/golfer) = $26,000,000 $26,000,000 in total costs + ($40,000,000 × 12% return) = $30,800,000 $30,000,000 - 26,000,000 = 4,000,000 $4,800,000 desired operating income - $4,000,000 operating income at $60/round equals a shortfall of $800,000 Diff: 2 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 111) If a product line has a negative contribution margin, the product is not covering its fixed costs and should be discontinued. Answer: TRUE Diff: 1 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 112) If the cost savings from discontinuing a product exceed the lost revenues from discontinuing the product, it should be retained. Answer: FALSE Diff: 1 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 113) From a purely financial standpoint, if a product line has a negative contribution margin, the product line should be discontinued. Answer: TRUE Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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114) Fixed costs that exist even after a product is discontinued are called unavoidable fixed costs. Answer: TRUE Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 115) When deciding whether to discontinue a product, managers should only consider the costs that will be saved. Answer: FALSE Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 116) If a product has a negative contribution margin, it should not be discontinued. Answer: FALSE Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 117) Fixed costs that will continue to exist if a product is discontinued are relevant. Answer: FALSE Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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118) Unavoidable fixed costs are A) irrelevant to the decision of whether to discontinue a product line because they will differ between alternatives. B) relevant to the decision of whether to discontinue the department. C) irrelevant to the decision of whether to discontinue a product line because they will not differ between alternatives. D) none of the above. Answer: C Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 119) Common fixed costs that are allocated between departments are generally A) direct fixed costs of the department. B) relevant to the decision of whether to discontinue the department. C) irrelevant to the decision of whether to discontinue the department. D) direct fixed costs of other departments. Answer: C Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 120) Fixed costs that are allocated among all departments are known as A) direct fixed costs. B) relevant fixed costs. C) general fixed costs. D) common fixed costs. Answer: D Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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121) A company's manager would consider which of the following in deciding whether to discontinue its electronics product line? A) The costs it could save by discontinuing the product line B) The revenues it would lose from discontinuing the product line C) How discontinuing the electronics product line would affect sales of its other products (like CDs) D) All of the above Answer: D Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 122) All of the following are considerations for discontinuing a product or product line, except A) whether the product has a positive or negative contribution margin. B) not having any free capacity. C) if discontinuing the product or product line will affect sales of remaining products. D) determining if direct fixed costs could be avoided if the product or product line is discontinued. Answer: B Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 123) A drug store decides to discontinue its health and beauty section of products because it has been unprofitable. This strategy could backfire because A) the store can readily fill the available space. B) the store's sales may suffer by not having this convenience category of products. C) it has automatically saved that department's fixed costs. D) none of the above. Answer: B Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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124) Fixed costs that continue to exist even after a product line is discontinued are called A) unavoidable fixed costs. B) avoidable fixed costs. C) variable fixed costs. D) relevant fixed costs. Answer: A Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 125) Each month, Burrel Incorporated produces 500 units of a product that has unit variable costs of $17.00. Total fixed costs for the month are $4,375. A special sales order is received for 200 units of the product at a price of $20 per unit. In deciding to accept or reject the special sales order, it is appropriate to consider the A) new fixed cost per unit of $6.25. B) current fixed cost per unit of $8.75. C) difference between the offered price and the variable cost per unit. D) difference between the two fixed costs per unit, or $2.50. Answer: C Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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126) Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $480,000 355,000 125,000 76,000 $49,000

Hiking $340,000 235,000 105,000 38,000 $67,000

Fashion $140,000 120,000 20,000 38,000 $(18,000)

Assuming fixed costs remain unchanged, how would discontinuing the Fashion line affect operating income? A) Increase in total operating income of $29,000 B) Increase in total operating income of $132,000 C) Decrease in total operating income of $78,000 D) Decrease in total operating income of $20,000 Answer: D Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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127) Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $480,000 355,000 125,000 76,000 $49,000

Hiking $340,000 235,000 105,000 38,000 $67,000

Fashion $140,000 120,000 20,000 38,000 $(18,000)

If $25,000 of fixed costs will be eliminated by discontinuing the Fashion line, how will operating income be affected? A) Increase $5,000 B) Decrease $45,000 C) Increase $54,000 D) Increase $103,000 Answer: A Explanation: A) Contribution Margin $ 105,000 Less Fixed Expenses 51,000 New Net income 54,000 Less original OI 49,000 Increase in OI $ 5,000 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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128) Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $480,000 355,000 125,000 76,000 $49,000

Hiking $340,000 235,000 105,000 38,000 $67,000

Fashion $140,000 120,000 20,000 38,000 $(18,000)

Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $30,000 per year, how will operating income be affected? A) Decrease $10,000 B) Increase $59,000 C) Increase $10,000 D) Increase $162,000 Answer: C Explanation: C) Sales Revenue 340,000 Plus Additional Revenue 30,000 Total Revenu 370,000 Less Variable Expenses (235,000) Contribution Margin 135,000 Less Fixed Expenses (76,000) New Net OI 59,000 Less original OI (49,000) Increase in OI $ 10,000 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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129) Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $480,000 355,000 125,000 76,000 $49,000

Hiking $340,000 235,000 105,000 38,000 $67,000

Fashion $140,000 120,000 20,000 38,000 $(18,000)

Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Fashion line is used to increase the production of Hiking boots by 250%, how will operating income be affected? A) Increase $137,500 B) Increase $235,500 C) Increase $186,500 D) Decrease $137,500 Answer: A Explanation: A) Add'l Hiking Revenue$ 340,000 × 2.5 = $ 850,000 Less Hiking Variable Expenses $ 235,000 × 2.5 = (587,500) Contribution Margin 262,500 Less: Fixed Expense (76,000) Operating Income 186,500 Less old OI 49,000 Difference $ 137,500 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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130) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $490,000 355,000 135,000 76,000 $59,000

Luxury $360,000 235,000 125,000 38,000 $87,000

Sporty $130,000 120,000 10,000 38,000 $(28,000)

Assuming fixed costs remain unchanged, how would discontinuing the Sporty line affect operating income? A) Increase in total operating income of $49,000 B) Increase in total operating income of $142,000 C) Decrease in total operating income of $10,000 D) Decrease in total operating income of $108,000 Answer: C Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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131) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $490,000 355,000 135,000 76,000 $59,000

Luxury $360,000 235,000 125,000 38,000 $87,000

Sporty $130,000 120,000 10,000 38,000 $(28,000)

If $20,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected? A) Decrease $30,000 B) Increase $10,000 C) Increase $69,000 D) Increase $128,000 Answer: B Explanation: B) Contribution Margin $ 125,000 Less Fixed Expenses 56,000 New Net income 69,000 Less original OI 59,000 Increase in OI $ 10,000 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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132) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $490,000 355,000 135,000 76,000 $59,000

Luxury $360,000 235,000 125,000 38,000 $87,000

Sporty $130,000 120,000 10,000 38,000 $(28,000)

Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $32,000 per year, how will operating income be affected? A) Increase $22,000 B) Increase $174,000 C) Decrease $22,000 D) Increase $81,000 Answer: A Explanation: A) Sales Revenue 360,000 Plus Additional Revenue 32,000 Total Revenue 392,000 Less Variable Expenses (235,000) Contribution Margin 157,000 Less Fixed Expenses (76,000) New Net OI 81,000 Less original OI (59,000) Increase in OI $ 22,000 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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133) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $490,000 355,000 135,000 76,000 $59,000

Luxury $360,000 235,000 125,000 38,000 $87,000

Sporty $130,000 120,000 10,000 38,000 $(28,000)

Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Sporty line is used to increase the production of Luxury watches by 250%, how will operating income be affected? A) Increase $299,500 B) Increase $177,500 C) Increase $236,500 D) Decrease $177,500 Answer: B Explanation: B) Add'l Hiking Revenue $ 360,000 × 2.5 = $ 900,000 Less Hiking Variable Expenses $ 235,000 × 2.5 = (587,500) Contribution Margin 312,500 Less: Fixed Expense (76,000) Operating Income 236,500 Less old OI 59,000 Difference $ 177,500 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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134) Jim Bean Company has three product lines: D, E, and F. The following information is available:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

$ $ $ $ $

D 80,000 40,000 40,000 12,000 28,000

E $42,000 $21,000 $21,000 $15,000 $46,000

F $20,000 $12,000 $ 8,000 $17,000 $(9,000)

Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed expenses are unavoidable. Assuming Jim Bean Company discontinues product line F and does not replace it, what affect will this have on operating income? A) Increase $9,000 B) Increase $17,000 C) Increase $8,000 D) Decrease $8,000 Answer: D

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Explanation: D) Sales revenue, D

$

80,000

Sales revenue, E Sales revenue from D and E

$

122,000

Variable expenses, D

40,000

Variable expenses, E Variable expenses from D and E

$

61,000

Fixed expenses, D Fixed expenses, E

$ $

12,000 15,000

Fixed expenses, F Fixed expenses for all products

$

44,000

Sales revenue from D and E

$

122,000

Variable expenses from D and E Contribution margin from D and E

$

61,000

Fixed expenses for all products Operating income (loss) from D and E

$

17,000

Operating income (loss), D Operating income (loss), E

$ $

28,000 6,000

Operating income (loss), F Operating income (loss) from all products

$

25,000

$

17,000

Operating income (loss) from D and E Operating income (loss) from all products

Difference in operating income Diff: 2 LO: 8-4 EOC: E8-34A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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135) Jim Bean Company has three product lines: D, E, and F. The following information is available:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

$ $ $ $ $

D 80,000 40,000 40,000 12,000 28,000

E $42,000 $21,000 $21,000 $15,000 $46,000

F $20,000 $12,000 $ 8,000 $17,000 $(9,000)

Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Jim Bean Company discontinues product line F and rents the space formerly used to produce product F for $20,000 per year, what affect will this have on operating income? A) Increase $29,000 B) Increase $12,000 C) Decrease $12,000 D) Increase $37,000 Answer: B

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Explanation: B) Sales revenue, D Sales revenue, E

$ $

80,000 42,000

Rental revenue from discontinuing F Revenue from D and E only

$

142,000

Variable expenses, D

40,000

Variable expenses, E Variable expenses from D and E

$

61,000

Fixed expenses, D Fixed expenses, E

$ $

12,000 15,000

Fixed expenses, F Fixed expenses for all products

$

44,000

Revenue from D and E only

$

142,000

Variable expenses from D and E Contribution margin from D and E

$

81,000

Fixed expenses for all products Operating income (loss) from D and E

$

37,000

Operating income (loss), D Operating income (loss), E

$ $

28,000 6,000

Operating income (loss), F Operating income (loss) from all products

$

25,000

$

37,000

Operating income (loss) from D and E Operating income (loss) from all products

Difference in operating income Diff: 3 LO: 8-4 EOC: E8-34A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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136) Jim Bean Company has three product lines: D, E, and F. The following information is available:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

$ $ $ $ $

D 80,000 40,000 40,000 12,000 28,000

E $42,000 $21,000 $21,000 $15,000 $46,000

F $20,000 $12,000 $ 8,000 $17,000 $(9,000)

Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Assuming Jim Bean Company discontinues line F and is able to double the production and sales of product line E without increasing fixed costs. What affect will this have on operating income? A) Decrease $13,000 B) Increase $13,000 C) Increase $30,000 D) Increase $34,000 Answer: B

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Explanation: B) Sales revenue, E Discontinue F, increase in production of

$

42,000

E New sales revenue for E

$

84,000

Sales revenue, D Sales revenue from D and E

$

164,000

$

21,000

E New variable expenses for E

$

42,000

Variable expenses, D Variable expenses from D and E

$

82,000

Fixed expenses, D Fixed expenses, E

$ $

12,000 15,000

Fixed expenses, F Fixed expenses for all products

$

44,000

Sales revenue from D and E

$

164,000

Variable expenses from D and E Contribution margin from D and E

$

82,000

Fixed expenses for all products Operating income (loss) from D and E

$

38,000

Operating income (loss), D Operating income (loss), E

$ $

28,000 6,000

Operating income (loss), F Operating income (loss) from all products

$

25,000

$

38,000

Variable expenses, E Discontinue F, increase in production of

Operating income (loss) from D and E Operating income (loss) from all products Difference in operating income

Diff: 3 LO: 8-4 EOC: E8-34A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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137) Jim Bean Company has three product lines: D, E, and F. The following information is available:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

$ $ $ $ $

D 80,000 40,000 40,000 12,000 28,000

E $42,000 $21,000 $21,000 $15,000 $46,000

F $20,000 $12,000 $ 8,000 $17,000 $(9,000)

Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed costs are unavoidable. Assume Jim Bean Company is able to increase the sale price of product F to $32,000 with no change in volume of units sold and no change in variable costs or fixed costs. What affect will this have on operating income? A) Increase $37,000 B) Increase $12,000 C) Decrease $12,000 D) Decrease $20,000 Answer: B

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Explanation: B) Sales revenue, D Sales revenue, E

$ $

80,000 42,000

New revenue for F Sales revenue for all products

$

154,000

Variable expenses, D Variable expenses, E

$ $

40,000 21,000

Variable expenses, F Variable expenses for all products

$

73,000

Fixed expenses, D Fixed expenses, E

$ $

12,000 15,000

Fixed expenses, F Fixed expenses for all products

$

44,000

Sales revenue for all products

$

154,000

Variable expenses for all products Contribution margin for all products

$

81,000

Fixed expenses for all products New operating income (loss) for all products

$

37,000

Operating income (loss), D Operating income (loss), E

$ $

28,000 6,000

Operating income (loss), F Original operating income (loss) from all products

$

25,000

$

37,000

New operating income (loss) for all products Original operating income (loss) from all products

Difference in operating income Diff: 3 LO: 8-4 EOC: E8-34A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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138) The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Toaster $600,000 $450,000 $150,000 $75,000 $75,000

Microwave $255,000 $210,000 $45,000 $75,000 $(30,000)

Total $855,000 $660,000 $195,000 $150,000 $45,000

If fixed costs remain unchanged and Germain Appliances discontinues the Microwave line, how will operating income change? A) Will decrease by $150,000 B) Will increase by $45,000 C) Will decrease by $45,000 D) Will increase by $150,000 Answer: C Explanation: C) Sales revenue, Toasters $ 600,000 Variable expenses, Toasters Contribution margin for Toasters only

$

150,000

Total fixed expenses for both products Operating income (loss) for Toasters only

$

0

Operating income (loss) for Toasters only

$

0

Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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139) The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Toaster $600,000 $450,000 $150,000 $75,000 $75,000

Microwave $255,000 $210,000 $45,000 $75,000 $(30,000)

Total $855,000 $660,000 $195,000 $150,000 $145,000

If Germain Appliances can eliminate fixed costs of $32,000 by discontinuing the Microwave line, then discontinuing it should result in which of the following? A) Increase in total operating income of $45,000 B) Increase in total operating income of $13,000 C) Decrease in total operating income of $13,000 D) Decrease in total operating income of $45,000 Answer: C Explanation: C) Total fixed expenses for both products

$

150,000

Avoided fixed costs Unavoidable fixed costs

$

118,000

Sales revenue, Toasters

$

600,000

Variable expenses, Toasters Contribution margin for Toasters only

$

150,000

Unavoidable fixed costs Operating income (loss) from Toasters only

$

32,000

Operating income (loss) from Toasters only

$

32,000

Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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140) The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Toaster $600,000 $450,000 $150,000 $75,000 $75,000

Microwave $255,000 $210,000 $45,000 $75,000 $(30,000)

Total $855,000 $660,000 $195,000 $150,000 $45,000

If Germain Appliances can eliminate fixed costs of $32,000 and increase the sale of Toasters by 6,000 units at a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the Microwaves should result in which of the following? A) Increase in total operating income of $35,000 B) Increase in total operating income of $3,000 C) Decrease in total operating income of $35,000 D) Decrease in total operating income of $3,000 Answer: A

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Explanation: A) Increased volume of Toasters

$

6,000

Sale price per unit of new volume Additional revenue

$

180,000

Sales revenue, Toasters Total sales revenue fot Toasters

$

780,000

$

30.00

unit Variable expense per unit for new volume

$

22.00

Increased volume of Toasters Additional variable expenses

$

132,000

Variable expenses, Toasters Total variable expenses for Toasters

$

582,000

Total fixed expenses for both products

$

150,000

Avoidable fixed costs Unavoidable fixed costs

$

118,000

Total sales revenue for Toasters

$

780,000

Total variable expenses for Toasters Contribution margin for Toasters only

$

198,000

Uavoidable fixed costs Operating income (loss) from Toasters only

$

80,000

Operating income (loss) from Toasters only

$

80,000

Sale price per unit of new volume Contribution margin for each new volume

Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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141) The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Curling Irons $600,000 $450,000 $150,000 $75,000 $75,000

Straighteners $260,000 $210,000 $50,000 $75,000 $(25,000)

Total $860,000 $660,000 $200,000 $150,000 $50,000

If fixed costs remain unchanged and Lovely Locks discontinues the Straightener line, how will operating income change? A) Will decrease by $150,000 B) Will increase by $50,000 C) Will increase by $150,000 D) Will decrease by $50,000 Answer: D Explanation: D) Sales revenue, Curling Irons $ 600,000 Variable expenses, Curling Irons Contribution margin for Curling Irons only

$

150,000

Total fixed expenses for both products Operating income (loss) for Curling Irons only

$

0

Operating income (loss) for Curling Irons only

$

0

Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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142) The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Curling Irons $600,000 $450,000 $150,000 $75,000 $75,000

Straighteners $260,000 $210,000 $50,000 $75,000 $(25,000)

Total $860,000 $660,000 $200,000 $150,000 $50,000

If Lovely Locks can eliminate fixed costs of $32,000 by discontinuing the Straightener line, then discontinuing it should result in which of the following? A) Increase in total operating income of $50,000 B) Decrease in total operating income of $18,000 C) Increase in total operating income of $18,000 D) Decrease in total operating income of $50,000 Answer: B Explanation: B) Total fixed expenses for both products $ 150,000 Avoidable fixed costs Unavoidable fixed costs

$

118,000

Sales revenue, Curling Irons

$

600,000

Variable expenses, Curling Irons Contribution margin for Curling Irons only

$

150,000

Unavoidable fixes costs Operating income (loss) for Curling Irons only

$

32,000

Operating income (loss) for Curling Irons only

$

32,000

Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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143) The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Curling Irons $600,000 $450,000 $150,000 $75,000 $75,000

Straighteners $260,000 $210,000 $50,000 $75,000 $(25,000)

Total $860,000 $660,000 $200,000 $150,000 $50,000

If Lovely Locks can eliminate fixed costs of $32,000 and increase the sale of Curling Irons by 6,000 units at a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the Straighteners should result in which of the following? A) Decrease in total operating income of $30,000 B) Increase in total operating income of $2,000 C) Increase in total operating income of $30,000 D) Decrease in total operating income of $2,000 Answer: C

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Explanation: C) Increased volume of Curling Irons

$

6,000

Sale price per unit of new volume Additional revenue

$

180,000

Sales revenue, Curling Irons Total sales revenue for Curling Irons

$

780,000

$

30.00

unit Variable expense per unit for new volume

$

22.00

Increased volume of Curling Irons Additional variable expenses

$

132,000

Variable expenses, Curling Irons Total variable expenses for Curling Irons

$

582,000

Total fixed expenses for both products

$

150,000

Avoidable fixed costs Unavoidable fixed costs

$

118,000

Total sales revenue for Curling Irons

$

780,000

Total variable expenses for Curling Irons Contribution margin for Curling Irons only

$

198,000

Uavoidable fixed costs Operating income (loss) from Curling Irons only

$

80,000

Operating income (loss) from Curling Irons only

$

80,000

Sale price per unit of new volume Contribution margin for each new volume

Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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144) The internal financial statements of Vera Incorporated show that their beaded purses incurred an operating loss in the most recent year. There were 25,000 purses sold in that year. Selected financial information about the purse line follows. Total sales revenue Variable costs Contribution margin Fixed costs Net operating loss

$ 190,000 $ 100,000 $ 90,000 $ 100,000 $ (10,000)

If the line of purses were to be discontinued, the company would avoid $16,000 in fixed costs per year. If Vera Incorporated were to discontinue the line of purses, the change in annual operating income would be a(n): A) increase in total operating income of $74,000. B) decrease in total operating income of $10,000. C) increase in total operating income of $10,000. D) decrease in total operating income of $74,000. Answer: D Explanation: D) Contribution Margin $ 90,000 Less Fixed exp. Avoided 16,000 Decrease in OI $ 74,000 Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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145) Simpson Corporation operates two divisions with the following operating results from last year:

Sales Variable costs Contribution margin Avoidable fixed costs Allocated common fixed costs Operating income (loss)

Western Division $ 620,000 $ 310,000 $ 310,000 $ 110,000 $ 90,000 $ 100,000

Eastern Division $ 290,000 $ 200,000 $ 90,000 $ 70,000 $ 45,000 $ (25,000)

Total $ 900,000 $ 510,000 $ 390,000 $ 180,000 $ 135,000 $ 75,000

Management is considering whether the Eastern Division should be discontinued since it incurred an operating loss last year. Allocated common fixed costs would continue for Simpson Corporation whether the division is discontinued or not. If the Eastern Division had been discontinued at the beginning of last year, what would the total operating income for Simpson Corporation have been for the year? A) $55,000 B) $20,000 C) $25,000 D) $110,000 Answer: A Explanation: A) SOLUTION Eastern Division Sales

$

290,000

Variable costs Contribution margin

$

90,000

$

75,000

Less avoidable fixed costs Segment margin for division Original total operating income Less segment margin for discontinued division Operating income if division discontinued Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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146) Benace Parts and Supply makes a variety of car parts. The company produces 6,000 A90 parts each year. Each A90 sells for $7 and has a contribution margin of $2. Currently, $16,000 of fixed manufacturing overhead is allocated to the A90 product line. If Benace Parts and Supply discontinues the A90 product line, $7,000 of fixed manufacturing overhead costs would be avoided. What would be the impact on total operating income if the A90 product line were to be discontinued? A) Increase in total operating income of $5,000 B) Decrease in total operating income of $5,000 C) Increase in total operating income of $4,000 D) Decrease in total operating income of $4,000 Answer: B Explanation: B) Number of units produced 6,000 Unit contribution margin Total contribution margin

$

12,000

Avoidable fixed costs Decrease (increase) in operating income if product discontinued Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 147) Jerry Enterprises is considering whether to discontinue a division that generates a total contribution margin of $65,000 per year. Fixed manufacturing overhead allocated to this division is $50,000, of which 18,000 is unavoidable. If Jerry Enterprises were to eliminate this division, the effect on the company's operating income would be a(n): A) increase in total operating income of $33,000. B) decrease in total operating income of $33,000. C) increase in total operating income of $47,000. D) decrease in total operating income of $47,000. Answer: B Explanation: B) SOLUTION Fixed manufacturing overhead of division $ 50,000 Portion of fixed MOH which is unavoidable Avoidable fixed manufacturing overhead

$

32,000

Total contribution margin

$

65,000

Avoidable fixed manufacturing overhead Division segment margin income (loss) Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 89 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

148) All About Animals has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $385,000 $205,000 $180,000 $102,000 $78,000

Cat Food $300,000 $165,000 $135,000 $50,000 $85,000

Dog Food $85,000 $40,000 $45,000 $52,000 $(7,000)

Assuming total fixed costs remain unchanged, how would discontinuing the Dog food line affect operating income? A) Increase in total operating income of $33,000 B) Increase in total operating income of $159,000 C) Decrease in total operating income of $45,000 D) Decrease in total operating income of $111,000 Answer: C Explanation: C) Sales revenue, Cat food $ 300,000 Variable expenses, Cat food Contribution margin for Cat food

$

135,000

Total fixed expenses Operating income (loss) from Cat food only

$

33,000

Operating income (loss) from Cat food only

$

33,000

Total operating income (loss) Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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149) All About Animals has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $385,000 $205,000 $180,000 $102,000 $78,000

Cat Food $300,000 $165,000 $135,000 $50,000 $85,000

Dog Food $85,000 $40,000 $45,000 $52,000 $(7,000)

If $12,000 of fixed costs will be eliminated by discontinuing the Dog food line, how will operating income be affected? A) Increase $123,000 B) Increase $45,000 C) Decrease $33,000 D) Decrease $57,000 Answer: C Explanation: C) Sales revenue, Cat food $ 300,000 Variable expenses, Cat food Contribution margin for Cat food

$

Fixed expenses

$

102,000

Avoidable fixed costs Unavoidable fixed costs

$

90,000

Contribution margin for Cat food

$

135,000

Unavoidable fixed costs Operating income (loss) from Cat food only

$

45,000

Operating income (loss) from Cat food only

$

135,000

45,000

Total operating income (loss) Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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150) Contribution margin income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $385,000 $205,000 $180,000 $102,000 $78,000

Cat Food $300,000 $165,000 $135,000 $50,000 $85,000

Dog Food $85,000 $40,000 $45,000 $52,000 $(7,000)

Assuming the Dog food is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $25,000 per year, how will operating income be affected? A) Increase $58,000 B) Increase $184,000 C) Decrease $20,000 D) Increase $20,000 Answer: C Explanation: C) Sales revenue, Cat food $ 300,000 Additional revenue if Dog food discontinued Total sales revenue for Cat food only

$

325,000

Variable expenses, Cat food Contribution margin for Cat food

$

160,000

Fixed expenses Operating income (loss) from Cat food only

$

Operating income (loss) from Cat food only

$

58,000

58,000

Total operating income (loss) Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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151) Contribution margin income statement data for the most recent year follow:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Total $385,000 $205,000 $180,000 $102,000 $78,000

Cat Food $300,000 $165,000 $135,000 $50,000 $85,000

Dog Food $85,000 $40,000 $45,000 $52,000 $(7,000)

Assuming the Dog food line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Dog food line is used to double the production of Cat food, how will operating income be affected? A) Increase $90,000 B) Increase $246,000 C) Increase $168,000 D) Decrease $90,000 Answer: A Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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152) Black Productions has three models: D, E, and F. The following information is available:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Model D $65,000 $32,000 $33,000 $16,000 $17,000

Model E $33,000 $13,000 $20,000 $16,000 $4,000

Model F $24,000 $14,000 $10,000 $16,000 $(6,000)

Black Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed expenses are unavoidable. Assuming Black Productions discontinues model F and does not replace it, what effect will this have on operating income? A) Decrease $10,000 B) Increase $10,000 C) Increase $6,000 D) Decrease $6,000 Answer: A Explanation: A) Contribution Margin 33,000 + 20,000 Fixed Exp 16,000 × 3 Operating Income

$53,000 48,000 5,000

Prior operating income

15,000

Decrease

10,000

Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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153) Black Productions has three models: D, E, and F. The following information is available:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Model D $65,000 $32,000 $33,000 $16,000 $17,000

Model E $33,000 $13,000 $20,000 $16,000 $4,000

Model F $24,000 $14,000 $10,000 $16,000 $(6,000)

Black Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed costs are unavoidable. Black Productions discontinues model F and rents the space formerly used to produce product F for $15,000 per year, what effect will this have on operating income? A) Increase $21,000 B) Increase $5,000 C) Decrease $21,000 D) Decrease $5,000 Answer: B Explanation: B) Contribution Margin 33,000 + 20,000 $53,000 Fixed Exp 16,000 × 3 48,000 Operating Income 5,000 Prior operating income Rent income Increase

-15,000 +15,000 5,000

Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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154) Black Productions has three models: D, E, and F. The following information is available:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Model D $65,000 $32,000 $33,000 $16,000 $17,000

Model E $33,000 $13,000 $20,000 $16,000 $4,000

Model F $24,000 $14,000 $10,000 $16,000 $(6,000)

Black Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed costs are unavoidable. Assuming Black Productions discontinues line F and is able to double the production and sales of model E without increasing fixed costs. What effect will this have on operating income? A) Increase $10,000 B) Decrease $10,000 C) Increase $26,000 D) Decrease $26,000 Answer: A

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Explanation: A) Sales revenue, E Discontinue F, increase in production of

$

33,000

E New sales revenue for E

$

66,000

Sales revenue, D Sales revenue from D and E

$

131,000

$

13,000

E New sales revenue for E

$

26,000

Variable expenses for E Variable expenses from D and E

$

58,000

Fixed expenses, D Fixed expenses, E

$ $

16,000 16,000

Fixed expenses, F Fixed expenses for all products

$

48,000

Sales revenue from D and E

$

131,000

Variable expenses from D and E Contribution margin from D and E

$

73,000

Fixed expenses for all products Operating income (loss) from D and E

$

25,000

Operating income (loss), D Operating income (loss), E

$ $

17,000 4,000

Operating income (loss), F Operating income (loss) from all products

$

15,000

Variable expenses, E Discontinue F, increase in production of

Operating income (loss) from D and E Operating income (loss) from all

$

25,000

products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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155) Black Productions has three models: D, E, and F. The following information is available:

Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss)

Model D $65,000 $32,000 $33,000 $16,000 $17,000

Model E $33,000 $13,000 $20,000 $16,000 $4,000

Model F $24,000 $14,000 $10,000 $16,000 $(6,000)

Black Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed costs are unavoidable. Assume Black Productions is able to increase the sale price of product F to $35,000 with no change in volume of units sold and no change in variable costs or fixed costs. What effect will this have on operating income? A) Increase $11,000 B) Increase $24,000 C) Decrease $11,000 D) Decrease $24,000 Answer: A

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Explanation: A) Sales revenue, D Sales revenue, E

$ $

65,000 33,000

New revenue for F Sales revenue for all products

$

133,000

Variable expenses, D Variable expenses, E

$ $

32,000 13,000

Variable expenses, F Variable expenses for all products

$

59,000

Fixed expenses, D Fixed expenses, E

$ $

16,000 16,000

Fixed expenses, F Fixed expenses for all products

$

48,000

Sales revenue for all products

$

133,000

Variable expenses for all products Contribution margin for all products

$

74,000

Fixed expenses for all products New operating income (loss) for all products

$

26,000

Operating income (loss), D Operating income (loss), E

$ $

17,000 4,000

Operating income (loss), F Original operating income (loss) from all products

$

15,000

New operating income (loss) for all products

$

26,000

Original operating income (loss) from all products

Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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156) Totally Technology manufactures Cameras and Video Recorders. The company's product line income statement follows:

Sales revenue Cost of goods sold Variable Fixed Total cost of goods sold Gross profit Marketing and administrative expenses Variable Fixed Total marketing and administrative expenses Operating income (loss)

Camera Video Recorder $300,000 $100,000

Total $400,000

$75,000 $82,000 $157,000 $143,000

$49,000 $28,000 $77,000 $23,000

$124,000 $110,000 $234,000 $166,000

$25,000 $32,000 $57,000 $86,000

$28,000 $19,000 $47,000 $(24,000)

$53,000 $51,000 $104,000 $62,000

Management is considering discontinuing the Video Recorder product line. Accountants for the company estimate that discontinuing the Video Recorder line will decrease fixed cost of goods sold by $10,000 and fixed marketing and administrative expenses by $4,000. Prepare an analysis supporting your opinion about whether or not the Video Recorder product line should be discontinued.

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Answer: Contribution margin income statement for DVDs: If Video Recorders discontinued: Sales revenue from Cameras Variable cost of goods sold from Cameras Variable marketing and administrative expenses from Cameras Contribution margin from Cameras only Total fixed costs of goods sold Decrease in fixed costs of goods sold if Video Recorders discontinued Fixed costs of goods sold if Video Recorders discontinued Total fixed marketing and administrative expenses Decrease in fixed marketing and administrative if Video Recorders discontinued Fixed marketing and administrative expenses if Video Recorders discontinued Contribution margin from Cameras only Fixed costs of goods sold if Video Recorders discontinued Fixed marketing and administrative expenses if Video Recorders discontinued Operating income (loss) Operating income (loss) from Cameras only Operating income (loss) with both products Decrease in operating income if Video Recorders discontinued

$ 300,000 $ (75,000) $ (25,000) $ 200,000 $ 110,000 $ (10,000) $ 100,000 $ 51,000 $ (4,000) $ 47,000 $ 200,000 $(100,000) $ (47,000) $ 53,000 $ 53,000 $ 62,000 $ 9,000

The company should keep producing and selling Video Recorders since operating income will decrease by $9,000 if the product line is discontinued. Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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157) Cornell Enterprises currently produces several products. Model L78 is showing a net operating loss as indicated by the following condensed income statement prepared for the year ended December 31.

You have been hired by Cornell Enterprises to help analyze the decision as to whether to eliminate Model L78. Upon investigation, you discover that if Model L78 is eliminated, $20,000 of the fixed costs shown on the above condensed income statement can be eliminated. The rest of the fixed costs allocated to Model L78 are common fixed costs that will be allocated to the remaining two products produced by Cornell Enterprises. Determine if Cornell Enterprises should discontinue Model L78. Answer: If product discontinued: Lost sales $(480,000) Savings in variable costs $ 360,000 Savings in avoidable fixed costs $ 20,000 Operating loss $ (100,000) Cornell Enterprises should not discontinue L78, since discontinuing the product will result in a $100,000 loss. Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 158) For some merchandisers, the primary constraint may be cubic feet of display space. Answer: TRUE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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159) A constraint is a factor that restricts production or sale of a product. Answer: TRUE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 160) Fixed costs affect product mix considerations. Answer: TRUE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 161) An example of an expansion constraint would be the size of the available labor pool. Answer: TRUE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 162) To maximize profits, produce the product with the lowest contribution margin per unit of the constraint. Answer: FALSE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 163) When making product mix decisions, companies are most profitable when they maximize production of the product with the greatest sales demand. Answer: FALSE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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164) When making product mix decisions, companies are most profitable when they maximize production of the product with the greatest sales price. Answer: FALSE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 165) All of the following are product mix considerations except A) What constraint(s) stops us from making (or displaying) all of the units we can sell? B) Which products offer the highest contribution margin per unit of the constraint? C) Would emphasizing one product over another affect fixed costs? D) Which product has the most sunk costs? Answer: D Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 166) The contribution margin per unit of constraint is calculated as A) contribution margin per unit × constraint per unit. B) contribution margin per unit × units per constraint. C) contribution margin per unit ÷ units per constraint. D) contribution margin per unit + constraint per unit. Answer: B Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 167) Companies with production constraints and irrelevant fixed costs will be most profitable when they maximize production of the product with the highest A) sales price. B) demand for the product. C) contribution margin per unit of the constraint. D) contribution margin per unit. Answer: C Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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168) The factor that restricts production or sale of a product is which of the following? A) Demanding factor B) Constraint C) Sunk factor D) Relevant factor Answer: B Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 169) A "constraint" is best described by which of the following? A) The distribution of all products to be sold B) A factor that restricts production or sales of a product C) Benefits foregone by choosing a particular alternative course of action D) Expected future costs that differ among alternatives Answer: B Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 170) A "sales mix" is best described by which of the following? A) A factor that restricts production or sales of a product B) Costs that were incurred in the past and cannot be changed C) Expected future costs that differ among alternatives D) The relative number of all products to be sold Answer: D Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 171) Which of the following could be a constraint for selling a product? A) Store hours B) Available labor hours for employees C) Shelf space D) All of the above could be constraints. Answer: D Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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172) All of the following would be considered in evaluating product or sales mix allocations, except A) deciding which product offers the lowest contribution margin per unit. B) deciding whether fixed costs would change as a result of the product sales mix. C) deciding upon any and all constraints associated with the product/sale mix. D) deciding which products will contribute the highest contribution margin per unit. Answer: A Diff: 2 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 173) Changing the product mix emphasis in the short run will usually not affect A) total variable costs. B) both total variable and total fixed costs. C) total fixed costs. D) total contribution margin. Answer: C Diff: 2 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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174) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Makers. The following data are available: Food Processors $125 $50

Sales price Variable costs

Espresso Makers $225 $150

The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,200 machine hours per month. What is the contribution margin ratio for food processors? A) 60.00% B) 150.00% C) 140.00% D) 33.33% Answer: A Explanation: A) Sales price, food processors $ 125.00 Variable costs, food processors Contribution margin per food processor Divide by

$

75.00 Divide by

Sales price, food processors Contribution margin ratio for food processors Diff: 2 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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175) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Machines. The following data are available:

Sales price Variable costs

Food Processors $125 $50

Espresso Machines $225 $150

The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,200 machine hours per month. What is the contribution margin per machine hour for espresso machines? A) $1,125 B) $225 C) $150 D) $75 Answer: B Explanation: B) Sales price, espresso machines $ 225.00 Variable costs, espresso machines Contribution margin per espresso machine

$

75.00

Espresso machines per hour Contribution margin per hour for espresso machines Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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176) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Machines. The following data are available:

Sales price Variable costs

Food Processors $125 $50

Espresso Machines $225 $150

The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,200 machine hours per month. What is the contribution margin per machine hour for food processors? A) $350 B) $225 C) $75 D) $150 Answer: D Explanation: D) Sales price, food processors $ 125.00 Variable costs, food processors Contribution margin per food processor

$

75.00

Food processors per hour Contribution margin per hour for food processors Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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177) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Machines. The following data are available: Food Processors $125 $50

Sales price Variable costs

Espresso Machines $225 $150

The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,200 machine hours per month. To maximize profits, what product and how many units should the company produce in a month? A) 2,400 Food Processors and 0 Espresso Machines B) 300 Food Processors and 675 Espresso Machines C) 2,400 Food Processors and 3,600 Espresso Machines D) 3,600 Espresso Machines and 0 Food Processors Answer: D Explanation: D) Sales price, food processors

$

125.00

Variable costs, food processors Contribution margin per food processor

$

75.00

Food processors per hour Contribution margin per hour for food processors

$

Sales price, espresso machines

$

225.00

Variable costs, espresso machines Contribution margin per espresso machine

$

75.00

Espresso machiness per hour Contribution margin per hour for espresso machines

$

225.00

Product to emphasize

150.00

Espresso Machines

Production capacity (hours)

1,200

Espresso machines per hour Number to produce Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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178) Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers. The following data are available: Waffle Makers $120 $45

Sales price Variable cost

Coffee Makers $215 $150

The company can manufacture two waffle makers per machine hour and three coffee makers per machine hour. The company's production capacity is 1,200 machine hours per month. What is the contribution margin ratio for waffle makers? A) 30.23%B) 62.50% C) 166.67% D) 137.50% Answer: B Explanation: B) Sales price, waffle makers $ 120.00 Variable costs, waffle maker Contribution margin per waffle maker Divide by

$

75.00 Divide by

Sales price, waffle makers Contribution margin ratio for waffle makers Diff: 2 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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179) Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers. The following data are available: Waffle Makers $120 $45

Sales price Variable cost

Coffee Makers $215 $150

The company can manufacture two waffle makers per machine hour and three coffee makers per machine hour. The company's production capacity is 1,200 machine hours per month. What is the contribution margin per machine hour for coffee makers? A) $195 B) $1,095 C) $130 D) $65 Answer: A Explanation: A) Sales price, coffee makers $ 215.00 Variable costs, coffee makers Contribution margin per coffee maker

$

65.00

Coffee makers per hour Contribution margin per hour for coffee makers Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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180) Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers. The following data are available: Waffle Makers $120 $45

Sales price Variable cost

Coffee Makers $215 $150

The company can manufacture two waffle makers per machine hour and three coffee makers per machine hour. The company's production capacity is 1,200 machine hours per month. What is the contribution margin per machine hour for waffle makers? A) $75 B) $225 C) $150 D) $330 Answer: C Explanation: C) Sales price, waffle makers $ 120.00 Variable costs, waffle makers Contribution margin per waffle maker

$

75.00

Waffle makers per hour Contribution margin per hour for waffle makers Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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181) Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers. The following data are available: Waffle Makers $120 $45

Sales price Variable cost

Coffee Makers $215 $150

The company can manufacture two waffle makers per machine hour and three coffee makers per machine hour. The company's production capacity is 1,200 machine hours per month. To maximize profits, what product and how many units should the company produce in a month? A) 3,600 Coffee Makers and 0 Waffle Makers B) 300 Waffle Makers and 675 Coffee Makers C) 2,400 Waffle Makers and 3,600 Coffee Makers D) 2,400 Waffle Makers and 0 Coffee Makers Answer: A Explanation: A) Sales price, waffle makers

$

120.00

Variable costs, waffle makers Contribution margin per waffle maker

$

75.00

Waffle makers per hour Contribution margin per hour for waffle makers $

150.00

Sales price, coffee makers

$

215.00

Variable costs, coffee makers Contribution margin per coffee maker

$

65.00

Coffee makers per hour Contribution margin per hour for coffee makers $

195.00

Product to emphasize

Coffee Makers

Production capacity (hours)

$

1,200

Coffee makers per hour Number to produce Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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182) Silvio Enterprises produces three products, with costs and selling prices as follows:

Each product requires a certain number of minutes on the drill press. There is only one drill press available so it is the constraint for this product. Model D7 requires 2 minutes of drill press time, Model B3 requires 1 minute of drill press time, and Model F5 requires 7 minutes of drill press time. In what order should Silvio Enterprises emphasize its products to maximize its contribution margin? (Rank the products in order from most profitable to least profitable.) A) Model B3, Model D7, Model F5 B) Model B3, Model F5, Model D7 C) Model D7, Model B3, Model F5 D) Model F5, Model D7, Model B3 Answer: A Explanation: A)

Selling Price Variable Cost Contribution Margin Divided by Minutes to Produce Contribution Margin per minute

Product B3 $42 18 24 1

Product D7 $34 12 22 2

Product F5 $50 36 14 7

$24.00

$11.00

$2.00

Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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183) Alamo Corporation processes all of its products through a lathe machine. The lathe is only available for 60 hours per week and is the constraint for all of the products. Data regarding Alamo Corporation's three products follows:

Selling price per unit Variable cost per unit Minutes of lathe time required per unit

Product A $75.00 $45.00 15

Product B $60.00 $35.00 20

Product C $90.00 $80.00 10

In what order should Alamo Corporation emphasize its products to maximize its contribution margin? (Rank the products in order from most profitable to least profitable.) A) Product B, Product A, Product C B) Product A, Product C, Product B C) Product A, Product B, Product C D) Product B, Product C, Product A Answer: C Explanation: C)

Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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184) Brittany Furniture manufactures two products: Couches and Beds. The following data are available: Couches $500.00 $350.00

Sales price Variable costs

Beds $700.00 $375.00

The company can manufacture two couches per machine hour and one bed per machine hour. The company's production capacity is 900 machine hours per month. What is the contribution margin ratio for Couches? A) 30.0% B) 42.86% C) 170.00% D) 23.08% Answer: A Explanation: A) Sales price, Couches $ Variable costs, Couches Contribution margin per Couch Divide by

$

500.00 150.00 Divide by

Sales price, Couches Contribution margin ratio for Couches Diff: 1 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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185) Brittany Furniture manufactures two products: Couches and Beds. The following data are available: Couches $500.00 $350.00

Sales price Variable costs

Beds $700.00 $375.00

The company can manufacture two couches per machine hour and one bed per machine hour. The company's production capacity is 900 machine hours per month. What is the contribution margin per machine hour for beds? A) $325 B) $1,075 C) $650 D) $975 Answer: A Explanation: A) Sales price, Beds $ 700.00 Variable costs, Beds Contribution margin per Bed

$

325.00

Beds per hour Contribution margin per hour for Beds Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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186) Brittany Furniture manufactures two products: Couches and Beds. The following data are available: Couches $500.00 $350.00

Sales price Variable costs

Beds $700.00 $375.00

The company can manufacture two couches per machine hour and one bed per machine hour. The company's production capacity is 900 machine hours per month. What is the contribution margin per machine hour for couches? A) $1,700 B) $300 C) $150 D) $250 Answer: B Explanation: B) Sales price, Couches $ 500.00 Variable costs, Couches Contribution margin per Couche

$

150.00

Couches per hour Contribution margin per hour for Couches Diff: 2 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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187) Brittany Furniture manufactures two products: Couches and Beds. The following data are available: Couch $500.00 $350.00

Sales price Variable costs

Bed $700.00 $375.00

The company can manufacture two couches per machine hour and one bed per machine hour. The company's production capacity is 900 machine hours per month. To maximize profits, what product and how many units should the company produce in a month? A) 1,800 couches and 900 beds B) 900 beds C) 1,800 couches D) 600 couches and 325 beds Answer: B Explanation: B) Sales price, Couches

$

500.00

Variable costs, Couches Contribution margin per Couch

$

150.00

Couches per hour Contribution margin per hour for Couches

$

300.00

Sales price, Beds

$

Variable costs, Beds Contribution margin per Bed

$

325.00

Beds per hour Contribution margin per hour for Beds

$

325.00

700.00

Product to emphasize Production capacity (hours)

Beds $

900

Beds per hour Number to produce Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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188) Brittany Furniture manufactures two products: Futons and Recliners. The following data are available: Futons $500.00 $325.00

Sales price Variable costs

Recliners $480.00 $120.00

The company can manufacture two futons per machine hour and one recliner per machine hour. The company's production capacity is 900 machine hours per month. What is the contribution margin ratio for futons? A) 53.85% B) 37.50% C) 165.00% D) 35.00% Answer: D Explanation: D) Sales price, Futons $ Variable costs, Futons Contribution margin per Futons Divide by

$

500.00 175.00 Divide by

Sales price, Futons Contribution margin ratio for Futons Diff: 1 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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189) Brittany Furniture manufactures two products: Futons and Recliners. The following data are available: Futons $500.00 $325.00

Sales price Variable costs

Recliners $480.00 $120.00

The company can manufacture two futons per machine hour and one recliner per machine hour. The company's production capacity is 900 machine hours per month. What is the contribution margin per machine hour for recliners? A) $1,080 B) $720 C) $600 D) $360 Answer: D Explanation: D) Sales price, Recliners $ 480.00 Variable costs, Recliners Contribution margin per Recliner

$

360.00

Recliners per hour Contribution margin per hour for Recliners Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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190) Brittany Furniture manufactures two products: Futons and Recliners. The following data are available: Futons $500.00 $325.00

Sales price Variable costs

Recliners $480.00 $120.00

The company can manufacture two futons per machine hour and one recliner per machine hour. The company's production capacity is 900 machine hours per month. What is the contribution margin per machine hour for futons? A) $350 B) $1,650 C) $175 D) $180 Answer: A Explanation: A) Sales price, Futons $ 500.00 Variable costs, Futons Contribution margin per Futon

$

175.00

Futons per hour Contribution margin per hour for Futons Diff: 2 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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191) Brittany Furniture manufactures two products: Futons and Recliners. The following data are available: Futons $500.00 $325.00

Sales price Variable costs

Recliners $480.00 $120.00

The company can manufacture two futons per machine hour and one recliner per machine hour. The company's production capacity is 900 machine hours per month. To maximize profits, what product and how many units should the company produce in a month? A) 900 recliners B) 1,800 futons and 900 recliners C) 1,800 futons D) 700 futons and 360 recliners Answer: A Explanation: A) Sales price, Futons

$

500.00

Variable costs, Futons Contribution margin per Futon

$

175.00

Futons per hour Contribution margin per hour for Futons

$

350.00

Sales price, Recliners

$

Variable costs, Recliners Contribution margin per Recliner

$

360.00

Recliners per hour Contribution margin per hour for Recliners

$

360.00

480.00

Product to emphasize Production capacity (hours)

Beds $

900

Recliners per hour Number to produce Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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192) Rose Incorporated manufactures two types of vases, small and large. The following per unit data are available:

Sale price Variable costs Machine hours required for 1 vase

Small Vase $60 $35 1

Large Vase $100 $60 2

Total fixed costs are $600,000 and Rose Incorporated can sell a maximum of 25,000 units of each type of vase annually. Machine hour capacity is 50,000 hours per year. A. Determine the contribution margin per unit for each type of vase. B. Determine the contribution margin per machine hour for each type of vase. C. Determine the number of units of each style of vase that Rose Incorporated should produce to maximize operating income. D. What is the dollar amount of the maximum operating income as calculated in C above? Answer: A.

B.

C.

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D.

Diff: 2 LO: 8-5 EOC: P8-46A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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193) Becky's Bakery produces two products, cake and pie. Becky's Bakery sells each cake for $15.00 and each pie for $10.00. Variable costs for cakes and pies are respectively, $7.00 and $6.00. There are 3,200 direct labor hours per month available for producing one of the two products. Fixed manufacturing overhead cost is allocated at $1,000 per month. Each cake and pie require 2 direct labor hours. Compute the following: A. Contribution margin per unit for each product. B. Contribution margin per direct labor hour for each product. C. The total number of products produced if only that product is produced each month. D. Income for a month if only one product is produced and total production is sold. Answer: A. Cakes Pies Selling price each $ 15.00 $ 10.00 Variable costs $ (7.00) $ (6.00) Contribution margin per unit $ 8.00 $ 4.00 B. Cakes Selling price each Variable costs Contribution margin per unit Divide by Hours taken for each Contribution margin per hour

Pies

$ 15.00 $ (7.00) $ 8.00 Divide by 2 $ 4.00

$ 10.00 $ (6.00) $ 4.00 Divide by 2 $ 2.00

C. Cakes Production capacity (hours) Divide by Hours taken for each Maximum to produce

Pies

3,200 Divide by 2 1,600

3,200 Divide by 5 1,600

D. Cakes Production capacity (hours) Divide by Hours taken for each Maximum to produce Contribution margin per unit Maximum to produce Total fixed costs Income

Pies

3,200 Divide by 2 1,600 $

8.00 1,600 $ 12,800 $ (1,000) $ 11,800

3,200 Divide by 2 1,600 $

4.00 1,600 $ 6,400 $ (1,000) $ 5,400

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Diff: 3 LO: 8-5 EOC: P8-46A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 194) When making outsourcing (make-or-buy) decisions, the focus is on how best to use available resources. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 195) Make or buy decisions are often referred to as outsourcing decisions. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 196) All other things being equal, if the incremental costs of outsourcing a product exceed the incremental costs of making a product, it should be outsourced. Answer: FALSE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 197) In most circumstances, all fixed costs can be eliminated by outsourcing a product. Answer: FALSE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 198) An opportunity cost is a past cost. Answer: FALSE Diff: 1 LO: 8-6 EOC: S8-11 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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199) Qualitative factors play an important part in make or buy decisions. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 200) Outsourcing decisions are best made by comparing the total manufacturing costs, both fixed and variable, allocated to the product versus the total unit cost charged by the outsourcing company. Answer: FALSE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 201) The maximum outsourcing price a company is willing to pay can be found by solving for the company's indifference point. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 202) Opportunity costs should be factored into outsourcing decisions. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 203) Companies often consider outsourcing so they can focus on their core competencies. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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204) In deciding whether to outsource, managers must consider A) relevant fixed and variable components. B) sunk costs. C) only variable costs. D) none of the above. Answer: A Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 205) Outsourcing decisions are sometimes referred to as A) make-or-buy decisions. B) make decisions. C) buy decisions. D) none of the above. Answer: A Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 206) All of the following are outsourcing considerations, except A) Are any fixed costs avoidable if we outsource? B) How do our fixed costs compare to the outsourcing cost? C) What could we do with the freed capacity? D) How do our variable costs compare to the outsourcing cost? Answer: B Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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207) If a company decides to outsource and then has freed capacity, the decision on what to do with that freed capacity would be based upon A) avoidable fixed costs. B) opportunity costs. C) unavoidable fixed costs. D) none of the above. Answer: B Diff: 2 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 208) Managers should consider which of the following when deciding whether to outsource a product or service? A) Quality of the product or service B) Delivery schedule of the product or service C) Cost charged for the product or service D) All of the above Answer: D Diff: 2 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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209) Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 40,000 parts is $120,000, which includes fixed costs of $60,000 and variable costs of $60,000. The company can buy the part from an outside supplier for $3.00 per unit, and avoid 30% of the fixed costs. If Harvey Automobiles makes the part, how much will its operating income be? A) $42,000 greater than if the company bought the part B) $42,000 less than if the company bought the part C) $78,000 greater than if the company bought the part D) $78,000 less than if the company bought the part Answer: A Explanation: A) Outside supplier price $ 3.00 Parts produced Purchase price

$

120,000

Fixed costs

$

60,000

Avoidable percentage of fixed costs Avoidable fixed costs

$

18,000

Fixed costs

$

60,000

Avoidable fixed costs Unavoidable fixed costs

$

42,000

Purchase price

$

120,000

Unavoidable fixed costs Cost if bought

$

162,000

Total cost to produce Income difference if produced Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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210) Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 40,000 parts is $120,000, which includes fixed costs of $60,000 and variable costs of $60,000. By outsourcing the part, the company can avoid 30% of the fixed costs. If Harvey Automobiles buys the part, what is the most Harvey Automobiles can spend per unit so that operating income equals the operating income from making the part? A) $1.30 B) $1.95 C) $4.05 D) $2.33 Answer: B Explanation: B) Cost to Build Variable Costs $60,000 Fixed Costs 60,000 Total $ 120,000 Less Unavoidable Fixed Cost 42,000 Adjusted Cost of part 78,000 Divided by 40,000 = $ 1.95 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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211) Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 40,000 parts is $120,000, which includes fixed costs of $60,000 and variable costs of $60,000. The company can buy the part from an outside supplier for $3.00 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $12,000 profit. If Harvey Automobiles makes the part, what will its operating income be? A) $54,000 greater than if the company bought the part B) $30,000 less than if the company bought the part C) $30,000 greater than if the company bought the part D) $150,000 greater than if the company bought the part Answer: C Explanation: C) Outside supplier price

$

3.00

Parts produced Purchase price

$

120,000

Fixed costs

$

60,000

Avoidable percentage of fixed costs Avoidable fixed costs

$

18,000

Fixed costs

$

60,000

Avoidable fixed costs Unavoidable fixed costs

$

42,000

$ $

120,000 42,000

bought Cost if bought

$

150,000

Cost if bought

$

150,000

Purchase price Unavoidable fixed costs Profit from free space if part is

Total cost to produce Income difference if produced Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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212) Cuyahoga Valley Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 40,000 parts is $138,000, which includes fixed costs of $68,000 and variable costs of $70,000. The company can buy the part from an outside supplier for $3.50 per unit, and avoid 30% of the fixed costs. If Cuyahoga Valley Bicycles makes the part, how much will its operating income be? A) $90,400 less than if the company bought the part B) $45,600 less than if the company bought the part C) $47,600 greater than if the company bought the part D) $49,600 greater than if the company bought the part Answer: D Explanation: D) Outside supplier price $ 3.50 Parts produced Purchase price

$

140,000

Fixed costs

$

68,000

Avoidable percentage of fixed costs Avoidable fixed costs

$

20,400

Fixed costs

$

68,000

Avoidable fixed costs Unavoidable fixed costs

$

47,600

Purchase price

$

140,000

Unavoidable fixed costs Cost if bought

$

187,600

Total cost to produce Income difference if produced Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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213) Cuyahoga Valley Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 40,000 parts is $138,000, which includes fixed costs of $68,000 and variable costs of $70,000. By outsourcing the part, the company can avoid 30% of the fixed costs. If Cuyahoga Valley Bicycles buys the part, what is the most Cuyahoga Valley Bicycles can spend per unit so that operating income equals the operating income from making the part? A) $1.33 B) $2.26 C) $4.64 D) $2.33 Answer: B Explanation: B) Cost to Build Variable Costs $70,000 Fixed Costs 68,000 Total $ 138,000 Less Unavoidable Fixed Cost 47,600 Adjusted Cost of part 90,400 Divided by 40,000 = $ 2.26 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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214) Cuyahoga Valley Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 40,000 parts is $138,000, which includes fixed costs of $68,000 and variable costs of $70,000. The company can buy the part from an outside supplier for $3.50 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $12,000 profit. If Cuyahoga Valley Bicycles makes the part, what will its operating income be? A) $37,600 greater than if the company bought the part B) $37,600 less than if the company bought the part C) $61,600 greater than if the company bought the part D) $175,600 greater than if the company bought the part Answer: A Explanation: A) Outside supplier price

$

3.50

Parts produced Purchase price

$

140,000

Fixed costs

$

68,000

Avoidable percentage of fixed costs Avoidable fixed costs

$

20,400

Fixed costs

$

68,000

Avoidable fixed costs Unavoidable fixed costs

$

47,600

$ $

140,000 47,600

bought Cost if bought

$

175,600

Cost if bought

$

175,600

Purchase price Unavoidable fixed costs Profit from free space if part is

Total cost to produce Income difference if produced Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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215) Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost The fixed overhead costs are unavoidable.

$4.00 $4.00 $3.00 $1.00 $12.00

Suri Company has offered to sell 6,000 units of the same part to Cruise Company for $14 per unit. Assuming the company has no other use for its facilities, what should Cruise Company do? A) Make the part and save $3 per unit. B) Make the part and save $6 per unit. C) Buy from Suri and save $2 per unit. D) Make the part and save $10 per unit. Answer: A Explanation: A) Cost to produce: Direct Materials $4.00 Direct Labor 4.00 Var. mfg 3.00 Total Cost to build 11.00 Cost to Purchase 14.00 Savings to build $ 3.00 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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216) Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost

$4.00 $4.00 $3.00 $1.00 $12.00

The fixed overhead costs are unavoidable. Assuming no other use for its facilities, what is the highest price per unit that Cruise Company should be willing to pay for the part? A) $12 B) $11 C) $8 D) $5 Answer: B Explanation: B) Cost to produce: Direct Materials $4.00 Direct Labor 4.00 Var. mfg 3.00 Total Cost to build 11.00 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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217) Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost

$4.00 $4.00 $3.00 $1.00 $12.00

The fixed overhead costs are unavoidable. Assuming Cruise Company can purchase 6,000 units of the part from Suri Company for $14 each, and the facilities currently used to make the part could be rented out to another manufacturer for $24,000 a year, what should Cruise Company do? A) Make the part and save $6.00 per unit. B) Make the part and save $2.00 per unit. C) Buy the part and save $2.00 per unit. D) Buy the part and save $1.00 per unit. Answer: D Explanation: D) Direct materials Direct labor

$ $

4.00 4.00

Variable manufacturing overhead Cost to produce

$

11.00

$

24,000 Divide by

Production level Additional rental revenue per unit

$

4.00

Price to buy from supplier

$

14.00

Additional rental revenue per unit Cost per unit if bought

$

10.00

Cost to produce

$

11.00

Rental revenue from unused space Divide by

Cost per unit if bought Savings if buy from supplier Diff: 2 LO: 8-6 EOC: E8-26A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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218) Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost

$4.00 4.00 3.00 1.00 $12.00

The fixed overhead costs are unavoidable. Assume Cruise Company can purchase 6,000 units of the part from Suri Company for $14.00 each, and the facilities currently used to make the part could be used to manufacture 6,000 units of another product that would have an $8 per unit contribution margin. If no additional fixed costs would be incurred, what should Cruise Company do? A) Make the new product and buy the part to earn an extra $5.00 per unit contribution to profit. B) Make the new product and buy the part to earn an extra $6.00 per unit contribution to profit. C) Continue to make the part to earn an extra $2.00 per unit contribution to profit. D) Continue to make the part to earn an extra $4.00 per unit contribution to profit. Answer: A Explanation: A) Direct materials Direct labor

$ $

4.00 4.00

Variable manufacturing overhead Cost to produce

$

11.00

Price to buy from supplier

$

14.00

Contribution margin per unit of new product Net cost to buy

$

6.00

Cost to produce

$

11.00

Net cost to buy Savings if new product made and part bought Diff: 2 LO: 8-6 EOC: E8-26A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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219) Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40: Number of parts produced annually Fixed costs Variable costs Total cost to produce

22,000 $ 40,000 $ 66,000 $ 106,000

Jackson Corporation can purchase the part from an outside supplier for $4.25 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation makes the part, how much will its operating income be? A) $47,500 greater than if the company bought the part B) $20,000 greater than if the company bought the part C) $7,500 greater than if the company bought the part D) $32,500 less than if the company bought the part Answer: C Explanation: C) Purchase cost 22,000 × $ 4.25 = $ 93,500 Plus unavoidable fixed cost 40,000 × 50% 20,000 Total Cost to purchase 113,500 Less Cost to build 106,000 Add'l cost to buy the part 7,500 Diff: 2 LO: 8-6 EOC: E8-26A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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220) Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40: Number of parts produced annually Fixed costs Variable costs Total cost to produce

22,000 $ 40,000 $ 66,000 $ 106,000

Jackson Corporation can purchase the part from an outside supplier for $4.25 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation buys the part, what is the most Jackson Corporation can spend per unit so that operating income is equal to $97,000? A) $5.32 B) $3.50 C) $1.93 D) $1.00 Answer: B Explanation: B) Desired Income $ 97,000 Less Unavoidable Fixed Cost 50% × $40,000 20,000 Equals Maximum cost of part 77,000 / 22,000 units = $ 3.50 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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221) Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40: Number of parts produced annually Fixed costs Variable costs Total cost to produce

22,000 $ 40,000 $ 66,000 $ 106,000

Jackson Corporation can purchase the part from an outside supplier for $4.25 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $2,000 profit. If Jackson Corporation makes the part, what will its operating income be? A) $5,500 less than if the company bought the part B) $5,500 greater than if the company bought the part C) 9,500 greater than if the company bought the part D) $111,500 greater than if the company bought the part Answer: B Explanation: B) Purchase price $ 4.25 × 22,000 = $ 93,500 Unavoidable Fixed Cost 50% × $40,000 20,000 Less lost profit from new product (2,000) Cost to buy $ 111,500 Current cost to produce 106,000 Difference 5,500 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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222) Moon Appliance manufactures a variety of appliances which all use Part B89. Currently, Moon Appliance manufactures Part B89 itself. It has been producing 9,000 units of Part B89 annually. The annual costs of producing Part B89 at the level of 9,000 units include: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost

$ 3.00 $ 8.00 $ 4.00 $ 3.00 $ 18.00

All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Moon Appliance has no alternative use for the manufacturing facilities. Nadal Parts Company has offered to sell 9,000 units of Part B89 to Moon Appliance for $20.00 per unit. What should Moon Appliance do? A) Make the part and save $9 per unit. B) Make the part and save $5 per unit. C) Buy from Nadal Parts Company and lose $2 per unit. D) Make the part and save $13 per unit. Answer: B Explanation: B) Purchase part $ 20.00 Add fixed cost 3.00 Total cost 23.00 Less build cost 18.00 Savings $ 5.00 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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223) Moon Appliance manufactures a variety of appliances which all use Part B89. Currently, Moon Appliance manufactures Part B89 itself. It has been producing 9,000 units of Part B89 annually. The annual costs of producing Part B89 at the level of 9,000 units include: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost

$ 3.00 $ 8.00 $ 4.00 $ 3.00 $ 18.00

All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Moon Appliance has no alternative use for the manufacturing facilities. Nadal Parts Company has offered to sell 9,000 units of Part B89 to Moon Appliance for $20.00 per unit. What is the highest price per unit that Moon Appliance should be willing to pay for the part? A) $7 B) $15 C) $11 D) $18 Answer: B Explanation: B) Direct Materials $ 3.00 Direct Labor 8.00 Variable MOH 4.00 Total Variable Cost $15.00 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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224) Moon Appliance manufactures a variety of appliances which all use Part B89. Currently, Moon Appliance manufactures Part B89 itself. It has been producing 9,000 units of Part B89 annually. The annual costs of producing Part B89 at the level of 9,000 units include: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost

$ 3.00 $ 8.00 $ 4.00 $ 3.00 $ 18.00

All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Assuming Moon Appliance can purchase 9,000 units of the part from the Nadal Parts Company for $20.00 each, and the facilities currently used to make the part could be rented out to another manufacturer for $18,000 a year, what should Moon Appliance do? A) Make the part and save $7.00 per unit. B) Make the part and save $3.00 per unit. C) Buy the part and save $7.00 per unit. D) Buy the part and save $3.00 per unit. Answer: B Explanation: B) Direct Materials Direct Labor Variable Expenses Cost to Produce

3.00 8.00 4.00 15.00

Potential income $ 18,000 / 9,000 units = $ 2.00 additional revenue per unit Price to buy from Supplier 20.00 Less Rental Revenue (2.00) Net Cost to Buy 18.00 Cost to Produce 15.00 Less Cost to Buy (18.00) Savings if Buy (3.00) Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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225) Moon Appliance manufactures a variety of appliances which all use Part B89. Currently, Moon Appliance manufactures Part B89 itself. It has been producing 9,000 units of Part B89 annually. The annual costs of producing Part B89 at the level of 9,000 units include: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost

$ 3.00 $ 8.00 $ 4.00 $ 3.00 $ 18.00

All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Assume Moon Appliance can purchase 9,000 units of the part from the Nadal Parts Company for $20.00 each, and the facilities currently used to make the part could be used to manufacture 7,000 units of another product that would have a $6 per unit contribution margin. If no additional fixed costs would be incurred, what should Moon Appliance do? A) Make the new product and buy the part to earn an extra $1.00 per unit contribution to profit. B) Make the new product and buy the part to earn an extra $4.00 per unit contribution to profit. C) Continue to make the part to earn an extra $3.00 per unit contribution to profit. D) Continue to make the part to earn an extra $8.00 per unit contribution to profit. Answer: A Explanation: A) Direct Materials $ 3.00 Direct Labor 8.00 Variable MOH 4.00 Total Variable Cost $15.00 Less cost to buy 20.00 Savings (5.00) Plus CM from new product 6.00 Total add'l contribution to profit $ 1.00 Diff: 3 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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226) Victoria Technologies makes a part used in the manufacture of digital cameras. Management is considering whether to continue manufacturing the part, or to buy the part from an outside source at a cost of $24.00 per part. Victoria Technologies needs 60,000 parts per year. The cost of manufacturing 60,000 parts is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs

$ 750,000 600,000 525,000 750,000 $2,525,0000

If Victoria Technologies buys the part, it would pay $.60 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 50% of fixed manufacturing overhead costs. Victoria Technologies' factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $70,000. Prepare an analysis to show which alternative makes the best use of Victoria Technologies' factory space: 1) Make the part 2) Buy the part and leave facilities idle 3) Buy the part and use facilities to make another product

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Answer: Transport cost per unit (if bought)

$

0.60

Number of parts needed Total variable transportation

$

36,000

Fixed manufacturing overhead

$

750,000

Avoidable percentage of fixed costs Avoidable fixed manufacturing overhead

$

375,000

Fixed manufacturing overhead

$

750,000

Avoidable fixed manufacturing overhead Unavoidable fixed manufacturing overhead

$

375,000

Total variable transportation Unavoidable fixed manufacturing overhead

$ $

36,000 375,000

Total variable transportation $ Unavoidable fixed manufacturing overhead $ Total purchase price $ Contribution margin provided by alternate use

36,000 375,000 1,440,000

Total purchase price Total cost to buy parts and leave facilities idle

of space Total cost to buy parts and use facilities to make another product Total manufacturing costs to make parts #3: Victoria Technologies should buy the part and use facilities to make another product since their total costs will be $1,781,000 under this option versus total costs of $2,625,000 to make the part. Diff: 3 LO: 8-6 EOC: P8-47A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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227) Define the term constraints and give an example. What product should be made first when resource constraints exist? Answer: Constraints are the limited resources that restrict production or sale of a product, and they vary from company to company. For a manufacturer, production may be constrained by labor hours, machine hours, or available materials. For a merchandiser, the primary constraint is cubic feet of display space. When resource constraints exist, the company should focus on selling the products with the highest contribution margin per unit of the constraint. Diff: 2 LO: 8-6 EOC: P8-47A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 228) Patty's Mailbox Company produces a standard mailbox with variable manufacturing costs of $18 per unit. The selling price of the standard mailbox is $25 per unit. The fixed manufacturing overhead cost is $67,000. A normal production run includes 100,000 units. Patty's Mailbox Company has discovered an additional process to change the standard mailbox into a deluxe mailbox. Additional costs are estimated at $4 per unit. The deluxe mailbox would sell for $35. Additional fixed manufacturing overhead cost of $23,000 would be incurred if the deluxe mailbox is produced. There would be no change in the number of units produced. Make an analysis to determine if Patty's Mailbox Company should continue producing and selling the standard mailbox or change the standard mailbox into a deluxe mailbox.

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Answer: Standard mailbox: Standard mailbox selling price Production volume Revenue

$ 25.00 100,000 $ 2,500,000

Standard mailbox variable costs Production volume Variable costs

$ 18.00 100,000 $ 1,800,000

Revenue Variable costs Fixed manufacturing overhead Operating income for Standard mailbox

$ 2,500,000 $(1,800,000) $ (67,000) $ 633,000

Deluxe mailbox: Deluxe mailbox selling price Production volume Revenue

$ 35.00 100,000 $ 3,500,000

Standard mailbox variable costs Deluxe mailbox additional costs Total costs Production volume Variable costs

$ 18.00 $ 4.00 $ 22.00 100,000 $ 2,200,000

Fixed manufacturing overhead Additional fixed manufacturing overhead Fixed costs

$ 67,000 $ 23,000 $ 90,000

Revenue Variable costs Fixed costs Operating income for Deluxe mailbox

$ 3,500,000 $(2,200,000) $ (90,000) $ 1,210,000

Operating income for Deluxe mailbox Operating income for Standard mailbox Increase in income

$ 1,210,000 $ (633,000) $ 577,000

Change the standard mailbox into the deluxe mailbox for $577,000 increase in operating income. Diff: 2 LO: 8-6 EOC: P8-47A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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229) Sunk costs should be considered when deciding whether to sell a product as is or process it further. Answer: FALSE Diff: 2 LO: 8-7 EOC: S8-13 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 230) A decision must be made at the point in a process where a product can either be sold as is or processed further. Answer: TRUE Diff: 2 LO: 8-7 EOC: S8-13 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 231) A sunk cost is a past cost that can be changed regardless of which future action is taken. Answer: FALSE Diff: 1 LO: 8-7 EOC: S8-13 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 232) When the extra revenue from processing further is less than the extra cost of processing further, the best decision would be to A) process further. B) develop a new product. C) not process further. D) start over. Answer: C Diff: 1 LO: 8-7 EOC: E8-28A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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233) The benefit foregone by choosing a particular alternative course of action is referred to as a(n) A) sunk cost. B) opportunity cost. C) variable cost. D) incremental cost. Answer: B Diff: 1 LO: 8-7 EOC: E8-28A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 234) In making the decision whether to sell a product as is or process the product further, the expected income from selling the product as is may be defined as which of the following? A) The opportunity cost of processing the product further B) A sunk cost of processing the product further C) The opportunity cost of selling the product as is D) A limiting factor in processing the product further Answer: A Diff: 2 LO: 8-7 EOC: E8-28A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 235) In a sell or process further decision, the company should process further if A) the extra cost of processing further is the same as the extra revenue. B) the extra revenue from processing further is less than the extra cost. C) the extra cost of processing further is greater than the extra revenue. D) the extra cost of processing further is less than the extra revenue. Answer: D Diff: 2 LO: 8-7 EOC: E8-28A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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236) Which of the following would be a consideration for "sell as is or process further" decisions? A) Revenue generated if sold "as is" B) Revenue generated if "further processed" C) Costs involved in further processing D) All of the above Answer: D Diff: 2 LO: 8-7 EOC: S8-13 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 237) Bear Country Granola is considering selling premium granola. It already sells regular for $6.75/pound and would sell premium granola for $9.50/pound. The cost for organic grains for the premium granola would be $1.15/pound. A cost that would not be considered in this decision would be A) the extra revenue generated by selling premium. B) the cost of refining the regular granola. C) the cost of further processing the regular granola into premium granola. D) any of the above would be considered. Answer: B Diff: 2 LO: 8-7 EOC: S8-13 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 238) Four Guys Company has in its inventory 5,000 damaged televisions that cost $50,000. The televisions can be sold in their present condition for $32,000, or repaired at a cost of $43,000 and sold for $76,000. What is the opportunity cost of selling the televisions in their present condition? A) $82,000 B) $119,000 C) $33,000 D) $75,000 Answer: C Explanation: C) Selling price after repair $ 76,000 Cost to repair Opportunity cost to sell in current condition Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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239) Paula has the following information to evaluate–her current salary of $55,000 versus total revenues of $120,000 and expenses of $75,000 from starting a new business. How much is the opportunity cost associated with starting the new business? A) $55,000 B) $120,000 C) $45,000 D) $75,000 Answer: A Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 240) Zach has the following information to evaluate–his current salary of $75,000 versus total revenues of $100,000 and expenses of $67,000 from starting a new business. How much is the opportunity cost associated with staying at his current job? A) $75,000 B) $(8,000) C) $33,000 D) $167,000 Answer: C Explanation: C) Revenues $ 100,000 Expenses 67,000 Potential income $ 33,000 Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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241) Brittany Furniture manufactures two products, pillows and cushions, from a joint process. Pillows are allocated $7,000 of the total joint costs of $25,000. There are 2,500 pillows produced and 2,500 cushions produced each year. Pillows can be sold at the split-off point for $12 per unit, or they can be processed further into a deluxe pillow for additional processing costs of $8,000 and sold for $16 for each deluxe pillow. If the pillows are processed further and made into deluxe pillows, the effect on operating income would be: A) $30,000 net increase in operating income. B) $2,000 net decrease in operating income. C) $2,000 net increase in operating income. D) $30,000 net decrease in operating income. Answer: C Explanation: C) Selling Price × Units $ 16.00 × 2,500 = $40,000 less Additional cost 8,000 Profit 32,000 Less split-off point sales $ 12 × 2,500 = 30,000 Net increase $2,000 Diff: 3 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 242) Upscale Dishwear manufactures two products, salad plates and platters, from a joint process. Salad plates are allocated $7,500 of the total joint costs of $25,000. There are 3,000 salad plates produced and 3,000 platters produced each year. Salad plates can be sold at the split-off point for $12 per unit, or they can be hand painted for additional processing costs of $8,400 and sold for $16 for each deluxe salad plate. If the salad plates are processed further and made into deluxe plates, the effect on operating income would be: A) $36,000 net increase in operating income. B) $3,600 net decrease in operating income. C) $36,000 net decrease in operating income. D) $3,600 net increase in operating income. Answer: D Explanation: D) Selling Price × Units $ 16.00 × 3000 = $48,000 less Additional cost 8,400 Profit 39,600 Less split-off point sales $ 12 × 3,000 = 36,000 Net increase $3,600 Diff: 3 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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243) A joint production process at Happy Days Farms results in two products, blackberry syrup and blackberry jam. The following cost and activity data relate to these two products: Blackberry syrup Blackberry jam $ 10,000 $ 12,000

Joint costs allocated Number of units produced from joint process

1,500

1,500

Selling price at split-off point Selling price after processing further

$ 2.50 $ 5.00

$ 1.75 $ 2.00

$ 2,000

$ 2,000

Cost of processing further

Blackberry syrup can be sold as-is (at the split-off point) for $2.50 per unit, or it can be processed further into a specialty blackberry juice and then sold for $5.00 per unit. If blackberry syrup is processed further into the specialty blackberry juice, what would be the overall effect on operating income? A) $1,750 net increase in operating income B) $1,750 net decrease in operating income C) $3,750 net increase in operating income D) $3,750 net decrease in operating income Answer: A Explanation: A) Selling Price after further processing 1500 × $ 5.00 = $ 7,500 Additional Processing cost 2,000 Net Income 5,500 Less Income if sold at split-off point 1,500 × $ 2.50 3,750 Equals increase in Operating Income $ 1,750 Diff: 3 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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244) A joint production process at Sunny Brooks Dairy results in two products, cherry jelly and cherry jam. The following cost and activity data relate to these two products: Cherry jelly $ 10,000

Cherry jam $ 12,000

Number of units produced from joint process

2,000

2,000

Selling price at split-off point Selling price after processing further

$ 2.50 $ 5.00

$ 1.75 $ 2.00

$ 2,200

$ 2,000

Joint costs allocated

Cost of processing further

Cherry jelly can be sold as-is (at the split-off point) for $2.50 per unit, or it can be processed further into a specialty cherry smoothie and then sold for $5.00 per unit. If cherry jelly is processed further into the specialty cherry smoothie, what would be the overall effect on operating income? A) $2,800 net decrease in operating income B) $5,000 net decrease in operating income C) $5,000 net increase in operating income D) $2,800 net increase in operating income Answer: D Explanation: D) Selling Price after further processing 2000 × $ 5.00 = $ 10,000 Additional Processing cost 2,200 Net Income 7,800 Less Income if sold at split-off point 2,000 × $ 2.50 5,000 Equals increase in Operating Income $ 2,800 Diff: 3 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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245) Stoog Enterprises manufactures ceiling fans that normally sell for $90 each. There are 300 defective fans in inventory, which cost $55 each to manufacture. These defective units can be sold as is for $20 each, or they can be processed further for a cost of $40 each and then sold for the normal selling price. Stoog Enterprises would be better off by a A) $21,000 net increase in operating income if the ceiling fans are repaired. B) $9,000 net increase in operating income if the ceiling fans are sold as is. C) $9,000 net increase in operating income if the ceiling fans are repaired. D) $21,000 net increase in operating income if the ceiling fans are sold as is. Answer: C Explanation: C) Normal selling price $ 90.00 Sold "as is" price per unit Incremental revenue per unit

$

Cost to repair each unit Incremental income per unit from further processing

70.00 $

30.00

Number of defective units Total incremental income from further processing Diff: 3 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 246) Longview Baskets has in its inventory 2,000 damaged baskets that cost $20,000. The baskets can be sold in their present condition for $12,000, or repaired at a cost of $13,000 and sold for $35,000. What is the opportunity cost of selling the baskets in their present condition? A) $32,000 B) $25,000 C) $48,000 D) $22,000 Answer: D Explanation: D) Selling price after repair $ 35,000 Cost to repair Opportunity cost to sell in current condition Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions

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247) Molly has the following information to evaluate–her current salary of $57,000 versus total revenues of $62,000 and expenses of $47,000 from starting a new business. How much is the opportunity cost associated with starting the new business? A) $62,000 B) $15,000 C) $57,000 D) $47,000 Answer: C Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 248) Jackie has the following information to evaluate–her current salary of $74,000 versus total revenues of $100,000 and expenses of $65,000 from starting a new business. How much is the opportunity cost associated with staying at her current job? A) $35,000 B) $165,000 C) $74,000 D) $(9,000) Answer: A Explanation: A) Revenues from the new business $ 100,000 Costs to start a business Opportunity cost of staying at current job Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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249) On the line in front of each statement, enter the letter corresponding to the term that best fits that statement. An item may be used more than once or not at all. A. B. C. D.

relevant costs sunk costs constraint contribution margin

E. F. G. H.

opportunity costs full cost of product or service sales mix variable costing

____ Costs that were incurred in the past and cannot be changed ____ Benefits foregone by choosing a particular alternative course of action ____ Expected future costs that differs among alternatives ____ Costs of developing, producing and delivering a product or service ____ A factor that restricts production or sales of a product Answer: B, E, A, F, C Diff: 2 LO: 8-7 EOC: E8-28A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

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